Hon Peter Dunne
Minister of Revenue
Tax law change for finance company workouts
The Cabinet has agreed in principle to make a law change to prevent unanticipated tax liabilities arising for troubled finance companies and certain other debtors that enter into workout agreements with their creditors, Finance Minister Bill English and Revenue Minister Peter Dunne announced today.
"An unanticipated technical consequence of changes last year to the tax rules on returning income and expenditure from financial arrangements is that companies which enter into workout arrangements with creditors can find themselves facing an immediate, one-off tax payment," Mr English and Mr Dunne said.
"In these difficult financial times, it is especially important that the tax rules are not an impediment to debtors and creditors establishing successful workout agreements. These agreements can often be preferable to the alternatives of the company being put into receivership or being liquidated.
"The fact that the new tax liability sometimes needs to be paid in cash immediately could seriously affect the likelihood of a workout being successful.
"The tax problem is that when a workout occurs, frequently debtors that use International Financial Reporting Standards for financial reporting purposes find that their liabilities are revalued. This revaluation creates income for accounting purposes, thus giving rise to the unexpected increase in tax liability.
"Therefore the government will introduce a technical tax change to allow affected debtors to use yield-to-maturity calculations that are based on actual and expected cash flows on those liabilities amended by the workout.
"The change will be incorporated into a taxation bill as soon as possible. In the meantime our tax policy officials will undertake limited consultation with professional groups and other stakeholders on the details of the proposed legislation. Once enacted, the change will be effective from the beginning of the 2008–09 income year," the Ministers said.
Media contact: Bryan McDaniel, 021 228 0747