New legislation - 2006: Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 [2006 No 3]

Trans-Tasman imputation credit-streaming

Sections ME 6(1B), (1C) and (1D) and ME 8(6) of the Income Tax Act 2004

The amendments close a loophole by preventing Australasian groups of companies from allocating imputation credits to dividends paid to a New Zealand investor if the payment of the dividends results in a tax deduction in Australia.

Background

The intention of the trans-Tasman imputation rules is that New Zealand and Australian shareholders of trans- Tasman companies can be allocated imputation credits representing New Zealand tax paid and franking credits paid, in proportion to their ownership of the company. However, each country's credits can be utilised only by its residents.

The amendments address the problem of imputation "credit-streaming", where imputation credits were deliberately directed to New Zealand owners of Australian-issued redeemable preference shares, although the proceeds of the share issue did not directly cause further New Zealand tax to be paid by the Australasian group. A particular feature of these arrangements was that under Australian law, the share coupons were deductible as interest.

Key features

New section ME 6(1B) provides that imputation credits may not be attached to a dividend that is:

• paid in relation to a share that is a debt interest under the Australian Income Tax Assessment Act 1997; and
• included in the Australian tax return of the paying company.

This includes dividends paid on redeemable preference shares, as discussed above.

Section ME 8(6) provides that the "benchmark" dividend rules do not apply to any dividend to which imputation credits cannot be attached under section ME 6(1B).

Application dates

The general rule is that imputation credits may not be allocated to dividends paid on or after 21 July 2005. There are, however, several grandparenting rules.

Section ME 6(1C) provides that the new rule does not apply to a dividend if the shares were issued before 21 July 2005 and:

• the shareholder is not a member of the same group of companies that the dividend-paying company belongs to; and
• they are members of the same wholly owned group of companies, but both are non-resident.

Section ME 6(1D) provides an exception to the general "same group of companies" test where the shareholder acquired the shares:

• before 21 July 2005;
• for business reasons; and
• for reasons independent of the relationship between the shareholder and the paying company:
  • as part of a share broking business; or
  • as an investment held by the shareholder as part of an insurance business; or
  • as security for a loan given as part of a money lending business; or
  • as a trustee for a beneficiary who is not a company in the same group of companies as the shareholder.

Other pages in: Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 [2006 No 3]

• Temporary exemption from tax on foreign income for new migrants and certain returning New Zealanders
• Clarification of treaty override power
• Rewrite amendments
• Reimbursement for the use of a private motor vehicle
• Organisation approved for charitable donee status
• Resident withholding tax on dividends paid by non-resident companies
• Amendments to disputes rules
• Miscellaneous technical amendments
• GST on goods outside New Zealand at the time of supply
• GST and distributions from a trust made for no consideration between associated registered persons
• GST and international postage stamps
• GST and credit contracts legislation
• Bloodstock write-down rates
• Duty on racing
• GST on goods and services supplied to security holders
• Regrassing and fertilising expenditure
• The addition of Spain to the grey list
• Unacceptable tax position
• Reverse takeovers and continuity rules
• Increase in the child tax rebate
• Income tax exemption for gaming machine income of gaming trusts
• Tax consequences of natural disasters
• Taxation of foreign hybrids and foreign tax credit rules
• Exemption for rights to benefit from employment-related foreign superannuation schemes
• New disclosure and recordkeeping rules for foreign trusts
• Treatment of distributions from cooperatives
• ACC attendant care payments
• Venture capital investment alongside the Venture Investment Fund
• Corporate migration
• Allocation of research and development tax deductions
• Taxation of share-lending transactions
• Fringe benefit tax
• Depreciation rates
• Aligning provisional tax payments with GST
• PAYE subsidy for small businesses

Date published: 22 Jun 2006

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