Transfers of overpaid provisional tax

(Clauses 28 and 51)

Summary of proposed amendments

The bill proposes that overpaid provisional tax in the AIM taxpaying company may be transferred to the AIM company shareholders to meet their provisional tax liabilities on the dates that their provisional tax is due (regardless of when it is paid in the AIM company).

Application date

The proposed amendments will apply for the 2018–19 and later income years.

Key features

New section LA 6(2)(db) of the Income Tax Act 2007 enables a company using AIM to transfer a tax credit to its shareholders. Section 120 LB of the Tax Administration Act 1994 provides that this amount does not give rise to a tax credit for the shareholder but is treated as transferred tax paid for the year that the provisional tax credit relates to. The transfer is treated as a refund for the purposes of the AIM company’s imputation credit account.

New section LA 6 (2C) of the Income Tax Act 2007 provides that the amount transferred is capped at the lessor of the amount the company chooses, the net amount of the shareholder’s tax credit or the company’s net amount of their tax credit.

Detailed analysis

There is a risk that accounting income for AIM purposes could be manipulated through the accrual of shareholder employee payments. To ensure this does not occur, it is proposed that the calculation of AIM payments be based on accounting income before shareholder salaries are accrued and deductions for such payments can only be taken for the salary paid within the two-month period that the tax payment relates to. This treatment of shareholder salaries will be confirmed as a required adjustment in the Determination proposed in section 91AAX of the Tax Administration Act 1994.

Proposed section LA 6 of the Income Tax Act 2007 will allow overpayments of provisional tax that relate to shareholder employee salary accruals to be transferred to meet the shareholders tax liability on that salary at the end of the income year.

The proposal provisional tax attribution will not apply to AIM provisional taxpayers, as the mechanism within AIM will assist with achieving the same outcome.

The transfer of overpaid provisional tax from the AIM company to its shareholders is simpler when the two parties have aligned balance dates, as the tax paid at the company level will be paid in time to meet the shareholders’ provisional tax liability.

When an AIM shareholder has an early or late balance date, an amendment enables the AIM company’s provisional tax to be pro rated against all instalment dates for the year regardless of the mismatch in provisional tax payment dates to the AIM company.

Example 1

Bogart Ltd is a retailer that sells musical instruments, owned equally by John and Lynn Bogart. They elect to use AIM for their businesses and in the income year ending 31 March 2019 make the following overpayments in AIM. All parties have a March balance date.

Provisional tax payment dates 28-Jun 2018 28-Aug 2018 28-Oct 2018 15-Jan 2019 28-Feb 2019 7-May 2019
Bogart Ltd AIM overpayments $100 $100 $100 $100 $100 $100
Shareholder provisional tax liability due dates   $200   $200   $200

In this instance, Bogart Ltd can easily transfer its overpaid provisional tax at year-end to John and Lynn to meet their provisional tax liabilities. As the dates align there will be no UOMI charges on John and Lynn.

Example 2

Murray Ltd is a dog breeding operation owned by Sarah and Gareth Murray. Murray Ltd has an agreed July balance date, as is common in the dog breeding industry. Sarah and Gareth have standard March balance dates. The payment schedule for the 2019 income year would look as follows:

Provisional tax payment dates 28 Aug 2018 28 Oct 2018 15 Jan 2019 28 Feb 2019 7 May 2019 28 June 2019 28 Aug 2019
Murray Ltd AIM overpayments   $100 $100 $100 $100 $100 $100
Shareholder provisional tax liability due dates $150   $150   $150    

In this instance, Murray Ltd would be able to transfer its excess provisional tax payments to Sarah and Gareth despite there being a mismatch in their provisional tax dates. These transfers would be calculated and transferred at Murray Ltd’s year-end.

Murray Ltd’s transfer is limited to the amount of overpaid tax in Murray Ltd – that is, the company cannot transfer more than $450 as the transfer cannot be more than Sarah and Gareth’s provisional tax underpayment for the year. Payments can be transferred to Sarah and Gareth at their 2019 provisional tax dates, negating any UOMI exposure.