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Stapled stock legislative changes introduced

Hon Dr Michael Cullen
Minister of Finance
Hon Peter Dunne
Minister of Revenue

Wednesday 27 August 2008 Media Statement

Stapled stock legislative changes introduced

The government has introduced legislative changes to treat certain stapled stock instruments as equity for tax purposes, to prevent a loss to the revenue through their use.

The changes have been added to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill by means of a Supplementary Order Paper released today.

“As announced in February, the proposed changes are aimed at preventing a large, potential revenue loss arising from company issues of debt instruments that are attached to shares,” Finance Minister Michael Cullen and Revenue Minister Peter Dunne said today.

“The concern arises because companies using stapled stock can pay tax-deductible interest to shareholders as a substitute for dividends, which becomes a revenue problem when foreign shareholders are involved.

“Under current law, the debt part of these instruments can be treated as debt for tax purposes, making the interest deductible, which is often at odds with the way the debt component is treated for accounting and regulatory purposes.

“As a result of consultation on the technical details of the proposed legislation, the government has narrowed its scope so that it better targets the arrangements that gave rise to our concerns.

“The changes will be limited to arrangements involving ‘ordinary’ shares – or shares that are not fixed rate shares, and in which the company issuing the debt is a party to the legal stapling arrangements and the debt component is such that it would normally give rise to tax-deductible interest. Debts stapled before 25 February 2008 will not be affected.

“These stapled instruments will be treated as equity for tax purposes, and the company that issued them will not be able to claim interest deductions on the returns paid to investors in relation to the debt component. The returns paid will instead be treated as dividends for tax purposes.

“Interested parties will have a further opportunity to express their views on the proposed changes when the Finance and Expenditure Committee invites submissions on the contents of the taxation bill to which the stapled stock amendments have been added.

“These changes are a specific response to a specific type of transaction that could have caused substantial revenue loss. More generally, the use of various types of hybrid instruments that are partly debt and partly equity is increasing with the growing sophistication of financial markets.

“We have therefore asked our officials to look at the issue and ensure that the relevant tax rules are up to date, provide business certainty and reasonably protect the tax base. Officials will ensure that consultation with the private sector takes place before making any recommendations on the matter to Ministers,” they said.

The Supplementary Order Paper is available at:


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