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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:

"What happens when a company forgives a debt within its group"

Illustration for Income Tax Act 2007

When a debt is forgiven within a group of companies, this law applies. You need to know if the company that lent the money and the company that borrowed the money are part of the same group. The law says the borrower is treated as having paid the debt on the day it was forgiven. If the lender and borrower are in the same group, the law does not apply if the lender is not a New Zealand resident. The law also does not apply if someone outside the group used to own the debt. The law explains what a "proportional debt ratio" and "proportional ownership ratio" are. These are used to work out how much of the debt is forgiven. You can read more about this in the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 and the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022. The law says the borrower and lender are treated as having paid and received the debt. This happens when the debt is forgiven and the borrower and lender meet certain conditions. You can find more information about this in section YC 4 of the Income Tax Act 2007.

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

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Topics:
Money and consumer rights > TaxesBusiness > Industry rules
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"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 ETiming 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. 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. 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 (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(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).