- Available capital distribution amount and disregarded dividends
- Imputation credit accounts and use of pre-consolidation imputation credits
- Eligibility requirements to form or join a consolidated group
- Reciprocal shipping exemption
(Clauses 9, 27 and 61)
Summary of proposed amendment
The proposed amendments clarify that dividends and gains that are disregarded in calculating foreign investment fund (FIF) income are treated as excluded income.
The amendments apply from the date of enactment.
Some offshore investments by New Zealand residents are taxed under the FIF rules. There are four methods that can be used to calculate FIF income: the comparative value method, the deemed rate of return method, the fair dividend rate method or the cost method. Because these returns are effectively taxed on an accruing basis, actual dividends derived by the investor from an interest in a FIF and gains from disposing of the interest, are disregarded for income tax purposes.
However, under the rewritten core provisions, an amount derived by a New Zealand resident is excluded from the calculation of taxable income only if that amount is either excluded income or exempt income. In the rewrite of the FIF rules, this relationship with the core provisions was not made clear when stating that distributions or gain arising from an interest in a FIF are disregarded when calculating the person’s income tax liability.
This has resulted in a question being raised about whether a disregarded amount derived by a corporate investor from a FIF is treated as a capital amount and able to be included in the available capital distribution amount, which, in some circumstances, is able to be later distributed tax-free. The policy intention is that a dividend or gain arising from an interest in a FIF and which is disregarded when calculating taxable income has an income nature and so should not be included in the available capital distribution amount. The amendments ensure the correct policy outcome is achieved.
Summary of proposed amendment
The proposed amendment corrects an unintended change arising from the rewrite of the Income Tax Act 2007, which relates to the limit on the use of pre-consolidation imputation credits belonging to an individual company in a consolidated group.
The proposed amendment restores the law to the position that existed in the Income Tax Act 2004. This limits the amount of pre-consolidation credit the individual company may transfer to the consolidated group’s imputation credit account (group ICA) to no more than the amount of the debit balance that would otherwise arise after a debit entry to the group ICA.
The amendment will apply from the beginning of the 2008–09 tax year.
A consolidated group of companies maintains an imputation credit account for tax paid for the consolidated group. Each member company of a consolidated group may also have an imputation credit account in relation to imputation credits the company has before it joins a consolidated group.
Those pre-consolidation credits may be used to offset a debit balance arising in the consolidated group’s imputation credit account. However, an ambiguity arising in the rewrite of this provision into the Income Tax Act 2007 may permit pre-consolidation imputation credits in excess of this limit to be transferred to the consolidated group’s imputation credit account.
The transfer of imputation credits from an individual company’s imputation credit to the imputation account of a consolidated group (of which the individual company is a member) is intended to be allowed when:
- a debit entry is made to the group ICA; and
- that debit entry would result in the group ICA having a debit balance after the debit entry.
Summary of proposed amendments
The amendment restores the law to the same outcome that existed under the Income Tax Act 2004 so that when one company elects to leave an imputation group, the imputation group continues to exist.
The amendment will come into force on 1 April 2008, and ensures that the adverse effect of the unintended legislative change does not arise.
The rewrite of the consolidated group rules into the Income Tax Act 2007 has resulted in an unintended legislative change in relation to the meaning of “eligible company” for imputation group purposes.
The issue relates to a member of a consolidated group (company X) electing to leave the imputation group (that consisted of companies X, Y and Z) but remaining within the consolidated group. The consolidated group consists of companies X, Y and Z. The unintended change results in the following differences between the two Acts:
- Under the 2004 Act, Company X’s election to leave the imputation group would not affect the eligibility of Companies Y and Z to be in the imputation group.
- Under the 2007 Act, Company X’s election to leave the imputation group results in companies Y and Z no longer being eligible to be in the imputation group.
The proposed amendment restores the original intention of the 2004 Act.
Summary of proposed amendments
The proposed amendment corrects an unintended change arising from the rewrite of the Income Tax Act 2007, with respect to the reciprocal shipping exemption at section YD 6(3) of the Act.
The exemption applies on the basis of reciprocity. That is, New Zealand will agree not to tax the income of a shipping operator of another country if in reciprocal circumstances a New Zealand resident shipping operator will not be taxed by that other country.
Prior to the rewrite, the legislation referred to a New Zealand resident shipping operator either being “not liable to, or exempt from” income tax in the other country. During the rewrite, however, the words “not liable to” were omitted. Concerns have since been raised that this inadvertently narrowed the scope of the provision. The proposed amendment therefore reinstates the words “not liable to”, to restore the full original meaning.
The amendment will apply from 1 April 2008 (the date from which the Income Tax Act 2007 had effect).
The original policy intent of the provision was for it not to matter whether the income is exempt from tax or not liable to tax in the first instance. Under the rewrite of the Income Tax legislation, this was narrowed to only permit the exemption to apply when the income is exempt from tax. This proposed remedial amendment will restore the original wider meaning.