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Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 6: Disposal of trading stock

You could also call this:

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

When you own part of a look-through company and sell your share, there are special rules about trading stock. These rules apply if the company’s total turnover is $3,000,000 or less in the year you sell, and the trading stock isn’t livestock.

If you’re selling your share (you’re the ‘exiting owner’), you don’t have to pay tax on the money you get for the trading stock. However, you can’t claim any deductions for that trading stock in the year you sell or in future years.

If you’re buying a share (you’re the ‘entering owner’), you can’t claim a deduction for the money you pay for the trading stock. But for tax purposes, you’re treated as if you had bought and owned the trading stock from the beginning, not the person who sold it to you.

It’s important to note that section HB 4 takes priority over these rules. This means if there’s any conflict between this section and HB 4, you should follow HB 4.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683718.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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“Selling your share in a look-through company for less than its value”

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HB 7: Disposal of depreciable property, or

“Rules for selling your share in a look-through company with depreciable property”

Part H Taxation of certain entities
Look-through companies

HB 6Disposal of trading stock

  1. This section applies when a person (the exiting owner) disposes of some or all of their owner’s interests for a look-through company, to the extent to which those interests include trading stock that is not livestock, and, for the income year of disposal, the total turnover of the look-through company, ignoring section HB 1, is $3,000,000 or less.

  2. The amount of consideration paid or payable to the exiting owner for the trading stock is excluded income of the exiting owner.

  3. The exiting owner is denied a deduction in relation to the trading stock for the income year in which the disposal of the trading stock occurs and later income years, to the extent to which the entering owner is allowed a deduction because of subsection (5).

  4. The entering owner is denied a deduction for the amount of consideration paid or payable to the exiting owner for the trading stock.

  5. For the purposes of calculating the income tax liability of an entering owner, the entering owner is treated as if they had acquired and held the trading stock, not the exiting owner.

  6. Section HB 4 overrides this section.

Notes
  • Section HB 6: 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).