Banking group's equity threshold

(Clause 31)

Summary of proposed amendment

The bill increases the minimum equity threshold of a reporting bank’s New Zealand banking group for a tax year from 4 percent of risk-weighted exposures (RWEs) to 6 percent of RWEs.

Application date

The amendment will apply from 1 April 2012.

Key features

Section FE 19(1) of the Income Tax Act 2007 contains a formula which a reporting bank must use to calculate the minimum equity threshold of its New Zealand banking group for a tax year. The formula contains a multiplier to be applied to the value of RWEs less deductions from equity value. This formula is to be amended by increasing the multiplier from 0.04 to 0.06.

The new formula will apply only for measurement dates under section FE 8(3) for periods beginning on or after 1 April 2012.

Background

Since 2005, a special form of thin capitalisation rule has applied for foreign-owned banks. The rule requires a New Zealand banking group to hold equity equal to at least 4 percent of its New Zealand assets − specifically, 4 percent of its RWEs (less deductions from equity value). The rule has the effect of limiting the interest deductions foreign-owned banks may take against their New Zealand sourced income for tax purposes.

It is proposed that the minimum equity threshold for tax purposes be increased from 4 percent to 6 percent of RWEs from 1 April 2012. The proposed increase for tax purposes is consistent with recent changes in the commercial and regulatory environment facing banks, which has seen average regulatory capital ratios steadily increase, while the average tax capital ratio has remained near the prescribed minimum.