Thin capitalisation - on-lending concession

Section FE 12(1) of the Income Tax Act 2007 

Key features

Section 46 of the Taxation (Tax Administration and Remedial Matters) Act 2011 amends section FE 12(1) of the Income Tax Act 2007 to ensure that a financial institution is able to utilise the on-lending concession in determining whether the thin capitalisation rules apply.

Detailed analysis

Under the thin capitalisation rules, a company controlled by non-residents has its interest deductions reduced if the group debt levels exceed 75% of total group assets. However, a concession applies to allow financial institutions to borrow beyond the 75% threshold if borrowings are on-lent to either:

• a person who is not associated with the taxpayer; or
• a non-resident who also does not operate a business through a fixed establishment in New Zealand.

The concession treats borrowings by the entity as being first used in making advances to other entities. The effect of the rule is that the debt ratio is calculated against mainly fixed assets. In the 2004 Act, the on-lending concession applied to all classes of taxpayers, not just natural persons, as intimated in section FE 12(1) prior to this amendment.

This amendment ensures that the on-lending concession for the thin capitalisation rules includes all classes of taxpayers.