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New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 1: What this subpart does

You could also call this:

“This subpart explains how interest deductions are limited for certain New Zealand taxpayers”

This part of the law talks about how the government adjusts the amount of interest that New Zealand taxpayers can deduct from their taxes. It does this by treating the taxpayer as if they earned more income in certain situations.

The law applies to you if you’re not a foreign-owned bank and you have too much debt in New Zealand compared to your worldwide debt. It also applies if you’re controlled by someone who doesn’t live in New Zealand, or if you have investments in certain foreign companies.

If you’re a foreign-owned bank, the law applies if you don’t have enough equity (money invested by owners) in your New Zealand banking group.

The law explains who these rules apply to, when they apply, what happens when they do apply, and how to calculate things like debt percentages and equity thresholds. It also tells you how to figure out which companies are part of your New Zealand group or worldwide group.

This helps make sure that companies aren’t using too much debt in New Zealand to reduce their taxes unfairly.

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 It might be out of date or be missing some parts.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=DLM1516398.

Topics:
Money and consumer rights > Taxes
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FD 3: Certain transfers of residential land included in settlement of claim under Treaty of Waitangi, or

“Residential land transfers for Treaty settlements: Tax rules explained”

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FE 2: When this subpart applies, or

“When interest apportionment rules apply to people and businesses with foreign connections”

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 1What this subpart does

  1. This subpart applies to adjust the effective level of interest deductions for a New Zealand taxpayer by treating the taxpayer as deriving income—

  2. if the taxpayer is not a foreign-owned bank and the level of debt in New Zealand of the taxpayer's New Zealand group (identified in sections FE 3 or FE 25 to FE 30) is disproportionately high, either by comparison with the total level of debt worldwide of the taxpayer's worldwide group (identified in sections FE 31 to FE 32) or, in some situations, by comparison with the level of the taxpayer's debt in New Zealand arising from debt funding provided by third parties, and the taxpayer—
    1. is controlled by a single non-resident:
      1. is controlled by a non-resident owning body:
        1. is controlled by a trustee of a trust, if 50% or more by value of settlements on the trust are from persons who are, or are controlled by, non-residents or non-resident owning bodies and who act in concert:
          1. is a person (an outbound entity) with an income interest in a CFC or with an interest in a FIF that satisfies the requirements of section EX 35 (Exemption for FIF resident in Australia) or for which the person uses the attributable FIF income method:
            1. is a New Zealand entity who controls an outbound entity; and
            2. if the taxpayer is a foreign-owned bank and the level of equity for the taxpayer's New Zealand banking group (identified in sections FE 33 to FE 37) is less than the acceptable threshold level.

              1. This subpart sets out—

              2. the persons to whom the interest apportionment rules may apply:
                1. the thresholds for the application of the rules:
                  1. the consequences of application of the rules:
                    1. how to calculate the debt percentages of a New Zealand group and a worldwide group:
                      1. how to calculate a reporting bank’s New Zealand equity threshold, net equity, and funding debt:
                        1. how to determine the membership of a New Zealand group, a worldwide group, and a New Zealand banking group:
                          1. how to measure ownership interests in companies for the purposes of this subpart.

                            Compare
                            Notes
                            • Section FE 1(1) heading: replaced, on (applying for the 2015–16 and later income years), by section 105(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                            • Section FE 1(1): replaced, on (applying for the 2015–16 and later income years), by section 105(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                            • Section FE 1(1)(a)(iii): replaced (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 170(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                            • Section FE 1 list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on , by section 50(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                            • Section FE 1 list of defined terms CFC: inserted (with effect on 30 June 2009), on , by section 206(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                            • Section FE 1 list of defined terms control: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                            • Section FE 1 list of defined terms FIF: inserted (with effect on 1 July 2011), on , by section 50(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                            • Section FE 1 list of defined terms income derived from New Zealand: repealed, on , by section 64(2)(a) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                            • Section FE 1 list of defined terms income interest: inserted (with effect on 30 June 2009), on , by section 206(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                            • Section FE 1 list of defined terms non-resident owning body: inserted, on , by section 105(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                            • Section FE 1 list of defined terms ownership interest: inserted, on , by section 105(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                            • Section FE 1 list of defined terms source in New Zealand: inserted, on , by section 64(2)(b) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                            • Section FE 1 list of defined terms trustee: inserted, on , by section 105(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).