Notional interest under IFRS

Clauses 38 and 55

Issue: Description of the problem is incorrect

Submission

(Law Society)

The way the problem has been described in the bill commentary – namely that deductions may be allowed for notional payments – is inappropriate. The financial arrangements recognise notional payments in other situations.

Comment

Officials agree that a clearer problem description would be that taxpayers may be able to claim deductions for payments where there is no economic substance. This will be reflected in the Tax Information Bulletin on enactment.

Recommendation

That the submission be noted.

Issue: Change of spreading method adjustment should be removed

Submission

(KPMG, NZICA)

The requirement to perform a change of spreading method adjustment for taxpayers who have been claiming deductions (or paying income tax) on interest-free loans should be removed.

The bill proposes that this adjustment be performed in the 2014/15 income year, which will have begun for some early balance-date taxpayers before the bill receives Royal assent. If the adjustment is to be kept, taxpayers should have the option of performing this adjustment in the 2015/16 income year.

Comment

The purpose of requiring the change of spreading method adjustment is to reverse any deductions a taxpayer has previously taken under an interest-free loan. Without this requirement, taxpayers will not have to reverse these deductions until the loan expires, which may not be for many years. This could provide a significant timing advantage. Officials therefore do not agree that the change of spreading method adjustment should be removed.

Officials also disagree with deferring the timing for this adjustment. While some early balance-date taxpayers will have already started the 2014-15 income year before the bill receives Royal assent, we do not expect them to have to file their tax returns until well after this occurs. In addition, officials consider that affected taxpayers have been aware of this change for some time.

Recommendation

That the submissions be declined.

Issue: Application date of the proposal

Submission

(Corporate Taxpayers Group, NZICA)

The application date for this change should be deferred until the 2014/15 income year.

Comment

Officials agree. This change would align the application date of the proposal with the year the change of spreading method adjustment is required. It will also mean the change generally applies prospectively.

Recommendation

That the submission be accepted.

Issue: Compliance costs

Submission

(NZICA)

This change should only be enacted after consideration is given to the associated compliance costs.

Comment

The IFRS financial reporting spreading method generally reduces compliance costs by allowing amounts financial arrangements to be spread as they are under IFRS accounting. However, good tax policy can require a departure from IFRS treatment where it would produce an inappropriate result for tax purposes. This amendment is a reflection of this policy.

Recommendation

That the submission be noted.

Issue: Drafting of the proposal

Submission

(Ernst & Young)

The wording of proposed section EW 15D(2)(ad) is unclear and should be revised.

Comment

Officials agree.

Recommendation

That the submission be accepted.