Becoming a PIE – transitional issues

Issue: Treatment of excess foreign investor tax credits

Submission

(32 – KPMG)

The legislation should clarify how a PIE that has excess foreign investor tax credits before becoming a PIE can claim the value of those credits after becoming a PIE.

Comment

Officials consider that the current rules allow excess foreign investor tax credits to be carried forward and used for a future tax year. We note there is no provision allowing the credits to be converted into formation losses.

Recommendation

That the submission be declined.

Issue: Tax credits for supplementary dividends carried forward upon transition into PIE

Submission

(33 – Investment Savings and Insurance Association of NZ Inc)

The tax credits from supplementary dividends should be grossed up at the company tax rate on the date of entry into the PIE rules and treated as formation losses. This change should apply retrospectively from 1 October 2007.

Comment

Officials consider that, under current income tax rules, PIEs can carry forward excess imputation credits which reduce the tax liability of the PIE as a whole. The provision relating to credits received by a portfolio tax rate entity or portfolio investor proxy in section HL 29 does not preclude this result. This is consistent with the rule that unless a general provision is specifically “switched off” in relation to a PIE it should be treated as applying to a PIE.

Recommendation

That the submission be declined.