Plain language law

New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 6B: Alternative apportionment of interest by some excess debt entities

You could also call this:

“How some companies split their interest costs for tax purposes”

If you are a company or person required to split up your interest costs for a year, this law applies to you. It explains how to work out an amount of income from New Zealand for that year.

To find this income amount, you need to use a special math formula. The formula uses your net interest, which is the money you can take off your taxes for interest minus any money you get from lending to certain people. It also uses something called the NZ group ratio, which is worked out in another part of the law. The last part of the formula uses a threshold ratio.

The threshold ratio is the smaller of two numbers. It’s either 50% or 110% of a worldwide group ratio. This worldwide ratio is also worked out in another part of the law.

When you use this formula, you’ll get an amount that counts as income from New Zealand. This is important for your taxes.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM4469875.

Topics:

Money and consumer rights > Taxes

FE 6: Apportionment of interest by excess debt entity, or

“How to calculate and report income from interest expenses for certain entities”

FE 7: Apportionment of interest by reporting bank, or

“How reporting banks calculate extra income when their equity is below the threshold”

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 6BAlternative apportionment of interest by some excess debt entities

This section applies to a company or person that is required by section FE 5(1D) to apportion its interest expenditure for an income year under this section.
The company or person is treated under section CH 9 (Interest apportionment: excess debt entity) as deriving from New Zealand in the income year an amount of income calculated for the income year using the formula—
$net interest × (NZ group ratio − threshold ratio) ÷ NZ group ratio.$

Where:
In the formula,—
net interest is the deductions for interest allowed to the company or person under sections DB 6 to DB 9 (which relate to deductions for interest) from a financial arrangement providing funds to the company or person, reduced by the income of the company or person from a financial arrangement on arm's-length terms providing funds to a person who meets the requirements of section FE 13(3):
NZ group ratio is the interest-income ratio given by section FE 5(1E) for the New Zealand group of the company or person:
threshold ratio is the lesser of—
1. 50%:
2. 110% of the interest-income ratio given by section FE 5(1E) for the worldwide group of the company or person.

Notes

Section FE 6B: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 54(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
Section FE 6B(3)(a): amended (with effect on 1 July 2009), on 2 November 2012, by section 68 of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (2012 No 88).