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Inland Revenue

Tax Policy

Thin capitalisation

No clause

Issue:   Introductory provision to the rules


(Corporate Taxpayers Group)

Section FE 1(1)(a)(iii) refers to an entity that is “controlled by a group of entities, including non-residents and entities controlled by non-residents, that act together”.  The phrase “act together” appears have been picked up from earlier versions of the thin capitalisation reforms that were proposed in 2013, however that phrase was ultimately not adopted and does not appear elsewhere in the thin capitalisation rules.

Section FE 1(1)(a)(iii) should be removed from the Act, as it creates confusion as to the scope of the thin capitalisation rules.


The submitter is correct that the concept of non-residents who act collectively for the purposes of the thin capitalisation rules is expressed in the definition of “non-resident owning body” as set out in section FE 4.

There is one exception to this.  For trustees of a trust, this concept is expressed as “a group of persons who act in concert”.  Thus trustees of a trust are subject to the rules if 50 percent or more of the settlements on the trust are made by a group of persons who act in concert and those persons are themselves subject to the rules.

Officials therefore recommend that section FE 1(1)(a)(iii) be amended to clarify that the rules apply when a taxpayer is a trustee and when the majority of settlements have come from people subject to the rules who are acting in concert.


That the submission be accepted, subject to officials’ comments.

Issue:   Double counting rule


(Matter raised by officials)

Section FE 2(1)(cb)(i) provides that thin capitalisation rules apply when the members of a non-resident owning body have, on aggregate, a 50 percent or larger ownership interest in a New Zealand company.  However, as a person’s ownership interest in a company includes any direct ownership interests that an associated person has in that company, this can potentially result in a person’s ownership interest being counted more than once.

To prevent this double counting, the section provides that the aggregate ownership interest of a non-resident owning body should be determined as if the members are associated.  The intention of treating the members as associates is to utilise the rule in section FE 41 that prevents double counting.  From a technical perspective, however, this does not work as section FE 41 applies only in relation to section FE 40.


Officials recommend the rules be amended to clarify that the ownership interests of a non-resident owning body should not be counted more than once.  This amendment should apply from the beginning of the 2015–16 income year to align with the application date of section FE 2(1)(cb)(i).


That the submission be accepted.