Debt forgiveness between related parties has been a regular topic in our Tax Alert for the past three years. It is great to finally be able to report that the issue was resolved with the passage of the Taxation Act (Annual Rates for 2016-2017, Private Corporations and Remedies), 2017) on March 30, 2017. We know that many readers have waited for the final version of these rules to clean up intercompany loans once and for all. In some cases, an amendment that comes into effect on July 1, 2017 may require action sooner rather than later. In cases where such a debt is cancelled by the creditor and no longer needs to be repaid, it currently becomes taxable income for the debtor. However, since the agreement exists between related parties, the creditor does not benefit from a tax deduction for the non-performing loan. (a) Ensure that tax rules for debt relief are fair and equitable and consistent with the broad low-interest rate base paradigm; In the future – debt capitalization or debt relief? 48. Option 1 – Reverse debtor income is the only effective option as it solves the current problem of asymmetric debt relief in all appropriate situations where net economic assets or ownership do not change. 12. Until recently, some taxpayers chose to capitalize their debts instead of cancelling their debts and dealing with this asymmetric result because it did not result in asymmetric tax outcomes. Debt capitalization is literally the conversion of debt into equity or capital. Treasury Secretary Todd McClay announced today that Cabinet has approved a series of proposals to address the current unfair situation where debt relief between related parties can lead to a false tax outcome in certain circumstances.
29. As stated in the `Status quo` section of that RIS, the question arises as to whether a legislative solution applicable to domestic debt should also apply to incoming debt. The new tax rules on debt relief clarify and demystify IRD`s treatment of streamlining corporate debt through debt capitalization and/or equity and/or debt relief. By placing these transactions tax-free for qualified economic groups and eliminating this tax risk and risk, a significant obstacle has been removed for group companies seeking to rationalize their corporate credit positions. The potential for debt relief revenues from the rules of the Financial Regulation has been a source of frustration for many years. Overall, remission income occurs when a debtor is exempt from performing its obligations under a financial agreement and has not repaid the debt with full and reasonable consideration. 9. The combination of these two sets of rules – the rules on debt relief income and the refusal of bad debts for associated persons – means that debt relief between these two parties leads to an asymmetric outcome. There is income for one party, but the other party cannot claim a deduction. However, there is often no change in the wealth of the related group of people and therefore no economic transaction that should be taxed. Similar rules apply to partnerships and the review of companies.
In other words, the creditor`s proportional investment in the debtor remains virtually unchanged after the debt has been transferred. In such circumstances, there are no discount recipes. It would apply if the debtor and the creditor are members of the same group of wholly-owned companies or if the debtor is a company or partnership and certain other criteria are met. to the extent that the distribution is less than or equal to the total amount of the debts cancelled by the creditor. 43. Since then, many informal discussions have taken place with tax lawyers and auditors. This was both before and after the formal consultation. Initial discussions focused on the importance of the issue and the distortion of the asymmetric effect. Subsequent discussions (after the publication of the background paper) focused on the issuance of the incoming debt and the details. It addresses the question of whether debt relief between certain related persons should continue to be imposed asymmetrically and, if not, how this current asymmetric treatment should be resolved. When determining revenue or expenditure for the adjustment of basic prices referred to in Article EZ 38, an amount due to a debt, including an amount accumulated and unpaid at the time of the Decree, shall be considered paid if it is allocated under the old rules of the Financial Regulation, if, first, one issue that may be relevant is the creation of the “available subscribed capital” in the debtor company. This term refers to what tax law within a company identifies as tax-recognized shareholder capital.
Interestingly, debt relief for accounting purposes is credited to reserves. The new tax rules provide that, in certain circumstances, debt relief is included in the debtor company`s available subscribed capital, as this is similar to a capitalization of corporate debt that already creates such corporate tax capital. This result can bring added value to companies and shareholders in certain situations. (b) Ensure that tax rules applicable to debt relief impose only the net economic income of an “economic group”, i.e. whether assets or ownership have changed economically. 2. Debt relief is the cessation of the liability of a debtor by operation of law or surrender by the creditor. The provisions apply to debt forgiveness relief from 2008-2009 or subsequent years of income, with the exception of a year of income prior to the 2015-2016 income year, for which the taxpayer has taken a tax position and returned the debt relief income in accordance with the old rules. On September 3, 2015, Finance Minister Todd McClay announced that Cabinet had approved final proposals to address the situation in which debt relief revenues arise and the debtor and creditor are part of the same group of wholly-owned New Zealand companies. In the past, Group companies have often resorted to debt capitalization instead of forgiving it because of the result under the rules of the financial agreement. If the debts were cancelled instead, the rules of the financial arrangement resulted in an asymmetric result, since, under the accrual price adjustment mechanism, debt relief income was generated for the borrower, while the lender with related parties was denied a deduction for the principal amount under the bad debt amortization rules (interest may have accrued and been returned as than income, but subsequent depreciation was allowed as a deduction for bad debts).
Officials recognized that the resulting debt relief revenues and asymmetric outcomes were not appropriate in the context of a wholly-owned corporate group and set out to determine what the right policy outcome should be in that context. A thematic paper and various versions of bills have since followed to find a viable solution. It remains to be seen whether debt capitalization is back on the table as an option to clean up the Group`s loans. There may be cases where leverage is still preferable to debt cancellation. It is hoped that the tax office will clarify how QB 15/01 (Income tax: tax evasion and debt capitalization) will be applied after the introduction of these rules, if any. .