DG 11Interest expenditure: close companies

1. This section quantifies the amount of a deduction that a close company is allowed for an income year when—

2. the company has an asset to which this subpart applies; and
3. the company incurs interest expenditure for the income year.

4. The company must first determine the amount of its debt value and its asset value for the income year, and then apply either subsection (3) or subsections (4) to (6).

5. If the debt value for the income year is equal to or less than the asset value for the income year, the company is allowed a deduction for interest expenditure incurred for the income year of an amount calculated using the formula in subsection (3B).

6. The formula is—

   $interest\; expenditure\; \times \; (income-earning\; days\; +\; capital-use\; days)\; ÷\; (income-earning\; days\; +\; counted\; days).$

   Where:

7. In the formula in subsection (3B),—

8. interest expenditure is the amount of interest expenditure incurred by the company for the income year:
9. income-earning days is the number of days in the income year for which the company derives income from the use of the asset, other than exempt income, including days on which—
   1. the use of the asset is described in section DG 4(3) to (5):
   2. the asset has become unavailable for use because another person who had earlier reserved the asset for their own use, subsequently did not take advantage of that reservation:
   3. a fringe benefit tax liability arises:
10. capital-use days is the number of days in the income year on which the asset is used in such a way that the expenditure relating to the use is of a capital nature:
11. counted days is the number of days in the income year on which the asset is in use, each of which is not an income-earning day as described in paragraph (b).

12. If the debt value for the income year is more than the asset value for the income year, the company must calculate a reduced amount of interest expenditure for the income year using the formula—

    $interest\; expenditure\; \times \; company’s\; asset\; value\; ÷\; company’s\; debt\; value.$

    Where:

13. In the formula in subsection (4),—

14. interest expenditure is the total amount of interest expenditure incurred by the company for the income year:
15. company's asset value is the amount of the company's asset value for the income year:
16. company's debt value is the amount of the company's debt value for the income year.

17. The company is allowed a deduction for the income year of a portion of the reduced amount described in subsection (4),—

18. of an amount calculated using the formula in subsection (3B); and
19. treating the reduced amount as if it were the item interest expenditure in the formula.

20. The company is allowed a deduction for the amount of interest expenditure calculated under subsection (6C) to the extent to which the amount would be a deduction under Part D (Deductions) in the absence of this subpart.

21. The formula is—

    $interest\; expenditure\; -\; reduced\; amount.$

    Where:

22. In the formula in subsection (6C),—

23. interest expenditure is the amount of interest expenditure incurred by the company for the income year:
24. reduced amount is the reduced amount of interest expenditure calculated using the formula in subsection (4).

25. When subsection (3) applies for an income year, the amount that remains outstanding after subtracting the debt value for the income year from the asset value for the income year (the net asset balance), must be used under sections DG 12 to DG 14, as applicable.

26. For the purposes of this subpart, asset value means the value of the asset at the end of an income year, using—

27. for land, including an improvement to land, the amount given under subsection (8B):
28. for other property, its adjusted tax value.

29. For the purposes of subsection (8)(a), the asset value is the following amount, as applicable:

30. the amount given by the later of either—
    1. its most recent capital value or annual value as set by the relevant local authority; or
    2. its cost on acquisition or, if the transaction involves an associated person, its market value:
31. if the land or improvement to land is a leasehold estate in land, the market value of the leasehold estate which the person may establish by a valuation that is or has been made by a registered valuer no more than 3 years before the end of the income year:
32. if different activities are carried out on the land on a single record of title within the meaning of the Land Transfer Act 2017, the value applying under paragraph (a) or (b), as applicable, adjusted as follows:
    1. by multiplying the value by the percentage that the area of land that is the portion of the land used in relation to the asset to which this subpart applies bears to the total land area described in the record of title:
    2. by a valuation that is or has been made by a registered valuer no more than 3 years before the end of the income year, of the portion of land used in relation to the asset to which this subpart applies.

33. For the purposes of this subpart, debt value—

34. means the average outstanding amount that gives rise to the interest payable by the company, measured by reference to the amounts outstanding at the start of and at the end of an income year; and
35. for a person who has, in the income year, more than 1 asset to which this subpart applies, is reduced in subsection (5)(c), sections DG 12(6)(c) and DG 13(8)(c), by an amount previously taken into account under this subpart for the income year.

Notes

• Section DG 11: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 17 July 2013, by section 30(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
• Section DG 11(1)(b): replaced (with effect on 27 March 2021), on 31 March 2023, by section 42(1) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
• Section DG 11(3): replaced (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(3B) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(3B): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(3C) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(3C): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(5): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6)(a): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6)(b): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6B) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6B): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6C) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6C): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6D) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(6D): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11(8)(a): replaced (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 30 June 2014, by section 55(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 11(8B) heading: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 30 June 2014, by section 55(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 11(8B): inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 30 June 2014, by section 55(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
• Section DG 11(8B)(c): amended, on 12 November 2018, by section 250 of the Land Transfer Act 2017 (2017 No 30).
• Section DG 11(8B)(c)(i): amended, on 12 November 2018, by section 250 of the Land Transfer Act 2017 (2017 No 30).
• Section DG 11 example: replaced (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on 24 February 2016, by section 103(7) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section DG 11 list of defined terms beneficiary: repealed (with effect on 27 March 2021), on 31 March 2023, by section 42(2) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
• Section DG 11 list of defined terms disallowed residential property: repealed (with effect on 27 March 2021), on 31 March 2023, by section 42(2) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
• Section DG 11 list of defined terms interposed residential property holder: repealed (with effect on 27 March 2021), on 31 March 2023, by section 42(2) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).