The timing of tax pool transactions can create a debit or credit to the taxpayer’s Imputation Credit Account (ICA).
Note: This information is not intended to substitute a taxpayer or tax agent making their own enquiries regarding their or their client’s ICA position, and is not intended to constitute tax advice.
The Income Tax Act 2007 outlines the rules for the timing of imputation credits/debits for companies in relation to deposits, transfers or withdrawals to, within and from a tax pool. Inland Revenue also provides useful commentary online on this topic.
How and when tax pool transactions are accounted for
The date of the imputation credit for a deposit into a tax pooling account is the date of the deposit (any subsequent transfer of these funds to Inland Revenue will not give rise to an ICA entry).
The date of the imputation credit for a purchase of an amount of tax from a tax pooling intermediary is the effective date the credits are applied to your client’s income tax account. This credit however does not arise until the amount of tax is transferred from the tax pool to your client’s income tax account.
Where funds have been purchased but are not used to meet a liability of your client and are subsequently refunded or on-sold, the date of the imputation credit is the date of the refund or the transfer. A debit to your client’s ICA also arises for the amount refunded or on-sold.
Sales and refunds
Where funds have been deposited or purchased, but are not used to meet a liability of your client and are subsequently refunded or on-sold, the date of the imputation debit is:
a) the last day of the previous tax year, to the extent the amount of the debit is no more than the credit balance in the ICA on that date; or
b) the day the refund is made, to the extent of the remaining amount of the debit that is no more than the credit balance in the ICA on the day of the refund; or
c) the last day of the previous tax year for the remainder of the debit.
What if there is a break in shareholder continuity?
Where there is a break in shareholder continuity, the general rule is that your client can retain the backdated effective date of any amounts deposited or purchased, but they will lose the ICA credits that attach to the amount deposited.
How does a break in shareholder continuity affect imputation credits on amounts purchased?
If there is a break in shareholder continuity during the year, then any imputation credits on amounts purchased that are credited to your client’s Inland Revenue account at a date prior to the breach in continuity will be lost. Therefore, if your client wishes to retain the imputation credits after a break in shareholder continuity, they should deposit or purchase their tax to match a date that is one day after the change in shareholder continuity. Please note this will leave your client exposed to late payment penalties and use of money interest up to the date of the change in shareholder continuity.
Whether your client wishes to retain imputation credits after a break in shareholder continuity will depend on whether the benefits of any additional imputation credits outweigh the drawbacks of late payment penalties and use of money interest. The rules around ICAs and shareholder continuity and the overlap with tax pooling can be quite technical and complex and are often highly fact specific. We recommend you obtain specialist advice or satisfy yourself around the relevant legislative requirements, if a combination of ICAs/tax pooling/shareholder continuity issues ever arise for your clients. Alternatively, please contact us ahead of time to discuss your requirements should you find yourself in this situation and we can discuss your options.
When do imputation credits arise on tax pooling transactions?
For amounts deposited in our trust account at Inland Revenue, imputation credits arise on the date of deposit and you can add them to your client’s ICA return immediately. When your client is purchasing or financing tax, imputation credits arise on the provisional tax date for which the tax has been purchased or financed, but those credits can only be attributed to your client’s ICA return once the tax is transferred from the tax pool to their Inland Revenue account. For financing transactions, this will be at the end of the finance period and not the beginning.
Can my client purchase tax to cover an ICA debit balance?
Your client can do this, but only to the extent they are also covering an income tax shortfall. Inland Revenue no longer allow amounts to be purchased purely for the purpose of addressing an ICA debit balance. Please note that your client is able to have their third provisional tax instalment payment applied prior to 31 March, so that all three provisional tax amounts purchased go towards reducing any ICA shortfall as at the 31 March prior to the third provisional tax instalment date.
What are the implications for an ICA if my client is settling a tax finance or tax purchase after 31 March and do I need to update Inland Revenue?
ICA credits will be effective at the date of tax your client is financing/purchasing, but only once the credits are transferred from the tax pool to your client’s Inland Revenue account. If the ICA return has been filed prior to that, then the ICA return should be refiled to update Inland Revenue. This is not a complicated or formal process; it can be a simple email outlining that tax credits have recently been transferred to your client’s account at the respective effective dates. We can provide to you the contact email address at Inland Revenue for this purpose. If the ICA return has not yet been filed before the credits are transferred, then they should just be included in the ICA return for that period. Penalties associated with any historic debit ICA position will be remitted once the credits are transferred, to the extent that your client has purchased/financed historical tax.
Can imputation credits be traded?
No, unfortunately that is outside the bounds of what Inland Revenue allows.