Ngā ture whakahaupū rahirahi Thin capitalisation rules

1

Certain non-debt liabilities are now included in the calculation of the debt percentage of the group (reducing the total assets). Deferred tax liabilities are included in non-debt liabilities, but there are carve outs. Determining which deferred tax liabilities should be included or excluded may be complex and care is required.

2

Taxpayers are able to use net current value instead of the value stated in their financial statements to calculate total assets. There is now a requirement that the valuation supporting the net current value should be prepared either by:

• an independent person who is an expert in the valuation of such assets
• using a methodology, assumptions and data approved by an expert.

Despite having a valuation, there remains an overarching requirement that the net current value should also be calculated under generally accepted accounting practice. Care should be taken to ensure that the valuation does not capture any value attributed to assets that cannot be recognised for accounting purposes, for example, internally generated goodwill.

3

A new anti-avoidance rule applies when a taxpayer substantially repays a loan just before the end of a year to circumvent the measurement date rules.

1

Debts and assets must be valued in New Zealand dollars for the safe-harbour calculation. Unexpected foreign exchange fluctuations have the potential to cause unanticipated breaches of the safe-harbour threshold. Currency conversions are permissible at the spot rate on your measurement date(s) or at the forward rate applicable on the first day of the year. These options and exchange fluctuations need to be incorporated into your regular reviews.

2

In a number of circumstances, the valuation of a financial arrangement for tax purposes can vary significantly from the value of debt recorded for the instrument in your financial statements. It's important that you understand the implications of the relevant tax rules on your financial arrangements.

3

Assets are valued by reference to generally accepted accounting practice. Companies adopt accounting policy changes for a wide range of reasons and often these changes have no tax impact. However, where your debt/asset ratio sits near the safe-harbour threshold, it's important that the personnel responsible for tax compliance keep abreast of accounting policy changes, especially those relating to asset valuations. Thin capitalisation calculations based solely on management accounts will not be sufficient.

4

International Financial Reporting Standards (IFRS) provide additional safe-harbour headroom for some taxpayers where the revaluation of assets is permitted. For others, the group debt percentage may be adversely impacted through asset impairment adjustments (for example, intangible property impairments). To the extent that taxpayers opt into the IFRS revaluation model on the upward market, subsequent market devaluation of assets could result in unanticipated breaches of the safe-harbour threshold. Be wary of any creative accounting solutions, especially in respect of intangibles.

5

From the 2016 income year, increases in asset values will be ignored if they are the result of transfers between associated persons. Exceptions apply if the increase would be allowed under accounting standards in the absence of the transfer or if the transfer relates to a wider transfer involving a non-associated person.

6

The thin capitalisation rules require consistent treatment for certain elections, for example, the controlling interests threshold for grouping purposes election and enlarged group election. It's important that you are aware of previous practices and elections made, particularly where there has been a change in personnel preparing the calculations. Certain elections have to be made by providing a notice with your tax return.

7

Consideration must also be given to the impact of any movements in the group structure during the year.

8

Non-resident withholding tax still applies to interest paid, even if a deduction is not available under the thin capitalisation rules.

9

Taxpayers that have an interest in a controlled foreign company (CFC) should exclude that investment from total assets in the debt percentage calculation. Care should be taken if consolidated accounts are used to prepare the thin capitalisation calculations so as to carve out the consolidated CFC assets and liabilities.

10

From the 2016 income year, the thin capitalisation rules apply when non-residents who are acting together own 50% or more of a New Zealand company. They have also been extended to cover all trusts that have been majority settled by non-residents as well as all companies controlled by the trustees of such trusts.