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Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 13: Financial arrangements entered into with persons outside group

You could also call this:

“Rules for financial deals with people outside your tax group”

This section talks about how to handle financial arrangements when calculating debt percentages for tax purposes. It applies when you or someone in your group enters into a financial arrangement with another person.

When calculating the debt percentage for your group, you need to reduce the total group debt and total group assets by the amount still owed on the financial arrangement. This applies in certain situations.

For New Zealand groups, you can reduce the debt if the deal was made fairly and the other person is either:

  • A non-resident who doesn’t do business in New Zealand and earns income that isn’t taxed here
  • Someone not associated with the group that has too much debt
  • Someone associated with the group that has too much debt, but isn’t part of the New Zealand group and might be subject to these rules

For worldwide groups, you can reduce the debt if the other person isn’t associated with the group that has too much debt.

This section helps ensure that certain financial arrangements don’t unfairly impact your group’s debt calculations for tax purposes.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516446.

Topics:
Money and consumer rights > Taxes
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“How to calculate debt percentage for New Zealand groups”

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 13Financial arrangements entered into with persons outside group

  1. This section applies when—

  2. a person enters into a financial arrangement with another person (person A); and
    1. the person is a natural person, a member of a natural person's New Zealand group, an excess debt entity, or a member of an entity's New Zealand group or worldwide group; and
      1. in the absence of this section, the financial arrangement would be included in the calculation of the debt percentage of the natural person, excess debt entity, New Zealand group, or worldwide group; and
        1. the person—
          1. provides funds to person A under the financial arrangement:
            1. is the trustee of a trust with no trust property other than financial arrangements and property incidental to financial arrangements.

            2. In the calculation of the debt percentage of the New Zealand group and a worldwide group, the amount of total group debt and total group assets is reduced by the outstanding balance of the financial arrangement.

            3. In the calculation of the debt percentage of a New Zealand group, the reduction applies if the consideration for the financial arrangement is at arm’s length, and person A is 1 of the following:

            4. a non-resident who is not carrying on business through a fixed establishment in New Zealand and derives—
              1. income that does not have a source in New Zealand:
                1. income with a source in New Zealand, all of which is non-resident passive income or has relief from New Zealand tax available under a double tax agreement; or
                2. a person who is not associated with the excess debt entity; or
                  1. a person who is associated with the excess debt entity but—
                    1. is not a member of the New Zealand group; and
                      1. is a person to whom this subpart may apply under section FE 2.

                      2. In the calculation of the debt percentage of a worldwide group, the reduction applies if person A is not associated with the excess debt entity.

                      Compare
                      Notes
                      • Section FE 13(1): replaced, on (applying for the 2015–16 and later income years), by section 109(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                      • Section FE 13(2): amended (with effect on 30 June 2009), on , by section 213(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                      • Section FE 13(3)(a): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 56(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                      • Section FE 13 list of defined terms double tax agreement: inserted (with effect on 30 June 2009), on , by section 213(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                      • Section FE 13 list of defined terms non-resident passive income: inserted (with effect on 1 July 2011), on , by section 56(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                      • Section FE 13 list of defined terms source in New Zealand: inserted (with effect on 30 June 2009), on , by section 213(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                      • Section FE 13 list of defined terms trustee: inserted, on , by section 109(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).