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Remedial matters

Transitional imputation penalty tax

Clause 71

The bill proposes that the transitional imputation penalty tax, which ensures that dividends are not over-imputed following the company tax rate change from 30% to 28%, should not apply to dividends paid out before the earlier of the 2010–11 tax return being filed or 31 March 2012 (the deadline for filing 2010–11 tax returns).

Submissions

(New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)

  1. The 10% (of 30%) penalty should be reduced as it is unnecessary and gives arise to punitive and unintended results. (New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
  2. Where a dividend for a listed company was declared in the period of the earlier of the 2010–11 tax return being filed or 31 March 2012, the penalty should not apply. This is on the basis that once dividends are declared under the stock exchange rules, a listed company is committed. (PricewaterhouseCoopers)
  3. The penalty, which was always intended to prevent deliberate over-imputing of dividends, can now be repealed because its usefulness is at an end as from 1 April 2013 dividends cannot be over-imputed. (PricewaterhouseCoopers)

Comment

After the recent company tax rate change from 30% to 28%, taxpayers may have paid out dividends at the old ratio of 30/70 (instead of the new ratio of 28/72) before they filed their 2010–11 tax return without fully appreciating the details of that tax return. The return may not have yielded sufficient 30% tax to cover the 30/70 imputation credits attached to the dividends. A one-off penalty tax at 10% (of 30%) would then apply on 31 March 2013.

We agree with submitters that the penalty at 10% is currently overstated, especially when the core imputation penalty ensures that companies do not overdraw their imputation accounts.

The penalty was intended to be a preventative device, to ensure that companies do not deliberately over-impute dividends at 30% during the transitional period (from the 2011–12 income year to 31 March 2013) when they had not paid underlying tax at 30% or more. In the previous transitional period, when the company tax rate decreased from 33% to 30%, the same penalty applied. Around 65 taxpayers were penalised, resulting in $550,000 of penalties being imposed.

Officials considered the option of reducing the penalty to better reflect the potential loss to the tax base. However, this option is not desirable as adjusting the penalty at this late stage will not be easy, particularly given that it will be due before this tax bill is enacted.

A better option at this stage is repealing the penalty. The administrative implications to correct the penalty are significant when compared with the potential loss to the tax base in this situation. The potential revenue risk reflected in the previous transitional period is immaterial. Also, the core imputation penalty is already in place to ensure that companies do not overdraw their imputation accounts.

Recommendation

That submission 3 be accepted, which will also deal with submissions 1 and 2.