KEY POINTS:
The Government has moved to give a tax break to struggling finance companies in order to prevent their restructuring plans being derailed by big unexpected bills from Inland Revenue.
Finance Minister Bill English and Revenue Minister Peter Dunne last night said an unanticipated technical consequence of changes last year to tax rules meant companies that enter into workout arrangements with creditors can find themselves facing an immediate, one-off tax payment.
"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," they said.
"These agreements can often be preferable to the alternatives of the company being put into receivership or being liquidated.
"The fact that the new tax liability sometimes needs to be paid in cash immediately could seriously affect the likelihood of a workout being successful."
At present a string of finance companies, including Hanover Finance, North South Finance, St Laurence Finance and Investments, Dorchester Pacific and Strategic Finance, have either gained investor backing or are seeking approval for restructuring plans which will repay creditors over extended periods.
St Laurence managing director Kevin Podmore said it was pleasing to see the Government act swiftly in support of the finance sector to ensure that investors were not affected by "an anomaly in the accounting process" and to give recently settled repayment plans "every chance of success".
"This legislative change will ensure that many finance companies will not be required to fund multimillion-dollar tax liabilities in respect of unrealised paper profits."
The problem being addressed relates to the use of International Financial Reporting Standards leading to stricken companies' liabilities being revalued and thereby creating income for accounting purposes. That in turn gives rise to an unexpected increase in tax liability for businesses already suffering from a shortage of liquidity.
The Government will introduce a mechanism to allow affected companies to use "yield to maturity" calculations based on actual and expected cash flows on liabilities amended by their restructuring plans.
TAX ATTACK
* Finance company repayment plans where debenture terms are rearranged are resulting in some companies posting large theoretical profits according to International Financial Reporting Standards.
* These paper profits in turn are generating hefty tax liabilities which threaten to sink already struggling firms.
* The Government yesterday moved to enact legislation to give affected companies a way around the problem.
