Consequences of Election and of Termination of Election
16.93. When an election applies, the taxable income or allowable loss of the company should be allocated to shareholders in accordance with their daily holdings of shares during the year of income. This will accord with the law as proposed in the United States where, for the present, allocation on daily holdings applies only to losses. Allocations of taxable income to shareholders will bear the same character as the income had in the hands of the company. There will need to be rules by which income of any class, for example dividends carrying an imputation credit, are treated as being spread over the allocations. Capital gains and losses will be allocated.
16.94. Special rules will be necessary to deal with pre-election accumulated income or pre-election losses of the company.
16.95. Allocations taxed to a shareholder will increase the cost of his shares for purposes of tax on any gain made on realisation of the shares. An actual distribution to a shareholder from allocated profits will not be taxed to the shareholder but will reduce the cost of his shares.
16.96. The revocation of an election in any year should be treated as relating to the whole of that year. To minimise scope for tax planning that might be practised by moving into and out of the election system, and to minimise administrative complications, the right to make a fresh election after a revocation should be restricted. In the United States a fresh election may not be made until five years after the revocation, except with the leave of the Revenue.