Chapter 6 - Administration and compliance

Tax returns

6.1 Section 42 of the Tax Administration Act 1994 sets out the return filing obligations of partnerships and partners. Partners are required to complete a joint income return for the partnership income and expenditure, and separate individual returns which include amounts allocated to the partner as a member of the partnership. Officials propose to follow a similar approach for qualifying companies.

6.2 A qualifying company under the new rules would not file a company tax return (IR4). This is because a qualifying company’s income and losses would not be retained at the company level but would be passed through to shareholders. Unlike ordinary companies, therefore, qualifying companies would have no tax payable and, for example, no imputation credit account to maintain. Instead, a qualifying company would be required, under section 42, to complete a partnership income tax return (IR7) which is appropriate for flow-through taxation. An IR7 form will include the details of each shareholder and the amounts allocated to each for the relevant income year. A qualifying company would still use the same “tax file number” (IRD number) while using an IR7 form, and would be treated as an entity for return filing purposes even though it is not assessed for tax.

6.3 Individual shareholders of a qualifying company would be required to separately include any allocated income and expenses from the qualifying company in their individual income tax return (IR3) for an income year.

6.4 A qualifying company (A) which is a shareholder in another qualifying company (B) would be allocated income and expenditure from company B in proportion to its effective interest. Both qualifying companies would need to file an IR7 return. Income allocated from company B to company A would subsequently flow through to company A’s shareholders, along with company A’s other income.

6.5 Trustee shareholders of qualifying companies would need to include any allocated income and expenditure from the qualifying company in their IR6 return.

Information requirements and record-keeping

6.6 The Taxation (Limited Partnerships) Act 2008 amended section 22 of the Tax Administration Act 1994. The amendment clarified that it is the partnership, rather than each partner in the partnership, that must maintain records.

6.7 It is not necessary for both shareholders and the qualifying company to keep business records. Therefore, it is proposed that shareholders of a qualifying company will not be required to retain any records if the company retains the necessary records under section 22 of the Tax Administration Act 1994. This is consistent with the record-keeping requirements for partners and partnerships. This is an example of a qualifying company being treated as an entity despite the general look-through rule in section HG 2. The existence of such exceptions is recognised by the section HG 2 wording of “unless the context requires otherwise”.

6.8 A qualifying company incorporated under the Companies Act 1993 will continue to be subject to the general regulatory requirements under the Companies Act and the Financial Reporting Act 1993 – for example, the requirement to file annual returns with the Companies Office.