Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

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

FE 18: Measurement of debts and assets of worldwide group

You could also call this:

“How to measure a worldwide group's debts and assets for tax purposes”

When measuring the debts and assets of a worldwide group for an excess debt entity:

You need to use accounting standards that are like the ones used in New Zealand. These should give consistent and fair financial reports.

You must follow the financial reporting rules of the country where the group’s combined financial accounts are made.

You can measure the group’s debt, assets, and non-debt liabilities using:

  • The average amount at the end of each day in the income year
  • The average amount at the end of each 3-month period in the income year
  • The amount on the group’s balance date just before the income year

There are special rules for measuring the group’s debt in some cases. These involve removing certain financial arrangements from the calculation.

If you can’t work out your group’s debt percentage, you can ask the tax department to estimate it for you.

If you don’t ask for an estimate or the tax department can’t make one, there are default percentages that will be used. These are 54.5454% for most entities, or 68.1818% for some overseas companies and trusts.

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 It might be out of date or be missing some parts.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=DLM1516461.

Topics:
Money and consumer rights > Taxes
Previous

FE 17: Consolidation of debts and assets, or

“Adding up a company group's debts and assets”

Next

FE 19: Banking group’s equity threshold, or

“Minimum equity requirement for NZ banking groups”

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

FE 18Measurement of debts and assets of worldwide group

  1. The amount of total group debt, the amount of total group assets, and the amount of total group non-debt liabilities of the worldwide group of an excess debt entity are calculated—

  2. using a standard that is equivalent to generally accepted accounting practice for consistent and non-distorting financial reporting; and
    1. in accordance with the financial reporting standards of the country where the worldwide group’s consolidated financial accounts are prepared.

      1. The amount of total group debt, the amount of total group assets, and the amount of total group non-debt liabilities of the worldwide group of an excess debt entity for an income year are measured using—

      2. the average amount at the end of each day of the income year; or
        1. the average amount at the end of each 3-month period in the income year; or
          1. the amount as at the worldwide group’s balance date that immediately precedes the income year.

            1. Despite subsection (1), an excess debt entity must measure the amount of total group debt by applying section FE 15 as if—

            2. section FE 15(1)(a) excluded from the measurement a financial arrangement meeting the requirements of subsection (3B); and
              1. section FE 15(1)(a)(ii) required the financial arrangement to give rise to an amount that would be allowed as a deduction to the natural person or to the entity, or another group member, if the entity or group member were resident in New Zealand.

                1. A financial arrangement is removed from the measurement of total group debt for an excess debt entity that is not an excess debt outbound company if—

                2. there is a person (the owner) who is not a member of the group and—
                  1. has an ownership interest in a member of the group:
                    1. is a settlor of a trust having a trustee who is a member of the group; and
                    2. the owner, or an associated person other than a member of the group,—
                      1. is a party to the financial arrangement:
                        1. guarantees, or provides security for, the performance of obligations under the financial arrangement, if the worldwide group is given by section FE 3(1)(d) or FE 31D:
                          1. provides, or undertakes to provide, funds for the use of a person who agrees to provide funds under the financial arrangement; and
                          2. the owner—
                            1. has direct ownership interests in a member of the group of 5% or more:
                              1. has made a settlement on a trust, having a trustee who is a member of the group, of 5% or more of the value of total settlements on the trust; and
                              2. the financial arrangement is not traded on an exchange that would be a recognised exchange if paragraphs (c) to (e) of the definition of recognised exchange referred to financial arrangements as well as to shares and options over shares.

                                1. If the amounts of the total group debt and total group assets are reduced under section FE 13 for the New Zealand group and worldwide group of an excess debt entity, the parts of the reduced amounts that relate to financial arrangements with members of the excess debt entity’s groups and the parts that relate to financial arrangements with persons outside the excess debt entity’s groups are treated as being in the same proportion as the parts of the total group debt and total group assets would be in without the reduction.

                                2. If an excess debt entity is unable to calculate the debt percentage of their worldwide group for an income year, they may apply to the Commissioner to estimate the percentage under this subpart. The estimate is then treated as the percentage applying for the purposes of this subpart.

                                3. The debt percentage of the worldwide group of an excess debt entity is treated as,—

                                4. 54.5454%, if the excess debt entity is not a trustee and not an excess debt outbound company, or is a trustee who is not described in section FE 2(1)(g), and—
                                  1. the entity is unable to calculate the percentage and does not ask the Commissioner to make an estimate under subsection (4):
                                    1. the Commissioner cannot reasonably estimate the debt percentage under subsection (4):
                                      1. all members of the entity's worldwide group, not including the entity, are resident in New Zealand and the entity's worldwide group is not determined under either of sections FE 3(1)(d) and FE 31D; or
                                      2. 68.1818%, if the excess debt entity is an excess debt outbound company, or is a trustee who is described in section FE 2(1)(g), and—
                                        1. the entity is unable to calculate the percentage and does not ask the Commissioner to make an estimate under subsection (4):
                                          1. the Commissioner cannot reasonably estimate the debt percentage under subsection (4):
                                            1. no member of the entity's worldwide group, other than the entity, is not resident in New Zealand.

                                            Compare
                                            Notes
                                            • Section FE 18(1): amended, on , by section 32(1)(a) (and see section 32(6) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(1): amended, on , by section 32(1)(b) (and see section 32(6) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(1): amended (with effect on 30 June 2009), on , by section 217(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                            • Section FE 18(2) heading: substituted (with effect on 30 June 2009), on , by section 217(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                            • Section FE 18(2): substituted (with effect on 30 June 2009), on , by section 217(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                            • Section FE 18(2): amended, on , by section 32(2) (and see section 32(6) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(3) heading: replaced, on (applying for the 2015–16 and later income years), by section 112(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18(3): replaced, on (applying for the 2015–16 and later income years), by section 112(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18(3B) heading: inserted, on (applying for the 2015–16 and later income years), by section 112(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18(3B): inserted, on (applying for the 2015–16 and later income years), by section 112(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18(3B)(b)(ii): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 174(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                            • Section FE 18(3B)(c): replaced, on , by section 32(3) (and see section 32(6) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(3C) heading: inserted, on , by section 32(4) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(3C): inserted, on , by section 32(4) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18(4): amended, on , by section 45(1) of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                                            • Section FE 18(4): amended (with effect on 30 June 2009), on , by section 217(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                            • Section FE 18(5): substituted, on (applying for the 2011–12 and later income years), by section 90(1) of the Taxation (Budget Measures) Act 2010 (2010 No 27).
                                            • Section FE 18(5)(a)(iii): replaced, on (applying for the 2015–16 and later income years), by section 112(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms apply: inserted, on , by section 45(2) of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                                            • Section FE 18 list of defined terms associated person: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms excess debt outbound company: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms financial arrangement: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms natural person: repealed (with effect on 30 June 2009), on , by section 217(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                            • Section FE 18 list of defined terms ownership interest: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms recognised exchange: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms settlor: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                            • Section FE 18 list of defined terms total group non-debt liabilities: inserted, on , by section 32(5) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                            • Section FE 18 list of defined terms trustee: inserted, on , by section 112(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).