Revenue Minister Todd McClay on September 3 announced that the New Zealand goverment will introduce tax legislation early next year providing that there will be no income to a debtor upon the cancellation of a debt owed to a related party. The proposal would apply retroactively from April 1, 2006.
“The government is determined to ensure fairness in the tax system,” McClay said.
The proposed changes, which were the subject of a February public consultation, would apply where the debtor and creditor are members of the same wholly owned group, or if the debtor is a company or partnership and certain criteria are met. The debtor and creditor must both be subject to New Zealand tax.
Under current law, when related party debt is forgiven by a creditor it becomes taxable income to debtor but is not deductible by the creditor.
Taxpayers have been planning around this result, issuing equity to the debtor company rather than forgiving a debt; however, recent Inland Revenue technical interpretation QB 15/01 has created a need to revisit the debt remission rules. The technical interpretation provides that when related party debt is capitalized it sometimes should be considered tax avoidance which should be reassessed as a debt remission.
“When the two parties are within the same wholly-owned group, the wealth of the group as a whole is not altered by the debt remission so clearly the tax outcome should reflect that. It should not result in net taxable income,” said McClay.
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