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Income Tax Act 2007

Taxation of certain entities - Terminating provisions

HZ 4C: Qualifying companies: transition into look-through companies

You could also call this:

“Rules for qualifying companies becoming look-through companies”

When a qualifying company becomes a look-through company for the first time, there are special rules that apply. This happens in the first or second income year starting on or after 1 April 2011. This is called the transitional year.

If you have an interest in the look-through company, you need to choose how to calculate your basis. Your basis is important for working out your deductions. You have two choices:

You can use the market value or the accounting book value of your shares at the end of the year before the transitional year.
You can pretend that the qualifying company was always a look-through company and apply all the relevant rules as if they had always existed.

If these calculations result in your basis being less than zero, it will be treated as zero instead.

The look-through company takes over all the choices and methods that the qualifying company had with Inland Revenue. After this happens, the look-through company is treated as if it doesn’t exist for tax purposes, and you as an owner are treated as if you personally made those choices and used those methods.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683723.

Topics:

Money and consumer rights > Taxes

Business > Industry rules

HZ 4B: Qualifying companies: transition into partnership, or

“How qualifying companies can become partnerships for tax purposes”

HZ 4D: Qualifying companies: transition into sole traderships, or

“How a qualifying company can become a sole tradership”

Part H Taxation of certain entities
Terminating provisions

HZ 4CQualifying companies: transition into look-through companies

This section applies when a qualifying company first becomes a look-through company for the first or second income year, whichever is relevant, that starts on or after 1 April 2011 (the transitional year).
For the purposes of applying sections HB 11 and HB 12 (which relate to look-through company deduction rules) to a person with an effective look-through interest for the look-through company for the transitional income year and later years, all of the persons who hold owner's interests must choose 1 of the 2 following methods for calculating their basis under section HB 11(3):
for calculating amounts under section HB 11(5)(a) for shares that were held at the end of the income year (the last year) before the transitional income year, they may choose to use the market value or the accounting book value of those shares as at the end of the last year. Calculations under section HB 11(7)(b) and (8)(b) are changed to account for the valuation under this paragraph; or
they may choose to apply section HB 11(3) as if the qualifying company had always been a look-through company and all relevant rules relating to look-through companies had always existed, applying those rules with any necessary modifications.

If the application of sections HB 11 and HB 12, as modified by this section, calculates an owner's basis as less than zero, then the owner's basis is treated as being zero.
The look-through company steps into the place of the qualifying company in relation to Inland Revenue Act elections and methods relating to the qualifying company.
After subsection (4) applies, section HB 1 (Look-through companies are transparent) applies, so that the elections and methods are those of an owner of an effective look-through interest for the look-through company.

Notes

Section HZ 4C: inserted, on 1 April 2011 (applying for income years beginning on or after 1 April 2011), by section 104(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
Section HZ 4C(2): amended (with effect on 1 April 2011), on 2 November 2012, by section 112(1) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
Section HZ 4C(2)(a): replaced (with effect on 1 April 2011), on 2 November 2012, by section 112(2) of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).
Section HZ 4C(4) heading: added (with effect on 1 April 2011), on 29 August 2011 (applying for income years beginning on or after 1 April 2011), by section 89(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section HZ 4C(4): added (with effect on 1 April 2011), on 29 August 2011 (applying for income years beginning on or after 1 April 2011), by section 89(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section HZ 4C(5) heading: added (with effect on 1 April 2011), on 29 August 2011 (applying for income years beginning on or after 1 April 2011), by section 89(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section HZ 4C(5): added (with effect on 1 April 2011), on 29 August 2011 (applying for income years beginning on or after 1 April 2011), by section 89(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section HZ 4C list of defined terms Inland Revenue Acts: inserted (with effect on 1 April 2011), on 29 August 2011 (applying for income years beginning on or after 1 April 2011), by section 89(2) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).