Restructure of NZ Internet Registry Limited ("NZIRL")

This paper summarises Ernst & Young's advice on the restructure of NZIRL into separate registry and registrar functions.

1. Objective

Separate registry and registrar functions to facilitate competitive and flexible registrar market and independent registry.

2. Incorporation of Special Purpose Registrar

Based on these objectives, Ernst & Young has suggested the following solution:

Steps:

1. Incorporate new entity to develop and own SRS software and administer registry function.

2. Domainz provides funding necessary to develop SRS software through payment of dividend to InternetNZ..

3. Transfer any staff or other assets required to conduct registry function.

4. Authorised Registrar enters into contract with ccTLD Manager.

5. The ccTLD Manager contracts with the SRS to provide a regulatory function.

6. SRS then contracts with Authorised Registrars.

A summary of the steps is contained in the Appendix.

3. Outcomes

The main outcomes can be summarised as follows:

Funds are transferred from Domainz to the new entity free of any tax impost provided the dividend is either fully imputed or InternetNZ/Domainz enjoys the wholly owned group dividend exemption.
The objective of establishing a separate registry is achieved immediately.
On the basis the DRS is of nil value, alternatives for the remainder of NZIRL are that its assets could be sold and Domainz either retained (for name protection purposes), liquidated or sold.

Appendix - Summary of Steps

Step One- Incorporate SRS Limited

Ernst & Young has considered the use of a partnership or a trading trust to hold the registry but recommends a corporate entity.

Step Two - Funding Development of SRS Software

Ernst & Young recommends that InternetNZ obtain funds from Domainz by the latter paying a fully imputed dividend. The proceeds of the dividend would then be available to SRS Limited through an equity investment. Excess imputation credits unutilised by InternetNZ can be converted to a loss, which could be offset against taxable income of InternetNZ, SRS Limited or Domainz.

Step Three - Transfer of Assets

If assets transferred from Domainz to SRS Limited have a market value equal to their tax book value, and transfer at this value, no depreciation issues will arise for Domainz. Otherwise, a taxable gain or deductible loss will arise. The cost base of these assets for SRS Limited may be restricted to that originally established by Domainz.
Any employee remuneration accruals are either paid out by Domainz prior to transfer or they remain with Domainz and are reduced when (for example) annual leave and bonuses are paid out. Legal advice will be required in respect of technical redundancy issues for employees transferring.
On the basis that both SRS Limited and Domainz are "registered persons" for GST purposes, Domainz will have a GST output tax liability on the sale price of assets while SRS Limited will be entitled to a corresponding input tax credit provided the assets are acquired for the principal purpose of making taxable supplies (i.e., registry services).
To alleviate any cash flow implications, Ernst & Young recommends InternetNZ, Domainz and SRS Limited register as a group for GST purposes.

Steps Four - Agreement between ccTLD Manager and Authorised Registrar

There should not be any adverse taxation consequences associated with the cc TLD Manager function of InternetNZ entering into a regulatory relationship, and accompanying legal documentation, with the Authorised Registrars.

Step Five- Agreement between ccTLD Manager and SRS Limited

In order to avoid any adverse tax consequences, specifically dividend and non-deductible expenditure issues, a written agreement should be executed between the companies for the services to be provided.

Step Six- SRS Limited Transacts with Authorised Registrars

The registrar fees paid to SRS Limited by Authorised Registrars would constitute gross income to SRS Limited. However, expenditure incurred on revenue account to derive those fees will generally be deductible.
Expenditure not directly incurred in deriving gross income but incurred as a necessary incident of SRS Limited's activities of carrying on business will generally be deductible to the extent incurred on revenue account. This is provided SRS Limited's activities constitute a "business" for tax purposes (i.e., has profit making intent).
The cost of developing the SRS software will be depreciable once (and while) the system is being used in producing gross income.
GST output tax will be payable by SRS Limited on the registry fees it receives while a GST input tax deduction will be available in respect of GST paid on acquiring goods and services for the principal purpose of making its taxable supplies (i.e., registry services).

Step Seven - Payments to InternetNZ

Charges for services rendered will be fully taxable to InternetNZ and will likely be fully deductible to the payer if incurred in producing gross income (again subject to the normal rules of deductibility).
It may be possible for any loans from InternetNZ to SRS Limited to be interest bearing in order to repatriate profits (if required). This will be advantageous from a tax perspective to the extent InternetNZ has losses or is able to obtain tax exempt status.
Dividends received by InternetNZ from SRS Limited or Domainz should be exempt from tax under the intra group dividend exemption.