Transitional imputation penalty tax

(Clause 71)

Summary of proposed amendment

As a result of the recent company tax rate change from 30% to 28%, relief is being provided to prevent the overreach of transitional imputation penalty tax. The penalty will not apply to dividends if they were paid out before the earlier of either the 2010–11 tax return being filed or 31 March 2012 (the deadline for filing 2010–11 tax returns).

Application date

The amendment will apply from 1 October 2010.

Key features

Relief is being provided to prevent the overreach of transitional imputation penalty tax following the change in the company tax rates from 30% to 28%. Under the proposed amendment, the penalty will not apply if dividends were paid out before the earlier of either the 2010–11 tax return being filed or 31 March 2012 (the deadline for filing 2010–11 tax returns).

The amendment is similar to the relief provided during the previous transitional period (when the company tax rate was reduced from 33% to 30%) and is consistent with the original policy intent of the transitional imputation penalty tax.

Background

As part of the company tax rate change from 30% to 28%, companies have approximately two years to pay out their 30/70 (or 33/67 credits at 30/70) imputation credits. During this “transitional period”, companies have the option to impute any credits at the old ratio of 30/70 or at the new ratio of 28/72. As part of this transitional period, a one-off transitional imputation penalty tax was put in place. The penalty is designed to ensure that companies do not excessively over-impute dividends during the transitional period, and to protect the tax base. This one-off penalty will be effective for balances as at 31 March 2013.

However, the transitional imputation penalty tax overreaches in some cases. Some companies that paid the dividends before the company tax rate changed on 1 April 2011 or before their 2010–11 tax return was filed and prepaid tax to fully impute to the extent allowed at that time, cannot avoid the penalty, even though any over-imputation was, on the face of it, not deliberate. This problem was identified during the previous transitional period (when the company tax rate was reduced from 33% to 30%), and relief was provided on the basis that the penalty should not apply if there was no intentional over-imputation.