FE 5Thresholds for application of interest apportionment rules

1. An excess debt entity must apportion its interest expenditure for an income year under section FE 6 if,—

2. the excess debt entity is none of an excess debt outbound company, an excess debt entity with a worldwide group given by section FE 31D, and a trustee who is described in section FE 2(1)(g), and—
   1. the debt percentage of its New Zealand group for the income year is more than 60%; and
   2. for a company or a trustee, the debt percentage of its New Zealand group for the income year is more than 110% of the debt percentage of the worldwide group; or
3. the excess debt entity has a worldwide group given by section FE 31D, and—
   1. the debt percentage of its New Zealand group for the income year is more than 60%; and
   2. the debt percentage of its New Zealand group for the income year is more than 100% of the debt percentage of the worldwide group; or
4. the excess debt entity is an excess debt outbound company, or is a trustee who is described in section FE 2(1)(g), and—
   1. the debt percentage of its New Zealand group for the income year is more than 75%; and
   2. for a company or a trustee, the debt percentage of its New Zealand group for the income year is more than 110% of the debt percentage of the worldwide group.

5. Despite subsection (1), an excess debt outbound company and a natural person or trustee who is described in section FE 2(1)(g) do not have to apportion interest expenditure for an income year under section FE 6 if, for the income year,—

6. a ratio of 90% or greater is obtained by dividing the amount for its New Zealand group of the total group assets measured under section FE 16 and reduced by the total group non-debt liabilities, measured under section FE 16B, by the amount for its worldwide group of the total group assets measured under section FE 18 and reduced by the total group non-debt liabilities, measured under section FE 18:
7. the company or person is eligible to choose, and chooses, under subsection (1BB) to use the threshold test in subsection (1D):

9. A company or person referred to in subsection (1B) that would otherwise be required to make an apportionment under section FE 6 may choose instead to be subject to the threshold in subsection (1D) and to the apportionment method in section FE 6B only if—

10. for each of the New Zealand group and the worldwide group, the amount (the adjusted net profit) given by subsection (1BC) is greater than zero; and
11. for the New Zealand group, the deductions for interest allowed to the group under sections DB 6 to DB 9 (which relate to deductions for interest) exceed the income of the group that is interest; and
12. for the worldwide group, treating the members as residents for the purposes of this paragraph, the deductions for interest allowed to the group under sections DB 6 to DB 9 exceed the income of the group that is interest; and
13. for the worldwide group, the amount of the total group debt, calculated for the income year as if for the purposes of determining the group's debt percentage under section FE 12, is equal to or more than 75% of the amount of total group assets, not including goodwill and reduced by total group non-debt liabilities; and
14. for the worldwide group, the proportion of the total group debt, calculated as for paragraph (d), for which the lender is not associated with the group under subpart YB (Associated persons) is equal to or more than 80%.

15. The adjusted net profit for a group is the amount calculated using the formula—

    $net\; -\; attributed\; +\; net\; interest\; +\; depreciation\; +\; amortisation.$

    Where:

16. In the formula in subsection (1BC),—

17. net is the net profit or loss of the group before tax using generally accepted accounting practice, treating a net loss as a negative amount:
18. attributed, for the worldwide group, is zero and, for the New Zealand group, is the income—
    1. under generally accepted accounting practice from an interest in a FIF or CFC described in section FE 2(1)(e) to (g); and
    2. included in the calculation of the item net profit or loss and not included in the calculation of the item net interest:
19. net interest is the deductions for interest allowed to the group under sections DB 6 to DB 9 from a financial arrangement providing funds to the group, treating the members as residents for the purpose of calculating this item for a worldwide group, reduced by the income of the group from a financial arrangement on arm's-length terms providing funds to a person who meets the requirements of section FE 13(3):
20. depreciation is the depreciation for the group using generally accepted accounting practice:
21. amortisation is the amortisation for the group using generally accepted accounting practice.

22. For the purposes of subsection (1B)(a), the total group assets and total group non-debt liabilities of a natural person's worldwide group under section FE 18 are measured on the basis that the natural person is an excess debt entity that has a worldwide group made up of—

23. the natural person; and
24. the natural person's New Zealand group; and
25. all CFCs in which the natural person or a member of the natural person's New Zealand group has an income interest; and
26. all FIFs in which the natural person or a member of the natural person's New Zealand group has an interest that meets the requirements of section EX 35 (Exemption for interest in FIF resident in Australia); and
27. all FIFs in which the natural person or a member of the natural person's New Zealand group has an interest for which the natural person or member uses the attributable FIF income method.

28. A company or person that chooses to be subject to the threshold test in this subsection must apportion the interest expenditure for the income year under section FE 6B except if the ratio (the interest-income ratio) given by subsection (1E) for the company or person's New Zealand group is equal to or less than the lesser of—

29. 110% of the interest-income ratio for the company or person's worldwide group:
30. 50%.

31. The interest-income ratio for a group is calculated using the formula—

    $net\; interest\; ÷\; adjusted\; net\; profit.$

    Where:

32. In the formula in subsection (1E),—

33. net interest is the deductions for interest allowed to the group under sections DB 6 to DB 9 from a financial arrangement providing funds to the group, treating the members as residents for the purpose of calculating this item for a worldwide group, reduced by the income of the group from a financial arrangement on arm's-length terms providing funds to a person who meets the requirements of section FE 13(3):
34. adjusted net profit is the amount given for the group by subsection (1BC).

35. A reporting bank must apportion its interest expenditure for an income year under section FE 7 if—

36. the New Zealand net equity of its New Zealand banking group for a tax year is less than its equity threshold; and
37. its group funding debt for the corresponding tax year is more than zero.

38. A natural person must apportion their interest expenditure for an income year under section FE 6 if,—

39. they are not described in section FE 2(1)(g), and the debt percentage of their New Zealand group for the income year is more than 60%; or
40. they are described in section FE 2(1)(g), and the debt percentage of their New Zealand group for the income year is more than 75%.

41. The debt percentage of a New Zealand group is calculated under sections FE 14 to FE 16. The debt percentage of a worldwide group is calculated under sections FE 17 and FE 18.

42. The calculations that a reporting bank must make for the purposes of section FE 7 are set out as follows:

43. for the banking group’s equity threshold, see section FE 19:
44. for the banking group’s New Zealand net equity, see section FE 21:
45. for the banking group’s funding debt, see section FE 23.

46. Repealed

Compare

• 2004 No 35 s FG 3

Notes

• Section FE 5(1): substituted, on 1 April 2011 (applying for the 2011–12 and later income years), by section 87(1) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
• Section FE 5(1)(a): amended, on 1 July 2018, by section 20(1) (and see section 20(8) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FE 5(1)(ab): inserted, on 1 July 2018, by section 20(2) (and see section 20(8) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FE 5(1B) heading: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5(1B): inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5(1B)(a): replaced, on 1 July 2018, by section 20(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FE 5(1B)(ab): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1B)(b): repealed (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BB) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BB): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BB)(d): amended, on 1 July 2018, by section 20(4) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FE 5(1BC) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BC): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BD) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1BD): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1C) heading: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5(1C): inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5(1C): amended, on 1 July 2018, by section 20(5) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FE 5(1C)(c): amended (with effect on 1 July 2011), on 23 March 2020, by section 118 of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
• Section FE 5(1C)(d): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1C)(e): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1D) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1D): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1E) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1E): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1F) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(1F): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5(3): substituted, on 1 April 2011 (applying for the 2011–12 and later income years), by section 87(2) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
• Section FE 5(6) heading: repealed (with effect on 1 July 2018), on 18 March 2019, pursuant to section 193(1) (and see section 193(2) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
• Section FE 5(6): repealed (with effect on 1 July 2018), on 18 March 2019, by section 193(1) (and see section 193(2) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
• Section FE 5 list of defined terms attributable FIF income method: inserted (with effect on 1 July 2011), on 7 May 2012, by section 53(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5 list of defined terms CFC: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5 list of defined terms excess debt outbound company: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5 list of defined terms income interest: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5 list of defined terms non-resident passive income: inserted (with effect on 1 July 2011), on 7 May 2012, by section 53(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
• Section FE 5 list of defined terms total group assets: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section FE 5 list of defined terms total group non-debt liabilities: inserted, on 1 July 2018, by section 20(7) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).