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Taxation (International Investment and Remedial Matters) Act 2012

The Taxation (International Investment and Remedial Matters) Bill was introduced into Parliament on 26 October 2010. It received its first reading on 9 November 2010, the second reading on 9 February 2012 and its third reading on 1 May 2012.

At the report-back stage of the Bill the Finance and Expenditure Committee recommended a number of changes to the legislation, including several intended to make the rules easier to apply.

The Taxation (International Investment and Remedial Matters) Act 2012 received Royal assent on 7 May 2012. It amends the Income Tax Act 2007, the Tax Administration Act 1994 and the Stamp and Cheque Duties Act 1971.

Overview

Applying the FIF rules

When a person has an interest in a FIF, they must first establish if an exemption from the FIF rules applies to that FIF.

Extending the thin-cap rules to active and Australian FIFs

The Act modifies the thin capitalisation rules so that investments in FIFs for which the investor uses the attributable FIF income method or the section EX 35 Australian exemption are treated the same as investments in CFCs.

Alternative thin-capitalisation test for some low asset companies

The Act introduces an alternative thin capitalisation test for certain New Zealand-based groups with offshore investments. This will give certain New Zealand taxpayers an option to apply an alternative method under the thin capitalisation rules. New Zealand multinational groups that have a high level of arm's length debt (provided that certain other conditions are met) can choose a test for thin capitalisation based on a ratio of interest expenses to pre-tax cashflows, rather than on a debt-to-asset ratio.

State-owned banking groups

The thin capitalisation rules have been altered to permit the Kiwibank group of companies to be treated separately from the rest of the New Zealand Post group. This is to reduce compliance costs and to ensure that the appropriate thin capitalisation test is used for the non-banking part of the New Zealand Post group.

Exemption from the outbound rules

Under the previous rules, section FE 5(1B)(b) provided an exemption from the thin capitalisation rules for excess debt outbound companies if total interest deductions for the New Zealand group did not exceed $250,000.

Application to non-residents with no fixed establishment

Changes have been made to the thin capitalisation rules to limit their application when non-resident companies do not carry on business through a fixed establishment in New Zealand. Those companies will no longer be subject to the rules if all their New Zealand-sourced income that is not relieved under a double tax agreement is non-resident passive income.

Zero rate of AIL on retail bonds

The Act amends the Stamp and Cheque Duties Act 1971 by providing a zero rate of AIL for bonds that are traded in New Zealand. Strict criteria are used to prevent ordinary loans, syndicated lending, private placements and other forms of closely held or non-traded debt from qualifying for the zero rate of AIL.

AIL and associated persons remedial

In 2009 a change was made to the associated persons definition. This had the unintended consequence of making some bond issuers and bond holders associated persons when they were only associated through the use of a bond trust.

Attributed foreign income - liability to tax

The Act expands the scope of income that can be excluded from attributed foreign income, by permitting some companies, which are not recognised for tax purposes in the country they operate in, to nevertheless be treated as resident in that country.

Active business test - clarifications and remedial amendments

The Act amends the meaning of passive income and total income used in the active business test for controlled foreign companies. This will make it easier to pass the active business test that is based on accounting data.

Third-party royalties paid through a chain of CFCs

In general, royalty payments are attributable income when they are received by a CFC. However there are several exceptions to this. One of these exceptions did not operate as intended and has been corrected.

Attributing telecommunications income

Most income of a CFC from services performed in New Zealand is attributable (that is, subject to New Zealand tax under the CFC rules). However, a concession was made for certain telecommunications income, subject to certain limitations. The Act replaces these limitations with requirements for the person performing the service in New Zealand.

Amendments to the exemption for insurance CFCs

The Act inserts section 91AAQ(5B) which enables the Commissioner to stipulate conditions that must be satisfied in addition to the existing requirements for a CFC or CFC group member to qualify as a non-attributing active CFC.

Revaluing former grey list shares that were inherited at a nil cost

The Act re-values some foreign shares that were inherited at a nil cost before 1 April 2007. This revaluation can have two tax consequences. First, the shares could enter into the FIF attribution rules. Secondly, in cases when the shares are held on revenue account and the shares have a market value that is higher than the market value on the date of inheritance, the holder will be taxed on the difference between these two values.

New residents' superannuation schemes

The exemption from the FIF rules for rights in a foreign employment-related superannuation scheme has been amended to properly reflect the policy intent. The exemption applies to contributions made while a person is non-resident or in the first four full income years after becoming resident. This amendment will ensure that ongoing fluctuations in the value of those exempt contributions, which occur after the four-year period ends, are also exempt from attribution under the FIF rules.

Repeal of branch equivalent tax accounts of companies and conduit tax relief accounts

The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 made major changes to the tax treatment of foreign investments. Those changes made branch equivalent tax accounts of companies (BETAs) and conduit tax relief accounts (CTRAs) obsolete.

The new Act removes the BETAs and CTRAs at the end of the relevant period, and repeals associated provisions and references.

Remedial amendments: Branch equivalent tax accounts of companies

The Act makes minor changes to branch equivalent tax accounts (BETAs) to ensure that these cannot go into credit.

Amendment to non-resident exclusion from conduit anti-avoidance rule

The conduit anti-avoidance rule in section GZ 2 has been amended to exclude conduit tax relief received by a CTR-group member to the extent that the CTR group member is owned by non-residents.

Losses of controlled foreign companies - transitions

Transitional provisions dealing with losses arising under the old international tax rules, and carried forward under the new international tax rules, have been reworded to ensure the policy intent of these provisions is realised.

Foreign tax credits of controlled foreign companies - transitions

Transitional provisions dealing with foreign tax credits arising under the old international tax rules, and being carried forward under the new international tax rules, have been reworded to ensure the policy intent of these provisions is realised.

Other remedial changes