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Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 4: General provisions relating to disposals

You could also call this:

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

This section talks about what happens when you own part of a special kind of company called a look-through company. It explains different situations where you might have to sell your part of the company.

If you’re getting into a look-through company, you can choose to use a special rule called HB 10 when you do your tax return.

If the look-through company stops existing, it’s like you’ve sold your part to someone else for what it’s worth at that time.

If the company reduces how much money people have put into it, but not equally for everyone, it’s treated like you’ve sold some of your part for what it’s worth.

If you get anything when the company stops or reduces its money, you don’t need to worry about it for tax purposes.

If the company stops being a look-through company for any reason (except for stopping existing), it’s like you’ve sold your part to someone else and then the company bought it back, both for what it’s worth at that time.

When figuring out how much your part of the company is worth, if you owe money to the company, you need to think about whether that debt might not be paid back fully.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3676684.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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“Companies lose previous tax losses when becoming look-through companies”

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HB 5: Disposal of owner’s interests, or

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

Part H Taxation of certain entities
Look-through companies

HB 4General provisions relating to disposals

  1. This section overrides sections HB 5 to HB 9. This section does not apply, and sections HB 5 to HB 9 do not apply, for disposals of owners' interests under transactions to which subpart FB (Transfers of relationship property) applies or is treated as applying.

  2. Section HB 10 applies for an entering owner if the entering owner furnishes a return of income that applies the section.

  3. A person is treated as disposing of all of their owner's interests for a look-through company to a single third party for a payment equal to the interests' market value, if the look-through company ceases to exist as an entity through liquidation, court order, or otherwise.

  4. A person is treated as disposing of all of their owner's interests for a look-through company to a single third party for a payment equal to the interests' market value to the extent to which an owner's capital is reduced by a cancellation or a buy-back by the look-through company that is not pro rata for all owners.

  5. Anything received by an owner in relation to permanent cessation or capital reduction, as described in subsection (3) or (4), is ignored.

  6. A person is treated as disposing of all of their owner's interests for a look-through company to a single third party for a payment equal to the interests' market value, if the look-through company ceases to be a look-through company because of a revocation or otherwise, but excluding cessation as described in subsection (3). The company is treated as acquiring all of the person's interests immediately after the cessation, from the third party, for a payment equal to the interests' market value, and for the purposes of section CB 15 (Transactions between associated persons), the person disposing of, and the company acquiring, the interests are treated as associated persons.

  7. In this section the market value of an owner’s interest in a financial arrangement as debtor must take into account the amount of any adjustment for credit impairment.

Notes
  • Section HB 4: 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).
  • Section HB 4(7) heading: inserted, on , by section 130(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
  • Section HB 4(7): inserted, on , by section 130(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
  • Section HB 4 list of defined terms financial arrangement: inserted, on , by section 130(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).