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Income Tax Act 2007

Taxation of certain entities - Look-through companies

HB 9: Disposal of short-term agreements for sale and purchase

You could also call this:

“Rules for selling or buying short-term agreements in a look-through company”

When you sell some or all of your ownership in a look-through company, and that ownership includes a short-term agreement for sale and purchase, special rules apply. The money you get for the short-term agreement is not counted as income for you. You can’t claim any deductions for the short-term agreement if the new owner is allowed to claim deductions because of this rule.

If you’re buying into the company, you can’t claim a deduction for the money you pay for the short-term agreement. However, after you buy it, you’re treated as if you had owned the short-term agreement from the beginning. This affects how your income tax is calculated for the rest of the tax year and future years.

It’s important to know that section HB 4 can override these rules.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683721.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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Part H Taxation of certain entities
Look-through companies

HB 9Disposal of short-term agreements for sale and purchase

  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 a short-term agreement for sale and purchase.

  2. The amount of consideration paid or payable to the exiting owner for the short-term agreement for sale and purchase is excluded income of the exiting owner.

  3. The exiting owner is denied a deduction in relation to the short-term agreement for sale and purchase, 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 short-term agreement for sale and purchase.

  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 short-term agreement for sale and purchase 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 short-term agreement for sale and purchase, not the exiting owner.

  6. Section HB 4 overrides this section.

Notes
  • Section HB 9: 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).