If you’re winding up your family trust, which some people are doing as a result of the top tax rate changing to 39%, be careful if your trust owns shares in your own company.
When there is a change in shareholding in a company, such as from the family trust to you, if the number of shares being transferred exceeds 34% of the total shareholding of the company, imputation credits are forfeited. In fact, you’ve also got to look out for past shareholding changes because the rule requires a continuity of shareholding of 66% of voting shares (and market value interests, if applicable) from the date the tax was paid to the date the credit is used. So if there has already been a shareholding change, be very careful. Declare a dividend to use up your imputation credits before you change your shareholding.
Why is this important? Because when you wind up your company you have to pay out retained earnings as dividends. If you’ve lost imputation credits, you get taxed again on these distributions. Imputation credits are designed to allow you tax relief to the extent the company has already paid tax on its income being distributed to you.
