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Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 7: Apportionment of interest by reporting bank

You could also call this:

“How reporting banks calculate extra income when their equity is below the threshold”

If you are a reporting bank, this law applies to you when your New Zealand banking group’s net equity is less than its equity threshold, and your group funding debt is more than zero.

In this case, you are treated as earning income. The amount of income is calculated using a formula that takes into account how much your net equity is below the threshold, your interest expenditure, your group funding debt, and the number of days in the relevant period.

The formula uses several terms:

‘Amount below threshold’ is how much your New Zealand banking group’s net equity is below the equity threshold.

‘Interest expenditure’ is the money your New Zealand banking group spends on interest during the income year. This doesn’t include interest related to certain shares or deductions that aren’t allowed under other laws.

‘Days in period’ is the number of days in the measurement period.

‘Group funding debt’ is the amount of debt your New Zealand banking group has for the tax year.

‘Days in year’ is the number of days in the income year.

If you need to split this income across part of an income year, you attribute the income to the part of the year where the measurement period falls.

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 It might be out of date or be missing some parts.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=DLM1516424.

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Money and consumer rights > Taxes
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Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 7Apportionment of interest by reporting bank

  1. This section applies to a reporting bank if, at the relevant measurement date referred to in section FE 8(3),—

  2. the New Zealand net equity of its New Zealand banking group for an income year is less than its equity threshold under section FE 19; and
    1. its group funding debt for the corresponding tax year is more than zero.

      1. The reporting bank is treated as deriving an amount of income under section CH 10 (Interest apportionment: reporting bank) calculated using the formula—

        amount below threshold × (interest expenditure ÷ group funding debt)× (days in period ÷ days in year).

        Where:

        • In the formula,—

        • amount below threshold is the amount by which the New Zealand net equity for the New Zealand banking group is less than the equity threshold under section FE 19:
          1. interest expenditure is the financial value for the New Zealand banking group of interest expenditure measured under generally accepted accounting practice that is—
            1. incurred by a member of the New Zealand banking group in the income year; and
              1. incurred other than in relation to a share that contributes to the item total interest in the formula in section FE 23, or is a deduction referred to in the definition of the item interest deductions in that section; and
                1. not denied as a deduction under section FH 3 (Payments under financial instruments producing deduction without income) as an unrecognised amount under section FH 3(2) or under section FH 7 or FH 11 (which provide for the matching of deductions and income from multi-jurisdictional arrangements):
                2. days in period is the number of days in the relevant measurement period:
                  1. group funding debt is the group funding debt for the New Zealand banking group for the corresponding tax year:
                    1. days in year is the number of days in the income year.

                      1. If an amount of income described in subsection (2) must be apportioned under this Act to a part of an income year, the amount of income for a measurement period is attributed to the part of the income year in which the measurement period falls.

                      Compare
                      Notes
                      • Section FE 7(3)(b): amended, on , by section 22(1) (and see section 22(5) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                      • Section FE 7(3)(b)(i): amended, on , by section 22(2) (and see section 22(5) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                      • Section FE 7(3)(b)(ii): amended, on , by section 22(3)(a) (and see section 22(5) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                      • Section FE 7(3)(b)(ii): amended, on , by section 22(3)(b) (and see section 22(5) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                      • Section FE 7(3)(b)(iii): inserted, on , by section 22(4) (and see section 22(5) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).