EW 46C Consideration when debt forgiven within economic group
When this section applies

(1)

This section applies to the extent to which an amount of debt is forgiven and—

(a)

the creditor is a member of the same wholly-owned group of companies as the debtor and the debtor is a New Zealand resident company:

(b)

the creditor is a member of the same wholly-owned group of companies as the debtor and, for the debtor, a group of persons who are New Zealand resident companies (the NZ group) hold, before section YC 4 (Look-through rule for corporate shareholders) is applied to the NZ group in relation to their interests,—

(i)

common voting interests that add up to 100%; and

(ii)

if a market value circumstance exists for a company that is part of a group of companies to which the debtor belongs, common market value interests that add up to 100%:

(c)

if the debtor is a company, the creditor is not a member of the same wholly-owned group of companies as the debtor and the creditor has ownership interests or, as applicable, market value interests in the debtor:

(d)

if the debtor is a partnership, the creditor has a partner’s interest in the income of the debtor:

(e)

if the debtor is a look-through company, the creditor has an effective look-through interest in the debtor.

Some points about this section

(2)

For the purposes of this section,—

(a)

the means by which an amount of debt is forgiven is immaterial:

(ab)

the debt includes an amount accrued and unpaid at the time of the forgiveness:

(b)

a group of natural persons (the single creditor group) who are creditors or who have interests in the debtor are treated as one creditor holding the total debts and interests of the single creditor group, if each person has natural love and affection for the others. However, a trust may join the single creditor group if—

(i)

the trust was established mainly to benefit a natural person for whom each person of the single creditor group has natural love and affection; and

(ii)

the amount given by dividing the amount that the trust forgives the debtor by the trust’s proportional ownership ratio is less than the amount given by dividing the amount that the single creditor group forgives the debtor by the group’s proportional ownership ratio (for example: $100 forgiven by the trust ÷ 40% ownership is greater than $100 forgiven by the group ÷ 50% ownership, so the trust may not join the group, even if the required natural love and affection exists):

(c)

a group of persons (the single corporate creditor group) that are creditors or that have interests in the debtor are treated as 1 creditor holding the total debts and interests of the single corporate creditor group, if—

(i)

each person is a member of the same wholly-owned group of companies; and

(ii)

the debtor is not a member of the wholly-owned group of companies.

When this section does not apply

(3)

This section does not apply if—

(a)

the creditor and debtor are members of the same wholly-owned group of companies; and

(b)

the creditor is a non-resident; and

(c)

the debt has been held by a person that is not a member of the wholly-owned group of companies.

Consideration: debtor

(4)

The debtor is treated as having paid the amount of debt on the date on which the creditor forgives it, if—

(a)

the relevant debt, creditor, and debtor are described in subsection (1)(a) or (b):

(b)

the proportional debt ratio for the amount equals the proportional ownership ratio.

Consideration: creditor

(5)

The creditor is treated as having been paid the amount of debt on the date on which the creditor forgives it, if—

(a)

the relevant debt, creditor, and debtor are described in subsection (1)(a) or (b):

(b)

the proportional debt ratio for the amount equals the proportional ownership ratio.

Some definitions

(6)

For the purposes of this section,—

nominal shares are shares held by the trustee of a share purchase scheme, or employees or former employees of the debtor, if the total of those shares represent voting interests in the debtor that add up to no more than 3%, or, as applicable, market value interests in the company that add up to no more than 3%

proportional debt ratio means, for a creditor and an amount of debt, the percentage that the creditor’s amount bears to the total amounts of debt to which this section applies forgiven at the time the creditor’s debt is forgiven

proportional ownership ratio means the creditor’s percentage of the ownership interests or, as applicable, market value interests, total partner’s interests, or total effective look-through interests for the debtor, ignoring nominal shares.

Defined in this Act: amount, consideration, employee, group of persons, income, look-through company, look-through interest, market value interest, New Zealand resident, nominal share, non-resident, partnership, partner’s interests, pay, proportional debt ratio, proportional ownership ratio, share, trustee, voting interest, wholly-owned group of companies

Section EW 46C: inserted (with effect on 1 April 2008), on 30 March 2017, by section 75(1) (and see section 75(2)) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).

Section EW 46C(2)(ab): inserted, on 1 July 2017, by section 76 of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).