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Income Tax Act 2007

Recharacterisation of certain transactions - Amalgamation of companies

FO 18: When amalgamating companies are parties to financial arrangement

You could also call this:

“Financial arrangements when companies merge”

When companies join together, this law talks about what happens to their financial arrangements. A financial arrangement is like a special agreement about money between the companies.

If the companies have a financial arrangement when they join, it’s treated as if it ended just before they joined. The amount of money involved depends on a few things:

For a special kind of joining called a resident’s restricted amalgamation:

  • If the company joining is able to pay its debts, the amount is what they still owe.
  • If the company joining might have trouble paying its debts but could probably manage, the amount is also what they still owe.
  • If the company joining can’t pay its debts, the amount is what the agreement is worth at the time of joining.

For other kinds of joining, the amount is what the agreement is worth when they join.

If the company that owes money can pay its debts or probably could manage to, the other company isn’t seen as letting them off the hook for any extra money.

If the company that owes money can’t pay its debts, the agreement is treated as if it ended just before joining. The amount is what the agreement is worth at that time. The other company is seen as letting them off the hook for any extra money they owed beyond what the agreement was worth.

These rules help figure out how much money is involved when companies join together and have these special financial agreements.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516818.

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Money and consumer rights > Taxes
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“How to calculate money owed on financial arrangements when companies merge”

Part F Recharacterisation of certain transactions
Amalgamation of companies

FO 18When amalgamating companies are parties to financial arrangement

  1. This section applies when amalgamating companies are parties to a financial arrangement that exists on the date of the amalgamation of the companies and section FO 21 does not apply.

  2. The financial arrangement is, for the purposes of section EW 31 (Base price adjustment formula), treated as having been discharged immediately before the amalgamation. The consideration for the discharge is as follows:

  3. on a resident's restricted amalgamation,—
    1. if the amalgamating company is solvent, the consideration is the accrued balance for the financial arrangement:
      1. if the amalgamating company is insolvent but is likely to be able to meet its obligations under the financial arrangement, the consideration is the accrued balance for the financial arrangement:
        1. if the amalgamating company is insolvent and is unlikely to be able to meet its obligations under the financial arrangement, the consideration is the market value of the financial arrangement on the date of the amalgamation:
        2. on an amalgamation other than a resident's restricted amalgamation, the consideration is the market value of the financial arrangement on the date of the amalgamation.

          1. Subsection (4) applies when an amalgamating company that is the borrower under the financial arrangement—

          2. is solvent; or
            1. is insolvent but is likely to be able to meet its obligations under the financial arrangement.

              1. The other party to the financial arrangement is not regarded as remitting an amount in excess of the consideration treated as paid for the discharge under subsection (2)(a)(i) or (ii) or (b), as applicable, merely by virtue of the discharge.

              2. Subsection (6) applies when an amalgamating company that is the borrower under the financial arrangement is insolvent and is unlikely to meet its financial obligations under the financial arrangement.

              3. For the purposes of section EW 31, the financial arrangement is treated as discharged immediately before the amalgamation and the market value of the financial arrangement is treated as being paid by the amalgamating company to the other party to the financial arrangement.

              4. For the purposes of subsection (6), the other party to the financial arrangement is treated as having remitted an amount equal to the excess over market value of the outstanding accrued balance for the financial arrangement, see section FO 20.

              Compare
              Notes
              • Section FO 18(1) heading: replaced, on , by section 115 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
              • Section FO 18(1): replaced, on , by section 115 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
              • Section FO 18(2) heading: substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(2): substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(3) heading: substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(3): substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(4) heading: substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(4): substituted (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(5) heading: added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(5): added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(6) heading: added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(6): added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(7) heading: added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18(7): added (with effect on 1 April 2008), on (applying for the 2008–09 and later income years), by section 66(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
              • Section FO 18 list of defined terms pay: inserted (with effect on 1 April 2008), on , by section 66(2) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).