Tax credits
- PIEs and tax credits
- Attribution of tax credits
- MRPs and foreign tax credits
- Foreign tax credits attributed to investors taxed at a zero-rate
- Foreign tax credits attributed to investors with PIRs greater than zero who have not exited the MRP
- PIEs and New Zealand tax credits
- New Zealand tax credits attributed to investors taxed at a zero-rate
- New Zealand tax credits attributed to investors with PIRs greater than zero
- Attributing refunds to investors
- Notified foreign investors tax credits
PIEs and tax credits
Quarterly and exit MRPs can use tax credits to reduce their entity tax liability for investors, other than investors that have had the zero rate applied, and to obtain a refund of income tax to the extent of the unused New Zealand tax credits. Investors cannot obtain a refund of foreign tax credits.
MRPs that elect to pay provisional tax and other PIEs are subject to normal income tax rules in relation to the use of any tax credits in their tax returns.
Attribution of tax credits
Both foreign and New Zealand tax credits are attributed to investors as a member of an investor class, and are able to be used by quarterly and exit MRPs to reduce the investor's share of the entity tax liability.
The type of tax credit and prescribed investor rate of an investor determine the treatment of these credits. There are also different treatments depending on whether the credits are foreign tax credits or New Zealand tax credits.
In most cases the attribution of tax credits to investors occurs daily. When the credit arises a MRP needs to establish the investor's share out of all investors' investments in one investor class. Then the MRP has to establish the investor's share in that class out of all investor classes. It does this under the formula:
| Credit x percentage x investor fraction |
| number of days in period |
MRPs attribute tax credits to the attribution period of the income year to which the credit relates. Foreign tax credits are applied against a tax liability before New Zealand tax credits.
MRPs and foreign tax credits
Foreign tax credits are amounts that, if paid, would satisfy a person's obligations in a foreign country in relation to amounts that have the same nature as income tax. Foreign tax credits can only be claimed to the extent of the New Zealand tax payable.
For quarterly and exit MRPs foreign tax credits are used to reduce a MRP's entity tax liability for each investor with a PIR greater than zero and are attributed to each attribution period and to each investor as a member of that investor class. However, if the MRP chooses, it can use the foreign tax credits to reduce the entity tax liability of the investor for another investor class.
Generally, the amount of foreign tax credit that is available to be used in a calculation period to reduce an investor's entity tax liability as a member of the investor class is the lesser of:
- available attributed foreign tax credits (excluding credits used in previous calculation periods) and
- the amount of the investor's entity tax liability for the current and earlier calculation periods (excluding credits used in previous calculation periods).
However, for investors that have been zero-rated, excluding PIEs and PIPs, foreign tax credits cannot exceed the attributed income tax liability for the tax year. For investors that have PIRs greater than zero, foreign tax credits cannot exceed the attributed income tax liability for the calculation period, although unused foreign tax credits may be offset in other calculation periods in certain instances. Any unused foreign tax credits at the end of the tax year would then be lost.
Exit MRPs can use foreign tax credits to reduce an investor's entity tax liability in the calculation period in which the credit is attributed and earlier calculation periods in the same tax year. This allows foreign tax credits attributed to an investor to be carried back (as well as forward) to previous attribution periods within the tax year.
A calculation period:
- can consist of 1 or more attribution periods
- under the quarterly option, is a quarter
- under the exit or provisional tax options, is an income year
- under the exit option when an exit period arises, is the exit period.
This allows the MRP to decide between using foreign tax credits to offset against the daily income tax liability or for calculation periods greater than a day to offset against the total period income tax liability if any.
For quarterly MRPs, foreign tax credits can only be used within the quarter or be carried forward to later quarters within the tax year. The MRP cannot apply foreign tax credits to a prior quarter. Any foreign tax credits still unable to be used at the end of the tax year would be forfeited.
The following examples demonstrate application of the foreign tax credits against the tax liability in a calculation period. Assume for the purposes of the following examples we are dealing with a quarterly MRP and the MRP has only two quarters in the tax year.
Example 1 - Unused credit applied in following quarter
| Quarter 1 | Quarter 2 |
|---|---|
| PIR 17.5% | PIR 17.5% |
|
Income $100 Foreign tax credit $30 |
Income $100 Foreign tax credit $15 |
|
Tax on $100 is $17.50 $17.50 of the foreign tax credit is applied and the tax liability is therefore nil |
Tax is $17.50 The $15 foreign tax credit is applied against the tax leaving a balance of $2 of tax liability. |
| The unused foreign tax credit of $12.50 is available for use in a later calculation period in the tax year. | $2 of the unused tax credit from the previous quarter is also applied, reducing the tax liability for the quarter to nil. The unused foreign tax credit of $10.50 is forfeited at the end of the tax year. |
| The investor certificate will record income of $200 for the year and tax credits of $35. | |
Example 2 - Unused credits lost
| Quarter 1 | Quarter 2 |
|---|---|
| PIR 17.5% | PIR 17.5% |
|
Income $100 Foreign tax credit $30 |
Loss $200 Foreign tax credit $15 |
|
Tax on $100 is $17.50 Foreign tax credit of $12.50 applied and tax liability is therefore nil |
Tax is nil ($35 is paid to the PIE - based on the loss of $200 x 17.5%) |
| The unused foreign tax credit of $12.50 is available for use in a later calculation period in the tax year | Foreign tax credit of $27.50 ($15 plus $12.50 from quarter 1) is forfeited at the end of the tax year |
| The investor certificate will record a loss of $100 for the year, tax credits of $17.50 and tax credits paid of $35. | |
Example 3
If the investor had applied two rates in the tax year, ie notified an incorrect rate in the first calculation period. Note also that in this example the investor also receives a greater tax credit than the tax liability for the tax year.
| Quarter 1 | Quarter 2 |
|---|---|
| PIR 17.5% | PIR 28% |
|
Income $100 Foreign tax credit $25 |
Loss $200 Foreign tax credit $15 |
|
Tax on $100 is $17.50 Foreign tax credit of $17.50 applied and tax liability is nil |
Tax payable is nil ($56 is paid to the PIE based on loss of $200 x 20%) |
| The unused foreign tax credit of $7.50 is available for use in a later calculation period in the same tax year | Foreign tax credit of $22.50 ($15 plus $7.50 from quarter 1) is forfeited at the end of the tax year |
|
The investor certificate will record a loss of $100 for the tax year, tax credits of $17.50 and tax credit paid of $56. Then in the lower rate panel in the investor certificate it will also record $100 income, attributed credits of $17.50 and tax paid of nil. A PIR of 28% should have applied in quarter 1. However the quarterly MRP will not be able to recalculate tax in that quarter. The income will be non excluded income of the investor. The investor is required to include the income in their income tax return and be taxed at their basic tax rate. A credit will be allowed for the tax deducted by the MRP. The previously forfeited foreign tax credits will be able to be claimed up to the investor's tax liability. Note that if this was the only income that was under taxed for the year and the investor did not need to file a return, the income would be covered by the $200 exemption. An exit MRP may have been able to recalculate the tax at the correct rate for the year on the income attributed by the MRP. If so the income would be excluded income of the investor. |
|
Foreign tax credits attributed to investors taxed at a zero-rate
If the zero-rated investor is itself a MRP or a PIP
The foreign tax credits attributed flow through to the investor and can be used without restriction. The MRP or PIP attributes foreign tax credits (and New Zealand tax credits) to its investors and limitations apply at that level.
If the investor is an investor (not being a zero-rated investor) with an exit period in a quarterly MRP
The foreign tax credits are limited to the lesser of:
- the amount of the attributed credit, or
- the amount calculated by multiplying their investor attributed income for the tax year by the notified rate that applied for the attribution period ending before the exit period.
The credits attributed to the zero-rated period flow through to the investor's tax return. Foreign tax credits limitations also apply in the investor's tax return.
If the investor is a zero-rated investor in a quarterly or exit MRP
The foreign tax credits are limited to the lesser of:
- the amount of the attributed credit, or
- the amount calculated by multiplying their investor attributed income for the tax year by the investor's basic tax rate.
Foreign tax credits attributed to investors with PIRs greater than zero who have not exited the MRP
Foreign tax credits for investors with PIRs greater than zero are limited to the amount of tax calculated on the income attributed to the investor. If the investor is attributed a loss in an attribution period, then no foreign tax credits can be used. The foreign tax credits can be used to reduce tax payable in earlier or later calculation periods provided they are with in the same tax year or quarter. Quarterly MRPs only carry forward credits to the next quarters in the same tax year.
PIEs and New Zealand tax credits
New Zealand tax credits are imputation credits, RWT credits, dividend withholding payment credits and Maori authority credits.
These credits must be used to reduce a MRP's entity tax liability for an investor in an investor class after allowing any foreign tax credits. Any excess credits are available to be refunded to the MRP except in the case of investors where a zero rate has been applied to the attributed income as noted below.
Formation losses attributed cannot be used to reduce the class net income of an investor class of an entity if sufficient New Zealand tax credits are available in an attribution period to offset the entity tax liability that would otherwise arise. That is, the New Zealand tax credits are offset before any formation loss is taken into account.
New Zealand tax credits attributed to investors taxed at a zero-rate
If the zero-rated investor is itself a MRP or PIP, the New Zealand tax credits attributed flow through to the investor and can be used without restriction.
New Zealand tax credits attributed to zero-rated investors and investors with an exit period in a quarterly MRP flow through to the investor's tax return. The usual tax credit limitations in the investor's tax return apply.
New Zealand tax credits attributed to investors with PIRs greater than zero
The New Zealand tax credits are limited to the lesser of:
- the New Zealand tax credits
- the tax liability on the investor's attributed income calculated by the MRP after allowing foreign tax credits (if any).
Any excess can be credited to the MRP, which then adjusts the investor interest for each investor or makes a distribution or adjusts the tax payment required by the investor.
Example
Investor B owns 15,000 $1 units and has a PIR of 10.5%.
The MRP derives $1,000 income, with an imputation credit of $300 attached, and attributes this to Investor B (10.5% x $1,000 = PIE tax of $105).
There is a credit of $195 ($300 imputation credit less $105 tax), which Inland Revenue credits to the MRP.
The MRP then adjusts Investor B's investor interest to 15,195 units.
Attributing refunds to investors
Where the MRP has a credit/refund it can attribute the credit to investors by increasing the investor interest in an investor class or another investor class or by making a distribution.
Notified foreign investors tax credits
Generally there will not be tax credits associated with income attributed to a notified foreign investor that is taxed at a rate greater than zero.
Imputation credits attached to dividends cannot be claimed as the dividend is zero-rated.
Foreign tax credits also can't be claimed as the foreign income is zero-rated.
PIEs are allowed exemption for RWT from interest so there should not be any RWT credits. If RWT has been deducted then a credit is allowed.
If an investor has:
- incorrectly claimed to be a notified foreign investor, or
- ceased qualifying in an earlier tax year and their attributed PIE income is no longer excluded income
then they can claim a tax credit for the amount of PIE tax paid.
Date published: 30 Aug 2011
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