Bad debts

DB 31 Bad debts
No deduction (with exception)

(1)

A person is denied a deduction in an income year for a bad debt, except to the extent to which—

(a)

the debt is a debt—

(i)

written off as bad in the income year:

(ii)

for which the debtor is released from making all remaining payments under the Insolvency Act 2006 excluding Part 5, subparts 1 and 2 of that Act, or under the Companies Act 1993, or under the laws of a country or territory other than New Zealand, and the person is required to calculate a base price adjustment by section EW 29 (When calculation of base price adjustment required) for the debt for the income year:

(iii)

for which the debtor is a company that is released from making all remaining payments by a deed or agreement of composition, and the person is required to calculate a base price adjustment by section EW 29 for the debt for the income year; and

(b)

in the case of the bad debts described in subsections (2) to (5), the requirements of the relevant subsection are met.

Deduction: financial arrangement debt: amount of income

(2)

A person who derives assessable income from a financial arrangement to which the financial arrangements rules apply is allowed a deduction for an amount owing under the financial arrangement, but only to the extent to which—

(a)

the amount is a bad debt and a requirement of subsection (1)(a) is met; and

(b)

the amount is attributable to the income; and

(bb)

the person is not associated with the debtor, or is associated with the debtor but the debtor has no deductions for the financial arrangement; and

(c)

subsection (5) does not limit the deduction.

Deduction: financial arrangement debt: dealers and holders

(3)

A person is allowed a deduction, quantified in subsection (3B), for an amount of a bad debt owing under a financial arrangement to which the financial arrangement rules apply, if—

(a)

the person carries on a business for the purpose of deriving assessable income; and

(b)

the business includes dealing in or holding financial arrangements that are the same as, or similar to, the financial arrangement; and

(c)

a requirement of subsection (1)(a) is met for the bad debt; and

(d)

the person is not associated with the person owing the amount written off.

Amount of deduction under subsection (3)

(3B)

For the purposes of subsection (3), the amount of the deduction for the amount owing under the financial arrangement is the lesser of—

(a)

the amount provided by subsection (4B); and

(b)

the amount provided by subsection (5).

Deduction: financial arrangement debt: dealers in property or services

(4)

A person is allowed a deduction for an amount owing under a financial arrangement to which the financial arrangements rules apply, but only to the extent to which—

(a)

the amount is a bad debt and the requirement of subsection (1)(a)(i) is met; and

(b)

the financial arrangement is an agreement for the sale and purchase of property or services; and

(c)

the person carries on a business of dealing in the property or services that are the subject of the agreement; and

(d)

the person carries on the business for the purpose of deriving assessable income; and

(e)

subsection (5) does not limit the deduction.

Amount for purposes of subsections (3) and (3B)

(4B)

For the purposes of subsections (3) and (3B), the amount is the least of—

(a)

the amount of consideration that the person pays for acquiring the financial arrangement:

(b)

the amount owing under the financial arrangement:

(c)

the amount calculated using the following formula, treating the calculation of a negative amount as zero:

amount owing − limited recourse consideration + adjustment amount.

Definition of items in formula

(4C)

In the formula in subsection (4B)(c),—

(a)

amount owing is the lesser of—

(i)

the amount of consideration that the person pays for acquiring the financial arrangement:

(ii)

the amount owing under the financial arrangement:

(b)

limited recourse consideration is the amount of consideration paid to the person under a limited-recourse arrangement that relates to the financial arrangement:

(c)

adjustment amount is an amount allocated for the income year under section EW 15D (IFRS financial reporting method) for the limited-recourse arrangement, to the extent to which the amount arises solely because of the reduction in the value of the limited-recourse arrangement due to the financial arrangement’s relevant bad debt amount.

Limited recourse: base price adjustment

(4D)

If subsection (4B)(c) applies for an amount owing under a financial arrangement, then the person is allowed a deduction, at the time the person performs a base price adjustment for the related limited-recourse arrangement, of an amount equal to the amount owing under the financial arrangement minus the total amount of deductions for the financial arrangement under subsections (2) and (3) that have arisen before the base price adjustment.

Definition of items in formula[Repealed]

(4E)

[Repealed]

Deduction: bad debt representing loss already offset

(5)

A person is allowed a deduction for a bad debt only to the extent to which it is more than the total of the amounts offset under section IC 1 (Company A making tax loss available to company B) that are described in paragraphs (e) and (f) if—

(a)

the person writing off the amount of debt is a company (company A); and

(b)

the debt is owed to it by another company (company B); and

(c)

company B—

(i)

itself uses the amount giving rise to the debt; or

(ii)

uses it to fund directly or indirectly another company (company C) that uses the amount; and

(d)

company B or company C has a tax loss, in the calculation of which the amount used is taken into account; and

(e)

company A, or a company that is part of the same group of companies as company A at any time in the income year in which company B or company C has the tax loss, offsets an amount for the tax loss under section IC 1; and

(f)

the offset is in a tax year before the tax year that corresponds to the income year in which company A writes off the amount of debt, but not before the 1993–94 tax year.

A definition

(5B)

In this section, limited-recourse arrangement means, in relation to an amount owing under a financial arrangement (the debt), an arrangement that is for the person’s business of dealing in or holding financial arrangements, and that provides for payment or non-payment by the person, contingent upon—

(a)

payment of some or all of the debt to the person:

(b)

failure to make payment of some or all of the debt to the person.

Link with subpart DA

(6)

The link between this section and subpart DA (General rules) is as follows:

(a)

subsection (1) overrides the general permission; and

(b)

for subsections (2) to (5),—

(i)

they supplement the general permission, to the extent to which they allow a deduction that is denied under the general permission; and

(ii)

they override the general permission, to the extent to which they deny a deduction that is allowed under the general permission; and

(iii)

the general limitations still apply, except that subsections (3) and (4D) override the capital limitation for a financial arrangement held as part of a business that includes dealing in or holding financial arrangements.

Defined in this Act: agreement for the sale and purchase of property or services, amount, arrangement, assessable income, associated person, business, company, deduction, financial arrangement, financial arrangements rules, general limitation, general permission, group of companies, income year, limited-recourse arrangement, supplement, tax loss, tax year

Compare: 2004 No 35 s DB 23

Section DB 31(1)(a): replaced (with effect on 1 April 2008 and applying for a debt that goes bad in the 2008–09 and later income years), on 27 February 2014, by section 34(1) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31(2)(a): amended (with effect on 1 April 2008 and applying for a debt that goes bad in the 2008–09 and later income years), on 27 February 2014, by section 34(2) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31(2)(bb): inserted, on 1 July 2017, by section 50(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section DB 31(3) heading: replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(3): replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(3B) heading: inserted (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(3B): inserted (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4) heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on 24 February 2016, by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4)(a): amended (with effect on 1 April 2008 and applying for a debt that goes bad in the 2008–09 and later income years), on 27 February 2014, by section 34(5) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31(4B) heading: replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4B): replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4B)(c) formula: amended (with effect on 20 May 2013), on 30 March 2017, by section 50(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section DB 31(4C) heading: replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4C): replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4C)(b): amended (with effect on 20 May 2013), on 30 March 2017, by section 50(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section DB 31(4C)(c): inserted (with effect on 20 May 2013), on 30 March 2017, by section 50(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section DB 31(4D) heading: replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4D): replaced (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4E) heading: repealed (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(4E): repealed (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(5B) heading: inserted (with effect on 20 May 2013), on 27 February 2014, by section 34(7) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31(5B): inserted (with effect on 20 May 2013), on 27 February 2014, by section 34(7) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31(5B): amended (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(6)(b)(iii): amended (with effect on 20 May 2013 and applying for a debt that goes bad in the 2008–09 or later income year), on 24 February 2016, by section 95(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31(6)(b)(iii): replaced (with effect on 1 April 2008 and applying for the 2008–09 and later income years), on 24 February 2016, by section 95(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).

Section DB 31 list of defined terms arrangement: inserted (with effect on 20 May 2013), on 27 February 2014, by section 34(8) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).

Section DB 31 list of defined terms limited-recourse arrangement: inserted (with effect on 20 May 2013), on 27 February 2014, by section 34(8) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).