Chapter 3 - Scope of the review

3.1 This document highlights a number of respects in which the thin capitalisation rules are currently not operating in the way intended, resulting in too little tax paid in New Zealand. The apparent problems with the rules have been identified by Inland Revenue in the course of its audit work. This document proposes amendments to the law to correct the problems that have been identified.

3.2 The focus of the document is ensuring that more tax is collected in cases where New Zealand-sourced income appears to be escaping tax. That is, the focus is on base maintenance.

3.3 The document will not consider the levels of existing “safe-harbour” debt-to-asset thresholds (60% for inbound investors, 75% for outbound). The safe harbour for inbound investors was reduced to its current level in the 2011-12 tax year, and the outbound threshold has been in operation only since 2009.

3.4 The document will not consider fundamental changes to the treatment of debt held by finance or insurance companies, although this may be reviewed later.

3.5 This document will not consider rules which reclassify debt as equity, such as the “substituting debenture” rule, although this could be a focus for future work.