Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

Taxation of certain entities - Terminating provisions

HZ 4D: Qualifying companies: transition into sole traderships

You could also call this:

“How a qualifying company can become a sole tradership”

This section explains how a qualifying company can change into a sole tradership. This change can happen in the first or second income year starting on or after 1 April 2011. Here’s how it works:

From the first day of the change, the sole tradership is treated as if it already exists and has all the assets, debts, rights, and duties of the qualifying company. The qualifying company is then ignored for tax purposes, except when needed to make this change work.

When the assets, debts, rights, and duties move to the sole tradership, it’s treated as a special kind of transfer. This means:

The move isn’t seen as a normal transfer.

The sole tradership takes over the qualifying company’s tax situation, as if it always had it.

The qualifying company no longer has a tax situation after the change starts.

Any tax account balances from the qualifying company are ignored after the change.

To make this change, the company must do these things in one income year:

Tell the tax department about the plan to change within 6 months of the start of the income year.

The sole trader must be the same person who was the only shareholder of the company.

Move all assets, debts, rights, and duties to the sole tradership, except for things that don’t fit with being a sole trader.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3683724.

Topics:
Money and consumer rights > Taxes
Business > Starting a business
Previous

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

“Rules for qualifying companies becoming look-through companies”

Next

HZ 4E: Transition out of LTC regime for Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017, or

“Rules for companies leaving the look-through company system due to 2017 law changes”

Part H Taxation of certain entities
Terminating provisions

HZ 4DQualifying companies: transition into sole traderships

  1. This section applies when a QCST transitional process is carried out for a qualifying company for the first or second income year, whichever is relevant, that starts on or after 1 April 2011 (the transitional income year).

  2. From the first day of the transitional income year to the first day of existence for the sole tradership that effectively replaces the qualifying company under a QCST transitional process, the sole tradership is treated as existing and having the assets and liabilities of the qualifying company, and associated rights and obligations, for that period. On and after the first day of the transitional year, the existence of the qualifying company is ignored for the purposes of the Inland Revenue Acts except to the extent necessary to give effect to this section.

  3. The moving to the sole tradership of the assets, liabilities, and associated rights and obligations, under a QCST transitional process is treated for the purposes of the Inland Revenue Acts as a unique form of transference for such assets, liabilities, rights, and obligations, with the following effects:

  4. the moving to the sole tradership of the assets, liabilities, and associated rights and obligations, is treated as not being a transfer of such assets, liabilities, rights, and obligations:
    1. the qualifying company has, before the first day of the transitional income year, the tax situation in relation to the assets and liabilities, and associated rights and obligations (the historical tax situation):
      1. the sole tradership is treated as stepping into the place of the qualifying company, and as having, on and after the first day of the transitional income year,—
        1. the qualifying company's historical tax situation; and
          1. the tax situation in relation to the assets and liabilities, and associated rights and obligations, that it would have if it had always had the historical tax situation:
          2. the qualifying company has no tax situation in relation to the assets and liabilities, and associated rights and obligations, on and after the first day of the transitional income year:
            1. all memorandum account balances and other tax accounting amounts for the qualifying company before the first day of the transitional income year are ignored and have no effect on and after that day (for example, the qualifying company has no effective ASC on and after the first day of the transitional income year).

              1. QCST transitional process means a process, for which all outcomes are achieved in an income year (the transitional income year), by which a company that is a qualifying company at the end of the income year before the transitional income year is transformed into a sole tradership. The process must have the following outcomes:

              2. the Commissioner receives a notice from the qualifying company before the day that is 6 months after the start of the transitional income year, stating an intention to revoke the company's qualifying company status and to complete the QCST transitional process relating to the sole tradership for the transitional income year; and
                1. the sole tradership is the same natural person who, at the end of the income year before the transitional income year, is the sole shareholder of the qualifying company; and
                  1. all assets and liabilities, and associated rights and obligations, of the qualifying company are moved to the sole tradership, excluding those that are inappropriate for a sole tradership.

                    Notes
                    • Section HZ 4D: inserted, on (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 4D(3)(b): amended, on , by section 196(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D(3)(b): amended, on , by section 196(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D(3)(c)(i): amended, on , by section 196(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D(3)(c)(ii): amended, on , by section 196(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D(3)(d): amended, on , by section 196(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D list of defined terms tax position: repealed, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                    • Section HZ 4D list of defined terms tax situation: inserted, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).