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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration when anti-avoidance provision applies

EW 49B: Guarantees for associated persons

You could also call this:

“Tax rules for paying someone else's debt when you're connected to them”

When you pay money to cover someone else’s debt because you guaranteed it, and that person is connected to you, this is what happens:

The person whose debt you paid (let’s call them the debtor) is seen as if they paid that amount themselves. It’s like they used the money you gave to pay off their debt.

If you have the right to ask the debtor to pay you back, it’s treated like you gave them a loan without interest for the amount you paid.

Even though you paid the money, it’s not seen as if you spent anything yourself.

If the debtor pays you back more than what you originally paid for them, the extra money is treated in two ways:

  1. For you, it counts as income that you earned.
  2. For the debtor, they can claim it as a deduction, which means they can subtract it from their taxable income.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM7281579.

Topics:
Money and consumer rights > Taxes
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Part E Timing and quantifying rules
Financial arrangements rules: Consideration when anti-avoidance provision applies

EW 49BGuarantees for associated persons

  1. This section applies when a guarantor pays an amount under a guarantee (a guarantee payment) for an associated person’s debt (the debtor) to the debtor’s creditor.

  2. For the debtor, the amount of the guarantee payment is treated as consideration paid or payable by the debtor for the debt.

  3. If the guarantor has recourse to the debtor in relation to the guarantee payment, the guarantor is treated as providing the debtor with an interest-free loan for the amount of the guarantee payment.

  4. For the guarantor, the guarantee payment is treated as not being consideration paid or payable by the guarantor.

  5. If the debtor later repays the guarantor more than the guarantee payment, the excess paid by the debtor is—

  6. income, under section CC 3(1) (Financial arrangements), of the guarantor; and
    1. a deduction that the debtor is allowed under section DB 13(1) (Repayment of debt in certain circumstances).

      Notes
      • Section EW 49B: inserted, on (applying for the 2017–18 and later income years), by section 78(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).