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Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 5: Disposal of owner’s interests

You could also call this:

“Selling your share in a look-through company for less than its value”

This section talks about what happens when you sell some or all of your ownership in a look-through company. It applies when the money you get from selling is less than the value of what you’re selling, minus some debts and $50,000.

When you sell your ownership, the money you get isn’t counted as income you have to pay tax on. However, you can’t claim any tax deductions for the part you sold in the year you sell it or in future years.

If someone buys your ownership, they can’t claim the money they paid you as a tax deduction. But after they buy it, they’re treated as if they owned it from the start for tax purposes. This means they can claim tax deductions for it in the future, except for some special deductions carried over from before.

There’s a rule that says if the value of what you’re selling, minus debts and $50,000, is more than what you’re getting paid for it, this section doesn’t apply.

Remember, there’s another rule in section HB 4 that can override this one, so you need to check that too.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3676678.

Topics:
Money and consumer rights > Taxes
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HB 4: General provisions relating to disposals, or

“Rules for selling or changing your part of a look-through company”

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HB 6: Disposal of trading stock, or

“Rules for buying and selling trading stock when you own part of a look-through company”

Part H Taxation of certain entities
Look-through companies

HB 5Disposal of owner’s interests

  1. This section applies when a person (the exiting owner) disposes of some or all of their owner's interests (the current interests) for a look-through company, if the amount calculated using the formula is less than zero—

    disposal payment + previous payments− (gross tax value − liabilities) − $50,000.

    Where:

    • In the formula,—

    • disposal payment is the total amount of consideration paid or payable to the exiting owner for the current interests:
      1. previous payments is the total amount of consideration paid or payable to the exiting owner for other disposals of some or all of their owner’s interests (the other interests) that have occurred in the year before the disposal of the current interests:
        1. gross tax value is the total of—
          1. the value under this Act of the current interests and other interests at the time the relevant interest is disposed of, to the extent to which the interests are revenue account property or depreciable property or financial arrangements:
            1. the market value of the current interests and other interests at the time the relevant interest is disposed of, to the extent to which the interests are not revenue account property or depreciable property or financial arrangements:
            2. liabilities is the amount of liabilities under generally accepted accounting practice at the time the relevant interest is disposed of, calculated by reference to the exiting owner’s ownership share for the relevant interest.

              1. The disposal payment described in subsection (2)(a) is excluded income of the exiting owner.

              2. The exiting owner is denied a deduction in relation to the current interests for the income year in which the disposal of the interests occurs and later income years to the extent to which the entering owner is allowed a deduction because of subsection (6).

              3. An entering owner is denied a deduction for the disposal payment described in subsection (2)(a).

              4. For the purposes of calculating the income and deductions of an entering owner for the part of the income year after the disposal of the interests occurs and later income years (the post-disposal periods), the entering owner is treated for the post-disposal periods as if they had originally acquired and held the current interests, not the exiting owner. However, this subsection does not apply to a deduction carried forward under section HB 12.

              5. Section HB 4 overrides this section.

              Notes
              • Section HB 5: inserted, on (applying for income years beginning on or after 1 April 2011, and for the purposes of the Commissioner receiving LTC elections, on and after 21 December 2010), by section 78(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).