Imputation credit account

Australian ICA company definition

Clause 103(4)

Submission

(Ernst & Young Limited)

It is not clear why the proposed definition of "Australian ICA Company” [in clause 103(4)] should refer to a company which "must" establish and maintain an ICA under section OB 2 when the latter section provides a choice. We suggest it refer to a company which chooses to establish and maintain an ICA under section OB 2.

Comment

A company resident in Australia may choose, if eligible, to opt into the New Zealand imputation system, under which the benefit of corporate tax paid in New Zealand is passed onto its shareholders. Once that choice is made and notice given to the Commissioner of Inland Revenue, the Australian company must apply New Zealand’s imputation rules. and is referred to as an Australian ICA company.

The main obligation arising for an Australian ICA company is to establish and maintain an imputation credit account (ICA). This involves keeping a record of imputation credits and imputation debits to the ICA.

We agree with the submitter that the drafting of the definition of Australian ICA company should be based on the taxpayer’s choice to apply the imputation rules and not solely on the obligation to establish and maintain an ICA. We also recommend that consequential amendments be made to section OB 2 for consistency with the recommended amendments to the definition of Australian ICA company.

Recommendation

That the submission be accepted, subject to officials’ comments above.

Issue: Definition of imputation credit account company (ICA company)

Clauses 99 and 103(13)

Submission

(Matter raised by officials)

That section OB 1 be amended to more clearly reflect the distinction between the application of the imputation rules to New Zealand resident companies and the obligation to establish and maintain an imputation credit account (ICA).

That the term “ICA company” be defined to include a New Zealand resident company to which section OB 1 applies, and also an Australian resident company that has chosen to opt into the New Zealand imputation system.

Comment

Clause 99

Section OB 1(1) of the Income Tax Act 2007 (2007 Act), as drafted in clause 99, does not clearly distinguish between which companies the imputation rules apply to and the primary obligations under the imputation rules for an ICA company.

The policy intent for section OB 1 is to state that:

• The imputation rules apply to all New Zealand resident companies, except for the types of companies listed in section OB 1(2).
• The main obligations of an ICA company are to establish and maintain an imputation credit account (ICA).

We recommend that section OB 1(1) and (2) be amended to better reflect this policy.

Clause 103(13)

We also recommend that the definition of “ICA company” in section YA 1 be consequentially amended (in clause 103(13)) to reflect that an ICA company is a company to which the imputation rules apply.

This approach results in the definition of “ICA company” referring to both a New Zealand resident company that must apply the imputation rules and an Australian ICA company that has chosen to apply the imputation rules.

In the 2007 Act, the definition of “ICA company” does not include an Australian ICA company, which differs from its corresponding definition in the Income Tax Act 2004. This omission, inadvertently arising in the rewrite of the imputation rules, arguably results in some administrative imputation rules in the Taxation Administration Act 1994 not applying to Australian ICA companies. The policy intention is that these administrative rules should apply to both a New Zealand resident company and an Australian ICA company.

Recommendation

That the submission be accepted.