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Inland Revenue

Tax Policy

Bad debts – limited recourse arrangements

Clause 84


(Chapman Tripp, Russell McVeagh)

The remedial amendments to ensure the tax rules are effective in limiting bad debt deductions to the actual economic loss are supported but may need to be further amended to deal effectively with bad debts funded by certain limited recourse arrangements.

Clauses 84(1) to (3), as currently crafted, are arcane and very difficult to understand, even for tax lawyers.  Furthermore, it is quite likely that they do not fully achieve their intended objective.  We propose to address this further with officials in advance of appearance at the Select Committee to see whether a better outcome can be proposed. (Chapman Tripp)

In summary:

  • We agree with the need to clarify, with retrospective effect, amendments enacted by the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 intended to limit bad debt deductions to reflect a person’s true economic loss.
  • A further remedial amendment is necessary as the provisions as drafted may not in all cases achieve a correct matching of the deduction for the bad debt loss to the income year in which income is recognised under the limited recourse arrangement.


Tax rules for bad debts introduced in 2014 were largely designed to limit bad debt deductions to the amounts of the debts excluding amounts funded by limited recourse arrangements.  The amounts funded by limited recourse arrangements are obviously not an economic loss to the creditor/lender.  This approach was supported by submitters to the original bill and is supported by submitters to this bill.  The remedial amendments in the bill help to ensure that the 2014 amendments work effectively, and the changes were signalled as being necessary in the Tax Information Bulletin (Volume 26, No 4) which discussed those 2014 changes.

Both submissions concern one aspect of the rules introduced in 2014 for bad debts funded by limited recourse arrangements.  A bad debt deduction that is otherwise allowable in an income year may be deferred until the related limited recourse arrangement matures.  However, there may be income from the limited recourse arrangement in the earlier income year when the bad debt deduction was otherwise allowable.  In this case a taxpayer would have income for a tax year and no deduction for the related bad debt until a subsequent year.  This may cause significant timing disadvantages and even permanent disadvantages in some cases.

Officials agree there may be inappropriate results for some taxpayers in some situations when debts/loans are funded by limited recourse arrangements.  The accounting and tax rules in these situations are complex and officials have been analysing them and discussing the impacts with some taxpayers and their advisers over the past few months.  The final outcome of the analysis is not yet completed and it is proposed that it continue to identify a complete solution to the issue.


That the submissions be noted but that officials complete their current analysis of the issue with a view to proposing remedial amendments in the next appropriate tax bill.  This will include consideration of the appropriate application date of any further remedial amendments.

Issue:   Application dates



The timing commencement and application aspects relating to clause 84 and the proposed new section DB 31(3) should be reviewed and revised, if necessary, to achieve full effectiveness.


Irrespective of the commencement date, all provisions have a clear application date.  However, we agree that each of clauses 84(1), (2), (3), (5) and (6) are addressing the same policy matters and the question of commencement should be reviewed to ensure drafting consistency.


That the submission be accepted.