Other matters
Issue: References to “associated person” in sections FE 2 and FE 26
Clauses 88 and 96
Submission
(Ernst & Young)
Several proposed paragraphs in section FE 2 provide that the members of a group should be treated as if they are associated. Such a reference is similarly included in proposed section FE 26(7). It is unclear what this is meant to achieve and it should be clarified.
Comment
The reference to associated persons is intended to link in with the rule in section FE 41 which, among other things, sets out how the interests of associated persons are to be combined. This rule, in essence, specifies that interests should not be double-counted.
Officials will consider whether the drafting could be improved.
Recommendation
That the submission be noted.
Issue: Extension of on-lending concession for trusts
Clause 91
Submissions
(Corporate Taxpayers Group, Ernst & Young, New Zealand Institute of Chartered Accountants, Russell McVeagh)
The on-lending concession is generally being extended for trusts so that it applies to all financial arrangements.
This extension is appropriate. (Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)
The extension applies only when a trust has no other property. However, “property” may include rights under financial arrangement contracts that have been entered into. The provision should be amended as a trust may have property that is incidental to its financial arrangements. (Corporate Taxpayers Group, Russell McVeagh)
The requirement for a trust to have a New Zealand group consisting of itself alone or itself and other trustees is not necessary. This requirement will automatically be fulfilled by virtue of the requirement that a trust owns no property other than financial arrangements. (Corporate Taxpayers Group, Ernst & Young)
Comment
Officials agree with both issues raised by submitters. The extension to the on-lending concession should still be available to a trust that holds property incidental to its financial arrangements.
We also agree that the requirement that a trust have a New Zealand group consisting of itself along (or itself and other trustees) is unnecessary as it will automatically be fulfilled given the requirement that the trust hold only financial arrangements.
Recommendation
That the submissions be accepted.
Issue: Grouping rules for trustees
Clause 89
Submission
(Ernst & Young, New Zealand Law Society)
Proposed amendments to section FE 3(1)(d) will provide that the New Zealand group of a trustee includes all companies controlled by the trustee. It is unclear what “control” means in this context. Arguably all companies that a corporate trustee has legal control over could be caught, regardless of the capacity in which that control is held. (Ernst & Young)
It is unclear why proposed sections FE 3(1)(f) and FE 3(1)(g) define the New Zealand and worldwide groups for a “controlling body” as a collective. (Ernst & Young, New Zealand Law Society)
Comment
“Control” in section FE 3(1)(d) is intended to refer to the control threshold set out in section FE 27, as held by the trustee in their capacity as trustee of the relevant trust. Officials will consider whether this drafting could be clarified.
Proposed sections FE 3(1)(f) and FE 3(1)(g) operate much in the same way as section FE 27 operates for parent companies. The controlling body is the New Zealand parent and every company under its control is included in its group.
These sections do not determine the New Zealand group of the companies controlled by the controlling body. That is done under proposed section FE 26(4D) and section FE 28. Again, this is much the same as how rules work for standard companies.
Officials note that these sections may no longer be necessary given the recommended changes to section FE 2(1)(cc).
Recommendation
That the submission be noted.
Issue: Reference to non-resident owning body in section FE 25
Clause 95
Submission
(Ernst & Young)
It is unclear why section FE 25 should be amended to include a reference to a “non-resident owning body”. Such a body is not a taxpayer and does not itself need to comply with the thin capitalisation rules.
Comment
Section FE 25 sets out how the grouping rules in sections FE 26 to FE 30 operate. The proposed amendments to section FE 25 reflect that these other sections are being modified to provide the New Zealand group of a non-resident owning body. Officials therefore consider that the amendment is appropriate.
Recommendation
That the submission be declined.
Issue: Worldwide group of those acting together
Clause 97
Submission
(Ernst & Young)
The heading of proposed section FE 31D should be amended to clarify that it applies when a non-resident owning body has been identified as a company’s New Zealand parent.
A similar provision should be provided if a company’s New Zealand parent is a controlling body (that is, determined under proposed section FE 26(4D)).
Comment
Officials will consider whether the drafting could be improved in this section.
Officials note that a similar provision is provided for a company with a New Zealand parent that is a controlling body in proposed section FE 3(1)(g).
Recommendation
That the submission be noted.
Issue: Exclusion of indirect CFC and FIF interests
Submission
(New Zealand Institute of Chartered Accountants)
Proposed section FE 16(1BA) will require individuals or trustees to exclude certain interests in a CFC or FIF held by companies in which those individuals or trustees have a significant interest.
This exclusion is not appropriate in all cases. If the individual or trustee will be taxed on the CFC or FIF income when it is distributed, the relevant assets should be able to be included for thin capitalisation purposes.
Comment
Proposed section FE 16(1BA) will bring the treatment of a person who has a significant indirect interest in a CFC in line with the treatment where they have a significant direct interest in a CFC. Officials consider the proposal should therefore proceed.
The submitter is correct that the individual or trustee will be taxed on their CFC or FIF income when it is eventually distributed. However, until this distribution occurs the individual or trustee may gain significantly from deferral. Officials note this situation could be avoided by placing debt offshore (so thin capitalisation thresholds are not breached) or by placing debt in a company (where any interest denial will generate imputation credits, preventing double-taxation of the eventual distribution).
Recommendation
That the submission be declined.
Issue: Rules to ensure debt and asset is used only once
Clause 92
Submission
(New Zealand Institute of Chartered Accountants)
The bill proposes several new provisions that are designed to ensure the assets and liabilities of an entity can only be included in one New Zealand group and one worldwide group for thin capitalisation purposes.
The rules are complex and further consideration is required to ensure the rules have no unintended consequences. More practical examples on the operation of the rules should also be provided.
Comment
For the thin capitalisation rules to work appropriately, a person’s debt and assets should only be counted for one thin capitalisation group. If the assets and debt are counted more than once it can inappropriately affect the amount of debt non-residents are able to put into New Zealand. Officials consider this rule should therefore be kept.
Recommendation
That the submission be declined.
Issue: Technical amendment to section FE 18
Submission
(Matter raised by officials)
Section FE 18(5)(a) deems the debt-to-asset ratio of an entity’s worldwide group to be 54.54 percent in several situations. One of these is if the group’s members are all resident in New Zealand – that is, the group does not operate outside New Zealand.
This section could arguably apply when a company’s worldwide group is deemed to be its New Zealand group, such as under proposed section FE 31D. This would not be appropriate. Officials recommend a technical amendment to section FE 18 to ensure the section does not apply in this case.
Recommendation
That the submission be accepted.
Issue: Drafting matters
Clauses 88, 89, 92, 93 and 96
Submission
(Ernst & Young, KPMG, New Zealand Law Society, PricewaterhouseCoopers)
- Proposed section FE 2(1)(d)(i) should be clarified so it is clear whether the associated person referred to is an associate of a non-resident or an associate of the trust.
- Proposed section FE 2(1)(cc) could be read to require that an entity must meet all of paragraphs (a) to (cb). This is presumably not intended so should be clarified.
- Proposed section FE 2(1)(cc) refers to “entities, including one or more trustee”. This could either be read as a group that includes at least one person acting as a trustee, or a group consisting solely of the trustees of one or more trusts. This should be clarified.
- Proposed amendments to section FE 3(1)(b) sets out the worldwide group for an individual. This is unnecessary as individuals cannot apply the worldwide group debt test.
- It is unclear that proposed section FE 16(1D) is intended to apply when shares are being transferred as the section refers to a transfer of assets.
- Proposed section FE 26(2)(bb) sets out when a non-resident owning body is a New Zealand parent. It should be clarified that the requirements in paragraphs (i) and (ii) apply to the non-resident owning body, not the excess debt entity.
- The word “entity” rather than “person” is used in several places. This suggests that only legal bodies are intended to be captured by the relevant provisions. Whether this is intended should be clarified.
Comment
Officials will consider whether the drafting could be improved in these sections.
Recommendation
That the submission be noted.