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Inland Revenue

Tax Policy

Chapter 5 - Eligibility for AIL

5.1 In order to access the AIL rules a New Zealand borrower must be an approved issuer and must make a payment of NRPI to a non-associated person on a registered security.

5.2 There are currently very few requirements for a person to become an approved issuer or to register a security. There is no legislative requirement that an approved issuer cannot register a security that is issued to an associated party. Instead interest is unable to legally have AIL paid on it when it is paid to an associated party.

5.3 A consequence of these limited requirements is that certain New Zealand taxpayers borrow from non-resident associates and use the AIL rules even though this interest does not meet the legislative requirements. While this approach is not in accordance with current law it can only be prevented after being detected by Inland Revenue.

Registration requirement

5.4 In order to reduce the level of non-compliance, we suggest additional requirements to the application to register a security. A security will only be able to be registered if, at the time the application to register it is made, it is expected that more than 75% of the total borrowing will be from non-associated persons who are one or more of:

  • a financial institution in the business of lending money to the public; or
  • 10 or more persons who are not associated with each other.

5.5 Approved issuers that are a financial institution in the business of lending money to the public will not be required to meet this test and will be able to continue to register securities as they do currently.

5.6 For the purpose of these tests it is suggested that:

  • a member of a registered banking group would be treated as in the business of lending money to the public; and
  • any other financial institution will be in the business of lending money to the public if they, or a group they are a member of, have outstanding lending to at least 100 persons.

5.7 We anticipate that these criteria will encompass the majority of current non-resident lending by non-associated persons. However, there may be other situations where it is demonstrably clear from the nature of the parties or the way or market in which funds are raised that there will be no association between the New Zealand borrower and foreign lender. For example, private placements in the international financial markets are transactions which could automatically qualify for AIL registration.

5.8 We invite submissions on how to frame criteria which would qualify a security for AIL registration in addition to those set out above. We also invite submissions from any parties who consider they would be unduly affected by these suggested changes. Where this is the case we also invite submissions on what easily verifiable information may be available to satisfy the Commissioner that the issuer of the security is not associated with the likely holder(s).

5.9 We suggest that this would initially only apply to securities registered after the suggested application date and would not affect currently registered securities.

5.10 Issuers of securities that were registered before the suggested application date would have to reapply under the new requirements within two years of the enactment date. If they do not reapply, or do not meet the criteria, the registered security status would be lost and NRWT would become payable on interest after that date.

AIL return

5.11 Currently the AIL return (IR 67A) does not identify who the payee is of the interest subject to AIL. In order to improve the ability to audit for AIL, or identify cases for audit, it would be beneficial if the return identified the payee, as is currently required for the NRWT annual reconciliation (IR 67S). Inland Revenue’s current computer system limitations prevent this from being cost effective at present, however, officials will reconsider this in the future.

Questions for submitters

5.1 Is 75% an appropriate threshold for registered security applications? If you consider a different threshold is appropriate how would you justify this?

5.2 Are there any other groups of security holders or issuers you consider should automatically qualify for holding or issuing registered securities?

5.3 What criteria could be used to enable private placements in the international financial markets to qualify for registration?

5.3 Are there any other robust tests which could be used to determine that a security will not be issued to persons associated with a New Zealand borrower?

5.4 Is two years an appropriate period to allow existing registered securities to re-register under the new application process?