Debt-remission consultation taxpayer friendly

Minister of Revenue Todd McClay has said that a consultation paper seeking public feedback on tax rules for related parties’ debt remission will lead to greater certainty and fairness for tax payers.

“This will be welcomed by group companies in corporate New Zealand as well as smaller mum and dad partnerships or businesses.  It’s my expectation that this consultation will lead to legislative change which is now overdue,” says Mr McClay.

Debt remission – the extinguishing of a borrower’s or debtor’s liability – often causes the borrower to derive taxable income on their gain – being the amount they now do not have to repay.  In this context the debt remission is usually associated with the debtor’s inability to repay their loan and the creditor remits the loan. 

However, when the creditor is associated with the debtor, the creditor is denied a bad debt deduction.  The result is one-sided taxation – income to the debtor, but no deduction to the creditor. 

“The issues paper follows on from an Inland Revenue technical interpretation.  This interpretation found that where related party debt was capitalised into shares this could sometimes be tax avoidance.  If it is tax avoidance the capitalisation is reassessed as being a debt remission.

“Debt capitalisation is becoming more commonplace. Tax law needs to provide certainty and this proposal will address a situation where over-taxation is taking place,” says Mr McClay.

The issue of inbound investment, which is a key base erosion and profit shifting concern, is not concluded in the officials’ issues paper.

Mr McClay says that Cabinet had endorsed the paper’s two key conclusions – that the over-taxation should be addressed, and that the proposed change should be retrospective. 

“The Government is very keen to ensure fairness in the tax system. We are also aware of the need for certainty. The proposals in this issues paper are a positive step forward,” Mr McClay says.

The issues paper, Related parties debt remission, can be found at www.taxpolicy.ird.govt.nz. Submissions close on 14 April 2015.