Imputation additional tax on leaving and joining wholly-owned groups

2010 amendment to the imputation credit shopping rules which prevent one group of companies obtaining imputation credits from another groups' tax liabilities.

Background

What are colloquially known as the imputation credit shopping rules are being amended to remove their over reach. These rules are designed to prevent one group of companies obtaining imputation credits from another group of companies' tax liabilities. When dealing with prepaid tax (where the associated imputation credits have been distributed to shareholders) even a minor change in shareholding can, in some circumstances, trigger the rules. This is inappropriate.

Key features

The main change is to Section OB 72(5) for a company which was part of a wholly-owned group and joins a new wholly-owned group. In respect of excess entitlements, it now provides that the company is liable for imputation penalty tax if a group of people hold common voting interests in the new group that exceed by 67% or more the common voting interests in the former group that are held by the same people immediately before the company joins the new group. Previously, the imputation penalty tax in this situation was payable where there was any change of ultimate shareholders in a wholly-owned group.

However, where the company joins a new wholly-owned group and the imputation additional tax is not payable in respect of an excess entitlement under section OB 71, the use of income tax refunds due to that company are then restricted by the new section OB 72B. Subsection (5) then restricts the use of the refunds in two ways:

  • Imputation credits which:
    • were derived from tax paid by the company or by a company in the same wholly-owned group (and was in that group immediately before joining the new group);
    • are attached to a dividend in relation to a shareholding by the company for a company in the same wholly owned group (and which was in that group immediately before joining the group and had that shareholding at that time).
  • To satisfy a tax liability of the company itself or a company (the member) that is in the same wholly-owned group as the company, if the company satisfies the Commissioner that the member was in the former group immediately before the company joined the new group.

As section OB 72 now allows a change in shareholding in a wholly-owned group of up to (but less than) 67%, section OB 72B provides a mechanism for tracking various shareholding changes in a wholly-owned group to determine if and when the 67% trigger occurs. It does this on a cascading basis for subsequent changes of shareholding which need to be calculated for each wholly-owned group which emerges from any change of shareholders.

Section OB 72B imposes an additional imputation tax liability for the restricted refund amount on the same basis that the imputation additional tax is payable for an excess entitlement in section OB 72.

There have been other changes to sections OB 71 and OB 72 which are clarifying the provisions which may have become unclear following the rewrite of the Act. They are not policy changes.

It should be noted that these provisions were introduced prior to a planned review of the policy framework of the imputation credit rules and that review is likely to result in a rewrite of these provisions.

Application dates

The changes to section OB 71 take effect from 1 April 2008 and the changes to sections OB 72 and OB 72B take effect from 1 March 2010.