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Income Tax Act 2007

Avoidance and non-market transactions - Market value substituted

GC 16: Credit rating of borrower: other than insuring or lending person

You could also call this:

“Rules for determining a borrower's credit rating for loans, excluding insurers and lenders”

This section explains how to determine a borrower’s credit rating for a loan when they are not an insuring or lending person. The rules apply to loans made on or after 1 July 2018.

You have a default credit rating if you don’t choose a different option or aren’t required to use a specific rating. You might have to use a restricted credit rating if you’re controlled by a group of non-resident people who don’t own most of you, and you have a lot of debt from related overseas parties.

If you’re not controlled by such a group, or if someone in the group owns most of you, you might need to use a group credit rating. This depends on how much debt you have and how it compares to your worldwide group’s debt.

You can choose to use an optional credit rating based on your existing debt that isn’t from related parties. This is limited to four times the amount of that debt.

The section also explains when you need to calculate these ratings and how to do it. It gives details on what each type of credit rating should be, including using ratings from approved agencies or comparing your debt to certain percentages.

If you’re part of a worldwide group, your credit rating might be based on the member of your group with the most debt, but it could be lowered by one or two levels depending on their rating.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS66326.

Topics:
Money and consumer rights > Banking and loans
Money and consumer rights > Taxes
Business > Industry rules
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GC 15: Aspects of loan adjusted for application of sections, or

“Rules for adjusting international company loans for tax purposes”

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GC 17: Credit rating of borrower: insuring or lending person, or

“How to determine a borrower's credit rating for overseas-connected loans”

Part G Avoidance and non-market transactions
Market value substituted

GC 16Credit rating of borrower: other than insuring or lending person

  1. For the purposes of sections GC 7 to GC 14, a borrower that is not referred to as an insuring or lending person in section GC 15(2) has a long-term issuer credit rating for a loan given by this section.

  2. A borrower has for a loan the default credit rating given by subsection (8) if, on the most recent calculation date given for the loan by subsection (6), the borrower—

  3. does not elect to use a credit rating given by 1 of subsections (9) to (11) for the loan, in the first return of income that includes the loan; and
    1. is not required to use a credit rating given by subsection (9) or (10).

      1. A borrower has the restricted credit rating given by subsection (9) if the borrower, or a non-resident that controls the borrower and has no other business activity, is controlled by a group of persons (a co-ordinated group) that is a non-resident owning body or is a group of persons that act in concert and are each described in section FE 2(1)(a) to (db) (When this subpart applies) and—

      2. on the most recent calculation date given for the loan by subsection (6) (the latest calculation date), the co-ordinated group does not include a person who has an ownership interest in the borrower, determined under sections FE 38 to FE 41 (which give the measurement of ownership interests in companies), of 50% or more; and
        1. the borrower has debt under cross-border related borrowings including the loan, of $10 million or more; and
          1. the borrower’s New Zealand group under subpart FE (Interest apportionment on thin capitalisation) has a debt percentage under section FE 12(3) (Calculation of debt percentages) of 40% or more or has a debt percentage equal to zero, or, for each lender on the latest calculation date,—
            1. there is no ultimate owner having an ownership interest in the lender, determined under sections FE 38 to FE 41, of 50% or more that is resident in the same country or territory as the lender; and
              1. under the tax law of the country or territory in which the lender is resident, income from the borrower’s cross-border related borrowings is, and would be for a company having the usual tax status of a company, subject to taxation at a rate of less than 15%; and
              2. the borrower does not elect to use the optional credit rating given by subsection (11) for the loan, in the first return of income that includes the loan.

                1. A borrower has the group credit rating given by subsection (10) if the borrower is not controlled by a co-ordinated group referred to in subsection (3) or, on the most recent calculation date given for the loan by subsection (6) (the latest calculation date), is controlled by a co-ordinated group that includes a person who has an ownership interest in the borrower, determined under sections FE 38 to FE 41, of 50% or more, and—

                2. the borrower has debt under cross-border related borrowings including the loan, of $10 million or more; and
                  1. the borrower’s New Zealand group under subpart FE has a debt percentage under section FE 12(3) that is 40% or more, or has a debt percentage equal to zero, and the borrower does not show that the debt percentage is less than 110% of the debt percentage of the borrower’s worldwide group under subpart FE, or, for each lender on the latest calculation date,—
                    1. there is no ultimate owner having an ownership interest in the lender, determined under sections FE 38 to FE 41, of 50% or more that is resident in the same country or territory as the lender; and
                      1. under the tax law of the country or territory in which the lender is resident, income from the borrower’s cross-border related borrowings is, and would be for a company having the usual tax status of a company, subject to taxation at a rate of less than 15%; and
                      2. the borrower does not elect to use the optional credit rating given by subsection (11), for the loan, in the first return of income that includes the loan.

                        1. A borrower has for a loan the optional credit rating given by subsection (11) if the borrower chooses to use the rate given by that subsection in the first return of income that includes the loan and uses the rate for an amount of related-party debt that is less than or equal to 4 times the total value of the long-term senior debt, that is not related-party debt, for which the borrower or a member of the borrower’s New Zealand group has the credit rating.

                        2. A calculation date under subsections (2) to (4) for a borrower for a loan is a date—

                        3. that is the day before the first income year of the borrower beginning on or after 1 July 2018, if the borrower enters the loan before that income year and does not use an earlier date under paragraph (d):
                          1. that is the day on which the borrower enters the loan, if that day is on or after the beginning of the first income year of the borrower beginning on or after 1 July 2018:
                            1. on or after the beginning of the first income year of the borrower beginning on or after 1 July 2018, on which the loan is renewed, extended, or renegotiated:
                              1. that is the last day before 1 July 2018 on which the loan is entered, renewed, extended, or renegotiated, if the borrower treats the date as a calculation date in the return of income provided for the first income year beginning on or after 1 July 2018.

                                1. If a calculation date under subsection (6) is not a measurement date under section FE 8 (Measurement dates) for which the borrower measures the amounts of total group debt and total group assets, and follows a measurement date for which the borrower has made such measurements, the debt percentage may be calculated by making appropriate adjustments to the debt percentage calculated for the most recent measurement date.

                                2. The credit rating of a borrower under this subsection is the credit rating that the borrower has for long-term senior unsecured debt or, if the borrower does not have such a credit rating, the credit rating for long-term senior unsecured debt that the borrower would have under section GC 13 in the absence of this section and section GC 15.

                                3. The credit rating of a borrower under this subsection is the higher of—

                                4. BBB−, or an equivalent rating, given for the borrower by a rating agency approved by the Reserve Bank of New Zealand under section 86 of the Non-bank Deposit Takers Act 2013:
                                  1. the credit rating that the borrower would have if the borrower’s New Zealand group under subpart FE had a debt percentage equal to the lesser of 40% and the debt percentage of the New Zealand group.

                                    1. The credit rating of a borrower under this subsection is the higher of—

                                    2. the credit rating, for debt that is long-term senior unsecured debt and not related-party debt or between associated non-residents, of the member, of the borrower’s worldwide group under subpart FE, that has the most such debt, reduced by,—
                                      1. if the member has a credit rating lower than BBB+, the division (the notch) that is the smallest division within the credit rating category or is the division between credit rating categories:
                                        1. if the member has a credit rating of BBB+ or higher, 2 notches:
                                        2. if no member of the borrower’s worldwide group under subpart FE has long-term senior unsecured debt, the credit rating of the member of the borrower’s worldwide group with the highest credit rating, which may be determined without considering the credit ratings of members that are reasonably considered to be unlikely to have the highest credit rating, reduced by,—
                                          1. if the member has a credit rating lower than BBB+, 1 notch:
                                            1. if the member has a credit rating of BBB+ or higher, 2 notches:
                                            2. the credit rating for long-term senior unsecured debt that the borrower would have under section GC 13 in the absence of this section and section GC 15.

                                              1. The credit rating of a borrower under this subsection is—

                                              2. the credit rating of the borrower, or a member of the borrower’s New Zealand group, for existing long-term senior debt that is not related-party debt, if the borrower or member has such a credit rating; or
                                                1. the credit rating corresponding to the rate of interest incurred by the borrower, or a member of the borrower’s New Zealand group, for existing long-term senior debt that is not related-party debt.

                                                  Notes
                                                  • Section GC 16: inserted, on , by section 42(1) (and see section 42(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                  • Section GC 16(3)(c): amended (with effect on 1 July 2018), on , by section 81(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                  • Section GC 16(4)(b): amended (with effect on 1 July 2018), on , by section 81(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                  • Section GC 16(5): amended (with effect on 1 July 2018), on , by section 130(1) (and see section 130(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                                  • Section GC 16(10)(a): amended (with effect on 1 July 2018), on , by section 206(1) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                  • Section GC 16(10)(ab): replaced (with effect on 1 July 2018), on , by section 81(3) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                                  • Section GC 16(11)(a): amended (with effect on 1 July 2018), on , by section 206(3)(a) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                  • Section GC 16(11)(b): amended (with effect on 1 July 2018), on , by section 206(3)(b) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).