Trans-Tasman imputation special rules
There are special rules for Trans-Tasman imputation which are slightly different to the general Australian imputation rules.
The Trans-Tasman imputation measures allow a New Zealand (NZ) resident company to choose to enter the Australian imputation system and gain access to Australian franking credits. Primarily, this will be when a NZ company pays Australian income tax.
The measure allows a NZ company to maintain an Australian franking account and to attach Australian franking credits to dividends it pays to its Australian shareholders. These Australian franking credits can then be passed on to Australian shareholders, who have invested in the NZ company in Australia. This alleviates double taxation of dividends paid to them. It avoids the taxation of company profits when earned by a company and again when a shareholder receives a dividend.
The measure does not allow recognition of NZ imputation credits (the NZ equivalent of Australian franking credits) attached to dividends received by Australian resident shareholders.
A NZ company that chooses to use the Trans-Tasman imputation rules will generally be subject to the Australian imputation rules in the same way as they apply to an Australian company.
The special rules apply to ensure that the measure operates appropriately and to preserve the integrity of the Australian imputation system.
On this page:
Making a choice to join the Australian imputation system
The Australian imputation rules will apply to a NZ resident company that has chosen to give notice to the Australian Commissioner of Taxation that they wish to be part of the Australian imputation system (making a franking choice). A NZ company that makes this choice will be known as a NZ franking company.
A NZ resident company choosing to enter the Australian imputation system has an income year (which is the Australian income year) from 1 July to 30 June, unless we have approved some other substituted accounting period.
A NZ resident company must notify us of their franking choice by lodging a Trans-Tasman imputation election form.
The notice must be lodged with us at least one month before a NZ company begins to make any franked distributions. For example, a NZ company must lodge the notification at least on or before 1 September 2016 if it wishes to start franking distributions from 1 October 2016.
A NZ franking choice will generally be in force from the start of the income year in which the notice was given to us. If a later income year is specified by a company, the company's NZ franking choice will be in force from the start of the specified income year. A NZ franking choice will continue in force until it is revoked by the company or cancelled by the Commissioner.
If a NZ company does not have an Australian tax file number (TFN), we will issue a TFN once you have made your franking choice.
Revoking or cancelling a franking choice
A NZ franking company may revoke its franking choice by notifying the Commissioner using the Trans-Tasman imputation revocation form.
We may cancel a company's NZ franking choice if the NZ franking company does not pay its franking deficit tax or over-franking tax liability by the due date or fails to provide a franking return to us when required.
When a NZ franking choice ceases to be in force, either
- a franking debit will arise to cancel any surplus in the franking account
- a franking deficit tax liability will arise if there is a deficit in the franking account.
Australian shareholder receiving NZ dividends and other distributions
The tax treatment, for Australian income tax purposes, of dividends paid by a NZ franking company to Australian resident shareholders is the same as dividends received from Australian franking entities. However, there are some additional aspects to be considered.
Australian shareholders must include the dividends paid by a NZ company and the attached Australian franking credits in their assessable income. Any supplementary dividend paid by the NZ company is also included in assessable income.
The Australian shareholder is entitled to a tax offset, equal to the franking credits included in their assessable income, against Australian income tax payable on the dividend. They are also entitled to a foreign income tax offset, in respect of any NZ withholding taxes, against Australian income tax payable on the dividend and the supplementary dividend.
Where a supplementary dividend is received by an Australian resident shareholder and the shareholder is also entitled to a foreign income tax offset, the franking credits included in the assessable income are reduced by the amount of the supplementary dividend. This will also result in a reduction of the franking credit tax offset by a similar amount.
Note: The NZ income tax rules do not provide for exemption from NZ withholding tax in respect of a dividend paid by a NZ company to a foreign resident from taxed corporate profits. Instead, NZ withholding tax imposed on the dividend is effectively refunded to the foreign resident in the form of a supplementary dividend. The supplementary dividend is also subject to NZ withholding tax.
Refer to Item 20: Foreign source income and foreign assets or property for details on completing your income tax return for NZ dividends and supplementary dividends that you received as an Australian resident shareholder.
Requirements for a NZ franking company
Franking accounts and credits
An Australian franking account operates on a tax-paid basis. This means that if a company pays $30 of Australian tax it would generate a credit of $30 in its franking account.
A NZ franking company is required to keep its franking account in Australian currency. It must operate in accordance with the Australian imputation rules – for example, recording franking credits or debits, including recording a liability to a franking deficit tax.
Allocating franking credits
A NZ franking company franks a distribution by allocating franking credits to it. Only distributions that are frankable can have franking credits allocated to them.
Frankable distributions can only be franked to the maximum franking credit amount. The maximum franking credit for a distribution is equal to the maximum amount of income tax that the entity making the distribution could have paid, at the current corporate tax rate, on the profits underlying the distribution.
A NZ franking company will not be able to allocate any franking credits and pay a franked distribution until one month after the election form is lodged notifying of their NZ franking choice.
Other distributions paid by NZ franking companies that are unfrankable include conduit tax relief additional dividends and supplementary dividends.
A NZ franking company can attach both Australian franking credits and NZ imputation credits to the same dividend.
Issuing distribution statements
If a shareholder receives dividend distributions from a NZ franking company with Australian franking credits attached to it they should receive a distribution statement for that dividend as well.
The NZ franking company is required to provide shareholders with a distribution statement on or before the day the dividend is paid (if it is a public company) or within four months of the end of the company's income year (if it is a private company).
In addition to the information required in a Distribution Statement, the statement from a NZ franking company must include the:
- amount, if any, deducted by way of NZ non-resident withholding tax
- currency in which all amounts are expressed
- exchange rate on the day the decision to pay the distribution was made
- amount of any NZ supplementary dividend paid in connection with the dividend
- the amount of NZ imputation credits attached to the dividend.
The benchmark rule and the disclosure requirements
The benchmark rule requires a franking entity to frank all frankable distributions within a franking period to the same extent. This rule is designed to achieve a similar effect to the NZ rule about benchmark dividends.
The benchmark rule is applied to a NZ franking company in the same way as an Australian franking company. Further information about the benchmark rule can be found on the link below.
The imputation rules generally apply in relation to a NZ franking company's income year.
The franking periods that apply are similar to those of an Australian company.
Franking account tax return
A franking account tax return must be lodged by a franking entity, which includes a NZ franking company, when there is a:
- liability to pay franking deficits tax
- a liability to pay over-franking tax
- or where the company is obliged to disclose a significant variation in its benchmark franking percentages to us
- written notice from the Commissioner to the franking entity requiring a franking account return.
If the NZ franking company does not meet the above criteria, there is no need to lodge a franking account tax return.
If the Australian resident NZ franking company is required to lodge an income tax return, the franking account tax return should be lodged separately. If the franking account tax return is lodged at the time the income tax return is due, the franking account tax return may be late and a general interest charge may apply to any outstanding tax amounts.
The franking account return is due one month after the end of the income year. This is also the date by which any franking deficit tax and over-franking tax is payable.
An early balancing NZ franking entity with an approved substituted accounting period of, for example, 31 March will need to lodge its franking account tax return and pay any franking tax liabilities by 30 April.
Early balancing entities should use our pre-printed Franking account tax return. The form is generally available from July of the income year. Early balancing entities will need to use a previous year's form. For example, if the NZ entity has a 31 March 2016 year-end, the NZ franking entity will need to use the Franking account tax return 2015. The NZ franking entity will need to cross out the year '2015' and write '2016' instead.
Entities with approved substituted accounting periods will also need to specify the period that the income year relates to. For example, a March year-end NZ entity will specify '01/04/2015 to 31/03/2016' in the period boxes at the top of the Franking account tax return, above Section A.
Integrity rules are in place to ensure that the imputation system is not used to benefit members who don’t have a sufficient economic interest in the entity or prefer some members over others.
For NZ entities, the exempting entity rules (relating to the integrity rules on franking credit trading) are modified to allow a NZ franking company to be 'looked through' to find effective Australian ownership. This is so NZ franking companies will not automatically be treated as exempting entities.
A NZ-listed company that is a NZ franking company, along with its Australian or NZ 100% owned subsidiaries will also not be treated as exempting entities.
In cases of wholly owned groups that include a company that is not resident in Australia or NZ, if the NZ parent company is a NZ franking company and is not treated as an exempting entity, then none of the companies in that wholly owned group will be an exempting entity.
Refer to the links below for more details on the imputation integrity rules affecting franking entities, which includes a NZ franking company.
Transfer of franking credits and debits where a group includes a non-Tasman company
In the case of a wholly owned group which includes a company that is not resident in Australia or NZ, special rules will apply to make sure credits are not lost in wholly owned groups where:
- there is an NZ parent company
- all NZ companies in the group have made a NZ franking choice
- interposed between Australian and/or NZ resident companies is a company that is not resident in either country.
In general terms, franking credits and debits are transferred up the group structure to the franking account of the NZ company that holds shares in the interposed company.
Joint and several liability
All members of the same wholly owned group that are Australian or NZ residents may be held jointly and severally liable for any outstanding franking related liabilities of the NZ franking company, unless they are prevented by an Australian or NZ law from entering into an arrangement to make them jointly or severally liable.
General interest charge (GIC) applies to outstanding tax liabilities that are not paid by the due and payable date.
Penalties may also apply for failure to meet certain tax obligations (including lodging returns when required), and if there is a shortfall of tax in certain circumstances.
Additional penalties can also apply where entities fail to meet their obligations under tax laws in relation to making false or misleading statements, taking positions that are not reasonably arguable, entering into schemes, refusing to provide documents to the Commissioner and disregarding private rulings.
The Trans-Tasman imputation rules allow a New Zealand (NZ) company to choose to enter the Australian imputation system. Special rules apply to ensure the rules operate appropriately and the integrity of the Australian imputation system is preserved.