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New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation - Debt percentage of New Zealand group

FE 14: Consolidation of debts and assets

You could also call this:

“How to calculate debt percentage for New Zealand groups”

When you’re part of a New Zealand group, you need to calculate something called a debt percentage. This is done differently depending on what kind of entity you are.

If you’re a company, you add up all the debts and assets of the group members. You do this as if all the companies were one big company, following the rules that accountants use.

If you’re a person or a trustee, you do the same thing - add up all the debts and assets as if everything was one big group.

If someone in your group doesn’t live in New Zealand, you only include their stuff if it’s used for business in New Zealand or if it’s for income that comes from New Zealand and can’t avoid New Zealand tax.

If someone is part of more than one group, their debts and assets can only be counted in one New Zealand group and one worldwide group.

When figuring out the debt percentage and working out if you can claim a deduction, there are some special rules:

  • Some types of leases are treated like loans
  • Some types of expenses are treated like interest payments

These rules help make sure everything is counted fairly when working out the debt percentage.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516450.

Topics:
Money and consumer rights > Taxes
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FE 13: Financial arrangements entered into with persons outside group, or

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

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FE 15: Total group debt, or

“Calculating the total debt owed by a New Zealand group”

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation: Debt percentage of New Zealand group

FE 14Consolidation of debts and assets

  1. For an excess debt entity that is a company, the debt percentage of a New Zealand group is calculated under generally accepted accounting practice for the consolidation of companies for the purposes of eliminating intra-group balances by consolidating the debts and assets of the members of the entity’s New Zealand group.

  2. For a natural person and an excess debt entity that is a trustee, the debt percentage of a New Zealand group is calculated under generally accepted accounting practice for the consolidation of companies for the purposes of eliminating intra-group balances by consolidating the debts and assets for the group.

  3. If a member of a New Zealand group is not resident in New Zealand, the assets and debts of the member are included in a consolidation only to the extent to which the assets and debts are for the group member to—

  4. carry on business in New Zealand through a fixed establishment in New Zealand:
    1. derive income, other than non-resident passive income, that has a source in New Zealand and for which relief from New Zealand tax under a double tax agreement is unavailable.

      1. If an entity (the common member) is, under sections FE 3 and FE 26 to FE 29, a member or part of a member of different New Zealand groups, the liabilities and assets of the common member are included under this subpart in the total group debt, total group assets, and total group non-debt liabilities of not more than 1 New Zealand group and in no worldwide group other than the worldwide group determined using that New Zealand group.

      2. For the purposes of subsection (3B), the debts and assets of the common member referred to in subsection (3B) are included with the debts and assets of the other members of the New Zealand group—

      3. given by section FE 26, in the absence of section FE 26(2)(bb) and (bc), (3)(d), (4D), and (6), for the common member; or
        1. if paragraph (a) does not specify 1 New Zealand group, chosen by the excess debt entity to which the interest apportionment rules are being applied for the common member and the excess debt entity.

          1. For the purposes of subsection (3B), the debts and assets of the common member referred to in subsection (3B) are included with the debts and assets of the other members of the worldwide group given by sections FE 31 to FE 36B for the common member and the common member's New Zealand group under subsection (3C).

          2. In this subpart, in the determination of total group debt, total group assets, and total group non-debt liabilities and in the calculation of an amount for which a deduction is denied,—

          3. a specified lease under section FZ 2 (Effect of specified lease on lessor and lessee) is treated as a financial arrangement that provides funds to the issuer; and
            1. expenditure incurred by the lessee under a specified lease for which a deduction is allowed under section BD 2 (Deductions) is treated as an amount of interest to which any of sections DB 6 to DB 8 (which relate to deductions for interest expenditure) applies; and
              1. interest that is allowed as a deduction under either of the following sections is treated as an amount of interest to which any of sections DB 6 to DB 8 applies, if not already allowed under those sections:
                1. section DP 1(1)(b) (Expenditure of forestry business):
                  1. section DV 10(1)(a) or (b) (Building societies).

                  Compare
                  Notes
                  • Section FE 14(2) heading: substituted (with effect on 30 June 2009), on , by section 214(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14(2): substituted (with effect on 30 June 2009), on , by section 214(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14(3) heading: substituted (with effect on 30 June 2009), on , by section 214(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14(3): substituted (with effect on 30 June 2009), on , by section 214(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14(3)(b): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 57(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                  • Section FE 14(3B) heading: inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(3B): inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(3B): amended, on , by section 28(1)(a) (and see section 28(4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                  • Section FE 14(3B): amended, on , by section 28(1)(b) (and see section 28(4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                  • Section FE 14(3C) heading: inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(3C): inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(3D) heading: inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(3D): inserted, on (applying for the 2015–16 and later income years), by section 110(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                  • Section FE 14(4): amended, on , by section 28(2) (and see section 28(4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                  • Section FE 14 list of defined terms double tax agreement: inserted (with effect on 30 June 2009), on , by section 214(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14 list of defined terms non-resident passive income: inserted (with effect on 1 July 2011), on , by section 57(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                  • Section FE 14 list of defined terms source in New Zealand: inserted (with effect on 30 June 2009), on , by section 214(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section FE 14 list of defined terms tax: inserted (with effect on 1 July 2011), on , by section 57(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                  • Section FE 14 list of defined terms total group non-debt liabilities: inserted, on , by section 28(3) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).