Deductions for holders of debt – compliance change
Issue: Support for compliance change
(KPMG, Corporate Taxpayers Group, New Zealand Law Society)
The submitters support the change to allow creditors an automatic bad debt deduction in certain situations.
That the submission be noted.
Issue: Situations to which the compliance change applies
New Zealand Law Society
The submitter seeks confirmation that holders of financial arrangements that have been discharged without consideration or that have become irrevocable or unenforceable through the lapse of time will still be entitled to a bad debt deduction if written off as bad after the discharge or lapse of time.
Alternatively, it is submitted that the proposed amendments be extended to include other situations where a debt has been compromised, namely, when a financial arrangement has been discharged without consideration, or has become irrevocable or unenforceable through the lapse of time.
The primary object of the proposal is to minimise compliance costs faced by small taxpayers and only in situations where it was clear the debt was bad. The rationale was that the requirement for a debt to be written off before a bad debt deduction is taken can be unnecessarily onerous for creditors. This is because they would need up-to-date knowledge of the financial state of the debtor in order to take the bad debt deduction in time. In some situations, creditors are not informed of upcoming liquidations or bankruptcies so they would need to regularly check the companies register or public listings for updates on the financial status of debtors.
In comparison, officials consider that the compliance criteria for creditors of debts that have been discharged without consideration or become irrevocable or unenforceable through the lapse of time are not onerous. These creditors should have adequate notice that the debtor is unable to meet their obligations in full and have sufficient time to write off the debt as bad under current rules.
Furthermore, the requirement to write off a bad debt is a way of proving that taxpayers have turned their mind to the debt and that the debt is truly bad. In the case of a remission of law or a composition with creditors, it is highly likely the debt is a bad debt and the creditor should be allowed a deduction (as is intended under current policy settings). Officials do not consider it necessary to prove the debt is bad by writing it off and therefore removing the compliance cost for these creditors is appropriate.
In comparison, debts that have been discharged without consideration or become irrevocable or unenforceable through the lapse of time are not necessarily bad debts. Officials consider that to amend the bad debt deduction rules so that it is not necessary to write off the debt would make it too easy to take a deduction and could present a risk to the revenue base. In these cases where it is not clear that the debt is a bad debt, officials consider that the current write-off compliance criteria should remain.
That the submission be declined.
Issue: Application date of compliance change
(Ernst & Young, NZICA, Corporate Taxpayers Group)
The time of application of the changes should not depend on when taxpayers have filed their returns. Taxpayers who have applied the current law should be allowed to claim a bad debt deduction from the 2008-09 year onwards. (Ernst & Young and NZICA)
The application date should be amended if it is intended to have effect for any taxpayers from the 2008-09 year other than those who have not yet filed their returns for any relevant previous year (Ernst & Young and Corporate Taxpayers Group). An amendment should be made so that the proposed change is retrospective to confirm tax filing positions previously adopted and simply prevent taxpayers from reopening historic positions to take advantage of the amendment (Corporate Taxpayers Group).
The current application date of 2008-09 was chosen on the basis that it would ensure targeted taxpayers affected by the high compliance criteria (primarily small investors in failed finance companies) would be able to benefit from the amended tax rules.
In theory, taxpayers that would be disadvantaged by the originally proposed application date (and that the submitters are proposing the change should extend to) are those that made an economic loss on a financial arrangement, failed to write off the bad debt in time, and returned income under current law. Officials are not aware of any such taxpayers and it is considered highly unlikely that taxpayers would have taken this tax position. To extend the application date to such taxpayers could result in high administrative costs and potential operational implications. However, to ensure a fair result, officials agree that the proposed change should extend to taxpayers who filed taking the position described above in years from 2008-09. It is considered that as there will be very few (if any) taxpayers who applied the current law and will benefit from the retrospective application date, any additional administrative costs incurred as a result of accepting this submission would be negligible.
Officials also agree that, as currently drafted, where a taxpayer has filed an income tax return prior to the date of Royal Assent, and claimed a bad debt deduction when the debt was not written off in time, that taxpayer will still technically be non-compliant with the Act. This class of taxpayer should be entitled to access the new rules. Officials therefore agree that an amendment be made so that the proposed change is retrospective to confirm tax filing positions previously adopted, however, as noted in the comment above, taxpayers will not be prevented from reopening historic positions to take advantage of the amendment.
That the submission be accepted in part.