Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Recharacterisation of certain commercial arrangements

FA 2: Recharacterisation of certain debentures

You could also call this:

“Tax treatment of profit-linked loans as shares”

When you have a profit-related debenture, the law treats it as a special kind of share for tax purposes. The interest you pay on this debenture is considered a dividend.

If you’re a company that issues a profit-related debenture, you can’t claim a tax deduction for the interest you pay on it. You also can’t claim deductions for any costs related to the debenture or for borrowing money secured by the debenture.

A profit-related debenture is a type of loan where the interest rate changes based on the company’s dividends or profits. However, it’s not a profit-related debenture if the interest rate is set by a fixed relationship to things like banking rates, general commercial rates, or economic indices.

If you issued debentures before 8 pm on 23 October 1986, there are special rules in section FZ 1.

The rules about companies issuing debentures in section HD 14 don’t apply to profit-related debentures described here.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516258.

Topics:
Money and consumer rights > Taxes
Previous

FA 1: What this subpart does, or

“This subpart explains how certain business transactions are taxed and treated”

Next

FA 2B: Stapled debt securities, or

“Rules for company-issued debt securities attached to non-fixed-rate shares”

Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 2Recharacterisation of certain debentures

  1. A profit-related debenture is treated for tax purposes as a share described in paragraph (b) of the definition of share in section YA 1 (Definitions), and the interest payable under the debenture is treated as a dividend.

  2. A company issuing a profit-related debenture is denied a deduction under section DB 10 (Interest or expenditure connected to profit-related debentures) for—

  3. interest payable under the debenture; or
    1. expenditure or loss incurred in connection with the debenture; or
      1. expenditure or loss incurred in borrowing the money secured by or owing under the debenture.

        1. Repealed

        2. A profit-related debenture—

        3. means a debenture with a rate of interest that is set from time to time by reference to—
          1. the dividend payable by the company issuing the debenture; or
            1. the profits of the company issuing the debenture, however measured:
            2. does not include a debenture under which the interest payable is determined by a fixed relationship to—
              1. banking rates; or
                1. general commercial rates; or
                  1. economic, commodity, industrial, or financial indices, but the application of this subparagraph is subject to section FZ 1(3) (Treatment of interest payable under debentures issued before certain date):
                  2. does not include a debenture treated as a share under section FA 2B (Stapled debt securities).

                    1. Repealed

                    2. Repealed

                    3. Repealed

                    4. For the treatment of debentures issued before 8 pm New Zealand standard time on 23 October 1986, see section FZ 1.

                    5. Section HD 14 (Companies issuing debentures) does not apply to a profit-related debenture described in this section, or to an amount paid or payable under it.

                    Compare
                    Notes
                    • Section FA 2(1): amended, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), by section 102(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2(2): amended, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), by section 102(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2(3) heading: repealed (with effect on 1 April 2008), on , pursuant to section 201(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(3): repealed (with effect on 1 April 2008), on , by section 201(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(4): substituted (with effect on 1 April 2008), on , by section 201(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(4)(b)(iii): amended (with effect on 1 April 2008), on , by section 201(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(4)(c): added (with effect on 1 April 2008), on , by section 201(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(5) heading: repealed, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), pursuant to section 102(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2(5): repealed, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), by section 102(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2(6) heading: repealed (with effect on 1 April 2008), on , pursuant to section 201(6) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(6): repealed (with effect on 1 April 2008), on , by section 201(6) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                    • Section FA 2(7) heading: repealed, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), pursuant to section 102(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2(7): repealed, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), by section 102(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                    • Section FA 2 list of defined terms substituting debenture: repealed, on (not applying, for an income year, to a debenture that a person is party to, if the debenture is issued under an arrangement entered into before 22 November 2013; and a binding ruling on the application of section FA 2(5) was issued to the person in relation to the arrangement; and the binding ruling would continue to apply but for the repeal of the substituting debenture rule by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (the Act); and for the whole of the income year, the total amount and the term of all debentures issued under the arrangement are not more than those disclosed in the application for the binding ruling; and the person makes an irrevocable election in writing, received by the Commissioner on or before 31 July 2014, that the repeal of the substituting debenture rule in the Act does not apply to their debenture), by section 102(4) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).