Imputation credit loophole to be closed

Michael Cullen

The Government is closing a loophole to prevent Australasian groups of companies abusing the New Zealand tax rules on dividends and imputation credits, Revenue Minister Michael Cullen announced today.

Dr Cullen said legislation would be tabled in Parliament this week to amend income tax law to prevent companies from allocating imputation credits to dividends paid to New Zealand investors if the payment of the dividends results in tax deductions in Australia.

The trans-Tasman imputation rules, which came into effect two years ago, came out of a joint Australia-New Zealand reform to reduce the double taxation of trans-Tasman investments.

Dr Cullen said the aim was for New Zealand imputation credits be available to Australian companies for their New Zealand investors and, correspondingly, Australian franking credits available to New Zealand companies for their Australian investors.

"Some companies appear to be taking advantage of an unforeseen loophole in the rules," Dr Cullen said.

"They are setting up schemes whereby imputation credits are directed away from foreign shareholders, who generally cannot use the imputation credits, and streamed towards a special group of New Zealand investors, who can. At the same time, the payment is deductible as interest in Australia.

"That is a form of imputation credit streaming and is unacceptable. The government is therefore acting to prevent this activity, which ultimately results in a loss to the New Zealand tax base."

Dr Cullen said the law change would apply to shares issued from today.

The new rules would apply to dividends paid after 1 April 2006 from shares already issued within the same group of companies. Other existing non-group company issues (the public issues) will be allowed to run through to their maturity.

The changes will be introduced by means of a Supplementary Order Paper to the taxation bill currently before Parliament.

- NZPA