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Consolidated groups and foreign losses

Section OB 1 of the Income Tax Act 2004 and the Income Tax Act 1994

The law has been amended to make the loss rules for consolidated groups consistent with the rules for nonconsolidated groups. This will prevent losses from being used in two different jurisdictions by a consolidated group.

Background

Under the group loss rules, a loss-making company can offset its losses against the income of another company in the same group. Companies can group their losses if they are at least 66 percent commonly owned.

Under the consolidation rules, companies can elect to be treated as a single entity (the "consolidated group") if they are 100 percent commonly owned and subject to certain other requirements contained in the definition of "eligible company". Effectively, this means that a loss-making company can offset its income against another company in the same consolidated group.

There are two restrictions that prevent companies in a non-consolidated group from grouping the same loss in more than one jurisdiction. First, dual-resident companies may not offset losses against the income of other companies in a group. A "dual-resident company" is a New Zealand-resident company which is either treated as non-resident under a double tax agreement or is liable for tax in another jurisdiction by reason of domicile, residence or place of incorporation. Second, in order to offset losses, the loss-making company must either be incorporated in New Zealand or carry on business in New Zealand through a fixed establishment. This requirement helps ensure that companies cannot change their place of residence to circumvent the restriction against grouping the same loss in more than one jurisdiction.

Under previous law, these rules did not apply in the same way to consolidated groups. While the rules for consolidated groups required that the company be a New Zealand resident, they did not include the requirements relating to incorporation or fixed establishment in New Zealand that are in the loss rules for non-consolidated groups.

Further, although the rules for consolidated groups required that a company must not be treated as a non-resident for the purposes of a double tax agreement, there was no restriction on grouping losses if a company in a consolidated group was also liable for income tax in another country because of their domicile, residence or place of incorporation.

Key features

Every member of a consolidated group must be an "eligible company" as defined in section OB 1. The amendment modifies the definition of "eligible company" to require that the company in question be incorporated in New Zealand or carry on business in New Zealand through a fixed establishment. The amended definition further requires that an eligible company must not be liable for tax in another jurisdiction by reason of domicile, residence or place of incorporation.

To ensure that taxpayers cannot retrospectively take advantage of the discrepancy in the previous law, the equivalent definition in the Income Tax Act 1994 has also been amended. This amendment applies from the 1997-1998 income year. The application date coincides with the date that the income tax core provisions took effect, which included the enactment of current loss grouping rules.

However, a savings provision ensures that the amended definition does not apply to taxpayers who were members of a consolidated group (under previous law) at the time. The position of existing dual-resident members of a consolidated group is protected for their 2005-2006 and 2006-2007 years if they elected to join the consolidated group before 17 May 2006.

Certain dual-resident members that are genuine trading companies are also grandparented for 2005-2006 and later income years. These companies must be in business and have elected to join the consolidated group before 17 May 2006. In addition, the company's interest deductions (or deductions under the financial arrangement rules) for the previous income year, ignoring foreign exchange fluctuations in the debt, must be less than 50 percent of the company's total allowable deductions for that year.

Application date

The amendment applies from the 1997-1998 income year. Table 1 illustrates when the grandparenting provisions will apply.

Table 1
Taxpayer's situation Savings or grandparenting provision applies for
Taxpayer was a member of a consolidated group at the time 1997-98 to 2004-05 income years
Taxpayer elected to be part of consolidated group before 17 May 2006 2005-06 and 2006-07 income years
The taxpayer:
  • elected to be part of consolidated group before 17 May 2006; and
  • is in business; and
  • less than 50 percent of the company's total allowable deductions for the previous income year were interest deductions (or deductions under the financial arrangement rules).
2005-06 and later income years