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Income Tax Act 2007

Taxation of certain entities - Trusts

HC 31B: Value transfer by deferral, or non-exercise, of right to demand payment

You could also call this:

“Delaying or not asking for payment can be seen as giving a gift”

This section talks about what happens when someone (called the creditor) helps another person (called the debtor) by giving them money or something valuable. The debtor agrees to pay it back, but doesn’t do so right away.

If the debtor doesn’t pay interest on the money they owe for a while, and the creditor doesn’t ask for the money back or waits to ask for it, it might count as giving the debtor a gift. This could be important if the creditor is a trustee or settlor of a trust.

To figure out how much of a gift the creditor has given, you need to do some maths. You calculate how much interest the debtor should have paid if they were charged the normal rate, and then subtract how much interest they actually paid. The difference is considered the gift.

The normal rate of interest can be either the rate set by the government or the rate that banks usually charge. The debtor gets to choose which one to use.

If this situation involves a trust, there are special rules in section HC 27(6) that might apply instead of these rules.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS330542.

Topics:
Money and consumer rights > Taxes
Money and consumer rights > Banking and loans
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Part H Taxation of certain entities
Trusts

HC 31BValue transfer by deferral, or non-exercise, of right to demand payment

  1. This section applies when a person (the creditor) provides financial assistance to or for the benefit of another person (the debtor) with an obligation (the debtor obligation) that the debtor could meet, if performance of the obligation were demanded immediately after the time of the provision, by paying an amount (the debt amount) and—

  2. the debtor does not pay to the creditor, for a period for which the debtor has the debtor obligation, interest on the debt amount at a rate equal to the prescribed rate of interest or the market rate; and
    1. the debtor obligation is not forgiven; and
      1. the right of the creditor to demand payment of the debt amount under the debtor obligation is not exercised or is deferred; and
        1. the non-exercise, or the deferral, results in a transfer of value by the creditor; and
          1. the transfer of value meets the requirements of—
            1. section HC 14 for the transfer of value to be a distribution made by a trustee:
              1. section HC 27(2)(b) for the creditor to be a settlor of a trust.

              2. This section does not apply to a situation in the application of section HC 27(6) to the situation.

              3. The value transferred by the creditor during a period for which the debtor obligation exists is the amount calculated for the debt amount, treated as a loan, using the formula—

                benchmark interest – interest paid.

                Where:

                • In the formula,—

                • benchmark interest is the amount of interest that would have accrued on the debt amount that is unpaid during the period if the interest had been calculated on the daily balance of the loan at a rate that is equal to whichever the debtor chooses of the prescribed rate of interest and the market rate:
                  1. interest paid is the total of—
                    1. the amount of interest that accrues on the debt amount during the period:
                      1. the amount that would have accrued as interest on the debt amount during the period if the amount had not been included in a taxable distribution to the debtor:
                        1. for a period that includes the date on which the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 receives the Royal assent (the transition date), the amount that is benchmark interest for the part of the period that precedes the transition date.

                        Notes
                        • Section HC 31B: inserted, on , by section 143 of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).