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Income Tax Act 2007

Deductions - Employee or contractor expenditure

DC 10: Disposal of business: transferred employment income obligations

You could also call this:

“Tax rules when selling a business and transferring employees”

When you sell your business or part of it to someone else, this law applies if an employee moves to work for the new owner. If you and the new owner agree in writing that they will pay the employee, there are some tax rules you need to know about.

If you and the new owner aren’t related, you can claim a tax deduction for any money you set aside to pay the employee, as long as it depends on the employee staying in their job. You’re treated as if you paid this money when you sold the business.

If you and the new owner are related, the new owner can claim a tax deduction for the money you set aside, but only if you could have claimed it if you hadn’t sold the business. In this case, you can’t claim the deduction yourself.

The new owner can also claim a tax deduction for any extra money they pay the employee beyond what you set aside.

This law adds to the general rules about what you can claim as a tax deduction. It overrides the rule about capital expenses, but you still need to follow the other general rules about tax deductions.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1513780.

Topics:
Money and consumer rights > Taxes
Business > Starting a business
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Part D Deductions
Employee or contractor expenditure

DC 10Disposal of business: transferred employment income obligations

  1. This section applies when—

  2. a person (the seller) disposes of a business, or a part of a business, to another person (the buyer); and
    1. an employee of the seller working in the business, or the part of the business, becomes an employee of the buyer under the disposal arrangements; and
      1. the seller and the buyer agree in writing, under the disposal arrangements, that the buyer assumes the obligation to pay an amount of employment income to the employee.

        1. If the seller and the buyer are not associated persons at the time of the disposal,—

        2. the seller is allowed a deduction, in the income year of the disposal, for the provision made by the seller for any part of the amount that remains contingent on the employee continuing in employment or any similar factor; and
          1. the seller is treated under section EA 4(4) (Deferred payment of employment income) as having paid the amount of the provision at the time of the disposal.

            1. If the seller and the buyer are associated persons at the time of the disposal,—

            2. the buyer is allowed a deduction for the provision made by the seller for the amount of employment income if the seller would have been allowed a deduction for the amount if the business, or the part of the business, had not been disposed of; and
              1. subsection (2) does not apply, and section EA 4(5) will mean that the seller cannot get a deduction for the amount.

                1. The buyer is allowed a deduction for any part of the amount of employment income that the buyer pays that is more than the provision made by the seller for the amount.

                2. The link between this section and subpart DA (General rules) is as follows:

                3. subsection (2)(a) supplements the general permission; the general limitations still apply:
                  1. subsections (3)(a) and (4) override the capital limitation; the general permission must still be satisfied and the other general limitations still apply.

                    Compare
                    Notes
                    • Section DC 10 heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(1)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(1)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(1)(c): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(2): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(2)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(2)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(3): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10(3)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10 list of defined terms time of the disposal: inserted (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section DC 10 list of defined terms time of the sale: repealed (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).