Repeal of branch equivalent tax accounts of companies and conduit tax relief accounts
(Clauses 4, 6, 10, 11, 52, 59 to 61, 63, 65, 67, 68, 75 to 96, 98, 100 to 102, 104 to 111, 113 to 115, 117 to 125, subclauses 126(5), (8), (10), (12) to (15), (17), (19), (22), (23), (26), (28) and (31) to (33), and clauses 127, 128, 130, 133 to 135 and 137 to 139)
Summary of proposed amendment
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 made major changes to the tax treatment of foreign investments.
Those changes made branch equivalent tax accounts of companies (BETAs) and conduit tax relief accounts (CTRAs) obsolete.
However, the government at the time announced that these memorandum accounts would be retained for a transitional period of two years, to allow the use of remaining BETA debits (to prevent double-taxation of foreign income) and the distribution of conduit-relieved income (to prevent the dilution of foreign dividend payment credits).
This Bill proposes provisions to remove the BETAs and CTRAs at the end of the relevant period, and to repeal associated provisions and references.
Application date
The proposed repeal of BETAs and related provisions applies, for most provisions, from the beginning of the fourth income year the taxpayer is under the new international tax rules (that is, the first income year beginning on or after 1 July 2012).
A restriction on elections to use BETA debit balances, limiting the use to relieving tax on attributed foreign income that is allocated to the second year under the international tax rules or to an earlier year, would apply from the first income year beginning on or after 1 July 2009.
The proposed repeal of CTRAs and related provisions would apply from the beginning of the first income year beginning on or after 1 July 2011.
Key features
BETAs will be repealed after three years under the new international tax rules passed in 2009, but debit balances will be able to be used to relieve tax on attributed foreign income only where that income is allocated to the second year under the new rules or to an earlier year. BETAs remain for the third year only to allow determination of income and filing of returns for the second year.
CTRAs will be repealed after two years under the new international tax rules. Dividends not paid before that date will not be able to have conduit tax credits attached to them.
Detailed analysis
All references in this part of the Commentary are to the Income Tax Act 2007, unless noted.
Branch equivalent tax accounts (BETAs) of companies
Branch equivalent tax accounts of companies are being phased out. Branch equivalent tax accounts of individuals (non-companies) are unaffected.
Paragraph FM 6(3)(d)
Proposed repeal of this paragraph along with BETA accounts of companies. Dividends between companies in a consolidated group are normally ignored, but are still taken into account for the purposes of the rules relating to BETAs. Once BETAs of companies cease to exist, this paragraph will become redundant.
Section GB 40
Proposed repeal of this section. Arrangements to avoid continuity restrictions on BETA account balances will cease to be relevant when BETA account balances are repealed. Arrangements affecting balances prior to repeal will still be caught, since the section applied at the time.
Paragraphs OA 2(1)(d), 5(5)(a), 5(5)(c), 6(5)(a), 6(5)(c), sub-paragraphs OA 7(2)(d)(i) and (ii), paragraphs OA 8(6)(c) and (g)
Proposed repeal or alteration of these provisions. With the repeal of BETAs of companies from the first income year beginning on or after 1 July 2012, no further credits or debits will arise in the accounts and there will not be any balances in the accounts. No further BETA debits will be used by companies to meet tax liabilities.
Section OA 9, paragraphs OA 10(1)(d) and 10(3)(c), subsection OA 14(6), and paragraphs OA 15(1)(c) and 15(3)(c)
Proposed repeal or alteration of these provisions. If an amalgamating company has a BETA, BETA debits and credits have to be transferred across to the BETA of the amalgamated company. The requirement to transfer the credits will no longer be necessary if either the amalgamating or amalgamated company has no BETA account.
Paragraph OB 4(3)(h)
Proposed repeal of this provision. From the beginning of the first income year beginning on or after 1 July 2012, a company will not be able to make an election to use a BETA debit balance to meet an income tax liability. In addition, even if it makes an election prior to that date, it will not be able to make the election in respect of a tax liability for income relating to an income year beginning on or after 1 July 2011. Paragraph (h) will therefore be redundant.
Subsections OE 7(3) and OP 101(2)
When the repeal of BETAs of companies was announced, the government said that there would be a two-year transitional period during which existing debit balances could continue to be used.
That is, companies will still be able to reduce their tax liability for attributed foreign income earned in the first two income years following application of the new income tax rules.
Because the amount of income for the second year will not be known immediately, it will be impractical to make elections to use BETA debit balances before the end of the second year. For that reason, BETAs will remain for a third year.
New requirements have been introduced in sections OE 7 and OP 101 to prevent elections to use BETA debits unless:
- the election is made before the end of the third income year; and
- the election relates to a tax liability for attributed foreign income that has been allocated to the second year or to an earlier year.
These requirements apply retrospectively from the date of application of the new international tax rules.
Subsections OE 1(1) and (3), sections OE 2 to OE 4, OE 6 to OB 16B, OP 97 to OP 98, OP 100 to OP 104B and OP 108B
It is proposed to repeal these provisions, which impose requirements on BETA companies to keep BETAs and make appropriate entries in them, with effect from the first income year beginning on or after July 2012. The BETA regime for companies and requirements to keep such accounts will be no longer required from that date.
Accounts must still be kept for the final year of the BETAs, even if only a part tax year because of the repeal (BETAs always have a 31 March “balance” date, which may not correspond to the end of an income year). Relevant information must also be provided in an imputation credit account (ICA) return for the final year, and records must continue to be kept for the normal record-keeping period (see commentary on changes to the Tax Administration Act 1994, below).
Subsection OE 5
This provision is modified to apply only to BETA accounts of individuals, following the repeal of the rules for companies.
Section OZ 16
It is proposed to repeal this provision at the same time as BETAs of companies. This was a transitional provision to reduce remaining balances in BETAs following changes to the corporate tax rate in Budget 2010.
Sub-paragraph YC 17(12)(b)(iii) and subsection YC 18B(3)
It is proposed to repeal or modify these provisions to remove redundant references to BETAs.
Paragraph 22(2)(f) and subsection 22(7) of the Tax Administration Act 1994
References to BETA accounts will be redundant from the time those accounts are repealed, so are being removed. Records for periods when BETA accounts were in existence are still required to be kept – that requirement arose before repeal.
Paragraph 69(1)(e) of the Tax Administration Act 1994
It is proposed to repeal this paragraph. BETA information of companies will no longer have to be included in the annual ICA return under this section, once returns have been completed for the tax years up and including the year during which BETAs were repealed. It is possible that the BETA will not exist for the entire tax year in the year BETAs are repealed. Nevertheless, under the existing provision, it is still required to include relevant BETA information in the ICA return (the person was a BETA company during the tax year).
Section 77 of the Tax Administration Act 1994
It is proposed to repeal this provision. The provision previously required an amended annual ICA return if a retrospective election to be a BETA company was made, to ensure a complete record of BETA transactions would be returned. It will not be possible to make elections to become a BETA company from the beginning of the income year beginning on or after 1 July 2012, retrospective or not. Since an ICA return must already (under paragraph 69) be provided for any tax year falling wholly or partly within the last income year for which a BETA exists, section 77 is now redundant.
Conduit tax relief accounts
Sections CW 11 and HA 17
It is proposed to repeal section CW 11. Dividends that are fully credited for conduit tax relief will no longer be exempt income of conduit tax relief holding companies if they are paid later than the beginning of the first income year of the recipient beginning on or after 1 July 2011. There are a number of consequential amendments to remove references to section CW 11 in other provisions.
Section FE 21(12)(a)(iii)
It is proposed to repeal this section. It will neither be possible for companies to attach conduit tax relief credits to dividends, nor to be conduit tax relief holding companies, from income years beginning on or after 1 July 2011. This makes section FE(12)(a)(iii) redundant from the beginning of that income year.
Section GZ 2
It is proposed to repeal section GZ 2 of the Income Tax Act 2007, which is an anti-avoidance rule, on the same date as CTRAs. After the repeal of CTRAs, this section becomes redundant and its removal from the Act therefore aids clarity.
The rule in section GZ 2 was enacted to prevent people running up CTRA credit balances in anticipation of them being cancelled under the new international tax rules, and then effectively directing tax-relieved income to residents.
The rules apply to an arrangement involving transactions that occurred between the date on which repeal of conduit accounts was announced and the enactment of the international tax rules, after which further conduit tax relief was prevented.
The anti-avoidance rule will still apply to such arrangements even after repeal of section GZ 2. The rule still applies because the arrangement was entered into before the repeal and the rule would have applied at that time, triggering the imposition of additional income tax.
Section HG 2(4)(c)
It is proposed to repeal this section. This provision states that partnerships are not subject to the “no streaming” rules in subsection HG 2(2) in respect of CTR additional dividends. However, there will be no such dividends paid in any income year beginning on or after 1 July 2011.
Section LQ 5
It is proposed to repeal this section. Since conduit tax credits will no longer be attached to dividends by a company in any income year beginning on or after 1 July 2011, CTR additional dividends will not be payable by the company from that time either.
Paragraph OA 2(1)(c), subsections 5(4) and 6(4), paragraph OA 7(2)(c), and subsections OA 8(5) and 18(1)
It is proposed to repeal these paragraphs and subsections. With the repeal of CTRAs from the first income year beginning on or after 1 July 2011, no further credits or debits will arise in the accounts and there will not be any balances in the accounts. No further CTR credits will be attached to dividends.
Paragraphs OA 10(1)(c), 10(3)(b), subsection OA 10(4) and paragraphs OA 15(3)(b), OB 24(3)(c) and OB 53(3)(c)
It is proposed to repeal or alter these paragraphs. At one time, if an amalgamating company had a CTRA but the amalgamated company did not, CTR credits were to be converted to imputation credits and FDP was to be paid. The requirement to transfer the credits ceased when the new international tax rules came into force.
Sections OC 19 and OP 70
These sections are being repealed at the same time as CTRAs cease. They allow for a transfer from a CTRA to a foreign dividend payment memorandum account in certain circumstances. With no CTRA, such transfers will no longer be possible.
Subpart OD and sections OP 78 to 80, OP 83 to 87, OP 89 to 94 and OP 96
The subpart and sections, which impose requirements on CTR companies to keep CTRAs and make appropriate entries in them, are being repealed with effect from first income year beginning on or after July 2011. From that time, there will be no CTRAs to meet requirements for.
Accounts must still be kept for the final year of the CTRAs, even if only a part tax year because of the repeal (CTRAs always have a 31 March “balance” date, which may not correspond to the end of an income year). Relevant information must also be provided in an ICA return for the final year, and records must continue to be kept for the normal record-keeping period (see commentary on changes to the Tax Administration Act 1994, below).
Section OZ 17
It is proposed to repeal this provision at the same time as CTRAs. This was a transitional provision to reduce remaining credit balances in CTRAs following changes to the corporate tax rate in Budget 2010.
Paragraphs RF 8(1)(c) and (f), subsections RF (9)(1), 9(6) and (7), paragraph RF 10(3)(a), subsection RF 10(4), paragraph RF 10(5)(e) and subsection RF 10(7)
It is proposed to repeal these paragraphs at the same time as CTRAs, since it will no longer be possible to attach CTR credits to dividends or to pay a CTR additional dividend.
Sections YD 9 to YD 11
It is proposed to repeal these sections at the same time as CTRAs. A CTRA holding company must be a CTR company, so these provisions will become redundant once CTRAs are repealed.
Paragraph 22(2)(k) and sections 29, 30A and 68A of the Tax Administration Act 1994
References to CTR accounts or to CTR credits will be redundant from the time those accounts are repealed and CTR credits can no longer be attached to dividends, so it is proposed to remove these references.
Paragraph 69(1)(f) of the Tax Administration Act 1994
It is proposed to repeal this paragraph. CTRA information will no longer have to be included in the annual ICA return under this section, once returns have been completed for the tax years up and including the year during which CTRAs were repealed. It is possible that the CTRA will not exist for the entire tax year in the year CTRAs are repealed. Nevertheless, under the existing provision, it is still required to include relevant CTRA information in the ICA return (the person was a CTR company during the tax year).