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Income Tax Act 2007

Recharacterisation of certain transactions - Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 13: Election by borrower under financial arrangement

You could also call this:

“Choosing to treat borrowed money as shares for tax purposes”

If you borrow money under a financial arrangement, you can choose to treat it differently for tax purposes. You can do this if your payment to the lender wouldn’t be recognised and you couldn’t claim it as a deduction under section FH 3.

If you make this choice, the money you borrowed will be treated as if the lender bought shares in your business instead. You need to tell the tax office about your choice and when it starts.

When your choice begins, it’s like you’re paying back all the money you borrowed. Then, it’s as if the lender is using that money (minus any tax) to buy special shares in your business that can be bought back later.

If you can no longer make this choice because you can now claim a deduction for interest payments, it’s treated as if you’re buying back those special shares. Then, it’s as if you’re borrowing that money again from the lender.

The rules about tax on payments to people outside New Zealand apply to these pretend share transactions.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65844.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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Part F Recharacterisation of certain transactions
Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 13Election by borrower under financial arrangement

  1. A person who is a borrower under a financial arrangement may make an election under this section if a payment by the person to the lender under the financial arrangement would be an unrecognised amount under section FH 3(2) and denied as a deduction under section FH 3.

  2. The result of an election by the person is that, while the person is eligible to make an election, the financial arrangement is, for all purposes of the Act, a share held by the lender in the person.

  3. The person must notify the Commissioner of the election, specifying the date on which the election is effective, which must be on or after the date of the notice.

  4. On the date on which the election is effective, the person is treated as—

  5. paying the lender under the financial arrangement the amount owing under the loan (the repayment amount); and
    1. receiving the repayment amount, reduced by any withholding tax, from the lender as the subscription for a non-participating redeemable share.

      1. When the person ceases to be eligible to make an election for the financial arrangement because a deduction would not be denied under section FH 3 for a payment of interest under the financial arrangement, the person is treated as—

      2. paying to the lender the amount owing under the loan as a payment for cancellation of a non-participating redeemable share; and
        1. receiving, as a loan under the financial arrangement, from the lender the amount referred to in paragraph (a), reduced by any withholding tax.

          1. The NRWT rules apply to the amount of the payment under subsections (4)(a) and (5)(a).

          Notes
          • Section FH 13: inserted, on , by section 35(1) (and see section 35(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).