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The interaction of loss grouping and imputation credits – discussion document released

Tax Alert - October 2015

On 15 September 2015, the Government issued an Officials’ Issues paper proposing a solution to deal with the over-taxation that can arise in a specific situation as a result of the interaction between the loss grouping rules and imputation credit regime. 

The issue can affect companies within a group where ownership is greater than 66 percent, but less than 100 percent.  This is because at this level of ownership, losses can be grouped but this leads to less tax being payable by the profit company and as a consequence fewer imputation credits are generated.  If the profit company subsequently wishes to pay a dividend to one of its corporate group shareholders, the profit company may have insufficient imputation credits to fully impute the dividend. This problem does not arise where the profit and loss company are in a wholly owned (100 percent) group of companies because of the inter-corporate dividend exemption rule.

This issue means a company may be incentivised to acquire 100 percent of a target company in order to access the inter-corporate dividend exemption and avoid this issue.  Hence it could be distorting potential business combinations and could be shutting out minority shareholders. 

Officials therefore propose to allow companies utilising the loss offset rules to mutually agree to be allowed to perform an “imputation credit transfer” at the time a dividend is paid by a profit company in order to facilitate full imputation of that dividend.  Essentially the loss company will be able to transfer imputation credits to a profit company in conjunction with undertaking a loss offset and so allow the profit company to pay a fully imputed dividend despite utilising loss grouping.

Officials are interested to receive submissions on whether the proposed solution is workable and appropriate.  Submissions can be made until 27 October 2015.

 

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