Over-crediting of imputation credits in excess of FIF income

(Clauses 15 and 86)

Summary of proposed amendment

Amendments are being made to address a mismatch arising under the tax rules in relation to imputed dividends paid by Australian companies under the trans-Tasman imputation rules. This mismatch arises because imputation credits are calculated on the basis of the dividend paid but income tax arises only on the foreign investment fund (FIF) income.

New section LE 8B limits the amount of the tax credit to the shareholder receiving the imputed dividend to the amount of imputation credits they would have if the imputation credits were calculated on the basis of the shareholder’s FIF income from that company. The amendments apply only if the dividend received from the company exceeds the amount of FIF income.

Application date

The amendment applies for tax years commencing 1 April 2014.

Key features

New section LE 8B limits the amount of the tax credit to the shareholder receiving an imputed dividend from an Australian company to the amount of imputation credits they would have if the imputation credits were calculated on the basis of the resident's FIF income from that company. The section will apply only if the dividend amount exceeds the amount of FIF income.

In addition, a new section CV 18 is being added to ensure that the shareholder’s tax liability is calculated correctly in relation to the FIF income and imputation credits by providing that a person’s income includes the amount of imputation credits under new section LE 1(8B). In the absence of section CV 18, a shareholder subject to section LE 1(8B) would be under-taxed on their FIF income.

Background

The trans-Tasman imputation rules permit an Australian company to operate an imputation credit account (ICA). An Australian ICA company that has paid New Zealand tax can attach imputation credits to dividends paid to New Zealand shareholders. Wholly owned Australian and New Zealand companies can also form a trans-Tasman imputation group. New Zealand tax paid by a member of the group will generate imputation credits that can be distributed to a New Zealand shareholder. The amount of imputation credits that a particular shareholder receives is determined with reference to the actual dividend paid by the company. In the domestic context, this works as intended.

However, an issue arises when a New Zealand-resident shareholder receives a dividend with imputation credits attached that is paid from a closely held Australian company. The New Zealand resident’s investment in that company will generally be an attributing interest under the FIF rules. Under the FIF rules, a New Zealand resident is taxed only on the deemed FIF income; the actual dividend is disregarded.

A mismatch therefore arises, with imputation credits being calculated on the actual dividend paid but income tax arising only on the FIF income. If the dividend is of greater value than the amount of FIF income, the shareholder will receive excess imputation credits, which they can use against the tax on their other income, such as salary and wage income. This is inconsistent with the policy intent. The amendment is intended to address this mismatch.