Tax implications of company migrating from New Zealand (Brierley)

I am a Brierley shareholder and purchased my 60,000 shares at $4.00 each (total investment $240,000). The shares held by me are on capital account and are currently trading at 45c each (current value $27,000). I have heard that I may have to account for any subsequent capital gain in the shares now that Brierley is a foreign company. Furthermore, I understand that I will not be able to obtain a deduction for the difference in the purchase price and the current market value of the shares. Is this correct? ANSWER

Answer
You may be subject to the foreign investment fund (FIF) regime as Brierley has moved its incorporation to Bermuda and is now a foreign company for New Zealand tax purposes. See Question 58 for an explanation of the FIF regime.

As a general rule, if you are subject to the FIF regime, you will be liable to a form of capital gains tax if you use a particular method of calculating your income or loss from the investment.

Brierley officials lobbied the Government, which resulted in the enactment of certain amendments dealing with companies migrating from New Zealand and the entry of the New Zealand shareholders into the FIF regime. These amendments apply retrospectively to the 1999/2000 income year and subsequent income years.

The amendments were thought to be necessary because of the position of New Zealand shareholders where a New Zealand tax-resident entity "migrates" for tax purposes (ie, it ceases to be a New Zealand tax resident). As a general rule, when the entity has migrated to a country which is not a "grey list country", the New Zealand shareholders will have an interest in a FIF unless the cost of their shareholding does not exceed $50,000 (raised from $20,000 by the amendment). Bermuda is not a grey list country.

As it may have been some time between the original purchase of the shares and the migration of the company, the "cost" of those shares may be out of all proportion to their value at the time of the migration of the company. This is so in your case ¾ a difference of $3.55 per share.

The amendments to the foreign investment regime address the issue of the value of the FIF interest at the time of the migration of the company and the threshold rules for determining whether a person is subject to the rules. The market value of a person's shareholding at the time of the migration of the company is used to assess the threshold for the purposes of the application of the FIF rules as well as the value of the shares on entry into the regime.

The cost of the shares for FIF purposes (including the threshold calculation) is now the market value of the shares at the date the company becomes a foreign company (probably the date the company is removed from the New Zealand companies register). In Brierley's case, we understand this was around January 2000.

For the purposes of determining whether the "cost" of an interest in Brierley is more than the threshold you should take the market value of the shares at January 2000. At, say, 45c per share, the value of your shareholding is $27,000. As such, you will not be subject to the FIF regime providing the total value of all your FIF investments does not exceed $50,000.

The amendments to the regime do not address the other issue raised in your question. Where the opening market value of the shares (on the date the company becomes a foreign company) is less than the cost ¾ as in your case ¾ and the value subsequently rises, the Government will be taxing income that is, in fact, a recovery of shareholders' losses. This means that if the shares rise above 45c you will be taxed on the gain without the benefit of being able to claim any of the previous losses.

Income Tax Act 1994, ss CG 1(b), CG 14-CG 24.
2001 New Zealand Master Tax Guide, 26-090.

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