WELLINGTON: The Government of New Zealand has released a paper seeking public feedback on proposed changes to debt remission rules. Debt remission, the extinguishing of a borrower or debtor’s liability – often causes the borrower to derive taxable income on their gain, covering the amount they no longer 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.
Under the current rules, however, when the creditor is associated with the debtor (a related party), the creditor is denied a bad debt deduction. The result is one-sided taxation – income accruing to the debtor, but with no deduction allowed for the creditor.
Minister of Revenue Todd McClay said that the proposed changes to the rules are aimed at providing greater certainty and fairness for taxpayers. McClay said that the Cabinet had endorsed the paper’s two key conclusions – that over-taxation in such circumstances should be addressed and that the proposed change should be retrospective. “The issues paper follows on from an Inland Revenue technical interpretation. This interpretation found that where related-party debt was capitalized into shares this could sometimes [lead to] tax avoidance. If it is tax avoidance the capitalization is reassessed as being a debt remission. Debt capitalization is becoming more commonplace. Tax law needs to provide certainty and this proposal will address a situation where over-taxation is taking place,” he said.
“This will be welcomed by group companies in corporate New Zealand as well as smaller [family] partnerships or businesses,” he said. “It’s my expectation that this consultation will lead to legislative change which is now overdue.” McClay highlighted that the paper does not consider the issue of inbound investment, as this is being covered by the Organisation for Economic Cooperation and Development’s base erosion and profit shifting project.
