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Income Tax Act 2007

Deductions - Expenditure specific to certain entities

DV 23: Losses for QCs entering look-through companies rules

You could also call this:

“Tax deductions for losses when a qualifying company becomes a look-through company”

This section talks about how you can get a tax deduction if you own part of a company that changed from being a qualifying company to a look-through company in 2011 or 2012. Here’s what you need to know:

If your company made this change, and it had losses that it couldn’t use anymore because of the change, you might be able to claim some of those losses as a deduction.

You can only claim this deduction if it’s not more than the income you get from the look-through company. The amount you can claim is based on a special calculation that takes into account the total losses, any deductions already claimed, and how much of the company you own.

There are some limits on this deduction. If the losses came from overseas investments, you might not be able to claim all of them. The rules about foreign losses in subpart IQ will decide how much you can claim.

This deduction is allowed even if other tax rules would normally stop you from claiming it.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683706.

Topics:
Money and consumer rights > Taxes
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DV 22: Owners of look-through companies, or

“How owners of look-through companies can claim deductions”

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DV 24: Losses for QCs becoming sole traderships, or

“Tax losses from qualifying companies can be used when becoming a sole trader”

Part D Deductions
Expenditure specific to certain entities

DV 23Losses for QCs entering look-through companies rules

  1. This section applies to a person who has an effective look-through interest for a look-through company (the LTC) for an income year when—

  2. the LTC was a qualifying company that first becomes a look-through company for the first or second income year that starts on or after 1 April 2011; and
    1. but for becoming a look-through company and the application of section HB 3 (Loss balances extinguished), there would have been a loss balance to carry forward to the first or second income year that starts on or after 1 April 2011 (the relevant transitional income year).

      1. The person is allowed a deduction for an amount equal to an amount given by the formula in subsection (3), 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 HB (Look-through companies) for the LTC.

      2. For the purposes of subsection (2), the amount is calculated using the formula—

        (loss balance extinguished − subsequent deductions) × effective interest.

        Where:

        • In the formula,—

        • loss balance extinguished is the loss balance that would have been carried forward to the relevant transitional income year:
          1. subsequent deductions is the total amount of deductions allowed for previous income years under this section for all persons with an effective look-through interest for the LTC:
            1. effective interest is the person's average effective look-through interest for the income year for the LTC.

              1. Despite subsection (2), a person is denied a deduction for an amount in subsection (3) 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 HB for the LTC.

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

                  Notes
                  • Section DV 23: 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).