FDP debit balances

Sections OB 4(3), OC 30(4) and OC 31(3) of the Income Tax Act 2007

Two remedial amendments have been made to the foreign dividend payment (FDP) account rules so that when a company pays further income tax as a result of having an FDP debit balance, an FDP credit arises that eliminates the FDP debit balance.

In the absence of the remedial amendments, the FDP account would remain in debit for the following year, triggering an additional tax liability, even though the correct amount of further income tax has already been paid.

Background

As part of the 2009 international tax changes, an exemption was implemented for foreign dividends paid to companies. This meant that a special levy on foreign dividends, called a foreign dividend payment (FDP), was repealed.

FDP credit accounts were retained for five years to allow companies to distribute FDP credits to shareholders.

Previously, if an FDP account had a debit balance at the end of the year (for example, because excess credits were distributed), an additional FDP liability would be payable. In 2009 this liability was replaced with a further income tax liability to reflect the fact that FDP was repealed.

An unforeseen consequence of this change is that once an FDP account went into debit, the account would remain in debit for the following year, triggering an additional tax liability, even though the correct amount of further income tax has already been paid.

Key features

Under the existing law, a company that has an FDP debit balance at the end of the tax year, or at the time that the company stops being resident in New Zealand, is required to pay a further income tax equal to the FDP debit balance.

New sections OC 30(4) and OC 31(3) create an FDP credit for an amount of further income tax paid in these circumstances.

The payment of further income tax does not create an imputation credit (as otherwise two credits would be received for the same payment). New section OB 4(3)gb ensures this result holds when the company elects to treat the payment of further income tax as satisfying a liability to pay income tax.

Application date

The amendments apply from income years beginning on or after 1 July 2009, as this is consistent with earlier FDP changes that created the issue.