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KPMG welcomes debt capitalisation tax proposals

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Fuseworks Media
Fuseworks Media

KPMG welcomes proposals confirming that shareholders can convert debt to equity funding for insolvent companies. This will provide business with a simple route to rationalise group structures without unwarranted tax effects.

Inland Revenue, in a draft view released last year, indicated that converting debt to equity funding was tax avoidance. Without the conversion the insolvent company would have taxable income while the shareholders would have a non-deductible loss. As debt conversions prevented this mismatch from arising, Inland Revenue concluded this was tax avoidance. This was seen as uncommercial and unfair.

Paul Dunne, KPMG National Managing Tax Partner says that, "Government and Officials are to be congratulated for developing a pragmatic legislative solution. There are many wholly owned groups and family-owned entities which are affected by Inland Revenue’s draft view. They have been unable to liquidate these insolvent companies because of the uncertainty caused by the draft ruling. The proposal would end that uncertainty and allow these companies to be wound up."

Mr Dunne also welcomed the proposal to backdate the change to the 2006-07 tax year. "This will provide protection for past debt capitalisations and, as a result, Inland Revenue won’t be devoting audit resources to this issue in the meantime."

However, this situation also highlights the highly uncommercial nature of Inland Revenue’s initial view. Where a debt capitalisation occurs the shareholder has economically suffered a loss yet the application of the avoidance rules creates a tax liability.

Mr Dunne comments, "That such a conclusion can be put forward, is an indictment of the state of New Zealand’s tax avoidance law and of how it is being applied by Inland Revenue. In our view it has resulted in considerable uncertainty for taxpayers, and policy and legislative resources having to be unnecessarily deployed."

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