Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 11: Limitation on deductions by persons with interests in look-through companies

You could also call this:

“Limits on tax deductions for look-through company owners”

This section explains how the deductions for people with interests in look-through companies (LTCs) are limited. Here’s what you need to know:

You can’t claim deductions for an LTC if the LTC is partnered with another LTC or is part of a joint venture that includes another LTC.

Your deduction is limited to what’s called your “owner’s basis”. This is calculated using a formula that considers your investments, distributions, income, deductions, and any disallowed amounts.

The formula looks at things like:

  • The value of your shares in the LTC
  • Money the LTC owes you
  • Money or other things you’ve received from the LTC
  • Income you’ve earned through the LTC
  • Expenses or losses you’ve had through the LTC

There are special rules for dealing with foreign investment funds (FIFs) and how their income is counted.

The section also defines important terms like “guarantor”, “owner’s associate”, and “secured amounts”.

If you’re selling your interest in the LTC, you can still claim a deduction up to the amount of net income you get from the sale.

This section is quite complex, so if you’re dealing with an LTC, it’s a good idea to get help from a tax expert.

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 It might be out of date or be missing some parts.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=DLM3678210.

Topics:
Money and consumer rights > Taxes
Previous

HB 10: Disposal of livestock, or

“Rules for selling livestock ownership, especially breeding animals”

Next

HB 12: Limitation on deductions by owners of look-through companies: carry-forward, or

“Carrying forward unclaimed deductions for look-through company owners”

Part H Taxation of certain entities
Look-through companies

HB 11Limitation on deductions by persons with interests in look-through companies

  1. This section applies for a look-through company (the LTC) and an income year when,—

  2. but for this section, a deduction by virtue of section HB 1 or HB 12(2) or (3) would be allowed to a person who has an effective look-through interest for the LTC; and
    1. the LTC is a partner in a partnership that includes another look-through company, or the LTC is a member of a joint venture described in section HG 1 (Joint venturers) that includes another LTC.

      1. The person is denied the deduction for an income year to the extent to which their look-through company deduction for the income year is greater than the amount (the owner’s basis) calculated using the formula in subsection (3) at the end of the income year.

      2. For the purposes of subsection (2), the amount that is the owner’s basis is calculated using the following formula:

        investments − distributions + income − deductions − disallowed amount.

        Where:

        • The items in the formula are defined in subsections (5) to (9).

        • Investments is the total of—

        • the market value of a person's shares in the LTC at the time that the person acquires or subscribes for them:
          1. amounts that the LTC is debtor for in relation to the person, including a loan to the LTC and a credit balance in a current account:
            1. the secured amounts, if not accounted for under paragraph (b) by the person or another person.

              1. Distributions is the market value of distributions to the person from the LTC, including loans made to the person from the LTC and payments to which section DC 3B (Payments to working owners) does not apply.

              2. Income is the total of—

              3. income that the person has by virtue of section HB 1 in the income year and previous income years:
                1. if the person has FIF income or a FIF loss, an amount under subsection (7B):
                  1. capital gain amounts under section CD 44(7)(a) (Available capital distribution amount) that the person would have by virtue of section HB 1 in the income year and previous income years, if the person were treated as a company for the purposes of section CD 44(7)(a), unless the gain is accounted for under paragraph (a):
                    1. assessable income that the person has in previous income years from goods and services they contributed to the LTC, if the income is not accounted for under subsection (5) or paragraph (a) or (b) of this subsection.

                      1. The amount described in subsection (7)(ab) is given by the following formula, but if the calculation returns a negative number, the amount is zero:

                        dividend − FIF amount.

                        Where:

                        • In the formula,—

                        • dividend is the amount that would, under section HB 1, be the person's proportion of the dividend paid by a FIF to the LTC, if section CD 36(1) were ignored:
                          1. FIF amount is—
                            1. zero, if subparagraph (ii) does not apply:
                              1. the amount that is the person's FIF income, for the relevant income year and FIF, if the person has such an amount.

                              2. Deductions is the total of—

                              3. expenditure or loss in previous income years, to the extent to which the expenditure or loss is incurred by virtue of section HB 1 in the person deriving income by virtue of section HB 1, excluding any deductions denied in those previous years under this section:
                                1. capital loss amounts under section CD 44(9) that the person would have by virtue of section HB 1 in the income year and previous income years, if the person is treated as a company for the purposes of section CD 44(9), unless the loss is accounted for under paragraph (a):
                                  1. deductions that the person is allowed in previous income years in relation to assessable income described in subsection (7)(c), if the deduction is not accounted for under subsection (6) or paragraph (a) or (b) of this subsection.

                                    1. Disallowed amount is the amount of investments, as defined in subsection (5), made by the person within 60 days of the end of the income year, if those investments are or will be distributed or reduced within 60 days of the end of the income year, but an amount of investment made by the person within 60 days of the end of the income year is not a disallowed amount if the total amount distributed or reduced within 60 days of the end of the income year is $10,000 or less.

                                    2. This section does not deny a person (the exiting person) a deduction that is equal to or less than the amount of net income that the exiting person has for the amount paid or payable to the exiting person for the disposal of their owner's interests, ignoring other transactions.

                                    3. This section is modified by section HZ 4C (Qualifying companies: transition into look-through companies).

                                    4. In this section,—

                                      guarantor means—

                                      1. a person (person A) who has an effective look-through interest for the LTC, if—
                                        1. person A, ignoring section HB 1, secures the relevant debt by guarantee or indemnity:
                                          1. an owner's associate of person A secures the relevant debt by guarantee or indemnity:
                                          2. a person who is not described in paragraph (a)(i) and (ii) but who secures the relevant debt by guarantee or indemnity, if person A or an owner's associate also secures the relevant debt as described in paragraph (a)(i) or (ii)

                                            look-through company deduction means, for the person and the income year, the amount of the deductions that the person would be allowed if they were treated as having only income and deductions arising from the application of this subpart

                                              owner's associate means a person who does not have an effective look-through interest for the LTC and who is—

                                              1. a relative of a person who has an effective look-through interest for the LTC:
                                                1. a trustee who is associated in their capacity of trustee, with a person who has an effective look-through interest for the LTC

                                                  recourse property means property to which a creditor has recourse, to enforce a guarantee or indemnity for the relevant debt, if the guarantee or indemnity expressly provides recourse to only that property

                                                    secured amounts means, for the person, the lesser of the following applicable amounts:

                                                    1. the amount of the look-through company's debt ignoring section HB 1 (the secured debt) for which the person is a guarantor, divided by the total number of guarantors for the secured debt:
                                                      1. the market value of the recourse property for the secured debt to the extent of the interest that the person and their owner's associates have in it, net of higher-ranking calls whether actual, future or contingent, divided by the total number of guarantors described in paragraph (a) of the definition of guarantor who have an interest in the recourse property or have an owner's associate with an interest in the recourse property.

                                                      Notes
                                                      • Section HB 11: 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 11(1): replaced, on (applying for the 2017–18 and later income years), by section 131(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                      • Section HB 11(5)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                                      • Section HB 11(5)(c): amended (with effect on 1 April 2011), on , by section 80(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7)(a): replaced (with effect on 1 April 2011), on , by section 80(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7)(ab): inserted (with effect on 1 April 2011), on , by section 80(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7B) heading: inserted (with effect on 1 April 2011), on , by section 80(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7B): inserted (with effect on 1 April 2011), on , by section 80(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7C) heading: inserted (with effect on 1 April 2011), on , by section 80(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(7C): inserted (with effect on 1 April 2011), on , by section 80(3) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(12) heading: replaced (with effect on 1 April 2011), on , by section 80(4) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11(12): replaced (with effect on 1 April 2011), on , by section 80(4) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11 list of defined terms FIF loss: inserted (with effect on 1 April 2011), on , by section 80(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11 list of defined terms guarantor: inserted (with effect on 1 April 2011), on , by section 80(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11 list of defined terms owner's associate: inserted (with effect on 1 April 2011), on , by section 80(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
                                                      • Section HB 11 list of defined terms partner: inserted, on , by section 131(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                      • Section HB 11 list of defined terms partnership: inserted, on , by section 131(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                      • Section HB 11 list of defined terms recourse property: inserted (with effect on 1 April 2011), on , by section 80(5) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).