Loss Grouping and Imputation Credit Transfer
01 December 2015
This Officials Issues paper is targeted at a single issue - the deficit in imputation credits a profit company can experience where the profit company has benefit from loss from a fellow group company.
Imputation credits arise where a company pays income tax. A reduced amount of tax is paid where the company benefits from a group loss offset. Group loss offsets are performed by way of an election to offset transfer the loss from the loss company to a group company with taxable income. Where the loss is transferred by way of an offset the profit company can end up with a mismatch between its retained earnings and the balance of imputations credits.
Losses can also be transferred by way of a subvention payment. Originally subvention payments which are a deductible expense to the profit company had to be made for a dollar equivalent of the loss transferred. This was a useful mechanism. It provided funds to the loss company which they could use to repay intercompany debt which often arose from the profit company funding the losses. It would also lower the retained earnings of the profit company providing a better match between its imputation credits and its retained earnings.
The use of subvention payments for a full dollar for dollar basis is not always appropriate and many companies choose to make a subvention payment equivalent to the tax effect of the losses (28%) and transfer the balance of the loss (72%) transferred by way of the loss offset election.
Any deficit in imputation credits arising from a group loss offset or a 28% subvention payment inevitably results in any shareholder who does not benefit from the wholly owned inter-company dividend exemption incurring additional tax liability on receiving a dividend that would otherwise have been fully imputed.
Officials have received submissions that this is driving corporate behavior on mergers and acquisitions where 100% share ownership is pursued to get the benefit of the inter-corporate dividend and this may not be in the bests in interests of the economy.
The solution proposed is for the loss company to allow an imputation credit transfer from the loss company to the profit company at the time a dividend is paid by the profit company.
The imputation credit transfer will be agreed between both companies and cannot be by unilateral election. It is intended to apply where the loss company is a parent company and the profit company a subsidiary; or where both are sister companies with a common shareholder corporate parent. It is not intended to apply where the parent company is the profit company and the loss sits in the subsidiary as there are existing mechanisms for transferring the imputation credits around the group in such circumstances.
It is an interesting business friendly proposal which is likely to have a relatively narrow application. The time between the loss offset and the payment of a dividend and transfer of imputation credits is likely to challenge record keeping as a number of years may pass between these two times. However it is an interesting concept that should be considered while our imputation system remains.