Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

Definitions and related matters - Residence and source in New Zealand

YD 5: Apportionment of income derived partly in New Zealand

You could also call this:

“Dividing income when it's earned both in and outside New Zealand”

This section of the Income Tax Act 2007 explains how to determine the New Zealand source of income when it’s derived partly in New Zealand and partly outside New Zealand. Here’s what you need to know:

The rules apply when:

  • You run a business partly in New Zealand and partly overseas
  • A contract is made in New Zealand but performed (all or in part) by someone outside New Zealand
  • A contract is made overseas but performed (all or in part) by someone in New Zealand
  • Interest or redemption payments come from money lent outside New Zealand to a New Zealand resident who uses it for business outside New Zealand

The income and expenses need to be split between New Zealand and overseas sources. This split should result in the same net income or loss as if the New Zealand activities were done by a separate, independent person dealing at arm’s length.

For interest or redemption payments, there’s a special formula to work out how much is from a New Zealand source. This uses a ‘loan ratio’ based on the value of financial arrangements producing New Zealand income compared to total assets.

If the loan ratio is 0.05 or less, none of the interest or redemption payment is from a New Zealand source. If it’s 0.95 or more, all of it is from a New Zealand source.

These rules don’t apply to income from a permanent establishment in New Zealand, which has its own rules.

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 It might be out of date or be missing some parts.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=DLM1523145.

Topics:
Money and consumer rights > Taxes
Previous

YD 4B: Meaning of permanent establishment, or

“What counts as a fixed place of business in New Zealand for tax purposes”

Next

YD 5B: Attribution of income and expenditure to permanent establishment in New Zealand, or

“How to calculate income and expenses for your New Zealand-based permanent business location”

Part Y Definitions and related matters
Residence and source in New Zealand

YD 5Apportionment of income derived partly in New Zealand

  1. This section applies when—

  2. a person carries on business partly in New Zealand and partly outside New Zealand; or
    1. a contract is made in New Zealand and is performed, in whole or in part, by a person outside New Zealand; or
      1. a contract is made outside New Zealand and is performed, in whole or in part, by a person in New Zealand; or
        1. interest or a redemption payment is derived from money lent outside New Zealand to a New Zealand resident (the borrower) for the purposes of a business they carry on outside New Zealand through a fixed establishment outside New Zealand and through which the borrower lends money to another New Zealand resident.

          1. This section does not apply to business activities that a person carries on through a permanent establishment in New Zealand.

          2. This section does not apply to limit the effect of—

          3. any of the source rules in section YD 4 other than those in section YD 4(2), (3), and (11)(b)(i); or
            1. the source rules in section YD 4(2), (3), and (11)(b)(i) to the extent to which the income referred to is also income referred to in any source rule other than those in section YD 4(2), (3), and (11)(b)(i).

              1. Subject to subsection (4), the amount of income derived from the business or under the contract, and the amount of expenditure incurred in deriving the income, must be apportioned between New Zealand and sources outside New Zealand to the extent necessary to achieve the result in subsection (3).

              2. The result of the apportionment, to the extent consistent with subsection (2), must be that the person’s net income or net loss, in relation to the business or contract, is the same as a separate and independent person would have if they were carrying out only the person’s activities in New Zealand and dealing at arm’s length.

              3. Subject to subsections (6) and (7), interest or a redemption payment derived as described in subsection (1)(d) is apportioned to a source in New Zealand using the formula—

                loan ratio × amount.

                Where:

                • In the formula in subsection (4),—

                • loan ratio is calculated by applying the formula in subsection (8) to the business described in subsection (1)(d):
                  1. amount is the amount of interest or redemption payment described in subsection (1)(d).

                    1. If the loan ratio calculated by applying the formula in subsection (8) to a business is 0.05 or less, then none of the interest or redemption payment is treated as having a source in New Zealand.

                    2. If the loan ratio calculated by applying the formula in subsection (8) to a business is 0.95 or more, then all of the interest or redemption payment is treated as having a source in New Zealand.

                    3. The item loan ratio in subsection (4) is calculated using the formula—

                      financial arrangements producing New Zealand income ÷ total assets.

                      Where:

                      • In the formula in subsection (8),—

                      • financial arrangements producing New Zealand income, for a business, means the value of the business’s assets that are financial arrangements that produce income having a source in New Zealand as at—
                        1. the borrower’s balance date that immediately precedes the income year; if the borrower has a balance date before the start of the income year; or
                          1. the end of the day before the date on which the interest or redemption payment is paid, if subparagraph (i) does not apply:
                          2. total assets, for a business, means the value of all of the business’s assets as at—
                            1. the borrower’s balance date that immediately precedes the income year, if the borrower has a balance date before the start of the income year; or
                              1. the end of the day before the date on which the interest or redemption payment is paid, if subparagraph (i) does not apply.

                                2. Example

                                At its balance date of 31 March 2018, NZ Sub UK Branch has total borrowings from the wholesale markets of NZ$2b. NZ$1.5b has been lent to NZ Bank Ltd at 4% p.a., NZ$500m lent to a UK resident at 12% p.a. and there are no other assets. On 31 October 2018, the UK resident repays its loan and NZ Sub UK Branch uses the amount to repay the wholesale market lenders. On 31 January 2019, NZ Sub UK Branch pays interest of NZ$60m. NZ Sub UK Branch calculates the loan ratio in section YD 5(8) as NZ$1.5b ÷ NZ$2b = 0.75. NZ Sub UK Branch calculates the apportionment of income from interest in section YD 5(4) as: 0.75 x NZ$60m = NZ$45m. Therefore, NZ$45m of the interest payment on 31 January 2019 has a New Zealand source, so NZ Sub UK Branch pays AIL of $900,000 which is included in its AIL return for January 2019.

                              Compare
                              Notes
                              • Section YD 5(1)(c): amended, on , by section 295(1) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(1)(d): inserted, on , by section 295(2) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(1BA) heading: inserted, on , by section 52(1) (and see section 52(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                              • Section YD 5(1BA): inserted, on , by section 52(1) (and see section 52(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                              • Section YD 5(1B) heading: inserted (with effect on 1 April 2008), on , by section 574(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section YD 5(1B): inserted (with effect on 1 April 2008), on , by section 574(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section YD 5(1B)(a): amended, on , by section 295(3) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(1B)(b): amended, on , by section 295(3) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(2): amended, on , by section 295(4) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(3): amended (with effect on 1 April 2008), on , by section 574(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section YD 5(4) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(4): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(5) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(5): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(6) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(6): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(7) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(7): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(8) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(8): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(9) heading: inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5(9): inserted, on , by section 295(5) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 compare note: amended (with effect on 1 April 2008), on , by section 574(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section YD 5 list of defined terms financial arrangement: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms fixed establishment: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms income year: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms interest: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms loan: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms money lent: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms New Zealand resident: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms pay: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms redemption payment: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                              • Section YD 5 list of defined terms source in New Zealand: inserted, on , by section 295(6) (and see section 5) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).