Imputation debit breach of continuity adjustment

This amendment to the Income Tax Act 2007 covers debits to imputation credit accounts following a breach in shareholder continuity.

Section OB 32(2)(b) of the Income Tax Act 2007 has been amended retrospectively to ensure that the debit to an imputation credit account for a breach in shareholder continuity is correctly adjusted if the company has also received a debit to its imputation credit account for income tax refunded to the company before the breach in shareholder continuity occurred.

The Rewrite Advisory Panel agreed with a submission that section OB 32(2)(b) of the 2007 Act contained an unintended change in law. Section OB 32 provided for an adjustment to the debit to a company’s imputation credit account (ICA) for a refund of income tax if that refund has also been included in the calculation of the debit for a breach of continuity.

On a breach of shareholder continuity, the company’s imputation credit account (ICA) is debited for the amount of imputation credits for which shareholder continuity is not satisfied. However, as income tax refunded prior to a debit for breach of shareholder continuity also gives rise to a debit to the ICA, section OB 32(2)(b) adjusts the debit for breach of shareholder continuity to take into account the earlier debit for a refund of income tax, in this way preventing two debits to the ICA for the same imputation credit.

The unintended change in law limited the adjustment to a debit for breach of continuity for income tax refunded prior to the breach, to an amount that is less than the debit for the breach in continuity. In the corresponding provision in the 2004 Act (section ME 5(1)(e)), the adjustment amount could be less than or equal to the debit for the breach in continuity.