FH 4Receipts under financial instruments producing deduction without income

1. This section applies when a person (the payee) receives a payment under a financial instrument (the payment instrument) of an amount and—

2. the payment would not give rise to assessable income of the payee in the absence of this section and section FH 6 or gives rise to assessable income of the payee that would not be allocated to a period meeting the requirements of subsection (7); and
3. the taxation law of a country or territory outside New Zealand (the payer jurisdiction) treats the payment as being made under the payment instrument by a person or other entity (the payer); and
4. the payer jurisdiction allows the payer or other person or entity to deduct the amount from income or allows an equivalent tax relief for the payment; and
5. the payer jurisdiction does not have hybrid mismatch legislation corresponding to section FH 3 and applying to the payment; and
6. the payment instrument is or is part of a structured arrangement or the payer is related to the payee when the expenditure is incurred; and
7. the payment meets the requirements of subsection (2) or (3).

8. A payment received by the payee meets the requirements of this subsection if—

9. an amount of the payment does not give rise to assessable income of the payee; and
10. the amount would give rise to assessable income of the payee if the classification of the payment or payment instrument were varied.

11. A payment received by the payee under a financial instrument meets the requirements of this subsection if—

12. the payment gives rise to assessable income of the payee that, in the absence of this section, would be allocated to a period that does not meet the requirements of subsection (7); and
13. the duration of the financial instrument, including extensions contemplated by the financial instrument, may be more than 3 years.

14. The payee derives assessable income from the payment—

15. equal to the amount that would be assessable income of the payee if the classification of the payment or payment instrument were varied, for a payment meeting the requirements of subsection (2):
16. allocated under subsection (6).

17. If the payment received by the payee is a replacement payment under a returning share transfer, the amount of an imputation credit attached to the replacement payment is not included in the assessable income under subsection (4) and is not available as a tax credit under section LE 1 (Tax credits for imputation credits).

18. The assessable income under subsection (4) is allocated to the income year in which—

19. income from the payment would be derived if the classification of the payment or payment instrument were varied, for a payment meeting the requirements of subsection (2):
20. the deduction or tax relief referred to in subsection (1)(c) is allowed, for a payment meeting the requirements of subsection (3).

21. The period to which an amount of income is allocated meets the requirements of this subsection if the income is, or is reasonably expected to be, derived in an accounting period beginning within 24 months of the end of the accounting period to which a deduction or tax credit of the payer for the incurred expenditure is attributed.

Notes

• Section FH 4: inserted, on 1 July 2018, by section 35(1) (and see section 35(2) and (3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
• Section FH 4(6)(b): amended (with effect on 1 July 2018), on 18 March 2019, by section 196(1) (and see section 196(2) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).