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Income Tax Act 2007

Timing and quantifying rules - Terminating provisions - Definitions

EZ 39: Forgiveness of debt

You could also call this:

“What happens when someone cancels a debt you owe”

When you owe money to someone, it’s called a debt. Sometimes, the person you owe money to (the creditor) might forgive your debt. This means they say you don’t have to pay them back.

If a creditor forgives your debt because they love you, like a family member might, this forgiven debt is treated as if you paid it back. This also applies if you owe money to a trust, and the trust was set up to help people the creditor loves or to help organisations that don’t have to pay tax.

If you’re in charge of a trust (a trustee) and you give money to someone who isn’t loved by the creditor or isn’t a tax-free organisation, there are special rules. The money you give out might be counted as income for the trust. This happens in the year you give out the money, and only up to the amount of debt that was forgiven.

There’s an exception to this rule. If you’re giving money from one trust to another trust, and both trusts meet certain conditions, then the money given isn’t counted as income.

When the trust’s income is calculated this way because of a forgiven debt, it’s not counted as income for the person receiving money from the trust.

Each time you give out money from the trust, it reduces the total amount of forgiven debt that can be counted as income in the future.

These rules about giving out money from trusts with forgiven debts have been in place since 20 May 1999.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516123.

Topics:
Money and consumer rights > Taxes
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EZ 38: Income and expenditure where financial arrangement redeemed or disposed of, or

“Calculating income or loss when ending a financial arrangement”

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EZ 40: Accrued income written off, or

“How to claim a deduction for unpaid income you've written off as a bad debt”

Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 39Forgiveness of debt

  1. In determining the income or expenditure under the base price adjustment in section EZ 38, an amount owing under a debt, including an amount accrued and unpaid at the time of the forgiveness, is treated as paid when forgiven under the old financial arrangements rules if—

  2. the creditor is a natural person who forgives the debt, whether in a will or otherwise, because of the natural love and affection the creditor has for the debtor; or
    1. the creditor is a natural person who forgives the debt owing by a trust, whether in a will or otherwise, and the trust was established primarily to benefit—
      1. a natural person for whom the creditor has natural love and affection; or
        1. an organisation or a trust whose income is exempt under section CW 41 or CW 42; or
          1. a natural person that meets paragraph (b)(i) and an organisation or a trust that meets paragraph (b)(ii).

          2. Subsection (3) applies when a trustee makes a distribution, including a distribution of beneficiary income, to a beneficiary that is neither—

          3. a natural person for whom the creditor has natural love and affection; nor
            1. an organisation or a trust whose income is exempt under section CW 41 or CW 42.

              1. Subsection (4) does not apply when a trustee of a trust (trust A) to which subsection (1)(b) applies makes a distribution to another trust (trust B) if—

              2. trust B is a trust described in subparagraph (i), (ii), or (iii) of subsection (1)(b); and
                1. subsection (1)(b) would apply to trust B if, at the time the distribution is made, the creditor of trust A were a creditor of trust B, and the creditor had forgiven a debt owing by trust B.

                  1. A distribution to the beneficiary is income derived by the trustee—

                  2. in the income year in which the distribution is made; and
                    1. to the extent that the distribution is less than or equal to the total amount of debts forgiven by the creditor.

                      1. If subsection (4) applies, the income derived by the trustee is not income for the purposes of the beneficiary income definition.

                      2. For the purposes of subsection (4), the total amount of debts forgiven by the creditor is reduced by the amount of each distribution that is income derived by the trustee.

                      3. Subsection (4) applies to a distribution made on or after 20 May 1999.

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