Auckland Council restructuring

(Clause 106)

Summary of proposed amendment

The bill 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.

Application date

The amendment will apply from 31 October 2010.

Background

On 1 November 2010, the existing Auckland local authorities will cease to exist and be replaced by the Auckland Council. As part of this restructuring, certain assets owned by existing local authorities will vest in CCOs owned by the new Auckland Council.

For commercial reasons, the debt relating to those assets will not be transferred to the CCOs but will be assumed by the Auckland Council. In turn, the CCOs will enter into an acknowledgement of debt to the Council for the amount of the debt attributable to the assets.

Under the process proposed, there will be no funds or other consideration actually flowing from the Auckland Council to the CCO in relation to the acknowledgement of debt.

Detailed analysis

The absence of consideration flowing from the Auckland Council to the CCO in relation to the acknowledgement of debt creates 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.

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