Fonterra says its management of the tax treatment of its dividends to farmers will not change with the introduction of share trading among farmers (Taf) after questions from tax experts.

Currently Fonterra makes an election every year to IRD to have its dividends to farmers treated as "distributions" for tax purposes. This essentially means farmers can declare the dividend as part of their farm income and can therefore use it to make Income Equalisation Scheme deposits.

On the downside, it means as distributions those dividends become liable for ACC levies, which for a dairy farmer currently total 4.7 per cent of that income. Dividends are not liable.

With Fonterra planning to introduce Taf as part of a major capital restructure near the end of the year, accountants have been asking how the big company plans to deal with the issue of dividend treatment, given that under Taf, non-farmer investors will be able to buy dividend-carrying, NZX-listed units in Fonterra shares.

Taranaki BDO partner and rural advisory specialist Mark Irving said non-farmer or "townie" unit investors would not welcome their dividends being treated as distributions because distributions do not come with tax credits like most dividends from listed companies.

In response to Waikato Times questions, Fonterra chief financial officer Jonathan Mason said Taf would not change the way Fonterra structures its current tax model under the Income Tax Act treatment of co-operatives, which enables it to pay gross returns to farmers, who could then pay their appropriate tax.

Mason said he could not elaborate until the Taf prospectus, which would detail final tax structures for Fonterra Shareholders Fund units, was finalised.

Irving said Fonterra had advised a Taf roadshow meeting in Taranaki last week that it intended to elect to IRD that its dividends be treated as a distribution for farmers and as a tax credit-carrying dividend for sharemarket investors.

A dividend was not part of net income from the business of farming which determined the maximum income equalisation deposit a farmer could make in a year, he said.

- © Fairfax NZ News

Comments