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Income Tax Act 2007

Recharacterisation of certain transactions - Interest apportionment on thin capitalisation

FE 12B: Calculations for group for test and apportionment using interest-income ratio

You could also call this:

“How to calculate group interest deductions and income for tax purposes”

This section explains how to calculate certain amounts for a group of companies in New Zealand. These calculations are used to figure out how much interest the group can deduct from their taxes and how much of their income is from interest.

When you’re doing these calculations, you need to follow the rules that accountants use when they combine the financial information of different companies in a group. This helps to remove any transactions or money that just moves between companies in the same group.

If a company in the group isn’t based in New Zealand, you only include their financial information if it’s related to business they do in New Zealand through a permanent office, or if it’s income earned in New Zealand that they have to pay New Zealand tax on.

These rules help make sure that companies are paying the right amount of tax, especially when they’re part of a larger group or have operations in different countries.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM4469891.

Topics:
Money and consumer rights > Taxes
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Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation

FE 12BCalculations for group for test and apportionment using interest-income ratio

  1. The rules in this section apply to the calculation, for an entity's New Zealand group or worldwide group, of the following amounts:

  2. deductions for interest allowed to the group under sections DB 6 to DB 9 (which relate to deductions for interest), for the purposes of section FE 5(1BB):
    1. the income of the group that is interest, for the purposes of section FE 5(1BB):
      1. the items in the formula for adjusted net profit in section FE 5(1BC):
        1. the items in the formula for interest-income ratio in section FE 5(1E).

          1. An amount calculated under these rules for an entity's group must be calculated under generally accepted accounting practice for the consolidation of companies for the purposes of eliminating intra-group income, expenses, transactions, and balances.

          2. If a member of a New Zealand group is not resident in New Zealand, the amounts for the member are not included in a consolidation except to the extent that the amounts relate to—

          3. the carrying on of business in New Zealand through a fixed establishment in New Zealand:
            1. the derivation of income, other than non-resident passive income, that has a source in New Zealand and for which relief from New Zealand tax under a double tax agreement is unavailable.

              Notes
              • Section FE 12B: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on , by section 55(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
              • Section FE 12B(3)(b): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 55(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
              • Section FE 12B list of defined terms non-resident passive income: inserted (with effect on 1 July 2011), on , by section 55(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).