Timing of imputation credits and debits - tax pooling

2010 amendment covering tax pooling and the timing of imputation credits and debits and amending section OB 6 of the Income Tax Act.

The Rewrite Advisory Panel agreed with a submission that section OB 6 of the Income Tax Act 2007 contained an unintended change in law. The Panel considered that the change produced a different timing for the imputation credit on the transfer of an entitlement to funds in a tax pooling account, when compared to the outcome given by section ME 4(2)(ad) of the 2004 Act.

The Panel also noted that consequential amendments would be required for related imputation (tax pooling) provisions (sections OB 34, OB 35, OP 9, OP 32, and OP 33).

The purpose of "tax pooling" is to provide a pool of funds for use by companies to reduce exposure to use-of-money interest and late payment penalties - in particular, for provisional tax. A tax pooling intermediary administers the tax pooling account, including a transfer (when requested) of funds to a taxpayer's tax account with Inland Revenue.

Under the tax pooling rules, if a taxpayer pays an amount for tax into a "tax pooling account", that payment is held in trust for that taxpayer's benefit. Funds held for the benefit of a taxpayer in a tax pooling account are normally described as an entitlement to funds in the tax pooling account.

However, taxpayers may "sell" their entitlement to funds in a tax pooling account to another taxpayer. On that sale, the tax pooling intermediary transfers the entitlement to those funds to the other taxpayer.

Under the tax pooling imputation rules, a company is intended to have a credit in its imputation credit account (ICA) for:

  • a payment for tax made into the tax pooling account (that is, the taxpayer's own deposits into the tax pooling account);
  • the purchase of an entitlement to funds in a tax pooling account.

It is also possible that a purchaser of an entitlement may, instead of transferring the underlying funds to the purchaser's tax account with the Commissioner:

  • later on-sell that entitlement to another taxpayer; or
  • later request that the intermediary refunds to the purchasing company the funds representing that entitlement from the tax pooling account.

The tax pooling imputation rules provide specific timing rules for the imputation credit that relates to a deposit of funds or purchase of funds. These timing rules are necessary to ensure consistency with the overall objectives of:

  • the tax pooling rules;
  • enabling the benefit of tax paid at the corporate level to be available for shareholders; and
  • the rules relating to the transfer of other tax types to a taxpayer's income tax account with Inland Revenue.

The timing of imputation credits arising in relation to an entitlement to funds in a tax pooling account is as follows:

  • The date of the imputation credit for a deposit into a tax pooling account is the date of the deposit. If an entitlement to funds is on-sold, the vendor company must debit its ICA for the amount of the entitlement sold.
  • For a purchased entitlement, the date of the imputation credit for a purchased entitlement to funds in a tax pooling account is permitted to be backdated if the funds are transferred to the company's tax account with Inland Revenue. The backdating of the credit is to a date selected by the taxpayer, but can be no earlier than the date of the original deposit made to the tax pooling account. Some restrictions also apply to the backdating to prevent abuse of the backdating rule.
  • The date of the imputation credit for a purchased entitlement to funds in a tax pooling account that is on-sold (transferred) to another taxpayer is the date of the transfer. A debit to the company's imputation credit also arises for the amount on-sold on the transfer, because the purchased amount is not transferred to the company's tax account with Inland Revenue and therefore does not represent tax paid by the company.
  • The date of the imputation credit for a purchased entitlement to funds in a tax pooling account that is refunded to the company from the tax pooling account is the date of the refund. A debit to the company's imputation credit also arises for the amount on-sold, because the purchased amount is not transferred to the company's tax account with Inland Revenue and therefore does not represent tax paid by the company.

Detailed analysis

Section OB has been amended to ensure that a company acquiring an entitlement to funds in a tax pooling account receives an imputation credit, and that the date of the credit is as follows:

  • if the purchasing company requests the intermediary to transfer to the company's tax account with Inland Revenue, an amount representing an entitlement to the funds in the tax pooling account, the date of the credit is determined under the effective date rules in sections RP 19 and RP 20; or
  • if the purchasing company on-sells to another taxpayer that entitlement to the funds in the tax pooling account, the date of the credit is at the date the entitlement is transferred to the other taxpayer; or
  • if the purchasing company requests that the intermediary refunds the funds representing the purchased entitlement from the tax pooling account to the company, the date of the credit is the date of the refund.

Consequential amendments to other imputation (tax pooling) provisions

In addition:

  • As originally enacted in the 2007 Act, section OB 34 applied only to a company in relation to a deposit of its own funds in a tax pooling account. Section OB 34 has been amended to ensure that it applies to a company that has purchased an entitlement to funds in a tax pooling account.
  • As originally enacted, section OB 35 applied only to an on-sale of an entitlement that was deposited by the selling company. Section OB 35 has been amended to ensure that it applies to an on-sale of an entitlement to funds in a tax pooling account that a company had previously purchased from another company.
  • As originally enacted, section OP 9 contained the same drafting concerns set out above, and has been amended in the same way as section OB 6.
  • As originally enacted, section OP 32 and OP 33 were drafted differently from the language in sections OB 34 and OB 35. Sections OP 32 and 33 have been amended to ensure they are drafted to be consistent with the amendments for sections OB 34 and OB 35.
  • Section OP 33 has been amended to clarify that the tax pooling intermediary is the person that transfers entitlements to funds in a tax pooling account, as the trustee of those funds.