The Issues Log

Section / Provision Income Tax Act 2007

OB 41

Section / Provision Income Tax Act 2004

ME 5(1)(i) and ME 5(2)(h)

Date Received

Under the rewritten legislation it appears the debit to a company\'s ICA on a breach of shareholder continuity is equal to the company\'s ICA balance the day before the breach.  This leads to a nonsense result where a company pays a fully imputed dividend on the day of a continuity breach but prior to the change in shareholding.

Give examples: Taxpayer has an ICA balance on $100,000.  Taxpayer pays a cash dividend on the morning of 31 March of $233,333 which is fully imputed (and accordingly debits the company\'s ICA for the $100,000 imputation credits).  On the afternoon of 31 March shareholder continuity is lost.  OB 41 requires a debit to the ICA of the balance before the date of the continuity breach, i.e. the balance on 30 March.  This will put the taxpayer in a debit ICA balance at the end of 31 March.

Compare this with the 2004 Act where the balance at the \"specified time\" would be nil and there is no further debit to the ICA on the continuity breach - clearly the intended result.

The Panel has concluded and agree an unintended legislative change arises in respect of section OB 41 of the Income Tax Act 2007.

The Income Tax Act 2007 be amended retrospectively.