Plain language law

New Zealand law explained for everyone

 Plain Language Law homepage
Back to
FE 5: Thresholds for application of interest apportionment rules
or “Rules for when you must split interest expenses for tax purposes”
You could also call this:

“How to calculate and report income from interest expenses for certain entities”

This section explains how to calculate the income that an excess debt entity must report due to interest apportionment. Here’s what you need to know:

  1. If you’re an excess debt entity or a natural person, you might have to apportion your interest expenses.

  2. The amount of income you need to report is calculated using a formula. The formula is different depending on whether your worldwide group is given by section FE 31D or not.

  3. If your worldwide group is not given by section FE 31D, the formula includes factors like:
    • Your total interest deductions
    • Any mismatch amounts
    • Dividends paid on certain types of shares
    • Adjustments based on your group’s finance costs
    • Your total debt and any concessions
    • A group debt factor

  4. If your worldwide group is given by section FE 31D, the formula is similar but focuses on related-party interest.

  5. There are specific rules for how to calculate each part of the formula.

  6. If you’re part of a wholly-owned group of companies, another company in your group can choose to report this income instead of you.

  7. There are limits on how much income the other company can choose to report.

Remember, this is a complex area of tax law. If you’re unsure about how this applies to you, it’s a good idea to talk to a tax professional.

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 It might be out of date or be missing some parts.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

Next up: FE 6B: Alternative apportionment of interest by some excess debt entities

or “How some companies split their interest costs for tax purposes”
Next

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 6Apportionment of interest by excess debt entity

  1. This section applies to an excess debt entity or a natural person if section FE 5 requires the entity or person to apportion their interest expenditure for an income year under this section. A natural person is treated as an excess debt entity for the purposes of this section other than in the item threshold amount.

  2. An excess debt entity having a worldwide group that is not given by section FE 31D is treated under section CH 9 (Interest apportionment: excess debt entity) as deriving in the income year an amount of income calculated for the income year using the formula—

    (total deduction − mismatch + FRD − adjust) × (total debt − concession) ÷ total debt× group debt factor.

    Where:

    • In the formula in subsection (2),—

    • total deduction is the whole amount of the excess debt entity’s deduction for interest that would be allowed, in the absence of subpart FH (Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements), under any of sections DB 6 to DB 8 (which relate to deductions for interest expenditure) less—
      1. the total amount allowed in relation to interest payable to a company that is a member of the entity’s New Zealand group under sections FE 3 and FE 28, but this does not include an amount referred to in subparagraph (ii); and
        1. the total amount allowed in relation to interest payable under a financial arrangement excluded from the total group debt of its New Zealand group under section FE 15:
        2. mismatch is the total of amounts denied as deductions in the income year under section FH 3 (Payments under financial instruments producing deduction without income) as unrecognised amounts under section FH 3(2) and as interest under sections FH 7 and FH 11 (which provide for the matching of deductions and income from multi-jurisdictional arrangements):
          1. FRD is the total amount of dividends paid by the excess debt entity in relation to fixed-rate foreign equity or fixed-rate shares—
            1. issued by the entity; and
              1. held by a person resident in New Zealand who is not a company that is a member of the entity's New Zealand group:
              2. adjust is—
                1. zero, if the excess debt entity is not an excess debt outbound company or a natural person or trustee described in section FE 2(1)(g) and is a party to a financial arrangement that is removed under section FE 18(3B) from the measurement of total group debt for the excess debt entity or that is related-party debt for which the lender is not a New Zealand resident and does not carry on a business through a fixed establishment in New Zealand; or
                  1. the amount (the group finance cost) that is the total amount for the New Zealand group found by calculating for each member of the New Zealand group the total amount (the member finance cost) of the items total deduction and FRD for the member, if the group finance cost is $1,000,000 or less and subparagraph (i) does not apply; or
                    1. the amount found by multiplying the amount by which $2,000,000 exceeds the group finance cost by the ratio obtained by dividing the member finance cost for the excess debt entity by the group finance cost, if the group finance cost is more than $1,000,000 and less than $2,000,000 and subparagraph (i) does not apply; or
                      1. zero, if the group finance cost is $2,000,000 or more and subparagraph (i) does not apply:
                      2. total debt is the total amount of the debt of the excess debt entity’s New Zealand group for the income year as calculated under section FE 15, before allowing for a reduction under section FE 13:
                        1. concession is any reduction allowed under section FE 13 in the total group debt of the excess debt entity’s New Zealand group for the income year, averaged when section FE 8(1)(a) or (b) applies:
                          1. group debt factor is—
                            1. 1, if the excess debt entity’s New Zealand group has a debt percentage for the income year equal to zero; or
                              1. the amount calculated by subtracting from 1 the amount calculated by dividing the threshold amount in paragraph (e) for the excess debt entity by the group debt percentage in paragraph (d) for the excess debt entity:
                              2. group debt percentage is the debt percentage of the excess debt entity’s New Zealand group for the income year:
                                1. threshold amount is, as applicable,—
                                  1. if 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), the greater of 60% and 110% of the debt percentage of their worldwide group:
                                    1. if the person is a natural person who is not described in section FE 2(1)(g), 60%:
                                      1. if the excess debt entity is an excess debt outbound company, or is a trustee who is described in section FE 2(1)(g), the greater of 75% and 110% of the debt percentage of their worldwide group:
                                          1. if the person is a natural person who is described in section FE 2(1)(g), 75%.

                                          2. An excess debt entity having a worldwide group that is given by section FE 31D is treated under section CH 9 as deriving in the income year an amount of income that is the greater of zero and the amount calculated for the income year using the formula—

                                            (related interest – mismatch + FRD2) × (total debt – concession) ÷ total debt × group debt comparison factor.

                                            Where:

                                            • In the formula in subsection (3B),—

                                            • related interest is the whole amount of the excess debt entity’s interest, incurred under financial arrangements meeting the requirements of section FE 18(3B) for removal of a financial arrangement from the measurement of total group debt for the entity’s worldwide group, that would be allowed, in the absence of subpart FH, as a deduction under any of sections DB 6 to DB 8 less—
                                              1. the total amount of deductions allowed for interest payable to a company that is a member of the entity’s New Zealand group under sections FE 3 and FE 28 and not included in the amount given by subparagraph (ii); and
                                                1. the total amount of deductions allowed for interest payable under a financial arrangement excluded from the total group debt for the entity’s New Zealand group under section FE 15:
                                                2. mismatch is the total of amounts denied as deductions in the income year under section FH 3 as unrecognised amounts under section FH 3(2) and as interest under sections FH 7 and FH 11:
                                                  1. FRD2 is the total amount of dividends paid by the excess debt entity for fixed-rate foreign equity or fixed-rate shares that—
                                                    1. are issued by the entity; and
                                                      1. are held by a person resident in New Zealand who is not a company that is a member of the entity’s New Zealand group; and
                                                        1. would be removed under section FE 18(3B) from the measurement of total group debt of the entity’s worldwide group if that provision applied to fixed-rate foreign equity and fixed-rate shares:
                                                        2. total debt is the total amount of the debt of the excess debt entity’s New Zealand group for the income year as calculated under section FE 15, before allowing for a reduction under section FE 13:
                                                          1. concession is any reduction allowed under section FE 13 in the total group debt of the excess debt entity’s New Zealand group for the income year, averaged when section FE 8(1)(a) or (b) applies:
                                                            1. group debt comparison factor is—
                                                              1. 1, if the excess debt entity’s New Zealand group or the excess debt entity’s worldwide group has a debt percentage under section FE 12(3) equal to zero for the income year; or
                                                                1. the amount calculated using the formula in subsection (3D), if subparagraph (i) does not apply.

                                                                2. The group debt comparison factor under subsection (3C)(f)(ii) for an excess debt entity and an income year is the amount calculated using the formula—

                                                                  (New Zealand group debt percentage – threshold amount) ÷ (New Zealand group debt percentage – worldwide group debt percentage).

                                                                  Where:

                                                                  • In the formula in subsection (3D), threshold amount is the amount that is the greater of 60% and the debt percentage of the excess debt entity’s worldwide group for the income year.

                                                                  • If a company that is in the same wholly-owned group of companies as the excess debt entity has a deduction for interest under any of sections DB 6 to DB 8, the company may choose to be treated as deriving the income that the excess debt entity would otherwise, under subsection (2) or (3B), be treated as deriving for the income year. The amount of income is not calculated using the formula in subsection (2) or (3B) but is limited as set out in subsection (5).

                                                                  • The amount of income for which the company may make the election under subsection (4), when added to any other income that the company chooses to treat itself as deriving under subsection (4), must not exceed—

                                                                  • the total amount of deductions that the company has for interest in the income year, except if paragraph (b) applies; or
                                                                    1. the total amount of the company’s interest, incurred under financial arrangements meeting the requirements of section FE 18(3B), if the excess debt entity has a worldwide group given by section FE 31D.

                                                                      Compare
                                                                      Notes
                                                                      • Section FE 6(1) heading: substituted (with effect on 30 June 2009), on , by section 211(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(1): substituted (with effect on 30 June 2009), on , by section 211(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(2) heading: replaced, on , by section 64(1) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(2): amended, on , by section 64(2) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(2) formula: amended (with effect on 1 July 2018), on , by section 64(3) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(2) formula: amended, on , by section 21(1) (and see section 21(7) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                      • Section FE 6(2) formula: amended (with effect on 30 June 2009), on , by section 211(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(3): amended, on , by section 64(4) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3)(a): amended, on , by section 21(2) (and see section 21(7) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                      • Section FE 6(3)(a): amended (with effect on 1 April 2008), on , by section 211(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(3)(a)(i): amended (with effect on 1 April 2008), on , by section 45(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(3)(aba): inserted, on , by section 21(3) (and see section 21(7) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                      • Section FE 6(3)(ab): inserted (with effect on 30 June 2009), on , by section 211(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(3)(ac): inserted (with effect on 30 June 2009), on , by section 211(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6(3)(ac)(i): replaced, on , by section 21(4) (and see section 21(7) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                      • Section FE 6(3)(ac)(i): amended (with effect on 1 July 2018), on , by section 119(1) (and see section 119(3) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                                                      • Section FE 6(3)(ac)(ii): substituted (with effect on 23 November 2010), on , by section 45(2) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(3)(ac)(iii): substituted (with effect on 23 November 2010), on , by section 45(2) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(3)(ac)(iv): substituted (with effect on 23 November 2010), on , by section 45(2) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(3)(cb): inserted (with effect on 1 July 2018), on , by section 64(5) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3)(e): substituted, on (applying for the 2011–12 and later income years), by section 88(1) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
                                                                      • Section FE 6(3)(e)(i): replaced, on , by section 21(5) (and see section 21(8) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                      • Section FE 6(3)(e)(iiib): repealed, on , by section 64(6) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3B) heading: inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3B): inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3C) heading: inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3C): inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3D) heading: inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3D): inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3E) heading: inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(3E): inserted, on , by section 64(7) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(4) heading: added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 45(3) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(4): added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 45(3) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(4): amended, on , by section 64(8) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6(5) heading: added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 45(3) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
                                                                      • Section FE 6(5): replaced, on , by section 64(9) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6 list of defined terms dividend: inserted, on , by section 64(10) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6 list of defined terms excess debt outbound company: inserted, on (applying for the 2011–12 and later income years), by section 88(2) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
                                                                      • Section FE 6 list of defined terms fixed establishment: inserted (with effect on 1 July 2018), on , by section 119(2) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                                                      • Section FE 6 list of defined terms fixed-rate foreign equity: inserted (with effect on 30 June 2009), on , by section 211(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6 list of defined terms fixed-rate share: inserted (with effect on 30 June 2009), on , by section 211(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                      • Section FE 6 list of defined terms New Zealand resident: inserted (with effect on 1 July 2018), on , by section 119(2) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                                                      • Section FE 6 list of defined terms related-party debt: inserted (with effect on 1 July 2018), on , by section 119(2) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                                                      • Section FE 6 list of defined terms resident in New Zealand: inserted, on , by section 64(10) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6 list of defined terms total worldwide debt: inserted, on , by section 64(10) (and see section 64(11) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                                      • Section FE 6 list of defined terms wholly owned group of companies: added (with effect on 1 April 2008), on by section 45(4) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).