Over-crediting of imputation credits in excess of FIF income

Clauses 15 and 86

Issue: Need for amendment

Submission

(New Zealand Institute of Chartered Accountants, Ernst & Young)

The amendment is unnecessary because the current rules provide the correct result over time.

Comment

The proposed amendment addresses a mismatch arising under the current tax rules in relation to imputed dividends paid by Australian companies under the trans-Tasman imputation rules but where the investment is taxed under the foreign investment fund (FIF) rules. This mismatch arises because the imputation credits are calculated on the basis of the dividend paid but income tax arises only on the FIF income. The actual dividend is not taxed. When the dividend exceeds the FIF income, the resulting excess imputation credits could be used to offset tax on other income such as salary and wages.

Allowing the New Zealand investor to receive imputation credits in excess of their tax liability on their Australian investment is inconsistent with the policy rationale underlying the imputation regime, which is to eliminate double taxation of New Zealand company profits.

Double taxation only arises to the extent of FIF taxation. The proposed amendment limits the amount of imputation credits – which are attached to a dividend received from an Australian company – which a resident can use to offset the New Zealand tax. The amendment requires the imputation credits to be calculated on the basis of the resident’s FIF income from that company, rather than on the actual dividend.

Officials consider that this is an effective and simple solution. Officials do not agree with the submission that it would be appropriate to allow imputation credits in excess of the amount that offsets the New Zealand tax on the FIF income which the Australian investment produces.

Officials consider the amendment is consistent with the existing rule that allows a tax credit for foreign tax paid on the dividend received by New Zealand resident even though the actual dividend is not subject to New Zealand tax because the shareholder is subject to the FIF rules. However, in this case, the foreign tax credit is limited to the New Zealand tax liability on the FIF income.

Recommendation

That the submission be declined.

Issue: Allowing excess credits to be carried forward or backwards

Submission

(New Zealand Institute of Chartered Accountants, Ernst & Young)

If the submission above is not accepted, excess imputation credits should be able to be carried forward or carried backwards and offset against FIF income in other periods.

Comment

Where an Australian investment is subject to the FIF rules, officials consider it is appropriate to place a limit on the amount of trans-Tasman imputation credits attached to a dividend received from the Australian investment in that year. The amount of imputation credits should be calculated on the basis of the New Zealand resident investor’s FIF income from the company in that year.

Any solution involving the carry forward or the carry backwards of imputation credits would be very complex for both taxpayers to comply with and for Inland Revenue to administer. The proposed amendment requiring the amount of imputation credits to be calculated on the basis of the New Zealand resident’s FIF income from an Australian investment provides an effective and simple solution to the problem of over-crediting of imputation credits in excess of FIF taxation.

The solution suggested by the submission would also not be consistent with the rule that allows a credit for foreign tax paid on a dividend received by New Zealand resident even though the actual dividend is not subject to New Zealand tax because the investment is taxed under the FIF rules. However, in this case, the foreign tax credit is limited to the New Zealand tax liability on the FIF income, and there is no provision for the carry forward or the carry back of credits.

Recommendation

That the submission be declined.

Issue: Limiting amendment to certain FIF calculation methods

Submission

(KPMG)

The limitation on imputation credits should only apply if the FIF income calculation method used is the fair dividend rate (FDR) or cost method.

Comment

The proposed amendment will require imputation credits attached to dividends paid by an Australian company to be calculated on the basis of the New Zealand shareholder’s FIF income, rather than on the actual dividend. Officials consider there is no basis for distinguishing between FIF calculation methods. The amendment should therefore apply equally regardless of the FIF calculation method used.

Recommendation

That the submission be declined.