2006 amendments prevent Australasian companies allocating imputation credits to dividends paid to NZ investor if the payment results in a deduction in Australia.

Sections ME 6(1B), (1C) and (1D) and ME 8(6) of the Income Tax Act 2004

The amendments close a loophole by preventing Australasian groups of companies from allocating imputation credits to dividends paid to a New Zealand investor if the payment of the dividends results in a tax deduction in Australia.


The intention of the trans-Tasman imputation rules is that New Zealand and Australian shareholders of trans- Tasman companies can be allocated imputation credits representing New Zealand tax paid and franking credits paid, in proportion to their ownership of the company. However, each country's credits can be utilised only by its residents.

The amendments address the problem of imputation "credit-streaming", where imputation credits were deliberately directed to New Zealand owners of Australian-issued redeemable preference shares, although the proceeds of the share issue did not directly cause further New Zealand tax to be paid by the Australasian group. A particular feature of these arrangements was that under Australian law, the share coupons were deductible as interest.

Key features

New section ME 6(1B) provides that imputation credits may not be attached to a dividend that is:

  • paid in relation to a share that is a debt interest under the Australian Income Tax Assessment Act 1997; and
  • included in the Australian tax return of the paying company.

This includes dividends paid on redeemable preference shares, as discussed above.

Section ME 8(6) provides that the "benchmark" dividend rules do not apply to any dividend to which imputation credits cannot be attached under section ME 6(1B).

Application dates

The general rule is that imputation credits may not be allocated to dividends paid on or after 21 July 2005. There are, however, several grandparenting rules.

Section ME 6(1C) provides that the new rule does not apply to a dividend if the shares were issued before 21 July 2005 and:

  • the shareholder is not a member of the same group of companies that the dividend-paying company belongs to; and
  • they are members of the same wholly owned group of companies, but both are non-resident.

Section ME 6(1D) provides an exception to the general "same group of companies" test where the shareholder acquired the shares:

  • before 21 July 2005;
  • for business reasons; and
  • for reasons independent of the relationship between the shareholder and the paying company:
    • as part of a share broking business; or
    • as an investment held by the shareholder as part of an insurance business; or
    • as security for a loan given as part of a money lending business; or
    • as a trustee for a beneficiary who is not a company in the same group of companies as the shareholder.