Trans-Tasman imputation

Sections FDB 1, ME 1, ME 1B, ME 1C, ME 10, ME 11, ME 12, ME 18, ME 19, MG 11 and OB1 of the Income Tax Act 1994 and Income Tax Act 2004, section 139A of the Tax Administration Act 1994

Introduction

A number of remedial amendments have been made to the recently enacted trans-Tasman imputation rules to improve their administrability and coherence.

Background

The trans-Tasman imputation rules in the Income Tax Act were enacted in 1995 to bring Australian resident companies within the scope of the imputation rules. This was part of a bilateral agreement with the Australian government which also included New Zealand-resident companies within the Australian imputation rules.

Australian and New Zealand shareholders of trans-Tasman companies that choose to take up these reforms can now be allocated imputation credits representing New Zealand tax paid and franking credits representing Australian tax paid, in proportion to their ownership of the company. However, each country's credits can be claimed only by its residents.

Key features

• Section FDB 1(1)(e) has been repealed and section FDB 1(2)(ab) has been added to clarify that an imputation group must include all members of a consolidated group or no members of a consolidated group.
• Section FDB 1(2)(b) has been amended to clarify that it is only when members of more than one consolidated group form or join an imputation group that the credits in a consolidated group imputation credit account must have the same shareholder continuity profile.
• Section ME 1(2)(a) has been amended to clarify that it is companies resident in countries other than New Zealand that are excluded from maintaining imputation credit accounts, rather than non-resident companies. This is because it is only resident companies under section ME 1(1) that are required to maintain an imputation credit account.
• Section ME 1B(4)(a) has been amended to give the Commissioner of Inland Revenue a discretion to accept late elections. The Commissioner will accept a late election only when the election would have been valid had it been received on time.
• The formula in section ME 1C has been corrected so it is "a x b" - that is, dividend times the exchange rate (rather than the previous a + b).
• Section ME 10(1D)(b) has been clarified to ensure that all entries to the imputation credit account from the New Zealand members of a trans-Tasman imputation group go to the resident imputation group, whether or not they could be considered to be "transactions".
• Section ME 12(1)(b)(i) has been removed and sections ME 18(1)(a), ME 18(3)(b), ME 19(3)(a) and (b) and ME 19(4)(b) have been amended to ensure that, for companies within a consolidated or imputation group, transfers can still be made between an individual company's imputation credit account and policyholder credit account. Section ME 18(4)(b) has been updated to refer to an imputation group's imputation credit account.
• Section ME 11(1)(f), ME 11(2)(d) and MG 11(1) have been amended to ensure that transfers made from a dividend withholding payment account to an imputation credit account can also be made to the imputation credit account of the imputation group of which the dividend withholding payment company is a member.
• The definition of "resident in Australia" in section OB 1, paragraph (a), has been omitted. This ensures that Australian resident companies which are also resident in New Zealand (dual resident companies) are eligible to elect to become imputation credit account companies.
• Section 139A(5) of the Tax Administration Act 1994 has been amended to omit annual imputation returns from this provision. This is to improve the consistency of the late filing penalty rules.

Application dates

The Commissioner's discretion to accept late elections and the amendments to allow transfers from a company's dividend withholding payment account to its imputation group's imputation credit account apply from the date of enactment, 21 December 2004.

The amendment to section ME 1C comes into force on 1 October 2003, the date from which Australian companies could pay imputed dividends.

The other amendments apply from 1 April 2003, the date from which Australian companies could use New Zealand's imputation rules.