Transitional imputation penalty tax

Section 140C of the Tax Administration Act 1994

The amendment repeals the transitional imputation penalty tax.

Background

The transitional imputation penalty tax was introduced as part of the company tax rate change from 30% to 28%. The penalty was intended to protect the tax base by ensuring that companies do not deliberately over-impute dividends at 30% during the transitional period (from the 2011-12 income year to 31 March 2013) when they had not paid underlying tax at 30% or more. The one-off penalty was to apply on 31 March 2013.

The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill contained a remedial amendment preventing overreach of the penalty. At the Select Committee stage of the Bill, concerns were raised in submissions that the penalty at 10% was excessive, especially when the core imputation penalty ensures that companies do not actually overdraw their imputation accounts. Further, the point was made the penalty was no longer necessary as it was preventative in nature and anyone who had transgressed had done so accidentally, whereas the penalty was intended to prevent deliberate over-imputation.

Key features

The amendment repeals the transitional imputation penalty tax. Repealing the penalty, rather than adjusting the penalty rate, is intended to minimise administrative implications, which were to arise from adjusting the penalty rate.

Companies who over-imputed dividends at 30% during the transitional period when they had not paid underlying tax at 30% or more are not subject to the transitional penalty tax. However, the core imputation penalty of 10% continues to apply to companies who overdraw their imputation accounts.

Application date

The amendment applies from 1 October 2010, which is when the transitional imputation penalty tax was introduced.