Asset uplifts
Issue: Asset uplift proposal should not proceed
Clause 93
Submissions
(Corporate Taxpayers Group, Deloitte)
The proposal to exclude increases in asset values following company restructures from the asset base for thin capitalisation should not proceed. If accounting allows for an increase in asset values, and the taxpayer can justify that value to its auditors, then that higher value should be able to be used for thin capitalisation purposes.
The submitters also noted that following accounting for determining the value of assets was a deliberate design choice, intended to reduce compliance costs. They argued it is inappropriate to deviate from this principle.
Comment
Generally accepted accounting principles (GAAP) require many kinds of asset, including much intangible property such as goodwill, to be valued at cost. Revaluation of such assets is generally not permitted because a reliable value cannot be determined. The main exception to this rule is when an unrelated party pays for the asset as the amount paid for the asset is a reasonable indication of its actual value.
There is a rare circumstance when increases in asset values can be recognised for accounting in the absence of a third-party purchase. This is when a corporate restructure known as a “business combination” is carried out, where two sister companies are effectively merged. Officials understand that all assets subject to the business combination (including intangible property) may be brought across at fair value – which may be above the asset’s book value. However, any changes in asset values that cannot be recognised in the absence of the business combination will not be reflected in the combined businesses’ parent’s consolidated accounts.
Business combinations can therefore be used to increase the value of a non-resident’s New Zealand operations – for example, if there is a non-resident parent company that combines two New Zealand companies. This would increase the amount of debt that the New Zealand companies can hold under the 60 percent safe harbour – despite the fact that there has been no increase in the value of assets in the parent company’s consolidated accounts. Officials therefore do not believe this type of asset uplift arrangement should be allowed.
Officials do not consider this change will have any significant compliance impact as business combinations are not common.
Recommendation
That the submission be declined.
Issue: Asset uplift rules should only apply prospectively
Clause 93
Submission
(Corporate Taxpayers Group, Deloitte, PricewaterhouseCoopers)
The asset uplift proposals should only apply to asset value increases occurring on or after the date the rules apply. Identifying historic uplifts in asset values could be difficult and therefore would impose significant compliance costs.
Comment
Officials agree that requiring taxpayers to identify and eliminate historic uplifts in asset values would impose significant compliance costs. It is reasonable for this change to apply only to subsequent uplifts.
Recommendation
That the submission be accepted.
Issue: Uplift as part of a larger restructure
Clause 93
Submissions
(Ernst & Young, New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
One exemption to the prohibition on including asset uplifts is when the increase in asset value follows a purchase of a parent company by a non-associate.
As currently drafted, this exemption appears to be too narrow. It should be sufficient that a restructure has arisen following a transaction with an unrelated party which affects a New Zealand company or its worldwide group.
Similarly, it is not clear if restructures following the acquisition of a foreign parent company are covered under the exemption. The context of the proposed legislation suggests that the company being acquired must be a New Zealand company. This is not appropriate as it will often be a foreign parent company that is purchased.
Further guidance should be provided on when a restructure could be regarded as part of the acquisition of the group by a third party. Restructures can take some time to implement and may occur a year or longer after the acquisition.
Further guidance should also be given on the meaning of the phrase “a reasonable proportion of the change in value of the company’s total assets”. (New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
The “reasonable proportionality” requirement should be deleted as taxpayers already have the burden of establishing that any changes in asset values are appropriate. (Ernst & Young)
Comment
The intention of proposed section FE 16(1E) is to allow uplifts to be recognised when a third party has, in essence, purchased a group of companies and part of that purchase price relates to the group’s intangible property. Officials understand that, immediately following the purchase, any increase in the value of the intellectual property will be isolated to the parent company of the group (that is, the purchased company). The company may then restructure its worldwide operations, in part to spread this increase in value among all of its subsidiaries.
The situations described by submitters, when a foreign parent company is purchased, should therefore be covered by the section.
Officials will consider whether the drafting could be improved to make this intention clearer. This includes when a restructure can be taken as being related to the acquisition of the group by a third party and what constitutes a “reasonable proportion” of the change in asset values.
Recommendation
That the submissions be noted.
Issue: Exemptions to the uplift rule are appropriate
Clause 93
Submission
(Ernst & Young)
The exemptions provided for the asset uplift rule are appropriate.
Comment
Officials agree. The exemptions allow uplifts to be counted for thin capitalisation purposes where:
- accounting allows assets to be revalued as a general principle; or
- where the uplift is a reflection of the price implicitly paid for the asset by a third party, such as might occur when a third party purchases a company’s parent.
Recommendation
That the submission be noted.
Issue: Optional nature of the exemptions
Clause 93
Submission
(KPMG)
Section FE 16(1E) currently provides that a taxpayer may include a change in asset value under two circumstances. It is unclear if this means taxpayers can elect not to include the change in value.
Comment
The carve outs are intended to be optional. Officials note that, if a taxpayer chooses not to exercise this option because an asset value has in fact gone down, accounting standards may still require that asset to be impaired.
Officials will consider whether the drafting could be improved.
Recommendation
That the submission be noted.