Auckland Council restructuring amendment

Section 83 of the Local Government (Auckland Transitional Provisions) Act 2010

Section 186 of the Amendment Act amends section 83 of the Local Government (Auckland Transitional Provisions) Act 2010, which provides transitional tax relief on the amalgamation of Auckland local authorities into one Council. It provides that for the purposes of the financial arrangement rules in the Income Tax Act 2007, when the new Auckland Council enters into an acknowledgement of debt with a council-controlled organisation (CCO) without paying the principal to the CCO, the Auckland Council is deemed to have advanced the amount of the principal to the CCO.

Background

On 1 November 2010, a new Auckland Council was established to replace the former Auckland local authorities. As part of this restructuring, certain assets owned by the former local authorities were vested in CCOs owned by the new Auckland Council. For commercial reasons, the debt relating to those assets was not transferred to the CCOs but was assumed by the Auckland Council. In turn, the CCOs entered into an acknowledgement of debt to the Council for the amount of the debt attributable to the assets.

Under the transfer process, there were no funds or other consideration actually flowing from the Auckland Council to the CCO in relation to the acknowledgement of debt. The absence of consideration flowing from the Auckland Council to the CCO in relation to the acknowledgement of debt created a problem under the financial arrangement rules in the Income Tax Act 2007.

The general definition of "financial arrangement" in section EW 3(2) does not apply to the acknowledgement of debt because there is no consideration paid by the Council to the CCO. However, the debt is a financial arrangement because section EW 3(3)(a) applies. This provision captures all debts, regardless of whether the borrower receives consideration.

Under the financial arrangement provisions, the difference between the amount received and the amount paid under a debt (generally the interest component) is deductible to the borrower and assessable income to the lender. Because there is no flow of funds from the Auckland Council to the CCO under the acknowledgment of debt, the CCO will have a tax deduction for all amounts (interest and principal) paid under the debt and the Auckland Council will have assessable income of the same amount.

Key features

Section 186 of the Amendment Act:

• ensures that only interest (and not the principal) is deductible to the CCO and assessable to Auckland Council;
• provides that Auckland Council will be deemed to have advanced the amount of the principal to the CCO; and
• applies for the purposes of the financial arrangement rules in the Income Tax Act 2007.

Application date

The amendment applies from 31 October 2010.