Govt aims to slash red tape on interest tax

By Brian Fallow

WELLINGTON - Simpler and clearer rules for companies claiming a tax deduction for interest payments are planned as part of a package of measures designed to reduce tax compliance costs.

Like Alexander the Great hacking through the Gordian knot, the Government in a discussion paper released yesterday proposes a rule that interest incurred by companies is to be fully deductible, with two exceptions relating to cross-border cases.

"Most companies have been able to structure their debt in a way that does secure interest deductibility in most circumstances, but there has been a lot of confusion in this area for many years," PricewaterouseCoopers tax partner John Shewan said.

"This document is breath-taking in its pragmatism and its simplicity. But I can't help but think, 'why didn't this happen 20 years ago?'."

An issues paper the Inland Revenue released last year illustrated how complex the whole area is and seemed to have prompted a pragmatic decision, given that companies can structure their affairs to make their interest costs deductible, to just declare them deductible, Mr Shewan said.

"A lot medium-sized business, in particular, suffer unnecessarily through not realising they have to jump through lots of hoops to make interest deductible. What this document does is make those kinds of gymnastics no longer necessary."

The two exceptions to the rule relate to non-residents investing in, or through, New Zealand companies to ensure that they do not load interest costs at the expense of the New Zealand tax base.

At present the thin capitalisation rules do not apply if the New Zealand company's debt is less than 75 per cent of its assets. That safe harbour threshold is to be lowered to 66 per cent, in line with Australia's.

The other exception relates to "conduit" investment, by a non-resident into a foreign company but channelled through a New Zealand subsidiary.

Interest on debt incurred to fund private and domestic spending, such as a residential mortgage, is not deductible under New Zealand law. Because of concerns over the business/domestic boundary the Government said it was not yet able to consider what the interest deductibility rules should be for non-company taxpayers such as individuals and trusts.