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CB 32B: Owners of look-through companies
or “Tax responsibilities for people who own part of a look-through company”
You could also call this:

“How to calculate dividend income when a company becomes a look-through company”

This section explains how you calculate income from dividends in the first year a company becomes a look-through company (LTC). It applies when you have an interest in an LTC at the start of the year, and the company was not an LTC in the previous year. It also applies when you have an interest in an LTC that has joined with another company.

You will have income from dividends in these situations. The amount of income is worked out using special formulas. These formulas take into account things like the company’s untaxed reserves, imputation credits, and your share in the company.

The law provides two different ways to calculate this income. Which way you use depends on whether the company was a qualifying company before and if the dividend would be fully imputed.

The income you get from this is treated as a dividend with an attached imputation credit. This means you might get a tax credit along with the income.

The law gives detailed instructions on how to use the formulas, including what each part of the formula means and how to figure out the numbers to put into it. It also explains when to measure these amounts, which is usually the day before the company becomes an LTC or the day it joins with another company.

Lastly, the law clarifies what counts as income tax payable and refunds due when using these formulas. This helps make sure the calculations are done correctly.

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Next up: CB 33: Amounts derived by mutual associations

or “Income from mutual deals between an association and its members is taxable”
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Part C Income
Income from business or trade-like activities: Exclusion for investment land

CB 32CDividend income for first year of look-through company

  1. This section applies for an income year when, in the income year, the person has—

  2. an effective look-through interest for a look-through company (LTC) on the first day of that year, and the company existed in the previous income year, but was not a look-through company in that previous year:
    1. an effective look-through interest for a look-through company on the day after the LTC amalgamates in that year with a company that ceases to exist after the amalgamation (the amalgamating company), and the amalgamating company was not a look-through company immediately before the amalgamation.

      1. The person has an amount of income under—

      2. subsection (4); or
        1. subsection (8), if—
          1. the relevant LTC was a qualifying company in the relevant previous year; and
            1. a dividend under subsection (4) would not be fully imputed.

            2. An amount of income under subsection (4) or (8) is treated as a dividend including an attached imputation credit, as provided by the relevant subsection.

            3. For the purposes of subsection (2)(a), the amount of income is a positive amount calculated using the formula—

              (untaxed reserves + reserves imputation credit) × effective interest.

              Where:

              • In the formula in subsection (4),—

              • untaxed reserves is the amount given by the formula in subsection (6):
                1. reserves imputation credit is the total amount given by the formula in subsection (7B), up to the maximum permitted ratio for the untaxed reserves under section OA 18 (Calculation of maximum permitted ratios) and is treated as an attached imputation credit included in the dividend calculated under this section:
                  1. effective interest is the person’s effective look-through interest for an LTC on the relevant day under subsection (1)(a) or (b).

                    1. For the purposes of subsection (5)(a), the amount of untaxed reserves is calculated using the formula—

                      dividends – assessable income – exit exemption.

                      Where:

                      • In the formula in subsection (6),—

                      • dividends is the sum of the amounts that would be dividends if the following events occurred for the company or the amalgamating company (the company), immediately before it became an LTC or amalgamated with an LTC:
                        1. it disposed of all of its property, other than cash, to an unrelated person at market value for cash; and
                          1. it met all of its liabilities at market value, including income tax liabilities for the disposal year but excluding income tax liabilities that would arise solely from meeting all of its liabilities at market value or from disposing of all of its property; and
                            1. it was liquidated, with the amount of cash remaining being distributed to shareholders without imputation credits attached:
                            2. assessable income is the total assessable income that the company would derive by taking the actions described in paragraph (a)(i) and (ii) less the amount of any deduction that the company would have for taking those actions:
                              1. exit exemption is the amount given by the formula in section CX 63(2) (Dividends derived after ceased to be look-through company), treating the amount described in paragraph (a) as a dividend paid by the company for the purposes of section CX 63(1), if section CX 63 would apply to a dividend paid by the company.

                                1. For the purposes of subsection (5)(b), the amount of reserves imputation credit is calculated using the formula—

                                  current credits + future amounts.

                                  Where:

                                  • In the formula in subsection (7B),—

                                  • current credits is the amount of the balance in the company’s imputation credit account on the relevant day:
                                    1. future amounts is an amount of income tax payable for an earlier income year but not paid on or before the relevant day, less refunds due for the earlier income year but paid after the relevant day.

                                      1. For the purposes of subsection (2)(b), the amount of income is a positive amount calculated using the formula—

                                        ((balances ÷ tax rate – balances) + balances imputation credit) × effective interest.

                                        Where:

                                        • In the formula in subsection (8),—

                                        • balances is the sum of the following amounts:
                                          1. the balance in the company’s imputation credit account on the relevant day:
                                            1. an amount of income tax payable for an earlier income year but not paid on or before the relevant day, less refunds due for the earlier income year but paid after the relevant day:
                                            2. tax rate is the basic tax rate for the income year of the company that contains the relevant day described in subsection (10):
                                              1. balances imputation credit is the amount of the item balances in paragraph (a), and is treated as an attached imputation credit included in the dividend calculated under this section:
                                                1. effective interest is the person’s effective look-through interest for an LTC on the relevant day under subsection (1)(a) or (b).

                                                  1. In this section, the relevant day for measuring relevant items in the formulas is—

                                                  2. the last day of the income year before the income year described in subsection (1)(a), as applicable; or
                                                    1. the day of the amalgamation described in subsection (1)(b), as applicable.

                                                      1. For the purposes of subsections (7C)(b) and (9)(a)(ii),—

                                                      2. income tax payable is income tax that would, when paid, give rise to a credit in the company’s imputation credit account under sections OB 4 to OB 29 (which relate to imputation credits):
                                                        1. a refund of income tax due is the amount that would, when paid, give rise to a debit to the company’s imputation credit account under sections OB 30 to OB 59 (which relate to imputation debits).

                                                          Notes
                                                          • Section CB 32C: replaced, on (applying for the 2017–18 and later income years), by section 14(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                          • Section CB 32C(5)(b): replaced, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(7)(a)(ii): replaced, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(7B) heading: inserted, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(7B): inserted, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(7C) heading: inserted, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(7C): inserted, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(9)(a)(i): amended, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(4)(a) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(9)(a)(ii): amended, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(4)(b) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(10): amended, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(5) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                                          • Section CB 32C(11): amended, on (with effect on 1 April 2017 and applying for the 2017–18 and later income years), by section 8(6) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).