PIE credit impairment provisions

(Clauses 43, 51 and 91)

Summary of proposed amendment

Amendments are being made to the portfolio investment entity (PIE) rules to ensure that multi-rate PIEs are able to claim deductions for credit impairment provisions. The amendments will also ensure that multi-rate PIEs have sufficient authority to claim deductions for expenses and pay tax for income when these are reflected in the PIE’s unit price or in its financial statements. The changes are intended to clarify uncertainty in the timing rules over when deductions can be made or income declared.

Application date

The amendments will apply from 1 October 2007.

Key features

The bill adds new sections HM 35B and HL 19B to the Income Tax Act 2007, and section HL 19B to the Income Tax Act 2004. These sections will clarify that multi-rate PIEs can claim deductions for expenses and pay tax for income at the point when they are reflected in the PIE’s unit price or its financial statements, even if this is before the PIE has legally incurred or derived the expenditure or income. The purpose of this timing rule is to maintain investor equity over time by ensuring that investors exiting a PIE are attributed their correct share of the PIE’s tax.

Under this new timing rule, any future change in an expense or income that has already been deducted or taxed will also be picked up for tax purposes at the point when the change is reflected in the PIE’s unit price or financial accounts.

These new sections also ensure that multi-rate PIEs are able to claim deductions for credit impairment provisions when they are reflected in the PIE’s unit price or its financial statements. Credit impairment provisions are created to reflect the decline in a financial asset’s value due to past events.

A PIE will only be able to claim deductions for credit impairment provisions if it has objective evidence of a loss in an asset’s value because of events that have already occurred. Specifically, the criteria set out in NZ IAS 39 will need to be met in order for the PIE to make such a deduction.

These amendments apply retrospectively from 1 October 2007. However, the bill includes transitional measures to confirm the tax positions already taken by multi-rate PIEs on the timing of income and expenses, as well as credit impairment provisions. These transitional measures prevent PIEs from making retrospective adjustments to their tax returns following these clarifications.