6 November 2001 Media 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.
ENDS