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

2012 amendment to the conduit anti-avoidance rule excludes conduit tax relief (CTR) received by a CTR group member if owned by non-residents.

Section GZ 2

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.

Application date

The remedial change to section GZ 2 applies to income years beginning on or after 1 July 2009.

Note that the Taxation (International Investment and Remedial Matters) Act 2012 also includes a provision to repeal section GZ 2 that applies from the beginning of the first income year beginning on or after 1 July 2011. This is because section GZ 2 has now become redundant and so it makes sense to remove it from the Income Tax Act 2007 at the same time as conduit tax relief accounts, in order to aid clarity. The amendment described here therefore affects only the first two years of the new CFC rules.

Key features

Under the conduit tax rules, chains of New Zealand holding companies were defined as "CTR group members" and each CTR group member was treated as non-resident for the purposes of the conduit rules to the extent that it was owned by non-residents (see sections YD 9 to YD 11).

The conduit anti-avoidance rule is intended to apply to tax relief arrangements that ultimately benefit a New Zealand-resident investor. Amendments have been made to the conduit anti-avoidance rule in section GZ 2 and the application of sections YD 9 to YD 11 to ensure that the definitions of resident and non-resident are consistent with those that previously applied under the recently repealed conduit tax relief rules.

Background

The conduit anti-avoidance rule is intended to claw back conduit tax relief from arrangements that were entered into in anticipation of the repeal of the conduit rules, and that had the effect of reducing the tax liabilities of New Zealand shareholders. This reflects the fact that conduit tax relief was designed to relieve tax on non-residents investing through New Zealand into CFCs.

Conduit tax relief was not intended to apply to income that was ultimately owned by New Zealand residents. The conduit anti-avoidance rule applies to arrangements that generated conduit tax relief credits between 4 December 2007 (when an issues paper announcing this policy was released) and the date from which conduit tax relief was repealed. The anti-avoidance rule does not apply to conduit tax relief received by the conduit tax relief company itself, or by a CTR holding company for the CTR company.

These exclusions are intended to ensure that the anti-avoidance rule does not apply to residents that are holding companies for non-resident investors. However the exclusions fail to accommodate conduit tax relief companies that are held through a chain of more than two New Zealand companies that are ultimately owned by non-residents. Under the conduit tax rules such chains of companies were defined as "CTR group members" and each CTR group member was treated as non-resident for the purposes of the conduit rules to the extent that it was owned by non-residents (for example, a CTR-group member that was 100% owned by non-residents would be 100% non-resident). (See sections YD 9 to YD 11.)

Consistent with this, the Act amends the anti-avoidance rule in section GZ 2 so that this rule does not apply in respect of conduit tax relief received by a CTR-group member to the extent that the CTR-group member is owned by non-residents.