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Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 7: Disposal of depreciable property

You could also call this:

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

When you own part of a look-through company and sell your share, there are special rules about the property that comes with it. These rules apply when the property can lose value over time (called depreciable property) and originally cost $200,000 or less.

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

The person buying your share (called the entering owner) can’t claim a deduction for the money they pay you for the property. But after they buy it, they’re treated as if they’ve owned the property from the start. This means they can claim deductions for it in the future.

It’s important to note that Section HB 4 can change these rules, so you should check that section too.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683719.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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HB 8: Disposal of financial arrangements and certain excepted financial arrangements, or

“Rules for selling ownership in a look-through company with financial arrangements”

Part H Taxation of certain entities
Look-through companies

HB 7Disposal of depreciable property

  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 an item of depreciable property that is not depreciable intangible property, and the total cost of the item when it was first acquired by the look-through company (whether or not it was at that time a look-through company) is $200,000 or less.

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

  3. The exiting owner is denied a deduction in relation to the depreciable property for the income year in which the disposal of the depreciable property 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 depreciable property.

  5. For the purposes of calculating the income tax liability of an entering owner for the part of the income year after the disposal of the depreciable property occurs and later income years (the post-disposal periods), the entering owner is treated for the post-disposal periods as if they had originally acquired and held the depreciable property, not the exiting owner.

  6. Section HB 4 overrides this section.

Notes
  • Section HB 7: 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).