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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration when anti-avoidance provision applies

EW 49: Income and deduction when debt disposed of at discount to associate of debtor

You could also call this:

“Taxation rules when debt is sold cheaply to someone connected to you”

When you owe money to someone and they sell your debt to someone else who is connected to you, there are special rules. These rules apply if the debt is sold for a much lower price than it’s worth.

If someone sells your debt for 80% or less of what it’s really worth, it’s called selling at a discount. When figuring out what the debt is worth, we don’t consider things like events that might reduce what you owe or changes in how likely you are to pay it back.

The person who buys your debt is treated as if they gave you a loan without charging interest. They’re considered to have lent you the amount they paid for your debt.

If you end up paying back more than what the new person paid for your debt, the extra money is treated in a special way. The person who bought your debt has to count the extra as income. You can also claim this extra amount as a deduction when you do your taxes.

These rules are designed to make sure that when debts are sold between people who know each other, it’s done fairly and everyone pays the right amount of tax.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515357.

Topics:
Money and consumer rights > Taxes
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EW 48: Anti-avoidance provisions, or

“Rules to prevent unfair tax avoidance when calculating financial amounts”

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EW 49B: Guarantees for associated persons, or

“Tax rules for paying someone else's debt when you're connected to them”

Part E Timing and quantifying rules
Financial arrangements rules: Consideration when anti-avoidance provision applies

EW 49Income and deduction when debt disposed of at discount to associate of debtor

  1. This section applies when a creditor disposes of a debt on or after 20 May 1999 to a person associated with the debtor and at a discount.

  2. A creditor disposes of a debt at a discount if the creditor disposes of it for 80% or less of the market value of the debt.

  3. The market value of a debt affected by any of the following factors is determined as if its market value were not affected by the factor. The factors are—

  4. the occurrence of an event reducing or cancelling the debtor’s obligations under the debt; or
    1. the occurrence of 1 of the following between the date on which the debt was entered into and the date of the disposal:
      1. a decline in the debtor’s creditworthiness; or
        1. an increase in the possibility that the debtor will not meet an obligation under the debt.

        2. The associated person is treated as having provided the debtor with an interest-free loan for the amount paid for the debt.

        3. If the debtor later repays the person associated with the debtor more than the amount the associated person paid for the debt, the excess amount paid by the debtor is—

        4. income, under section CC 3(1) (Financial arrangements), of the person associated with the debtor; and
          1. a deduction that the debtor is allowed under section DB 13(1) (Repayment of debt in certain circumstances).

            Compare
            Notes
            • Section EW 49 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 EW 49(1): 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 EW 49(1): amended, on , by section 22 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
            • Section EW 49(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 EW 49(5)(b): amended, on , by section 77 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
            • Section EW 49 list of defined terms 1988 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).