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Taxation (KiwiSaver and Company Tax Rate Amendments) Act 2007: Remedial amendments to the Portfolio Investment Entity tax rules

New Zealand tax credits

Section HL 27(11), which deals with credits other than foreign tax credits under subpart LC, allows New Zealand tax credits to be used by a portfolio tax rate entity in a similar manner to foreign tax credits.

That is, the total amount of New Zealand tax credits available can be used for a portfolio entity tax liability for an investor's interest in a portfolio investor class.  This is relevant for an investor who exits from a portfolio tax rate entity that pays tax under section HL 23 or when an entity elects to make optional payments of tax under proposed section HL 23B.  Example 3 illustrates.

Example 3


Class A

Class B

Day 1 PETL = $50   (NZTC = $33) PETL = $20  (NZTC = $0)
Day 2 PETL = $50   (NZTC = $0) PETL = $70  (NZTC = $15)

The investor withdraws 50 percent of his interest in Class A.  The investor's share of the tax liability for the interest redeemed is $50.  The entity can use the investor's total allocation of New Zealand tax credits over both classes - that is, $48 (not just the $33 credit relating to Class A) - to reduce this tax liability to $2.

As any excess New Zealand tax credits that are allocated to individuals can be rebated, this flexibility alters the timing of tax payments rather than the amount of tax paid.  The rules do not require an entity to follow the above approach - that is, using New Zealand tax credits allocated to an investor as a member of one portfolio investor class to offset the investor's portfolio entity tax liability in relation to another portfolio investor class.  This is simply another option available to portfolio tax rate entities.

As noted earlier, consequential amendments align New Zealand tax credits allocated in a tax year of the portfolio tax rate entity to the income year of zero-rated investors with non-standard balance dates.