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New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 12: Calculation of debt percentages

You could also call this:

“How to work out if your company has too much debt”

You need to calculate debt percentages for your New Zealand group and worldwide group. This helps figure out if you have too much debt.

For your New Zealand group, you use the rules in sections FE 14 to FE 16. If you’re a person or an excess debt entity, you also use sections FE 13 and FE 18.

If your New Zealand group’s debt percentage is over 60% or 75% (depending on your situation), you must calculate your worldwide group’s debt percentage using sections FE 17 and FE 18.

To calculate the debt percentage, you use this formula: group debt ÷ (group assets – non-debt liabilities). If your group assets minus non-debt liabilities is zero or negative, your debt percentage is zero.

The New Zealand group for a company includes all companies that are controlled by the New Zealand parent company. For individuals and trustees, the group is determined by sections FE 3(1) and (2).

The worldwide group for a company includes all companies that are part of the group under specific sections, depending on whether the company is an excess debt outbound company or not.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516444.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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“ Ignoring certain value changes in tax calculations ”

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FE 12B: Calculations for group for test and apportionment using interest-income ratio, or

“How to calculate group interest deductions and income for tax purposes”

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 12Calculation of debt percentages

  1. An excess debt entity must calculate the debt percentage of its New Zealand group under the rules set out in sections FE 14 to FE 16. A natural person or an excess debt entity must calculate their debt percentage under the rules set out in sections FE 13 to FE 16 and FE 18.

  2. If the debt percentage of the New Zealand group is, as applicable, more than 60% as described in section FE 5(1)(a) or (ab), or more than 75% as described in section FE 5(1)(b), then the entity must calculate the debt percentage of their worldwide group under the rules set out in sections FE 17 and FE 18.

  3. A group has a debt percentage equal to zero, except if the amount of the item group assets given by subsection (3B)(b) exceeds the amount of the item non-debt liabilities given by subsection (3B)(c), when the group has a debt percentage calculated, on a consolidated basis for an income year or accounting year as applicable, using the formula—

    group debt ÷ (group assets – non-debt liabilities).

    Where:

    • In the formula,—

    • group debt is the amount of the total group debt defined in section FE 15 for a New Zealand group and section FE 18 for a worldwide group:
      1. group assets is the amount of the total group assets defined in section FE 16 for a New Zealand group and section FE 18 for a worldwide group:
        1. non-debt liabilities is the amount of the total group non-debt liabilities defined in section FE 16B for a New Zealand group and section FE 18 for a worldwide group.

          1. For an excess debt entity that is a company, the New Zealand group is made up of all companies, traced tier by tier, that are identified as within the control threshold of the New Zealand parent, see section FE 27. Section FE 25 provides the process for determining who is a member of a group based on the identification of a New Zealand parent and the establishment of the control threshold.

          2. For an excess debt entity that is a company, the worldwide group is made up of all companies included as members of the worldwide group under—

          3. sections FE 31, FE 31D, and FE 32, for an excess debt entity that is not an excess debt outbound company:
            1. sections FE 31B, FE 31C, and FE 32, for an excess debt outbound company.

              1. For a natural person, the membership of the New Zealand group is determined as described in section FE 3(1) and (2), as applicable.

              2. For a trustee, the memberships of the New Zealand group and the worldwide group are determined as described in section FE 3(1) and (2), as applicable.

              Compare
              Notes
              • Section FE 12(1): amended (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 46(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
              • Section FE 12(1): amended (with effect on 30 June 2009), on , by section 212(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(2): amended (with effect on 1 July 2018), on , by section 65(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
              • Section FE 12(2): amended, on (applying for the 2011–12 and later income years), by section 89(1) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
              • Section FE 12(2): amended (with effect on 30 June 2009), on , by section 212(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(3) heading: replaced, on , by section 27(1) (and see section 27(3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
              • Section FE 12(3): replaced (with effect on 1 July 2018), on , by section 65(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
              • Section FE 12(3B) heading: inserted, on , by section 27(1) (and see section 27(3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
              • Section FE 12(3B): inserted, on , by section 27(1) (and see section 27(3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
              • Section FE 12(5) heading: substituted (with effect on 30 June 2009), on , by section 212(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(5): substituted (with effect on 30 June 2009), on , by section 212(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(5)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 173(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
              • Section FE 12(5)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 173(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
              • Section FE 12(6) heading: substituted (with effect on 30 June 2009), on , by section 212(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(6): substituted (with effect on 30 June 2009), on , by section 212(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(7) heading: added (with effect on 30 June 2009), on , by section 212(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12(7): added (with effect on 30 June 2009), on , by section 212(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12 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 12 list of defined terms excess debt outbound company: inserted (with effect on 30 June 2009), on , by section 212(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
              • Section FE 12 list of defined terms total group non-debt liabilities: inserted, on , by section 27(2) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).