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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration treated as paid by person

EW 46C: Consideration when debt remitted within economic group

You could also call this:

“Rules for handling cancelled debts between related businesses”

You need to know about a law that deals with debt within related business groups. Here’s what it says:

If a debt is cancelled within a group of related companies, it’s treated in a special way for tax purposes. This applies when:

  • The lender and borrower are in the same fully-owned group of companies
  • The borrower is a New Zealand company or has a fixed business in New Zealand
  • The lender can’t claim a tax deduction for the cancelled debt

The law sets out how to calculate the amount of debt that’s considered “paid” when it’s cancelled. This depends on the ownership relationship between the lender and borrower.

There are special rules for situations where:

  • The lender isn’t in the same group as the borrower but owns part of it
  • The borrower is a partnership or a look-through company
  • The lenders are a group of related individuals

The law also explains how to handle cases where the lender has already recorded a loss for the debt in their accounts.

This provision aims to prevent companies from getting unfair tax advantages by cancelling debts within their corporate group.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM7217226.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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EW 46B: Consideration when party changes from fair value method, or

“How to calculate value when switching from fair value method in financial arrangements”

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EW 46D: Consideration when insolvent company’s debt repaid with consideration received for issuing shares, or

“How insolvent companies repay debt by issuing shares”

Part E Timing and quantifying rules
Financial arrangements rules: Consideration treated as paid by person

EW 46CConsideration when debt remitted within economic group

  1. This section applies to the extent to which an amount of debt is remitted and—

  2. the creditor is a member of the same wholly-owned group of companies as the debtor and—
    1. the debtor is a New Zealand resident company:
      1. the debtor carries on a business in New Zealand through a fixed establishment in New Zealand and the creditor or an associated person cannot deduct, under this Act or a taxation law of a country or territory outside New Zealand, an amount in relation to the remission against income:
      2. the creditor is a member of the same wholly-owned group of companies as the debtor and, for the debtor, a group of persons who are New Zealand resident companies (the NZ group) hold, before section YC 4 (Look-through rule for corporate shareholders) is applied to the NZ group in relation to their interests,—
        1. common voting interests that add up to 100%; and
          1. if a market value circumstance exists for a company that is part of a group of companies to which the debtor belongs, common market value interests that add up to 100%:
          2. if the debtor is a company, the creditor is not a member of the same wholly-owned group of companies as the debtor and the creditor has ownership interests or, as applicable, market value interests in the debtor:
            1. if the debtor is a partnership, the creditor has a partner’s interest in the income of the debtor:
              1. if the debtor is a look-through company, the creditor has an effective look-through interest in the debtor.

                1. For the purposes of this section,—

                2. the means by which an amount of debt is remitted is immaterial:
                  1. the debt includes an amount accrued and unpaid at the time of the remission:
                    1. a group of natural persons (the single creditor group) who are creditors or who have interests in the debtor are treated as one creditor holding the total debts and interests of the single creditor group, if each person has natural love and affection for the others. However, a trust may join the single creditor group if—
                      1. the trust was established mainly to benefit a natural person for whom each person of the single creditor group has natural love and affection; and
                        1. the amount given by dividing the amount of the trust’s debt that is remitted for the debtor by the trust’s proportional ownership ratio is less than the amount given by dividing the amount of the single creditor group’s debt that is remitted for the debtor by the group’s proportional ownership ratio (for example: $100 remitted by the trust ÷ 40% ownership is greater than $100 remitted by the group ÷ 50% ownership, so the trust may not join the group, even if the required natural love and affection exists):
                        2. a group of persons (the single corporate creditor group) that are creditors or that have interests in the debtor are treated as 1 creditor holding the total debts and interests of the single corporate creditor group, if—
                          1. each person is a member of the same wholly-owned group of companies; and
                            1. the debtor is not a member of the wholly-owned group of companies.

                            2. This section does not apply if—

                            3. the creditor and debtor are members of the same wholly-owned group of companies; and
                              1. the creditor is a non-resident; and
                                1. the debt has been held by a person that is not a member of the wholly-owned group of companies.

                                  1. The debtor is treated as having paid the amount of debt on the date on which it is remitted,—

                                  2. if the relevant debt, creditor, and debtor are described in subsection (1)(a) or (b):
                                    1. to the extent to which the proportional debt ratio for the amount equals the proportional ownership ratio.

                                      1. Unless subsection (5C) applies, the creditor is treated as having been paid the amount of debt on the date on which it is remitted,—

                                      2. if the relevant debt, creditor, and debtor are described in subsection (1)(a) or (b):
                                        1. to the extent to which the proportional debt ratio for the amount equals the proportional ownership ratio.

                                          1. Subsection (5C) applies when—

                                          2. the relevant debt, creditor, and debtor are described in subsection (1)(a) or (b); and
                                            1. the creditor is a person to which section EW 41 applies in relation to the relevant debt.

                                              1. The creditor is treated as having been paid, on the date on which the amount of debt is remitted, the lesser of the following 2 amounts, or the first amount if they are the same:

                                              2. the amount of debt:
                                                1. the amount calculated by subtracting, from the amount of debt, any impairment of the relevant debt under generally accepted accounting practice at the time the creditor is treated under section EW 41(2) as having acquired their accrued entitlement to receive consideration in relation to the relevant debt.

                                                  1. For the purposes of this section,—

                                                    nominal shares are shares held by the trustee of an exempt ESS, or employees or former employees of the debtor, if the total of those shares represent voting interests in the debtor that add up to no more than 3%, or, as applicable, market value interests in the company that add up to no more than 3%

                                                      proportional debt ratio means, for a creditor and an amount of debt, the percentage that the creditor’s amount bears to the total amounts of debt to which this section applies remitted at the time the creditor’s debt is remitted

                                                        proportional ownership ratio means the creditor’s percentage of the ownership interests or, as applicable, market value interests, total partner’s interests, or total effective look-through interests for the debtor, ignoring nominal shares.

                                                        Notes
                                                        • Section EW 46C: inserted (with effect on 1 April 2008), on , by section 75(1) (and see section 75(2)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                        • Section EW 46C heading: amended (with effect on 1 April 2008), on , by section 97(1) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(1): amended (with effect on 1 April 2008), on , by section 97(2) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(1)(a): replaced (with effect on 1 April 2019), on , by section 97(3) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(2)(a): amended (with effect on 1 April 2008), on , by section 97(4) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(2)(ab): inserted, on , by section 76 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                                        • Section EW 46C(2)(ab): amended (with effect on 1 April 2008), on , by section 97(5) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(2)(b)(ii): amended (with effect on 1 April 2008), on , by section 97(6) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(2)(b)(ii): amended (with effect on 1 April 2008), on , by section 97(7) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(2)(b)(ii): amended (with effect on 1 April 2008), on , by section 97(8) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(4): amended (with effect on 1 April 2008), on , by section 97(9) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(4): amended (with effect on 1 April 2008), on , by section 181(1)(a) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(4)(a): amended (with effect on 1 April 2008), on , by section 181(1)(b) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(4)(b): amended (with effect on 1 April 2008), on , by section 181(1)(c) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(5): amended, on , by section 65(1) (and see section 65(4) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                                        • Section EW 46C(5): amended (with effect on 1 April 2008), on , by section 97(10) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C(5): amended (with effect on 1 April 2008), on , by section 181(2)(a) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(5)(a): amended (with effect on 1 April 2008), on , by section 181(2)(b) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(5)(b): amended (with effect on 1 April 2008), on , by section 181(2)(c) (and see section 181(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                        • Section EW 46C(5B) heading: inserted, on , by section 65(2) (and see section 65(4) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                                        • Section EW 46C(5B): inserted, on , by section 65(2) (and see section 65(4) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                                        • Section EW 46C(5C) heading: inserted, on , by section 65(2) (and see section 65(4) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                                        • Section EW 46C(5C): inserted, on , by section 65(2) (and see section 65(4) for application) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                                        • Section EW 46C(6) nominal shares: amended (with effect on 29 March 2018), on , by section 56(1) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                                                        • Section EW 46C(6) proportional debt ratio: amended (with effect on 1 April 2008), on , by section 97(11) (and see section 97(12) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                                        • Section EW 46C list of defined terms exempt ESS: inserted (with effect on 29 March 2018), on , by section 56(2) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                                                        • Section EW 46C list of defined terms generally accepted accounting practice: inserted, on , by section 65(3) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).