State-owned banking groups
(Clauses 45(3), 57, 58 and 126(29))
Summary of proposed amendment
The thin capitalisation rules are proposed to be altered to permit the Kiwibank group of companies to be treated separately from the rest of the New Zealand Post group. This is to reduce compliance costs and to ensure that the appropriate thin capitalisation test is used for the non-banking part of the New Zealand Post group.
Application date
For income years beginning on or after 1 July 2009.
This measure would apply retrospectively.
Key features
The thin capitalisation rules are proposed to be altered so that:
- a state-owned banking group (the Kiwibank group of companies) is not subject to the thin capitalisation rules by reason of New Zealand Post’s non-banking activities; and
- the New Zealand Post group may exclude the Kiwibank group of companies from its New Zealand group, so that it will apply the ordinary thin capitalisation rules rather than the thin capitalisation rules for banks.
These alterations apply only so long as the Kiwibank group of companies is not subject, in its own right, to the thin capitalisation rules (for example, by directly acquiring a controlled foreign company).
Detailed analysis
All references are to the Income Tax Act 2007 unless stated.
Background
The thin capitalisation rules, which limit excessive interest deductions against the New Zealand taxable income of multinationals, were extended in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009.
Prior to the extension, they applied only to non-residents and residents controlled by non-residents. After the extension, they also applied to other taxpayers with controlling interests in foreign companies.
The New Zealand Post group has such controlling interests, so is newly subject to thin capitalisation.
Because of the way the existing rules work, every New Zealand member of the group is subject to the rules, including Kiwibank. And because Kiwibank is a registered bank, the entire group must apply the special subset of thin capitalisation rules that apply to banks.
This requires undertaking costly calculations for the non-bank members of the group (for bank members the calculations are based on information that is already produced) and allows debt to be, roughly, 96% of assets. 96% was determined to be an appropriate ratio for a bank when the thin capitalisation rules for banks were introduced, but is unusually high for the significant non-banking operations of the group (75% is the standard ratio for groups without a registered bank).
Changes to rules
The Bill changes the rules so that a New Zealand state-owned banking group can be treated separately from non-banking activities in the same group.
Subsection FE 2(5)
New subsection FE 2(5) removes the requirement for a member of a state-owned banking group, to which section FE 36B applies, to take into account CFC or FIF interests held by associates outside the group (such as under sections FE 38, FE 41 or EX 15).
In effect, this removes Kiwibank from the scope of the interest apportionment rule in section FE 7; interests held by non-banking members of the New Zealand Post group no longer need to be counted. However, it only removes Kiwibank from this scope because no member of the banking group currently has its own interest in a non-portfolio FIF or CFC. If a member were to acquire such an interest, all members of the group would be within the scope of section FE 7 again.
Section FE 36 and 36B
The definition of a New Zealand banking group is proposed to be altered so that, in the exclusive case of a registered bank that is 100%-owned by the New Zealand government the group consists of:
- the registered bank;
- a company with a direct 100% voting interest in the registered bank; and
- those entities that are part of the financial reporting group for which the registered bank is the reporting entity, or would be part of it but for relevant materiality thresholds. The terms “financial reporting group” and “reporting entity” are defined by the Financial Reporting Act 1993.
This isolates the Kiwibank group from the rest of the New Zealand Post group. Without the alteration, the entire New Zealand Post group including Kiwibank would be treated as a New Zealand banking group.
The isolation relies on the definition of a New Zealand group for a company that is not part of the Kiwibank group. Paragraph FE 28(1)(c) excludes members of a New Zealand banking group from that New Zealand group (a New Zealand banking group exists despite the non-application of section FE 7 to that group). In other words, that company’s New Zealand group will be all the New Zealand-based entities in the New Zealand Post group except those in the Kiwibank group. That company will therefore use the standard apportionment rule in section FE 6 and not the banking rule in section FE 7.
The new rule in section FE 36B may not apply in certain situations. Specifically, a member of the New Zealand banking group (determined as if section FE 36B applied) may have interests in an offshore company that would bring it within the scope of section FE 2, even ignoring interests of associated persons outside the group under sections EX 15, FE 38 and FE 41. If that is the case, the existing rules in section FE 36 are invoked. (To prevent circularity, subsection FE 2(5) is ignored when deciding whether or not section FE 2 would apply).
That is, if a member of the Kiwibank group had an interest in a controlled foreign company or certain interests in foreign investment funds, the entire New Zealand Post group would again be a New Zealand banking group.
A decision has been taken at this stage not to develop more complex rules which might apply if both the banking and non-banking operations of New Zealand Post had offshore operations (currently only the non-banking operations do). In that case, there is a fall-back to the rules existing before the Bill.
A more comprehensive solution may be considered at a later date, perhaps in conjunction with other work on thin capitalisation.