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Income Tax Act 2007

Income - Recoveries

CG 2D: Remitted and other amounts: companies leaving groups

You could also call this:

“Tax consequences when companies leave groups with unpaid debts”

When you’re part of a group of companies, there are special rules about money that you owe but haven’t paid yet. These rules apply when your company (let’s call it Company C) is allowed to deduct money it owes from its taxes. If Company C uses this deduction to create a tax loss and then shares that loss with another company in the group (Company D), things can get tricky.

If Company C or Company D (or both) leave the group later, and Company C is in trouble financially (like being in liquidation or not having enough money to pay its bills), there might be consequences. If the original amount that Company C owed is still not paid when a company leaves the group, Company D might have to count that unpaid amount as income. This would happen just before the company leaves the group.

There are also rules about what happens if Company C gets money to pay off its debts within two years before leaving the group. Even if this payment helps Company C look like it can pay its bills, the tax office might still say it can’t if they think the payment wasn’t fair to other people Company C owes money to.

These rules don’t apply to certain types of financial arrangements. They also work differently with some other tax rules about company groups and tax losses. If you want to know more about those other rules, you can look at sections CG 2, FM 5(4), IC 11, and IC 12 of the tax law.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM6187273.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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CG 2C: Remitted and other amounts: companies in liquidation, or

“Tax implications for company groups when debts are cancelled during liquidation”

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CG 2E: Remitted and other amounts: income apportionment, or

“Splitting special income among company group members after shared tax losses”

Part C Income
Recoveries

CG 2DRemitted and other amounts: companies leaving groups

  1. This section applies when—

  2. a company that is part of a group of companies (company C) is allowed a deduction for an amount that it is liable to pay; and
    1. company C includes some or all of the amount of the deduction in the calculation of a net loss for a tax year; and
      1. the net loss is a tax loss component included in a tax loss of company C for the tax year under section IA 2(2) or (3) (Tax losses); and
        1. after the inclusion of the amount of the deduction in the calculation of its net loss, company C makes some or all of the tax loss available to another company in the group (company D) to subtract from its net income for a tax year; and
          1. after the tax loss is made available to company D,—
            1. either company C or company D, or both, leave the group; and
              1. at the date of the departure, company C is in liquidation, receivership, or does not satisfy the solvency test set out in section 4 of the Companies Act 1993; and
              2. the liability referred to in paragraph (a) remains unpaid at the date on which either company C or company D, or both, leaves the group.

                1. An amount equal to the amount of the unpaid liability referred to in subsection (1)(f) is income of company D.

                2. Company D is treated as deriving the income immediately before the date on which either company C or company D, or both, leaves the group.

                3. Subsection (5) applies for the purposes of subsection (1)(e)(ii) when—

                4. a transaction results in an amount being received by a creditor of company C within a period of 2 years before either company C or company D, or both, leaves the group; and
                  1. the payment of the amount reduces, in whole or in part, the liability of company C so that company C satisfies the solvency test set out in section 4 of the Companies Act 1993.

                    1. The Commissioner may treat company C as not satisfying the solvency test set out in section 4 of the Companies Act 1993 if the Commissioner considers—

                    2. the amount is paid when company C is insolvent; and
                      1. the payment has allowed the creditor to receive more towards the satisfaction of a debt owed by company C than the creditor would receive or would be likely to receive if company C were placed in liquidation on the day on which company C or company D, or both, leaves the group.

                        1. This section does not apply to a liability that is a financial arrangement, whether or not the liability has been remitted or cancelled.

                        2. This section—

                        3. overrides section CG 2:
                          1. is modified by section FM 5(4) (Liability when company leaves consolidated group):
                            1. is overridden by sections IC 11 and IC 12 (which relate to the tax losses of certain group companies) but only to the extent to which sections IC 11 and IC 12 apply to reduce a tax loss component arising in an earlier tax year that would otherwise be subject to this section.

                              Notes
                              • Section CG 2D: inserted (with effect on 22 November 2013 and applying when an event, listed in the following paragraphs, occurs after this date: (a) company A is removed from the register of companies; (b) company C is insolvent and leaves the group of companies; (c) company D leaves the group of companies), on , by section 18(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).