How the fair dividend rate would work
The following are examples of how the fair dividend rate for taxing international shares would work.
Monday, September 18th 2006, 5:11AM
How would the fair dividend rate work?Individuals would apply the "fair dividend rate" based on the market value of shares held at the start of the year.
That is, if an investor holds $100,000 of offshore shares at the start of the year, their taxable income would be $5,000 (unless they are able to show that their investment has returned less than 5% or has made a negative return).
Examples
Where an individual makes a total return of more than 5%
John holds offshore shares that have a market value of $100,000 at the start of the year. These shares are worth $115,000 at the end of the year. John also derives a $10,000 dividend.
Under the fair dividend rate approach, John would either pay tax on 5% of $100,000 or a lower amount if his return for the year is less than 5%. No tax would be payable if he made a negative return.
John’s total return for the year is the $15,000 capital gain on his shares and the dividend of $10,000. His total return is therefore $25,000. However, his taxable income for the year would be limited to 5% of the opening value of his shares. This would result in taxable income of $5,000. (Note: under the fair dividend rate method dividends would not be separately taxed)
Where an individual makes a total return of less than 5%
Mary also holds offshore shares that have a market value of $100,000 at the start of the year. These shares increase in value to $102,000 at the end of the year. Mary also receives a $1,000 dividend.
As in the previous example, Mary would pay tax on 5% of $100,000 (her opening value) unless she can show that she made a return of less than this.
Mary’s total return for the year is $3,000 (comprised of a capital gain of $2,000 and a dividend of $1,000), which is less than 5% of her opening value of $100,000. Therefore, Mary would only be taxable on $3,000.
Where an individual makes a negative return
Judy holds offshore shares that have a market value of $100,000 at the start of the year, which decrease in value to $75,000 at the end of the year. She also receives a $10,000 dividend.
As in the previous examples, Judy would be taxable on 5% of the opening value of her shares unless she can show that her total return for the year is less than 5%.
Judy’s total return for the year comprises a capital loss of $25,000 and the dividend of $10,000. Her net return is therefore a loss of $15,000. Because Judy has made a negative return on her offshore shares, no tax would be payable under the fair dividend rate approach.
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