Dividends and other company distributions: no tax credits on non-qualifying distributions
Non-qualifying distributions are not grossed up
ITTOIA05/S400 applies when a person receives a non-qualifying distribution, that is any distribution which is not a qualifying distribution (SAIM5050). A non-qualifying distribution does not carry a tax credit.
The recipient of the non-qualifying distribution is treated as having paid income tax at the dividend ordinary rate (SAIM1080) on the actual amount of the non-qualifying distribution (that is, there is no grossing up).
In the case of trustees of accumulation or discretionary trusts, the trustees are taxed on the amount or value of the distribution at the dividend trust rate. However, the trustees’ tax liability is reduced by an amount of income tax equivalent to the dividend ordinary rate.
Relief: qualifying distribution after linked non-qualifying distribution
A non-qualifying distribution is generally the first part of an event that will eventually be a qualifying distribution. So the issue of redeemable share capital (unless a stock dividend) is a non-qualifying distribution (see CTA20/S1136(1)(a)) but the repayment of that share capital is a qualifying distribution (SAIM5050). ITTOIA05/S401 provides relief to avoid double taxation for a higher rate taxpayer.
The section applies where a taxpayer pays income tax at the dividend upper rate on the receipt of a non-qualifying distribution and is subsequently liable to income tax at the dividend upper rate on the receipt of the linked qualifying distribution. ITTOIA05/S401 enables a taxpayer to set his or her extra tax liability (that is, the higher rate element) arising on the non-qualifying distribution against the extra liability arising on the qualifying distribution so that the taxpayer is only liable to pay the balance.
Where the earlier non-qualifying distribution was some years earlier than the later qualifying distribution, ITTOIA05/S401 (5) and (6) provides for the extra liability to be charge on the basis of the lower or basic rate applicable at the time.