Loophole in unit trust tax rules to be closed

  • Michael Cullen
Revenue

6 November 2001Media Statement
Loophole in unit trust tax rules to be closed

A possible loophole in the law that may allow unit trust managers to take advantage of excess imputation credits to achieve an unintended windfall gain at a potential cost to the revenue of $30 million is to be closed.

“The change will clarify that managers cannot take advantage of section CF 2(15) of the Income Tax Act to generate excess imputation credits following a simple redemption of units,” Revenue Minister Michael Cullen said.

"Investors in unit trusts usually dispose of their units by selling them back to the unit trust manager at market value. The manager then redeems them at the same time with the unit trust. This is usually a straightforward operation in which the manager does not make a cash gain or loss.

"The government is aware that some managers are trying to use the excess imputation credits arising from these transactions to offset their other income. It was never the intention of the law that imputation credits gained in this manner should be used in such a way.

"The law will be amended to ensure that when unit trust managers redeem units in the ordinary course of their business they will not be able to use the excess imputation credits arising from any dividend received if it merely reflects the manager's purchase costs of the units.

"The change, once enacted, will apply from today with effect from 1 April 1996, when the relevant rules came into force. It will not apply to unit trust managers who advised Inland Revenue before the date of this announcement that they intended to adopt or had adopted the position that this proposed amendment addresses.

"The amendment will be included in the tax bill to be introduced in December.

"The bill will include another technical change that will be welcomed by the unit trust industry because it removes a longstanding tax problem faced by the industry. The problem is known in the industry as the 'negative' dividend' issue. The change will allow unit trusts to use lost available subscribed capital that arises when units are redeemed to cover shortfalls in their imputation credit accounts," Dr Cullen said.

Contact: Patricia Herbert [senior press secretary] 471-9412 or 021-270-9013. Technical inquiries to Michelle Davie [tax advisor to Dr Cullen] 471-9728