Chapter 1 - Introduction

1.1 The transfer of losses from one company in a group to a profit-making company in the same group is a common business practice. It reduces the profit company’s taxable income and its tax liability while reducing the amount of losses the loss company would otherwise carry forward to a future period. It is commonly known as loss grouping.

1.2 Another established practice is attaching imputation credits to dividends paid by a company. These represent tax already paid by the company, or tax-paid income received by the company. A problem can arise for a profit company following loss grouping. By reducing its tax the profit company also has fewer imputation credits to pass on to shareholders.

1.3 If the profit company is not wholly owned by another company, the lack of imputation credits may result in additional tax being payable by the shareholders of the profit company upon the payment of a partially imputed dividend. This effectively negates the benefit of loss grouping, and can result in over-taxation of corporate profits.

1.4 Because this issue does not arise when the profit company is wholly owned by a corporate parent (as a result of the inter-corporate dividend exemption), the current tax settings may create an incentive for 100 percent, rather than partial, corporate acquisitions in circumstances where this may not be the most economically efficient outcome.

1.5 This issues paper proposes that a loss company be able to transfer imputation credits to a profit company in conjunction with undertaking a loss offset. The imputation credit transfer mechanism would allow the profit company to pay a fully imputed dividend despite engaging in loss grouping; thus removing any potential economic distortions created by the existing rules. This paper seeks readers’ views on whether the proposed solution is workable and appropriate.

How to make a submission

1.6 You are invited to make a submission on the proposed reforms and points raised in this issues paper. Submissions should be addressed to:

Loss grouping and imputation credits
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140

1.7 Alternatively, submissions can be made by emailing [email protected] with “Loss grouping and imputation credits” in the subject line. Electronic submissions are encouraged.

1.8 The closing date for submissions is 27 October 2015.

1.9 Submissions should include a brief summary of major points and recommendations. They should also indicate whether the authors are happy to be contacted by officials to discuss the points raised, if required.

1.10 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. You should make it clear if you consider any part your submission should be withheld under the Official Information Act.