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New Zealand law explained for everyone

Income Tax Act 2007

Deductions - Expenditure specific to certain entities

DV 21: Losses for QCs entering partnership regime

You could also call this:

“How partners can claim deductions for old qualifying company losses”

This law talks about what happens to losses when a qualifying company changes into a partnership. Here’s what you need to know:

If your partnership has replaced a qualifying company, and that company would have had losses to carry forward, those old losses are cancelled. However, you can still get a deduction for some of those losses.

You can claim a deduction for an amount that’s calculated using a special formula. This deduction can’t be more than the income you would have if you only considered the income and deductions from your partnership.

The formula looks at the cancelled loss balance, subtracts any deductions already claimed by partners in previous years, and multiplies this by your share in the partnership.

There are some limits on this deduction. If the losses came from foreign income, you can’t claim more than what’s allowed under the rules for foreign losses.

This law overrides the usual rules about what you can claim as a deduction.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683704.

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Part D Deductions
Expenditure specific to certain entities

DV 21Losses for QCs entering partnership regime

  1. This section applies to a person when,—

  2. for an income year, a person's partnership (the partnership) has effectively replaced a qualifying company or companies under a QCP transitional process; and
    1. ignoring the application of section HZ 4B(3) (Qualifying companies: transition into partnership), the company or companies would have had loss balances to carry forward to the first or second income year, as applicable, starting on or after 1 April 2011 (the relevant transitional income year).

      1. Despite section HZ 4B(3), for the relevant transitional income year and subsequent income years, a loss balance under Part I (Treatment of tax losses) is cancelled if the loss balance arose in relation to an income year before the relevant transitional income year.

      2. The person is allowed a deduction for an amount equal to an amount given by the formula in subsection (4), to the extent to which it is equal to or less than the net income the person would have for the income year if they were treated as having only income and deductions arising from the application of subpart HG (Joint venturers, partners, and partnerships) for the partnership.

      3. For the purposes of subsection (3), the amount is calculated using the formula—

        (loss balance extinguished − subsequent deductions) × partnership share.

        Where:

        • In the formula,—

        • loss balance extinguished is the loss balance cancelled under subsection (2):
          1. subsequent deductions is the total amount of deductions allowed for previous income years under this section for all persons with a partnership share in the partnership:
            1. partnership share is the person's average partnership share for the partnership for the income year.

              1. Despite subsection (3), a person is not allowed a deduction for an amount in subsection (4) to the extent to which—

              2. it arises from an amount carried forward under subparts IA and IQ (which relate to the treatment of foreign losses); and
                1. it is greater than the maximum amount they may subtract from their net income under subpart IQ, treating the amount as an attributed CFC net loss or a FIF net loss carried forward under subpart IQ, and the person as having the net income they would have for the income year if they were treated as having only income and deductions arising from the application of subpart HG for the partnership.

                  1. This section overrides the general permission and the general limitations.

                  Notes
                  • Section DV 21: inserted, on (applying for income years beginning on or after 1 April 2011), by section 45(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).