Debt remission changes get green light

Revenue Minister Todd McClay announced today that Cabinet has given its approval to a set of proposals intended to address the current inequitable situation where debt remission between related parties can, under certain circumstances, result in an incorrect taxation outcome.

At present, in cases when such debt is forgiven by the creditor, and no longer has to be repaid, it becomes taxable income for the debtor. However, because the arrangement is between related parties, the creditor does not receive a tax deduction for the bad loan.

“This will result in over-taxation in some situations and can affect mum and dad partnerships right through to corporate groups” says Mr McClay.

The main proposal is that there should be no debt remission income for the debtor when the debtor is in the New Zealand tax base. This would include controlled foreign companies and New Zealand subsidiaries of foreign companies.

It would apply where the debtor and creditor are members of the same wholly owned group, or if the debtor is a company or partnership and certain other criteria are met.

“When the two parties are within the same wholly-owned group, the wealth of the group as a whole is not altered by the debt remission so clearly the tax outcome should reflect that. It should not result in net taxable income.

“The Government is determined to ensure fairness in the tax system. That means making sure everyone pays their fair share.  I intend to introduce amending legislation early next year. To provide absolute certainty, it is proposed that this legislation, when enacted, should apply retrospectively from 1 April 2006,” Mr McClay says.

 For examples and technical details refer to www.taxpolicy.ird.govt.nz