Fixed-rate share remedial amendment

2011 amendment to Income Tax Act fixes an error that affects foreign fixed-rate shares held by individuals and trustees.

Sections EX 46(10)(a) and YA 1 of the Income Tax Act 2007

Section EX 46(10)(a) has been amended to fix an error that affects foreign fixed-rate shares held by individuals and trustees. Persons who have already filed tax returns will not face any additional tax, whether they had been applying the rules as they were intended to be applied or applied them in accordance with the unintended change.

Background

The fair dividend rate method, which is the standard way of taxing offshore portfolio investment, is not available for certain debt-like investments referred to in the legislation as "non-ordinary shares".

The definition of a non-ordinary share is contained in section EX 46(10). Prior to 2009 section EX 46(10)(a) referred to "a fixed-rate share". This was changed to "fixed-rate foreign equity" in 2009, which had the unintended consequence of limiting the provision to fixed-rate shares held by companies (whereas previously it also applied to individuals and trustees).

Key features

The reference to "fixed-rate foreign equity" in section EX 46(10)(a) is changed to "a fixed-rate share". This is necessary because the definition of "fixed-rate foreign equity" in section YA 1 is limited to fixed-rate shares that are held by companies and so would exclude fixed-rate shares held by individuals and trusts.

In addition, some cross-references to section EX 46(10)(a) and subpart FE have been inserted into the section YA 1 definition of "fixed-rate share". These cross-references clarify the definition of "fixed-rate share" that applies in these cases (as the definition of "fixed-rate share" can have slightly different meanings in different parts of the Act).

Application date

The amendment to section EX 46(10)(a) generally applies to income years beginning on or after 1 July 2009. However, in respect of those tax returns that have been filed for an income year beginning after 1 July 2009 and before 29 August 2011 any affected taxpayers are able to choose to retain the tax position that they included in those returns. This ensures that these taxpayers do not face any additional tax, whether they had been applying the rules as they were intended to be applied or applied them in accordance with the unintended change.

The new cross-references to section EX 46(10)(a) and subpart FE in the section YA 1 definition of "fixed-rate share" apply to income years beginning on or after 1 July 2009.