A company can only carry forward imputation credits where at least 66% continuity of shareholding is maintained. The policy behind this is to limit the availability of imptation credits to the shareholders who bore the tax liability that gave rise to the credit.
Where continuity is breached, any imputation credits that are not attached to a dividend paid prior to the loss of continuity will be lost.
However, where a change in shareholding occurs as a result of a change in trustee, special rules provide that there will not be a loss of continuity for tax purposes unless the anti-avoidance provision applies and the change of shareholding has the effect of defeating the continuity rules.
A resettlement, whereby the assets of one trust (including any shares) are resettled onto a new trust, will give rise to a breach of continuity even if there is no change in the class of beneficiaries.
A change of beneficiary will not cause a loss of continuity. However, where a change in beneficiary occurs under an arrangement that has the purpose of avoiding the continuity rules, a specific anti-avoidance provision provides that a deemed disposition and reacquisition occurs for tax purposes that has the effect of causing a loss of continuity. A change of beneficiaries could could comprise an arrangement that has the purpose of avoiding the continuity rules if the beneficiaries who will effectively enjoy the imputation credits are not the beneficiaries who were subject to the tax liability that gave rise to the credits. In this regard it is noted that although the focus is on the beneficiaries when applying the test, at law it is the trustee shareholder that enjoys the imptation credits at law.
Continuity provisions also apply to losses
To carry forward losses a company must maintain a minimum 49% continuity of ownership. As trustees are treated as a notional person for the purposes of the continuity provisions, a change of trustee will not, by itself, lead to a loss of continuity. However, as there are anti-avoidance provisions and exceptions to the “notional person” provisions, care is required to establish whether any tax consequences might arise from the appointment and removal of trustees.