Excess Imputation Credits

Sections LB 1 and LB 2 of the Income Tax Act 2004 and sections 33A and 177C of the Tax Administration Act 1994

Excess imputation credits received by individuals (natural persons) and unincorporated bodies must now be carried forward instead of being converted into a net loss. This ensures that the benefit of the credits is equal to the tax paid.

Background

Imputation credits received by taxpayers in excess of those required to meet their tax liability for the tax year were previously converted to a deemed net loss. This was carried forward and offset against net income in the next income year.

The benefit of the net loss when claimed would ideally equal the value of the imputation credit. For taxpayers such as individuals, whose marginal tax rate depends on their taxable income in each year, no single rate of conversion to a net loss could achieve this, so a “middle” effective marginal tax rate of 28% was used. The rate used declined over time and is now 21%, whereas the top tax rate is 39%. This has increased the disparity between the value of imputation credits and their potential value if converted to a net loss.

Key features

Section LB 2 of the Income Tax Act 2004 has been amended so that excess imputation credits received by an individual or unincorporated body are carried forward to the next income year. Carried-forward imputation credits remain “convertible credits” under section OB 1, and so will offset tax liabilities in the same order as “new” imputation credits under section BC 10.

Under an amendment to section 33A of the Tax Administration Act 1994, taxpayers with excess imputation credits will be required to file a tax return. This is consistent with requirements for taxpayers with a net loss. Based on the information it has, Inland Revenue intends to inform taxpayers of the value of any excess credits carried forward.

Under section 177C of the Tax Administration Act 1994 the Commissioner, when writing off an outstanding amount of tax, extinguishes any net loss available to the taxpayer up to the value of the outstanding tax by dividing the amount written off by 33% and reducing the net loss by that amount. Under an amendment to that section, the Commissioner will then extinguish any carried-forward excess credits of the taxpayer up to the value of the remaining outstanding tax being written off (if any).

Application date

The amendments apply to imputation credits received in the 2005-06 and later tax years.