Bill English

The Government is going to fix a law to prevent already troubled finance companies being hit with an immediate one-off tax bill.

Finance Minister Bill English and Revenue Minister Peter Dunne said changes to tax rules last year on returning income and expenditure from financial arrangements had created an unanticipated consequence.

This meant that struggling finance companies and some others with debts would be hit an immediate tax bill when they entered into a workout agreement with their creditors.

The problem is that when a workout agreement is reached liabilities are revalued and this creates income for accounting purposes which in turn creates the liability.

"In these difficult financial times, it is especially important that the tax rules are not an impediment to debtors and creditors establishing successful workout agreements," the ministers said in a statement.

"These agreements can often be preferable to the alternatives of the company being put into receivership or being liquidated."

Changes to fix the problem would be introduced as possible and be effective retrospectively from the beginning of the 2008/2009 tax year.