Section FE 5 — Income Tax Act 2007: Thresholds for application of interest apportionment rules

FE 5 Thresholds for application of interest apportionment rules Threshold for excess debt entity (1) An excess debt entity must apportion its interest expenditure for an income year under section FE 6 if,–– (a) the excess debt entity is not a trustee and not an excess debt outbound company, or is a trustee who is not described in section FE 2(1)(g) , and–– (i) the debt percentage of its New Zealand group for the income year is more than 60%; and (ii) for a company or a trustee, the debt percentage of its New Zealand group for the income year is more than 110% of the debt percentage of the worldwide group; or (b) the excess debt entity is an excess debt outbound company, or is a trustee who is described in section FE 2(1)(g) , and–– (i) the debt percentage of its New Zealand group for the income year is more than 75%; and (ii) for a company or a trustee, the debt percentage of its New Zealand group for the income year is more than 110% of the debt percentage of the worldwide group. Exceptions for excess debt outbound companies (1B) Despite subsection (1), an excess debt outbound company and a natural person or trustee who is described in section FE 2(1)(g) do not have to apportion interest expenditure for an income year under section FE 6 if, for the income year,— (a) the ratio of the total group assets measured under section FE 16 for its New Zealand group to the total group assets measured under section FE 18 for its worldwide group is 90% or greater: (ab) the company or person is eligible to choose, and chooses, under subsection (1BB) to use the threshold test in subsection (1D): (b) [Repealed] Eligibility for optional threshold, apportionment method (1BB) A company or person referred to in subsection (1B) that would otherwise be required to make an apportionment under section FE 6 may choose instead to be subject to the threshold in subsection (1D) and to the apportionment method in section FE 6B only if— (a) for each of the New Zealand group and the worldwide group, the amount (the adjusted net profit ) given by subsection (1BC) is greater than zero; and (b) for the New Zealand group, the deductions for interest allowed to the group under sections DB 6 to DB 9 (which relate to deductions for interest) exceed the income of the group that is interest; and (c) for the worldwide group, treating the members as residents for the purposes of this paragraph, the deductions for interest allowed to the group under sections DB 6 to DB 9 exceed the income of the group that is interest; and (d) for the worldwide group, the amount of the total group debt, calculated for the income year as if for the purposes of determining the group's debt percentage under section FE 12 , is equal to or more than 75% of the amount of total group assets, not including goodwill; and (e) for the worldwide group, the proportion of the total group debt, calculated as for paragraph (d), for which the lender is not associated with the group under subpart YB (Associated persons) is equal to or more than 80%. Formula for adjusted net profit (1BC) The adjusted net profit for a group is the amount calculated using the formula— net – attributed + net interest + depreciation + amortisation. Definition of items in formula (1BD) In the formula in subsection (1BC),— (a) net is the net profit or loss of the group before tax using generally accepted accounting practice, treating a net loss as a negative amount: (b) attributed , for the worldwide group, is zero and, for the New Zealand group, is the income— (i) under generally accepted accounting practice from an interest in a FIF or CFC described in section FE 2(1)(e) to (g) ; and (ii) included in the calculation of the item net profit or loss and not included in the calculation of the item net interest: (c) net interest is the deductions for interest allowed to the group under sections DB 6 to DB 9 from a financial arrangement providing funds to the group, treating the members as residents for the purpose of calculating this item for a worldwide group, reduced by the income of the group from a financial arrangement on arm's-length terms providing funds to a person who meets the requirements of section FE 13(3) : (d) depreciation is the depreciation for the group using generally accepted accounting practice: (e) amortisation is the amortisation for the group using generally accepted accounting practice. Natural persons' worldwide group total assets (1C) For the purposes of subsection (1B)(a), the total group assets of a natural person's worldwide group under section FE 18 are measured on the basis that the natural person is an excess debt entity that has a worldwide group made up of–– (a) the natural person; and (b) the natural person's New Zealand group; and (c) all CFCs in which the natural person or a member of the natural person's New Zealand group has an income interest: (d) all FIFs in which the natural person or a member of the natural person's New Zealand group has an interest that meets the requirements of section EX 35 (Exemption for interest in FIF resident in Australia); and (e) all FIFs in which the natural person or a member of the natural person's New Zealand group has an interest for which the natural person or member uses the attributable FIF income method. Elective threshold for excess debt entity (1D) A company or person that chooses to be subject to the threshold test in this subsection must apportion the interest expenditure for the income year under section FE 6B except if the ratio (the interest-income ratio ) given by subsection (1E) for the company or person's New Zealand group is equal to or less than the lesser of— (a) 110% of the interest-income ratio for the company or person's worldwide group: (b) 50%. Formula for group's interest-income ratio (1E) The interest-income ratio for a group is calculated using the formula— net interest adjusted net profit. Definition of items in formula (1F) In the formula in subsection (1E),— (a) net interest is the deductions for interest allowed to the group under sections DB 6 to DB 9 from a financial arrangement providing funds to the group, treating the members as residents for the purpose of calculating this item for a worldwide group, reduced by the income of the group from a financial arrangement on arm's-length terms providing funds to a person who meets the requirements of section FE 13(3) : (b) adjusted net profit is the amount given for the group by subsection (1BC). Threshold for reporting bank (2) A reporting bank must apportion its interest expenditure for an income year under section FE 7 if— (a) the New Zealand net equity of its New Zealand banking group for a tax year is less than its equity threshold; and (b) its group funding debt for the corresponding tax year is more than zero. Threshold for natural person (3) A natural person must apportion their interest expenditure for an income year under section FE 6 if,–– (a) they are not described in section FE 2(1)(g) , and the debt percentage of their New Zealand group for the income year is more than 60%; or (b) they are described in section FE 2(1)(g) , and the debt percentage of their New Zealand group for the income year is more than 75%. Debt percentages (4) The debt percentage of a New Zealand group is calculated under sections FE 14 to FE 16 . The debt percentage of a worldwide group is calculated under sections FE 17 and FE 18 . Equity threshold, net equity, group funding debt (5) The calculations that a reporting bank must make for the purposes of section FE 7 are set out as follows: (a) for the banking group’s equity threshold, see section FE 19 : (b) for the banking group’s New Zealand net equity, see section FE 21 : (c) for the banking group’s funding debt, see section FE 23 . Defined in this Act: attributable FIF income method , CFC , company , excess debt entity , excess debt outbound company , group funding debt , income interest , income year , interest , natural person , New Zealand , New Zealand banking group , New Zealand net equity , non-resident passive income , reporting bank , tax year , total group assets , trustee , Compare: 2004 No 35 s FG 3 Section FE 5(1): substituted, on 1 April 2011 (applying for the 2011–12 and later income years), by section 87(1) of the Taxation (Budget Measures) Act 2010 (2010 No 27). Section FE 5(1B) heading: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5(1B): inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5(1B)(ab): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1B)(b): repealed (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(2) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BB) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BB): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BC) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BC): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BD) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1BD): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(3) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1C) heading: inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5(1C): inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5(1C)(c): amended (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1C)(d): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1C)(e): inserted (with effect on 1 July 2011 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(4) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1D) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1D): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1E) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1E): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1F) heading: inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(1F): inserted (with effect on 1 July 2009 and applying for income years beginning on or after that date), on 7 May 2012, by section 53(5) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5(3): substituted, on 1 April 2011 (applying for the 2011–12 and later income years), by section 87(2) of the Taxation (Budget Measures) Act 2010 (2010 No 27). Section FE 5 list of defined terms attributable FIF income method : inserted (with effect on 1 July 2011), on 7 May 2012, by section 53(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5 list of defined terms CFC : inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5 list of defined terms excess debt outbound company : inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5 list of defined terms income interest : inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34). Section FE 5 list of defined terms non-resident passive income : inserted (with effect on 1 July 2011), on 7 May 2012, by section 53(6) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34). Section FE 5 list of defined terms total group assets : inserted (with effect on 30 June 2009), on 6 October 2009, by section 210(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).