2012 amendment to Income Tax Act increases minimum equity threshold of a reporting bank's NZ banking group for a tax year to 6% of risk-weighted exposures.

Section FE 19(1) of the Income Tax Act 2007

The minimum equity threshold of a reporting bank's New Zealand banking group for a tax year has been increased from 4% of risk-weighted exposures (RWEs) to 6% of RWEs, as announced in Budget 2011.

Background

Since 2005, a special form of thin capitalisation rule has applied for foreign-owned banks. The rule required a New Zealand banking group to hold equity equal to at least 4% of its New Zealand assets − specifically, 4% of its RWEs (less deductions from equity value). The rule has the effect of limiting the interest deductions foreign-owned banks may take against their New Zealand-sourced income for tax purposes.

In line with the announcement in Budget 2011, the minimum equity threshold for tax purposes has been increased from 4% to 6% of RWEs from 1 April 2012. This increase for tax purposes is consistent with recent changes in the commercial and regulatory environment facing banks, which has seen average regulatory capital ratios steadily increase, while the average tax equity capital ratio has remained near the prescribed minimum.

Key features

Section FE 19(1) of the Income Tax Act 2007 contains a formula which a reporting bank must use to calculate the minimum equity threshold of its New Zealand banking group for a tax year. The formula contains a multiplier to be applied to the value of RWEs less deductions from equity value. This formula has been amended by increasing the multiplier from 0.04 to 0.06.

The new formula only applies for measurement dates under section FE 8(3) of the Income Tax Act 2007 for periods beginning on or after 1 April 2012.

Application date

The change applies from 1 April 2012.