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Income Tax Act 2007

Deductions - Expenditure related to use of certain assets

DG 18: Quarantined expenditure: group companies and shareholders

You could also call this:

“Rules for handling limited expenses in company groups and for shareholders”

If you have some expenses that are limited by certain rules, this part of the law explains how to handle them. It applies when you’re in a group of companies or you’re a shareholder.

First, the law looks at all the companies in your group. Then, it looks at the shareholders, starting with those who own shares in the main company or a related company. It keeps going through levels of shareholders until there’s no one left to check.

You need to work out your ‘excess expenditure’ for the year. To do this, you add up all the expenses that were limited by the rules, plus any leftover expenses from previous years. Then you subtract something called the ‘outstanding profit balance’. This balance is different depending on whether you’re a company or a shareholder.

If your excess expenditure is more than zero, you can’t claim it as a deduction for that year. It gets ‘quarantined’, which means you might be able to use it in future years.

Every time you do this calculation, you need to reduce the outstanding profit balance by the amount of any deduction you’ve already counted. If the outstanding profit balance is bigger than your expenses, your excess expenditure is treated as zero.

Remember, this is just a simple explanation of the law. If you need to use these rules, you might want to ask for help from someone who knows a lot about tax.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM5494576.

Topics:

Money and consumer rights > Taxes

DG 17: Allocation of amounts quarantined under section DG 16, or

“How to use previously set-aside money for tax deductions on assets”

DG 19: Allocation of amounts quarantined under section DG 18, or

“Using previously set-aside money for expenses based on current year's profit”

Part D Deductions
Expenditure related to use of certain assets

DG 18Quarantined expenditure: group companies and shareholders

This section applies when—
a person incurs expenditure for an income year for which they are allowed a deduction that is limited under 1 or more of sections DG 12 to DG 14; and
the income year is an income year in which section DG 16(1)(b) applies.

The first application of this section is to every group company B in sequence until no other group companies exist to which this subsection applies.
The second application of this section is sequentially to—
first, 1 or more of the following persons, none of which is a company referred to in subsection (2):
1. a person who is a shareholder in company A:
2. a person who is a shareholder in a company that is part of the same group of companies as company A and has a voting interest in company A; and
secondly, a person who is a shareholder in a company referred to in paragraph (a); and
so on, until no other persons exist to which this subsection applies.

The amount of the person's excess expenditure for the income year is calculated using the formula—
$expenditure − outstanding profit balance.$

Where:
In the formula,—
expenditure is the total of the following amounts:
1. the total amount of deductions that the person is allowed for the income year under sections DG 12 to DG 14, as applicable and after any necessary apportionment; and
2. an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:
outstanding profit balance,—
1. for company B, is the amount of the outstanding profit balance referred to in section DG 16(5):
2. for a shareholder, is the amount that is the person's share of the outstanding profit balance referred to in section DG 16(5), calculated using the formula in section DG 13(3), treating the outstanding profit balance as if it were the net asset balance.

The excess expenditure calculated under subsection (4) is either quarantined or remains quarantined, as applicable, and is denied as a deduction for the income year.
For the purposes of subsections (4) and (5)(b), the amount that is the outstanding profit balance must be recalculated on each application, being reduced by an amount equal to the amount of any deduction counted.
For the purposes of the formula in subsection (4), if the amount of the outstanding profit balance for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

Notes

Section DG 18: 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 18 example: amended (with effect on 1 April 2013), on 30 June 2014, by section 59 of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).