Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013

30 New subpart DG inserted (Expenditure related to use of certain assets)

(1)

After section DF 5, insert:

Subpart DG—Expenditure related to use of certain assets

Introductory provisions

DG 1 What this subpart does

This subpart sets out the rules for the deductibility and apportionment of expenditure incurred for an income year in relation to an asset when the asset is used partly for income-earning purposes and partly for private purposes, and for a time during the income year, the asset is not in use.

Defined in this Act: asset, deduction, income, income year

DG 2 Application of this subpart
Asset by asset

(1)

The rules in this subpart apply on an asset by asset basis.

Relationship with sections DB 5, DB 7, and DB 8

(2)

The rules in this subpart override sections DB 5, DB 7, and DB 8 (which relate to deductions for financing expenditure) in relation to expenditure that this subpart applies to.

Relationship with subpart DD

(3)

Subpart DD (Entertainment expenditure) does not apply to expenditure incurred in relation to the private use of an asset to which this subpart applies.

Relationship with FBT rules and dividend rules

(4)

No liability to pay fringe benefit tax arises from the private use of an asset to which this subpart applies. In circumstances where section CX 17 (Benefits provided to employees who are shareholders or investors) applies to a company to which this subpart also applies, the company must choose to treat a non-cash benefit referred to in that section as a dividend.

Application to groups of and interests in companies

(5)

For the purposes of this subpart,—

(a)

a group of companies is treated as a wholly-owned group of companies:

(b)

a voting interest in a company includes a market value interest when a market value circumstance exists for the company.

Rules for identifying voting and market value interests

(6)

In this subpart,—

(a)

for the purposes of determining the extent to which a company (company A) has a voting interest or market value interest in another company (company B), the look-through rule in section YC 4 (Look-through rule for corporate shareholders) does not apply to treat company A’s voting interest or market value interest as held by company A’s shareholders or anyone else; and

(b)

for the purposes of determining the extent to which company A has a voting interest or market value interest of more than 10% in an associated company, the look-through rule in section YC 4 does not apply to treat a voting interest or a market value interest of company A in the associated company as held by their respective shareholders or anyone else; and

(c)

a zero voting interest is not a voting interest, and a zero market value interest is not a market value interest.

Defined in this Act: asset, associated, company, deduction, dividend, fringe benefit tax, group of companies, market value circumstance, market value interest, private use, voting interest, wholly-owned group of companies

DG 3 Meaning of asset for this subpart
Meaning of asset

(1)

For the purposes of this subpart, an asset, for an income year, means an item of property described in subsection (2) held by a person described in subsection (3) to the extent to which the item—

(a)

is used by the person in the income year partly to derive income and partly for private use; and

(b)

is not in use—

(i)

for at least 62 days in the income year; or

(ii)

when the asset is typically used only on working days, for at least 62 working days in the income year.

What items of property?

(2)

Subsection (1) applies to an asset that, in the complete form in which the person uses it for income-earning purposes,—

(a)

is 1 of the following:

(i)

land, including improvements to land:

(ii)

a ship, boat, or craft used in navigation on or under water, whether or not it has a means of propulsion:

(iii)

an aircraft; and

(b)

for an item referred to in paragraph (a)(ii) and (iii), has—

(i)

a cost to the person of $50,000 or more; or

(ii)

a market value on the date of acquisition of the asset of $50,000 or more, if the asset was not acquired at market value; and

(c)

includes any related items, things, or accessories pertaining to the asset.

Which persons?

(3)

A person excludes a company other than a close company and, for the purposes of this subpart, a reference in the definition of close company to a natural person includes a reference to a trustee.

Exclusions

(4)

Despite subsection (2), an asset is excluded from the operation of the rules in this subpart if—

(a)

the use of the asset meets the following criteria:

(i)

the private use of the asset is minor; and

(ii)

the main use of the asset is use in a business that is not a rental or charter business; and

(iii)

for a company or a trustee of a trust, the use of the asset places an obligation on the company or the trustee, as applicable, to pay fringe benefit tax or income tax:

(b)

the asset is a residential property and its only income-earning use is as a long-term rental property:

(c)

the asset—

(i)

is being used in an income year by a person (person A); and

(ii)

during the income year, undergoes a change of use; and

(iii)

the only uses made of the asset for the income year are the use by person A and the use by another person from which person A derives income.

Meaning of market value

(5)

For the purposes of this subpart, other than subsection (2)(b)(ii), market value means the price at which the asset is provided for use at a particular time or for a particular season—

(a)

in the open market; and

(b)

freely offered; and

(c)

made on ordinary terms; and

(d)

to a member of the public at arm’s length.

Partnerships and look-through companies

(6)

For the purposes of this section, if the asset is held through a partnership or a look-through company, the value of the interests in the asset held by all the partners in the partnership or all the shareholders in the look-through company, as applicable, is aggregated.

What constitutes use

(7)

For the purposes of this subpart, the use of an asset is the active use of the asset for its intended purpose.

Example

Graeme owns a yacht that he used with his family for a 4-week holiday. He also rented the yacht at market rates to other people who were not associates on 4 occasions, totalling 3 weeks. The cost of the yacht (including some capital improvements and items such as lifejackets and a dinghy) is $85,000. The rules in this subpart apply to Graeme.

Defined in this Act: amount, asset, business, close company, company, deduction, fringe benefit tax, income, income tax, income year, land, look-through company, market value, partnership, private use, shareholder, tax, trustee, working day

DG 4 Meaning of private use for this subpart
What is private use?

(1)

For the purposes of this subpart, private use of an asset—

(a)

means the use of the asset by a person described in subsection (2), whether or not—

(i)

the use is exclusive:

(ii)

an amount of income is derived in relation to its use:

(b)

includes the use of an asset when income derived in relation to the use of the asset is an amount that is less than 80% of the market value amount:

(c)

excludes the use of the asset referred to in subsections (3) to (5).

Use by natural persons

(2)

The person referred to in subsection (1)(a) is a natural person who is—

(a)

the person who owns, leases, licenses, or otherwise has the asset; or

(b)

a person associated with them.

Ordinary business use

(3)

The use of an asset is not private use if—

(a)

the asset is used to derive income for a particular period; and

(b)

the person uses the asset during the period solely in the ordinary course of their business.

Repairs

(4)

The use of an asset is not private use if—

(a)

the asset is used to derive income for a particular period; and

(b)

damage is caused to the asset during the period; and

(c)

the damage is not the result of ordinary wear and tear; and

(d)

the person uses the asset after the end of the period to repair the damage; and

(e)

the use of the asset referred to in paragraph (d) is necessary in order for the person to carry out the repairs.

Relocation expenses

(5)

The use of an asset is not private use if—

(a)

the asset is used to derive income for a particular period in an income year; and

(b)

the person uses the asset before the start of the period, or after the end of the period, or both, to relocate the asset; and

(c)

the use referred to in paragraph (b) and the relocation of the asset are necessary for the income-earning purposes; and

(d)

the income the person derives for the income year from the use of the asset includes an amount payable for the cost of relocation.

Exempt income

(6)

Subsections (3) to (5) do not apply if the person derives an amount of exempt income in relation to the use of the asset. For the treatment of certain amounts of income derived from the use of assets as described in this section, see section CW 8B (Certain amounts derived from use of assets).

Example

Mary owns a launch. During the course of an income year, she takes her family out on the launch, she lets her brother use the launch (paying the market rate of $200 per day) and she lets her friend use the launch (paying fuel costs only at the rate of $50 per day). All these uses are instances of private use. When Mary rents out the launch to non-associates at market rates, takes the launch to another port for rental to non-associates at $250 per day and then back again to the home port, or takes the launch to a boatyard for repair after damage was caused by a non-associate during a rental period, none of these instances is private use.

Defined in this Act: amount, asset, associated person, business, exempt income, income, lease, market value, pay, private use

DG 5 Meaning and treatment of interest expenditure for this subpart
Interest expenditure

(1)

In this subpart, interest expenditure, for a person to whom this subpart applies, means expenditure on interest, and includes an amount of interest on the sum of the outstanding balances of financial arrangements entered into by the person, if the financial arrangement—

(a)

provides funds to the person; and

(b)

gives rise to an amount for which the person would have a deduction.

Apportionment

(2)

For the purposes of this subpart,—

(a)

if the person is not a company, an amount of interest expenditure incurred in relation to an asset is included in the item expenditure in section DG 9(3)(a):

(b)

if the person is a company other than a qualifying company, an amount of interest expenditure incurred in relation to an asset is apportioned under section DG 11:

(c)

if the person is a qualifying company, they are treated for the purposes of this subpart as a person that is not a company.

Exchange rate fluctuations

(3)

Interest expenditure does not include a deduction for an amount that arises only from movement in currency exchange rates.

Defined in this Act: amount, asset, company, deduction, financial arrangement, interest, interest expenditure, qualifying company

DG 6 Associated persons: company rule modified

Despite section YB 3(1), for the purposes of this subpart, a company and a person other than a company are associated persons if—

(a)

the person has a voting interest in the company of 5% or more; or

(b)

the person’s share in the company gives them a right to use the asset.

Defined in this Act: asset, associated person, company, share, voting interest

When assets held simply

DG 7 Expenditure related to income-earning use
Expenditure on certain business and regulatory requirements

(1)

A person is allowed a deduction for expenditure or loss, including an amount of depreciation loss, to the extent to which the amount incurred—

(a)

relates solely to the use of an asset for deriving income of the person, other than exempt income; and

(b)

is expenditure—

(i)

from which the person would not reasonably expect to receive a personal benefit, or for a company, an associate of the person:

(ii)

that the person must reasonably incur to meet a regulatory requirement so that they may use the asset for deriving income and that would not have been incurred but for the requirement.

Expenditure that must be apportioned

(2)

Despite subsection (1) and for the avoidance of doubt, all expenditure on repairs and maintenance incurred in relation to an asset must be treated as expenditure that is limited under section DG 8. However, this subsection does not apply to the cost of repairing damage described in section DG 4(4).

Example

John operates a charter boat which he also uses privately. He incurs expenses including costs in meeting Maritime New Zealand survey requirements, advertising costs, and general maintenance costs. The advertising costs are fully deductible because they deliver no personal benefit. The survey costs are fully deductible if they are incurred only for charter purposes. The maintenance costs are not deductible under this provision because they deliver a personal benefit as well as an income-earning benefit. A portion of these maintenance costs may be allowed as a deduction under section DG 8.

Defined in this Act: amount, asset, associated person, company, deduction, depreciation loss, exempt income, income

DG 8 Expenditure limitation rule
Limited deduction

(1)

A person is allowed a deduction for expenditure or loss, including an amount of depreciation loss, that they incur in relation to the income-earning use of an asset to the extent of the amount calculated using the formula in section DG 9(2).

Depreciation recovery and loss on disposal

(2)

In the treatment of assets generally,—

(a)

if some or all of the expenditure on an asset is apportioned for tax purposes on the basis of space, floor area, or on another similar basis, that method of apportionment overrides the rules in this subpart to the extent of the amount of the deduction:

(b)

depreciation recovery income on disposal is dealt with in section EE 49 (Amount of depreciation recovery income when item partly used for business):

(c)

depreciation loss on disposal is dealt with in sections EE 44 to EE 48, and EE 50(6) and (7) (which relate to amounts of depreciation loss).

Relationship with other sections

(3)

This section—

(a)

supplements the general permission and overrides the capital limitation and the private limitation, but the other limitations still apply:

(b)

overrides section EE 50(2) (Amount of depreciation loss when item partly used to produce income).

Defined in this Act: amount, asset, capital limitation, deduction, depreciation loss, depreciation recovery income, general permission, private limitation

DG 9 Apportionment formula
What this section does

(1)

This section provides the formula for use in sections DG 8 and DG 11 to DG 13 to calculate the way in which an amount of expenditure or loss that a person incurs in relation to an asset is apportioned between its income-earning use and its private or other use.

Formula

(2)

The apportionment formula is—

expenditure×income-earning days
(income-earning days + counted days).
Definition of items in formula

(3)

In the formula,—

(a)

expenditure is the total expenditure or loss that is incurred by the person for an income year in relation to the asset, and that would be deductible in the absence of this subpart, other than expenditure that is—

(i)

related solely to the income-earning use of the asset as described in section DG 7; or

(ii)

related solely to the private use of the asset:

(b)

income-earning days is the total number of days in the income year for which the person derives income from the use of the asset, other than exempt income under section CW 8B(3) (Certain amounts derived from use of assets), including any days on which—

(i)

the use made of the asset is use described in section DG 4(3) to (5):

(ii)

the asset has become unavailable for use because another person who had earlier reserved the asset for their own use, subsequently did not take advantage of that reservation:

(iii)

a fringe benefit tax liability arises:

(c)

counted days is the total number of days in the income year on which the asset is in use, and the day is not an income-earning day as described in paragraph (b).

Other units of measurement

(4)

A unit of measurement of time other than days, whether relating to hours, or nights, or anything else, is to be used in the formula and in subsection (3)(b) and (c), if it achieves a more appropriate apportionment. For this purpose, the same unit must be used in relation to both items in subsection (3)(b) and (c).

Example

Jim rents out his aeroplane at market value for 100 hours in an income year, and uses it for his personal enjoyment for 50 hours. Jim incurs expenditure of $10,000 for general repairs and maintenance of the plane. He may deduct two-thirds of the expenditure (section DG 9(2)). The formula is $10,000 × (100/(100 + 50)) = $6,666.67.

Defined in this Act: amount, asset, deduction, exempt income, fringe benefit tax, income, income year, market value, private use

When assets held in corporate structures

DG 10 Interest expenditure rules
Groups of companies

(1)

Sections DG 11 to DG 14 provide for the apportionment of interest expenditure incurred by a company that has an asset to which this subpart applies, and by other companies that are in the same group of companies as the company, and by shareholders. Companies must provide information disclosure statements under section 30D of the Tax Administration Act 1994 to enable the calculations to be made.

Exclusions: group companies

(2)

A company (company A) that is treated as part of a wholly-owned group under this subpart, but is not part of a wholly-owned group for the other purposes of this Act, is excluded from the interest expenditure rules in sections DG 11 to DG 14 for an income year if—

(a)

no private use of an asset of a company in the group has been made in the income year by a shareholder of company A:

(b)

no tax losses have been made available under subpart IC (Grouping tax losses) between company A and other companies in the group.

Exclusion: corporate shareholders

(3)

Section DG 13 does not apply to a corporate shareholder if—

(a)

the shareholder has a direct or indirect interest of less than 50% in the company that has the asset; and

(b)

the shareholder has not enjoyed any private use of the asset.

Exclusion: non-corporate shareholders

(4)

Section DG 14 does not apply to a shareholder if—

(a)

the shareholder has a direct or indirect interest of less than 50% in the company that has the asset; and

(b)

the shareholder has not enjoyed any private use of the asset.

Treatment of qualifying companies

(5)

The interest expenditure rules apply to a qualifying company in the following way:

(a)

the company is treated as if section DG 11(3) applied to it in order to calculate the amount of the company’s net asset balance; and

(b)

sections DG 12 to DG 14 then apply to determine the amount of the deduction to which the company, another company, or a shareholder is entitled.

Associated persons

(6)

For the purposes of subsections (2), (3), and (4), a reference to a shareholder includes a person associated with the shareholder, unless the associated person is also a shareholder.

Defined in this Act: amount, asset, associated person, company, deduction, group of companies, income year, interest expenditure, net asset balance, private use, qualifying company, shareholder, tax loss, wholly-owned group

DG 11 Interest expenditure: close companies
What this section does

(1)

This section quantifies the amount of a deduction that a close company is allowed for an income year when—

(a)

the company has an asset to which this subpart applies; and

(b)

the company incurs interest expenditure for the income year.

Determining values and deductions

(2)

The company must first determine the amount of its debt value and its asset value for the income year, and then apply either subsection (3) or subsections (4) to (6).

Debt value less than asset value

(3)

If the debt value for the income year is equal to or less than the asset value for the income year, the company is allowed a deduction of a portion of interest expenditure incurred for the income year—

(a)

of an amount calculated using the formula in section DG 9(2); and

(b)

treating the company’s total interest expenditure for the income year as if it were the item expenditure in the formula.

Debt value more than asset value

(4)

If the debt value for the income year is more than the asset value for the income year, the company must calculate a reduced amount of interest expenditure for the income year using the formula—

interest expenditure×company’s asset value
company’s debt value.
Definition of items in formula

(5)

In the formula,—

(a)

interest expenditure is the total amount of interest expenditure incurred by the company for the income year:

(b)

company’s asset value is the amount of the company’s asset value for the income year:

(c)

company’s debt value is the amount of the company’s debt value for the income year.

Apportionment of reduced amounts

(6)

The company is allowed a deduction for the income year of a portion of the reduced amount described in subsection (4),—

(a)

of an amount calculated using the formula in section DG 9(2); and

(b)

treating the reduced amount as if it were the item expenditure in the formula.

Net asset balance

(7)

When subsection (3) applies for an income year, the amount that remains outstanding after subtracting the debt value for the income year from the asset value for the income year (the net asset balance), must be used under sections DG 12 to DG 14, as applicable.

Meaning of asset value

(8)

For the purposes of this subpart, asset value means the value of the asset at the end of an income year, using—

(a)

for land, including an improvement to land, the amount given by the later of either its most recent capital value or annual value (as set by the relevant local authority), or its cost on acquisition (or market value, if the transaction involves an associated person):

(b)

for other property, its adjusted tax value.

Meaning of debt value

(9)

For the purposes of this subpart, debt value

(a)

means the average outstanding amount that gives rise to the interest payable by the company, measured by reference to the amounts outstanding at the start of and at the end of an income year; and

(b)

for a person who has, in the income year, more than 1 asset to which this subpart applies, is reduced in subsection (5)(c), sections DG 12(6)(c) and DG 13(8)(c), by an amount previously taken into account under this subpart for the income year.

Example

Holiday Home Ltd holds a holiday home with a rateable value of $200,000. The company has debt of $40,000, with associated interest expenditure of $4,000. Since the debt value is less than the asset value, all the interest expenditure must be apportioned (section DG 11(3)).

Boat Ltd has a charter boat whose cost is $60,000. The company has debt of $100,000, with associated interest expenditure of $10,000. Since the debt value is more than the asset value, the company must apportion interest expenditure of $6,000 (section DG 11(4)-(6)). The formula is $10,000 × ($60,000/$100,000) = $6,000.

Defined in this Act: adjusted tax value, amount, asset, asset value, associated person, close company, cost, debt value, deduction, income, income year, interest, interest expenditure, land, market value, net asset balance, pay

DG 12 Interest expenditure: group companies
When this section applies

(1)

This section applies for an income year when—

(a)

a close company or a qualifying company (company A) has a net asset balance; and

(b)

company A is part of the same group of companies as another company (company B); and

(c)

company B has interest expenditure for which it is allowed a deduction.

How this section applies: looping rule

(2)

This section applies sequentially to every group company B until—

(a)

the net asset balance for the income year is reduced to zero, or is treated as reduced to zero; or

(b)

no other group companies exist to which this section applies.

Debt value less than net asset balance

(3)

If company B’s debt value for the income year is equal to or less than the net asset balance for the income year, company B is allowed a deduction of a portion of interest expenditure incurred for the income year,—

(a)

of an amount calculated by company A using the formula in section DG 9(2); and

(b)

treating company B’s total interest expenditure for the income year as if it were the item expenditure in the formula.

Recalculation of net asset balance

(4)

In the application of subsection (3), the amount of the net asset balance must be recalculated on each application, being reduced by an amount equal to each counted group company’s debt value.

Debt value more than net asset balance

(5)

If company B’s debt value for the income year is more than the net asset balance for the income year, company B must calculate a reduced amount of interest expenditure for the income year using the formula—

interest expenditure×net asset balance
company B’s debt value.
Definition of items in formula

(6)

In the formula,—

(a)

interest expenditure is the total amount of interest expenditure incurred by company B for the income year:

(b)

net asset balance is the amount of the net asset balance for the income year:

(c)

company B’s debt value is the amount of company B’s debt value for the income year.

Apportionment of reduced amounts

(7)

Company B is allowed a deduction for the income year of a portion of the reduced amount described in subsection (5),—

(a)

of an amount calculated by company A using the formula in section DG 9(2); and

(b)

treating the reduced amount as if it were the item expenditure in the formula.

Net asset balance zero

(8)

Once a calculation is made under subsection (5), company B’s net asset balance is treated as zero.

Net asset balance

(9)

If a net asset balance remains outstanding after the application of this section for an income year, the amount must be used under sections DG 13 and DG 14, as applicable.

Example

Holiday Home Ltd has an asset balance of $160,000 ($200,000 less $40,000) and is wholly owned by Parent Ltd. Parent has debt of $30,000, with associated interest expenditure of $3,000. Since Parent’s debt value is less than the asset balance, all of Parent’s interest expenditure must be apportioned (section DG 12(3)).

Defined in this Act: amount, asset value, close company, company, debt value, deduction, group of companies, income year, interest expenditure, net asset balance, qualifying company

DG 13 Interest expenditure: corporate shareholders
When this section applies

(1)

This section applies when—

(a)

a net asset balance remains outstanding for an income year after the application of—

(i)

first, section DG 12, if applicable; or

(ii)

secondly, section DG 11; and

(b)

1 or more of the following companies, none of which is part of a group of companies that includes company A, exists:

(i)

a company that is a shareholder in company A:

(ii)

a company that is a shareholder in a company that is part of the same group of companies as company A and has a voting interest in company A:

(iii)

a company that has a voting interest in a company referred to in subparagraph (i) or (ii).

How this section applies: looping rule

(2)

This section applies sequentially as follows:

(a)

first, to the companies referred to in subsection (1)(b)(i) and (ii); and

(b)

secondly, to the extent to which the debt value of the company for the income year remains less than the company’s share of the net asset balance, to the companies that are shareholders in a company referred to in paragraph (a); and

(c)

so on, until either—

(i)

the company’s share of the net asset balance for the income year is reduced to zero or is treated as reduced to zero; or

(ii)

no other corporate shareholders exist to which this section applies.

Limitation by share in asset balance

(3)

The deduction that the company is allowed for interest expenditure incurred for the income year is limited by its share of the net asset balance. The share of the asset balance is calculated using the formula—

net asset balance × company’s interest.
Definition of items in formula

(4)

In the formula in subsection (3),—

(a)

net asset balance is the amount of the net asset balance after the application of section DG 11 or DG 12, as applicable, and as recalculated under subsection (6):

(b)

company’s interest is the relevant voting interest in company A, expressed as a percentage.

Debt value less than asset balance

(5)

If the debt value for the company for the income year is equal to or less than its share of the net asset balance for the income year, the company is allowed a deduction of a portion of interest expenditure incurred for the income year,—

(a)

of an amount calculated by company A using the formula in section DG 9(2); and

(b)

treating the total interest expenditure for the income year as if it were the item expenditure in the formula.

Recalculation of asset balance

(6)

In the application of subsection (5), the amount that is the company’s share of the net asset balance must be recalculated on each application, being reduced by an amount equal to each counted company’s debt value.

Debt value more than asset balance

(7)

If the debt value for the company for the income year is more than its share of the net asset balance, the company must calculate a reduced amount of interest expenditure incurred for the income year using the formula—

interest expenditure×company’s share of net asset balance
company’s debt value.
Definition of items in formula

(8)

In the formula in subsection (7),—

(a)

interest expenditure is the total amount of interest expenditure incurred by the company for the income year:

(b)

company’s share of net asset balance is the amount calculated for the company under subsection (3):

(c)

company’s debt value is the amount of the debt value of the company for the income year.

Apportionment of reduced amounts

(9)

The company is allowed a deduction for the income year of a portion of the reduced amount described in subsection (7),—

(a)

of an amount calculated by company A using the formula in section DG 9(2); and

(b)

treating the reduced amount as if it were the item expenditure in the formula.

Net asset balance zero

(10)

Once a calculation is made under subsection (7), the amount that is the company’s share of the net asset balance is treated as zero.

Net asset balance

(11)

If a net asset balance remains outstanding after the application of this section for an income year, the amount must be used under section DG 14.

Example

Parent Ltd has 2 equal corporate shareholders, company Y, which has debt of $20,000 with associated interest expenditure of $2,000, and company Z, which has debt of $70,000 with associated interest expenditure of $7,000. Both companies’ share of the net asset balance is $65,000 ($130,000 × 50%). Since company Y’s debt value is less than its share of the net asset balance, all its interest expenditure must be apportioned (section DG 13(5)). Company Z’s debt value is greater than its share of the net asset balance, so it must apportion interest expenditure of $6,500 (section DG 13(7)-(9)). The formula is $7,000 × ($65,000/$70,000) = $6,500.

Defined in this Act: amount, company, debt value, deduction, group of companies, income year, interest expenditure, net asset balance, shareholder, voting interest

DG 14 Interest expenditure: non-corporate shareholders
When this section applies

(1)

This section applies for an income year when—

(a)

a net asset balance remains outstanding for an income year after the application of—

(i)

first, section DG 13, if applicable:

(ii)

secondly, section DG 12, if applicable:

(iii)

thirdly, section DG 11, if neither applies; and

(b)

a person exists who—

(i)

is not a company, other than a company acting as a trustee; and

(ii)

has a voting interest in company A; and

(iii)

has interest expenditure for which they are allowed a deduction.

Amount to be apportioned

(2)

For a natural person, the amount of interest expenditure that must be apportioned is only the amount of interest that the person incurs on money borrowed to acquire shares in company A or in a company referred to in section DG 13(1)(b).

Method of apportionment

(3)

The apportionment is made using the rules set out in section DG 13(2) to (10), treating the person as if they were the company.

Example

Company Y has 2 shareholders: Thomas, who has borrowed $200,000 to acquire a 50% interest in the company, and Brent, who has borrowed $10,000 to buy his 50% interest. Each has a share of the remaining net asset balance of $22,500. The formula is ($65,000 − $20,000) × 50% = $22,500. Since Thomas’s debt value is greater than his share of the net asset balance, Thomas must apportion 11.25% of his total interest expenditure (sections DG 14 and DG 13(7)-(9)). The formula is 22,500/200,000. Since Brent’s debt value is less than his share of the net asset balance, all Brent’s interest expenditure must be apportioned (sections DG 14 and DG 13(5)).

Defined in this Act: amount, company, deduction, income year, interest, interest expenditure, net asset balance, share, trustee, voting interest

Quarantined expenditure

DG 15 Quarantined expenditure rules

Sections DG 16 and DG 18 provide the rules that limit the amount of a person’s deduction under sections DG 7, DG 8, and DG 11 to DG 14 for an income year when the income derived from the use of the asset does not reach a specified threshold. The excess expenditure is quarantined and denied as a deduction for the income year. Sections DG 17 and DG 19 provide for the allocation of the quarantined amount to a later income year when the income derived is sufficient to offset the expenditure. Companies must provide information disclosure statements under section 30D of the Tax Administration Act 1994 to enable the calculations to be made.

Defined in this Act: amount, asset, company, deduction, income, income year

DG 16 Quarantined expenditure when asset activity negative
When this section applies

(1)

This section applies when—

(a)

a person incurs expenditure for which they are allowed a deduction that is limited under section DG 7, DG 8, or DG 11, as applicable, for an income year; and

(b)

the amount of income derived for the income year from the use of an asset, other than an amount of exempt income, is less than 2% of—

(i)

for land, including an improvement to land, the amount given by the later of either its most recent capital value or annual value, as set by the relevant local authority, or its cost on acquisition or market value, if the transaction involves an associated person:

(ii)

for other property to which this subpart applies, its adjusted tax value.

Quarantined amount

(2)

The amount of the person’s excess expenditure for the income year is calculated using the formula—

expenditure – asset income.
Definition of items in formula

(3)

In the formula,—

(a)

expenditure is the total of the following amounts:

(i)

the total amount of deductions that the person is allowed for the income year under sections DG 7, DG 8, and DG 11, as applicable and after any necessary apportionment; and

(ii)

an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:

(b)

asset income is the total amount of income, other than an amount of exempt income, derived for the income year from the use of the asset.

No deduction for quarantined amount

(4)

The excess expenditure calculated under subsection (2) is quarantined and denied as a deduction for the income year.

Outstanding profit balance

(5)

If the amount of expenditure for the income year is less than the amount of income for the income year, the excess income is the outstanding profit balance for the income year to be used under section DG 18. If the amount of expenditure for the income year is equal to or more than the amount of income for the income year, the outstanding profit balance is treated as zero.

Zero result

(6)

For the purposes of the formula in subsection (2), if the amount of income for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

Example

David has a city apartment with a rateable value of $300,000. He rents out the apartment and also uses it privately. He receives market rate rental of $4,000 from non-associates, and $6,000 from associates. David’s total allowable expenditure, under sections DG 7, DG 8, and DG 11, is $15,000. Since David’s income from non-associates is less than 2% of the apartment’s rateable value, the excess expenditure of $5,000 is denied as a deduction. The amount denied may be allocated to a later income year under section DG 17.

Defined in this Act: adjusted tax value, amount, asset, associated person, cost, deduction, exempt income, income, income year, land, market value

DG 17 Allocation of amounts quarantined under section DG 16
When this section applies

(1)

This section applies for an income year (the current year) when—

(a)

a person has an amount of excess expenditure quarantined under section DG 16 in relation to an asset for an income year before the current year; and

(b)

the person’s income for the current year from the use of the asset is more than the amount of their deductions under sections DG 7, DG 8, and DG 11, as applicable.

Deduction and allocation

(2)

The amount of previously quarantined expenditure that the person is allowed as a deduction for the current year must not be more than the lesser of—

(a)

the amount referred to in subsection (1)(a):

(b)

the amount calculated using the formula—

asset income − expenditure.
Definition of items in formula

(3)

In the formula,—

(a)

asset income is the total amount of income derived for the current year from the use of the asset:

(b)

expenditure is the total amount of deductions that the person is allowed in relation to the asset for the current year under sections DG 7, DG 8, and DG 11, as applicable, and after any necessary apportionment.

Outstanding profit balance

(4)

If the lesser amount in subsection (2) is the quarantined amount referred to in subsection (2)(a), an outstanding profit balance arises of an amount that is the difference between the amount of income for the current year and the amount of expenditure for the current year, including the quarantined amount allocated to the current year. The outstanding profit balance is available for use under section DG 19.

Zero result

(5)

For the purposes of the formula in subsection (2), if the amount of expenditure for the current year is greater than the amount of income for the current year, the result of the formula is treated as zero.

Modification for certain assets

(6)

For the purposes of subsection (1)(a), a quarantined amount that is related to an asset may be used in relation to another asset of the person if—

(a)

the first asset is damaged, destroyed, or lost, and is no longer held by the person; and

(b)

a second asset is acquired to replace the first asset; and

(c)

the 2 assets are identical or substantially the same.

Example, continued from section DG 16

In the following income year, David derives $10,000 from renting his city apartment at market rates to a non-associate. David’s total allowable expenditure, under sections DG 7, DG 8, and DG 11, is $8,000. He also has expenditure of $5,000 quarantined from the previous income year. David is able to deduct $2,000 of that quarantined expenditure. The remaining $3,000 continues to be quarantined and may be allowed as a deduction for a later income year.

Defined in this Act: amount, asset, deduction, income, income year

DG 18 Quarantined expenditure: group companies and shareholders
When this section applies

(1)

This section applies when—

(a)

a person incurs expenditure for an income year for which they are allowed a deduction that is limited under 1 or more of sections DG 12 to DG 14; and

(b)

the income year is an income year in which section DG 16(1)(b) applies.

How this section applies: first looping rule

(2)

The first application of this section is to every group company B in sequence until no other group companies exist to which this subsection applies.

How this section applies: second looping rule

(3)

The second application of this section is sequentially to—

(a)

first, 1 or more of the following persons, none of which is a company referred to in subsection (2):

(i)

a person who is a shareholder in company A:

(ii)

a person who is a shareholder in a company that is part of the same group of companies as company A and has a voting interest in company A; and

(b)

secondly, a person who is a shareholder in a company referred to in paragraph (a); and

(c)

so on, until no other persons exist to which this subsection applies.

Quarantined amount

(4)

The amount of the person’s excess expenditure for the income year is calculated using the formula—

expenditure – outstanding profit balance.
Definition of items in formula

(5)

In the formula,—

(a)

expenditure is the total of the following amounts:

(i)

the total amount of deductions that the person is allowed for the income year under sections DG 12 to DG 14, as applicable and after any necessary apportionment; and

(ii)

an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:

(b)

outstanding profit balance,—

(i)

for company B, is the amount of the outstanding profit balance referred to in section DG 16(5):

(ii)

for a shareholder, is the amount that is the person’s share of the outstanding profit balance referred to in section DG 16(5), calculated using the formula in section DG 13(3), treating the outstanding profit balance as if it were the net asset balance.

No deduction for quarantined amount

(6)

The excess expenditure calculated under subsection (4) is either quarantined or remains quarantined, as applicable, and is denied as a deduction for the income year.

Recalculation of outstanding profit balance

(7)

For the purposes of subsections (4) and (5)(b), the amount that is the outstanding profit balance must be recalculated on each application, being reduced by an amount equal to the amount of any deduction counted.

Zero result

(8)

For the purposes of the formula in subsection (4), if the amount of the outstanding profit balance for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

Example

Aircraft Ltd owns an aircraft to which the rules in this subpart apply; the income derived from the asset in the current year is less than 2% of the cost of the aircraft. The company has calculated an outstanding profit balance of $12,000 after the application of section DG 16. Aircraft is 100% owned by Parent Ltd, which has apportioned interest expenditure of $5,000 calculated under section DG 12. Parent has 2 equal shareholders, Alisa who has apportioned interest expenditure of $8,000, and Hamish who has apportioned interest expenditure of $1,000, both calculated under section DG 14. Parent must apply section DG 18 first, and is not required to quarantine any of its interest expenditure; the outstanding profit balance is reduced to $7,000 ($12,000 - $5,000). Alisa’s and Hamish’s share of the outstanding profit balance is $3,500 each ($7,500 x 50%). Alisa must quarantine $4,500 of interest expenditure ($8,000 - $3,500); Hamish is not required to quarantine any interest expenditure.

Defined in this Act: amount, asset, company, deduction, group of companies, income year, net asset balance, shareholder, voting interest

DG 19 Allocation of amounts quarantined under section DG 18
When this section applies

(1)

This section applies for an income year (the current year) when—

(a)

a person has an amount of excess expenditure quarantined under section DG 18 for an income year before the current year; and

(b)

an outstanding profit balance referred to in section DG 17(4) is available for use for the current year.

How this section applies

(2)

This section applies sequentially in the order set out in section DG 18(2) and (3) until the outstanding profit balance is reduced to zero.

Deduction and allocation

(3)

The amount of previously quarantined expenditure that the person is allowed as a deduction for the current year must not be more than the lesser of—

(a)

the quarantined amount referred to in subsection (1)(a):

(b)

the amount calculated using the formula—

outstanding profit balance − expenditure.
Definition of items in formula

(4)

In the formula,—

(a)

outstanding profit balance,—

(i)

for company B, is the amount of the outstanding profit balance determined for the company for the current year under section DG 18(5), if applicable, or otherwise under section DG 17(4):

(ii)

for a shareholder, is the amount that is the person’s share of the outstanding profit balance for the current year under section DG 18(5), if applicable, or otherwise under section DG 17(4), calculated using the formula in section DG 13(3), treating the outstanding profit balance as if it were the net asset balance:

(b)

expenditure is the total amount of deductions that the person is allowed for the current year under sections DG 12 to DG 14, as applicable, and after any necessary apportionment.

Recalculation of outstanding profit balance

(5)

For the purposes of subsections (3) and (4)(a), the amount that is the outstanding profit balance must be recalculated on each application, being reduced by an amount equal to the amount of any deduction for quarantined expenditure counted.

Zero result

(6)

For the purposes of the formula in subsection (3), if the amount of expenditure for the current year is greater than the amount of the outstanding profit balance for the current year, the result of the formula is treated as zero.

Example, continued from section DG 18

In the following income year, Aircraft has calculated an outstanding profit balance of $16,000 after the application of section DG 18. Section DG 19 does not apply to Parent or Alisa because they have no previously quarantined interest expenditure. However, the section does apply to Hamish because he has $4,500 of quarantined interest expenditure from the previous year. Hamish’s current year apportioned interest expenditure is $7,000, calculated under section DG 14, and his share of the outstanding profit balance is $8,000 ($16,000 x 50%). Hamish is allowed a deduction for $1,000 of previously quarantined expenditure ($8,000 - $7,000). His remaining quarantined expenditure is $3,500 ($4,500 - $1,000).

Defined in this Act: amount, company, deduction, income year, net asset balance, shareholder

Certain modifications to rules

DG 20 When income cannot be separately attributed
Exclusion from rules

(1)

Sections DG 16 and DG 18 do not apply to the use of an asset for an income year when—

(a)

the person derives an amount of income for the income year from the use of the asset in a business activity; and

(b)

because of the nature of the activity, an amount cannot be separately attributed to the use of the asset.

Re-inclusion

(2)

Subsection (1) does not apply if—

(a)

the person also uses the asset in deriving an amount of income that is separately attributable to the use of the asset; and

(b)

the use of the asset referred to in paragraph (a) is at least 80% of the total use of the asset both in the business activity referred to in subsection (1) and as described in paragraph (a).

Example

Paul uses a helicopter on his farm to check stock for 50 hours in an income year, rents it out for 50 hours, and also uses it privately. While the income from the rental is clear, the income Paul derives in relation to the use of the helicopter in farming operations is not. The use of the helicopter falls outside the rules under the exclusion in section DG 20(1), and does not meet the requirements for re-inclusion under section DG 20(2) as the use of the helicopter to earn rental income is only 50% of the total income-earning use of the helicopter. Any loss attributable to the helicopter is not quarantined.

Defined in this Act: amount, asset, business, income, income year

DG 21 Opting out of treatment under this subpart
Opt-out threshold

(1)

If the amount of income derived for an income year from the use of an asset is less than $4,000, the person who has the asset may choose to treat the income as exempt income under section CW 8B(2) (Certain amounts derived from use of assets). The threshold amount does not include an amount of income exempt under section CW 8B(3).

Quarantined expenditure

(2)

If, in relation to the use of an asset in an income year, the person has an amount of quarantined expenditure for the income year, they may choose to treat the amount of income derived that gives rise to the quarantined expenditure as exempt income under section CW 8B for the income year.

Consequences of opting out

(3)

When a person who has an asset chooses under subsection (1) or (2) to treat the income derived from the use of the asset as exempt income, any interest expenditure that must be apportioned under section DG 9 is treated as expenditure incurred in deriving exempt income.

No application to companies

(4)

This section does not apply when the person who has the asset is a company.

Example

Mike rents his bach out through the Internet to a non-associate. The gross amount he receives for an income year is $3,000. Mike can opt out of the rules in this subpart, which would mean that he would not be liable to tax on the amount, but would also not be entitled to claim any deductions in relation to the bach.

Defined in this Act: amount, asset, exempt income, income, income year, interest expenditure

DG 22 Application of rules to part years
When this section applies

(1)

This section applies when the total income-earning use, private use, and non-use of an asset of a person relates to only part of an income year.

Non-use period

(2)

For the purposes of section DG 3(1)(b), the number of days is calculated using the formula—

days×62.
365
When assets acquired during year: debt value

(3)

For the purposes of section DG 11(9), if the company acquires the asset during the income year, the debt value is treated as the outstanding amount at the end of the income year.

When assets disposed of during year: debt value

(4)

For the purposes of section DG 11(9), if the company disposes of the asset during the income year, the debt value is treated as the outstanding amount at the start of the income year.

When assets both acquired and disposed of during year

(5)

For the purposes of section DG 11(9), if the company both acquires and disposes of the asset during the income year, the debt value is treated as the average of the outstanding amounts on the date on which the asset was acquired and the date of its disposal.

When assets acquired during year: interest expenditure

(6)

For the purposes of sections DG 11 to DG 14, when company A acquires or disposes of an asset during an income year, the amount of interest expenditure that must be apportioned is calculated on a pro rata basis.

Ring-fenced losses in part years

(7)

For the purposes of section DG 16(1)(b), the threshold is calculated using the formula—

days×2%.
365
Definition of item in formulas

(8)

In the formulas in subsections (2) and (7), days is the number of days in the income year on which the person has the asset, and for the purposes of the calculation, section DG 9(4) similarly applies.

Defined in this Act: amount, asset, company, debt value, income year, interest expenditure, private use

(2)

Subsection (1) applies for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i). Subsection (1) applies for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii).