How the fair dividend rate would work

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The following are examples of how the fair dividend rate for taxing international shares would work.

Monday, September 18th 2006, 5:11AM

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

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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