Chapter 9 – Imputation and Withholding Payment Systems

9.1 Introduction
9.2 Draft Legislation
9.3 Allocation Rules
9.4 Deemed Dividends: Allocation Rules
9.5 Producer Boards
9.6 Co-operative Companies
9.7 Sharemilking Arrangements
9.8 Capital Distributions
9.9 Carry Forward of Credits by a Company
9.10 Carry Forward of Unutilised Imputation Credits
9.11 Refunds of Dividend Withholding Payment
9.12 Integration With BE Regime: Individuals
9.13 Group Investment Funds


9.1 Introduction

9.1.1 The main features and many of the details of the imputation and withholding payment systems were outlined in the Committee's first report which you accepted in full. Thus, compared with the international tax regimes, few issues remain to be decided in respect of the imputation and withholding payment systems. Chapters 9 and 10 outline the Committee's recommendations on the remaining issues. This chapter deals with the imputation and withholding payment regimes. Consequential changes to other parts of the Act are discussed in chapter 10.

9.2 Draft Legislation

9.2.1 Like the international regime, the imputation and withholding payment regimes will result in major additions to the existing Income Tax Act. For ease of reference, each regime is best dealt with in a separate part of the Act. There is no particular significance to the location of these parts but we propose that the imputation legislation make up a new Part XIIA of the Act (immediately following Part XII, which deals with the provisional tax system), the withholding payment legislation a new Part XIIB and the branch equivalent tax account ("BETA") provisions a new part XIIC.

9.2.2 Within each part, the main sets of provisions are those concerning the operation of the imputation credit account ("ICA"), the withholding payment account ("WPA") and BETA respectively; the penalty tax provisions which apply when a company does not comply with the credit allocation rules; the provisions necessary to allow shareholders to utilise the credits; the anti-avoidance provisions; and, lastly, a number of transitional arrangements.

9.2.3 In addition, a number of consequential changes are necessary to other sections of the Act. For example, we propose a new definition of a dividend and amendments to excess retention tax and the deemed dividend provisions. These are outlined in chapter 10.

9.3 Allocation Rules

9.3.1 The provisions concerning the operation of the imputation system by companies are contained in sections 394B to 394H of the draft legislation. The central feature of the scheme is the ICA. Each company will be required to operate an ICA since the balance in this account will determine the amount of credits that the company can allocate to its shareholders in any income year.

9.3.2 The allocation of credits by a company will be subject to the allocation rules proposed in our previous report which are designed to ensure that credits are apportioned across dividends and bonus issues made to all shareholders, rather than directed selectively to certain groups of shareholders. The principal requirement is that a company must maintain the same credit ratio (i.e. ratio of credit to the value of a dividend or taxable bonus share) for all dividends paid in any income year unless it makes a statutory declaration that a ratio change is not part of an arrangement to confer a taxation advantage on a group of shareholders. In our first report, we proposed that such declarations should be made at least 21 days in advance of the first distribution at the changed ratio but we now recommend that they should be able to be made at any time before the dividend is declared.

9.3.3 Where a company does not comply in any income year with the requirement outlined in the previous paragraph, all the dividends (including taxable bonus shares) it pays in that year will be deemed to have been credited at the highest credit ratio applied by the company during the year. The corresponding aggregate credit deemed to have been allocated will be debited to the ICA of the company.

9.3.4 In addition, in order to ensure that the credit allocated to a dividend is not disproportionate to the amount of the dividend, the maximum ratio of imputation and withholding credit to dividend will be limited to the ratio of 28:72, based on the company tax rate of 28 percent. Where a company exceeds this ratio, it is necessary to impose some penalty. This was not dealt with in our earlier report. We therefore propose that, where the credit ratio of a dividend applied by a company exceeds the maximum ratio, the excess credit should not be allowed to shareholders, nor should it be included in the definition of a dividend. If the credit is an aggregate of an imputation credit and a withholding credit, the excess to be disallowed should be deemed to be, first, withholding credit and, secondly, imputation credit.

Recommendation

9.3.5 Accordingly, the Committee recommends that:

a   where the credit ratio of a dividend applied by a company exceeds the maximum ratio, the excess credit not be allowed to shareholders, nor included in the definition of a dividend; and

b   a ratio change declaration be able to be made at any time before the first distribution at the changed ratio is distributed.

9.4 Deemed Dividends: Allocation Rules

9.4.1 Under the present Act, a number of types of payment or benefit given to the shareholders of certain companies are deemed to be dividends. As discussed in chapter 10, we consider that these provisions should be retained. Deemed dividends would, however, cause complications in the application of the allocation rules. First, the application of the deemed dividend provisions is uncertain. Thus, a payment or benefit given to a shareholder of a company may not be deemed to be a dividend until some time after the end of the income year in which it is paid or conferred. Since the deemed dividend would not have been credited, it would trigger an additional allocation debit to the ICA of the company in a previous income year. Secondly, the quantification of the value of a deemed dividend is also uncertain under the present rules. Where the Commissioner's assessment differed from the taxpayer's, a breach of the credit allocation rules may result, once again triggering an allocation debit.

9.4.2 In view of these uncertainties, we consider that it is impractical to require companies to allocate credits to deemed dividends in the same way as for cash dividends. As discussed in chapter 10, benefits previously deemed as dividends provided to "major shareholders" who are employees are to be brought within the fringe benefit regime. Consideration could be given to bringing all non-cash benefits provided to shareholders within the fringe benefit regime. In the interim, we propose that deemed dividends be excluded from the allocation rules where they arise in respect of benefits given to shareholders by way of the sale of company property to a shareholder at an inadequate consideration (presently dealt with under section 4(l)(b)); the purchase of property from a shareholder by a company for excessive consideration (a new provision); loans to shareholders other than bona fide loans at commercial interest rates; non-deductible expenditure enjoyed by proprietary company shareholders and associates; and excessive remuneration to directors or shareholders of proprietary companies, or their relatives.

9.4.3 A separate category of deemed dividends is interest on debentures or convertible notes which fall within sections 192, 195 or 196 of the Act. These need to be treated in the same way as ordinary dividends for the purposes of the allocation rules.

Recommendation

9.4.3 Accordingly, the Committee recommends that deemed dividends be excluded from the allocation rules where they arise in respect of benefits given to shareholders by way of the sale of company property to a shareholder at an inadequate consideration; the purchase of property from a shareholder by a company for excessive consideration; loans to shareholders other than bone fide loans at commercial interest rates; non-deductible expenditure enjoyed by proprietary company shareholders and associates; and excessive remuneration to directors or shareholders of proprietary companies, or their relatives.

9.5 Producer Boards

9.5.1 Co-operative companies and the producer boards (which are to lose their tax exempt status from the beginning of the 1989 income year) are to be included within the imputation system. The boards are created by statute and do not have a shareholding structure on which dividends and credit allocations could be based. They do, however, act on behalf of producers who can be regarded as their owners in an economic if not a legal sense. It is therefore appropriate to impute any income tax paid by boards to their respective producers.

9.5.2 The boards' operations take one of two principal forms:

a   the Dairy Board and the Apple and Pear Marketing Board have an export monopoly and purchase produce from producers or producer co-operatives. Thus, these boards make produce payments directly or indirectly to suppliers;

b   the Wool and Meat Boards do not have an export monopoly, though they may purchase product for price-smoothing reasons. The activities of these boards are funded principally by way of levies on producers which are proportionate to the value of each producer's output.

9.5.3 In both cases, the return to a producer takes the form of higher product prices as a result of the boards' direct or indirect involvement in price-smoothing, marketing and other forms of representation. Product payments or levies therefore provide an appropriate basis on which the boards could allocate credits to producers. Individual producers will receive product payments and/or pay levies at various times of the year. It is therefore necessary to aggregate product payments or levies over the income year and to base the credits subsequently allocated to each producer on the aggregate annual product payments received or aggregate levies paid by the producer during the year. Where credits are allocated on the basis of product payments, the proportion of the aggregate credit allocated to each producer in any income year would equal the proportion that the producer's product payment made up of the of the total product payments made by the board in the previous year (as the actual allocation could not be made until after the end of the year of production). Alternatively, the allocation could be on the basis of the value of product supplied during the production year, rather than on the payments made. An equivalent proportional allocation rule would apply where credits were allocated on the basis of levies. In either case, no credits could be allocated until after the end of the first year of operation of the scheme.

9.5.4 In practice, the Dairy Board buys produce from dairy companies who in turn purchase milk from their farmer suppliers. Thus, payments for produce pass from the Board to the companies and from the companies to farmers. For the purposes of the credit allocation rule outlined in the previous paragraph, each company can be regarded as a producer with respect to the Board.

9.5.5 Companies incorporated under the Companies Act will be able to allocate credits to either dividends or taxable bonus issues. In our view, the producer boards should have the option of distributing cash dividends as a means of allocating credits to their producers. The boards presently do not have any statutory authority to pay dividends so that the characterisation of a payment to a producer as a dividend would occur only in respect of its income tax treatment. Where a board is authorised to make a payment to a producer, for example, in consideration for product purchased, it would elect to make all or part of the payment non-deductible for tax purposes. The amount of the payment to be treated as a dividend should be calculated on the basis that the dividend were fully credited. For tax purposes only, the non-deductible payment would then be treated as a fully credited dividend. The dividend would be assessable to a producer in the same way as any other dividend, but the producer would be able to use the attached credit to offset the tax payable. The additional tax payable by a board therefore results in an equal tax saving to its producers. The mechanism to give effect to this election will be included in an amendment to section 199 which is currently being drafted by the Inland Revenue Department. We have anticipated this amendment in our draft legislation.

9.5.6 In order that cash flow considerations do not constrain a company's ability to allocate credits to its shareholders, companies will be able to allocate credits to taxable bonus issues. These will be taxed in the same way as dividends in the hands of shareholders. The boards do not at present have share capital so that a bonus issue allocation mechanism cannot be used. It is, however, desirable that the boards have a mechanism for allocating credits without having to pay out cash dividends. Hence, we propose that they should be able to allocate credits to notional dividends. As proposed for cash dividends paid by a board, the amount of a notional dividend should be computed by assuming that it is fully credited. In other words, the allocation of a credit of 28 cents would require the declaration of a notional dividend of 72 cents. Producers would be taxed on the sum of the notional dividend and the credit in the same way as if the dividends were actual dividends. Where a producer member is a company, the notional dividend would not be assessable but the credit would be added to its ICA or WPA.

9.5.7 This credit allocation mechanism is equivalent to allocating credits to taxable bonus shares. In the latter case, the amount capitalised by way of the taxable bonus issue is added to the paid-up capital of the company. The distribution of capital will be subject to marshalling rules which are outlined in section 9.8. The boards do not, however, have a share capital so that a return of capital cannot be made in substitution for dividends. Thus, we propose that the boards be able to maintain a record of notional capital for tax purposes. The amount allocated to notional capital would equal the amount of notional dividends declared by the board, net of any credits. Actual cash payments sourced from notional capital would be exempt in the hands of the recipient producers.

9.5.8 The boards should also be able to operate a withholding payment account (WPA) in order that credits for withholding payments made can be passed through to producers and a branch equivalent tax account (BETA) in order to relieve any double taxation of the income of a CFC in which a board has an income interest of 10 percent or more.

Recommendations

9.5.9 Accordingly, the Committee recommends that:

a   the producer boards be able to operate an ICA and WPA for the purposes of allocating credits to their constituent producers and a BETA for the purposes of relieving double taxation of income derived under the BE regime;

b   a board be able to allocate credits to either payments made to producers, which would be non-deductible and treated as dividends for tax purposes, or to notional dividends and in either case the amount of the dividend be computed on the basis that it is fully credited;

c   an allocation of credits by a board to its producers by way of cash and/or notional dividends be made only once in each income year;

d   the credits allocated by a board to its producers be in proportion to the product payments made or payable by the board to its producers and/or in proportion to the levies paid or payable by producers to the board;

e   the boards be able to maintain records for tax purposes in which to credit the net amount of notional dividends allocated (i.e. the gross notional dividends allocated less the amount of the credits attached to them);

f   the notional capital of a board be able to be distributed tax free to producers.

9.6 Co-operative Companies

9.6.1 A number of co-operatives are in a similar position to the producer boards in that the return they provide to their members is in the form of reduced input prices or higher output prices rather than dividends. Co-operative companies do, however, have issued share capital and may pay dividends to members. The number of shares held may, however, be unimportant since the return members obtain usually depends primarily on their transactions with the co-operative rather than their shareholdings. We therefore propose that co-operative companies be treated in much the same way as we have recommended for the producer boards. Thus, they would have the option of electing to make a payment to members non-deductible to the co-operative for tax purposes in which case it would be treated as a dividend. Credits could then be allocated to the dividend. In the event that cash dividends were not available, the notional dividend allocation mechanism outlined for the producer boards could be used. In either case, the credits would be allocated to members on the basis of their transactions with the co-operative.

9.6.2 Since some co-operative companies do, however, have a share capital and pay dividends, they should be also be able to allocate credits to dividends or taxable bonus shares in the same way as other companies.

9.6.3 The present section 199 applies not only to co-operative companies but more generally to "mutual associations". An association is widely defined as "any body or association of persons, whether incorporated or not". The Committee is uncertain of the nature of any unincorporated mutual associations and of their tax treatment. We therefore refrain from making any recommendations on the way they should be treated under imputation. Our recommendations therefore apply only to co-operative companies.

Recommendation

9.6.4 The Committee therefore recommends that co-operative companies be treated in the same way as the producer boards for the purposes of imputation except that they also have the option available to other companies of allocating credits to dividends or taxable bonus shares.

9.7 Sharemilking Arrangements

9.7.1 One of the issues outstanding from our first report was whether a special arrangement was needed for sharemilkers who receive product payments through members of co-operatives though they themselves are not members. This would be the case under some sharemilking agreements. Where payments by a dairy company for milk supplied are made directly to a sharemilker and the land-owner, dividends and attached credits paid on the basis of product supplied should be paid directly to both persons on the same basis that payments for milk supplied would be made. In other words, the sharemilker should receive dividends from the co-operative even though he may not be a shareholder.

9.7.2 Where some other contractual arrangement exists, we would be reluctant to prescribe a general remedy. The parties involved can be expected to amend their contractual arrangements if they wish to. Where both the sharemilker and the land-owner are members of the co-operative, each would receive dividends and credits directly from the co-operative.

Recommendation

9.7.3 Accordingly, the Committee recommends that, where payments by a dairy company for milk supplied are made directly to a sharemilker and the land-owner, dividends or bonus shares and attached credits paid on the basis of product supplied should be paid directly to both persons on the same basis that payments for milk supplied would be made.

9.8 Capital Distributions

9.8.1 The CD proposed that all distributions should be taxable, other than distributions of paid-up capital (including share premiums paid) made on the winding up of a company or on the redemption of shares. You agreed that this proposal should be amended by retaining the present exemption of distributions of capital profits on winding up.

9.8.2 The remaining issue is the treatment of a return of capital other than on winding up. In principle, a return of capital should not be taxed if it is merely a return of the capital paid in on the subscription of shares. If it were to be taxed, equity would be treated very differently from debt and instruments such as redeemable shares would not be viable. A return of capital should not, however, be a substitute for dividends and, pending solution of this problem, the Committee reserved its position on this issue in paragraph 2.6.4 of its earlier report.

9.8.3 It is conceivable that a company might issue shares, either of the same class or of separate classes, which are to be redeemed at regular intervals in the future. The redemptions would then be made instead of dividends. For example, if a company with a single class of shares redeems a certain percentage of every shareholder's holding each year, the resulting capital payments should be treated as dividends. Similarly, if a company issues a certain class of shares to its shareholders and then redeems them on a pro rata basis over a period of years, the return of capital should be treated as a dividend.

9.8.4 While providing for circumstances where a return of capital is made in substitution for a dividend, the legislation should give companies as much flexibility as possible to issue redeemable shares. We therefore propose that a return of capital made on the redemption of shares, other than on winding up, should be treated as capital, and hence non-assessable, provided that:

a   the shares were issued on terms such that they are to be redeemed at a specified date or dates or within a specified period; and

b   the capital returned is equal to the amount paid in, including any premium, on the subscription of the shares; and

c   the shares redeemed were not issued pursuant to an arrangement under which they were to be redeemed in a regular or systematic way such that it may reasonably be concluded that the return of capital is made in lieu of a dividend.

9.8.5 In addition to returning capital on the redemption of shares, capital may be returned pursuant to reductions in the par or nominal value of shares. Such partial redemptions will, however, invariably be made on a pro rata basis and hence on the same basis that dividends would be paid. For this reason, we propose that a distribution made on a partial reduction of the nominal or par value of shares not be treated as a return of capital but be treated as a dividend. We also propose that debentures which fall within sections 192 or 195 of the Act which are issued after 30 September 1988 be treated as shares for the purposes of these rules.

9.8.6 Our proposals are significantly different from those proposed in the CD so that it is reasonable that taxpayers have some notice of them. The implementation date of the proposals should also be integrated with the change to the tax treatment of bonus shares which is to come into effect on 1 October 1988. We therefore propose that they come into effect on 1 October 1988.

Recommendation

9.8.7 Accordingly, the Committee recommends that, with effect from 1 October 1988, a return of capital made by a company on the redemption of shares (including debentures issued on or after 1 October 1988 which come within sections 192 or 195 of the Act), other than on winding up, be exempt from tax in the hands of the recipient provided that:

a   the shares are issued on terms such that they are to be redeemed at a specified date or dates or within a specified period;

b   the capital returned is equal to the amount paid in, including any premium, on the subscription of the shares; and

c   the shares redeemed were not issued pursuant to an arrangement under which they were to be redeemed in a regular or systematic way such that it may reasonably be concluded that the return of capital is made in lieu of a dividend.

9.9 Carry Forward of Credits by a Company

9.9.1 In our first report, we referred to the need for anti-streaming provisions to ensure that the revenue cost of the imputation regime is not different from that envisaged by the Government. The allocation rules and anti-stapling provisions have this objective. In paragraph 2.4.8 of our earlier report, we referred to the possible need for a specific anti-avoidance rule buttressed by disclosure requirements to counteract temporary transfers of interests aimed at avoiding the allocation rules. The effect of the allocation rules would also be avoided by the accumulation of credits within companies which were then sold.

9.9.2 To limit the opportunity for such credit trapping and sale, we recommend in chapter 10 that excess retention tax be retained. This measure by itself is, however, not sufficient since, for example, the New Zealand holding company of a non-resident is not liable for ERT.

9.9.3 To supplement ERT with respect to companies owned by residents and as a measure effective in relation to non-residents, the Committee proposes that a 75 percent commonality of interests be required (using the same tests already used in section 188 of the Act with respect to the carry forward of losses, but extended to include fixed dividend shares) for a company to be able to carry forward the credit balance of its ICA, WPA or BETA. In the event that the 75 percent commonality is lost, a debit would arise in the relevant account equal to the credit balance of the account on the date that the required degree of commonality is lost. This measure will reduce trafficking in credits and is consistent with the integration principles underlying a full imputation system.

9.9.4 The compliance costs of a shareholding commonality rule are undoubtedly highest for listed companies because of normal trading of shares and the need to trace shareholdings through interposed companies. Moreover, listed companies and their subsidiaries are unlikely to be used as credit traps since their shareholders will generally be residents who are able to utilise the credits. Hence, we propose that there be an exception to the proposed commonality rule for companies listed on the New Zealand stock exchange and their wholly-owned subsidiaries.

Recommendation

9.9.5 Accordingly, the Committee recommends that a 75 percent commonality of shareholding (using the tests presently contained in section 188 of the Act but extended to include fixed dividend shares) be required for a company, other than a company listed on the New Zealand stock exchange or a wholly-owned subsidiary of such a company, to be able to carry forward the credit balance of its ICA, WPA or BETA.

9.10 Carry Forward of Unutilised Imputation Credits

9.10.1 Taxpayers in tax loss would be unable to utilise imputation credits (which are referred to in the draft legislation as "tax credits") so, in response to the Committee's recommendation, you agreed that they should be able to gross up the amount of any credit by dividing by a tax rate of 28 percent and adding the resulting amount to the amount of the tax loss to be carried forward. This was the mechanism that could at present be most easily accommodated within the Department's existing administrative and EDP systems. A better system would be to carry forward the amount of the unutilised credit but, according to the Department, it would be unable to implement this in the next year or so.

9.10.2 Since a system based on converting an unutilised credit to a loss carry forward is feasible, there seems no reason why it should not extend to all taxpayers. This would reduce the incentive for arbitrage amongst taxpayers aimed at utilising what would otherwise be wasted credits. Thus, we propose that all resident taxpayers, other than companies, be able to convert any imputation credits in excess of their tax liability in any income year, after taking into account all other tax reliefs, into a tax loss to be carried forward, where the amount of the loss is calculated as the amount of the unutilised credit divided by 0.28.

Recommendation

9.10.3 Accordingly, we recommend that that all resident taxpayers, other than companies, be able to convert any imputation credits in excess of their tax liability in any income year into a tax loss to be carried forward, with the amount of the loss calculated as the total amount of the unutilised credit divided by 0.28.

9.11 Refunds of Dividend Withholding Payment

9.11.1 The dividend withholding payment will be levied on dividends received on or after 1 April 1988 by resident companies from non-resident companies. The amount of the payment is intended to approximate the income tax that a non-corporate shareholder would pay on a dividend from a non-resident company if the dividend passed directly to the person. Where the eventual recipient shareholder would not incur such a liability, such as a non-resident or tax-exempt shareholder, or where the amount withheld exceeds a resident shareholder's tax liability, the excess is to be refunded.

9.11.2 The withholding payment is to be paid quarterly. The Government Economic Statement proposed that refunds to non-resident companies be made by the resident company paying the dividend. In our first report, we proposed that the payer company should offset the refund paid to a non-resident against its withholding payment liability for the quarter in which the refund was made. If the refund paid exceeded the liability, the excess would be refunded by the Department. Refunds to tax-exempt shareholders were to be made quarterly by the Department. In our report, we proposed that excess withholding credits should also be refunded to other resident taxpayers at the end of the year in the same way as refunds of other tax.

9.11.3 We have given further consideration to the refund mechanism. A problem with the proposed system is that the Department would be required to make reimbursing refunds to companies and refunds to tax-exempt shareholders before it had assessed withholding payment liabilities to verify, where necessary, that the withholding payment to be refunded had indeed been paid. One approach would be to have quarterly assessments but this would raise significantly the administrative and compliance costs involved. A more efficient system from an administrative point of view is to have annual assessments and annual refunds for all shareholders.

9.11.4 If an annual refund system were adopted, resident companies would face an unreasonable cash flow burden if they had to make not only the original withholding payment and pay that to the Department, but also refunds to non-resident shareholders that would be reimbursed only after the end of the year. We therefore consider that refunds to non-residents should be made by the Department on an end of year basis on application by a non-resident.

9.11.5 Withholding payment collected on behalf of non-resident shareholders can be viewed as an advance payment of some or all of their non-resident withholding tax (NRWT) liability on dividends paid. Thus, the withholding credit allocated to a dividend paid to a non-resident should be credited towards the NRWT payable on the dividend. Where the withholding credit was less than the NRWT payable, the payer company would be obliged to deduct the balance of the NRWT and pay it over to the Department as under the present system. Conversely, where the withholding credit exceeded the NRWT payable, the non-resident would claim a refund of the excess by making an application to the Department after the end of the income year in which the dividend was paid. Finally, if the withholding credit equalled the NRWT liability, no further payment or refund would be required.

9.11.6 The application for a refund by a non-resident or any other shareholder would need to be supported by the dividend statement supplied by the payer company. The draft legislation details the information that we propose be required to be included in the statement.

Recommendation

9.11.7 Accordingly, the Committee recommends that:

a   refunds of dividend withholding payment to all shareholders, irrespective of their residence or tax status, be made by the Department after the end of the income year in which the corresponding withholding credit was received;

b   where a withholding payment credit is allocated to a dividend paid to a non-resident, the non-resident withholding tax payable on the dividend be offset to the extent of the withholding payment credit.

9.12 Integration With BE Regime: Individuals

9.12.1 In our previous report, we recommended that individuals, like companies, should be able to operate a branch equivalent tax account ("BETA") for the purposes of avoiding double taxation of the income of a CFC, once as attributed income under the BE regime and again as a dividend when the income is distributed. The BETA would record the amount of tax paid by a person on attributed foreign income. The person could then offset tax payable on a dividend received from a CFC to the extent of the credit balance in the account. The computation of the tax payable on attributed income and the withholding payment liability on a dividend is straightforward for a company because of the flat rate of company and withholding tax. It is, however, more complicated for non-corporate taxpayers because of the progressive rate scale.

9.12.2 The objective of avoiding double taxation in the case of non-corporate taxpayers can be achieved more simply by recording in BETA the amount of attributed income the person has derived, rather than the tax paid on such income. A dividend received from a CFC would then be non-assessable to the extent of the credit balance in the account. We therefore recommend this approach instead of that proposed in our previous report.

Recommendation

9.12.3 Accordingly, the Committee recommends that, where a non-corporate taxpayer elects to establish a branch equivalent tax account, the amounts to be credited to the account be the attributed income derived by the person under the BE regime.

9.13 Group Investment Funds

9.13.1 Section 211A of the Act deals with group investment funds. The income of such funds is divided into two categories with "category A" income taxed as if it were derived by a company. The "category" B income of a fund is taxed as if it were derived by a trustee. A distribution of after-tax category A income is treated as dividend. As the trustees of such funds are taxed in the same way as companies in relation to category A income, it is appropriate that they be permitted to impute tax on distributions of category A income as if they were companies. The draft legislation gives effect to this.