Related Party Debt Remission

The potential for debt remission income to arise under the financial arrangement rules has been a source of frustration for many years.  Broadly remission income occurs when a debtor is discharged from meeting its obligations under a financial arrangement and has not repaid the debt with full and adequate consideration. 

This was a particular issue for an insolvent company who wished to restructure its balance sheet by converting debt into share capital and used the issue of shares as consideration to repay the debt.  If the company was insolvent there was uncertainty over what value should be attributable to the shares being issued in repayment of debt.  If the company had losses the shares may not have sufficient value to constitute full and adequate consideration. 

This led to a practice of shares being issued for cash with the cash then being held for a short period of time before being used to repay the debt.  It was felt that the use of cash on the issue of shares and repayment of the debt eliminated the risk of remission income arising.    

The risk of remission income arising was further heightened by Inland Revenue’s view of how the general anti-avoidance provisions could apply to certain debt capitalisations as set out in their Question We Have Been Asked (“QWBA”) examples issued in February 2015.

Irrespective of differing views on whether the QWBA was correct or how the general anti-avoidance provisions should be applied; the position has thankfully been resolved by retrospective amendments for debt remission within the same economic group.

Under the proposed amendments debt remission income will not arise where the debtor is a New Zealand resident company and the creditor is either:

  • a member of the same wholly owned group of companies as the debtor; or
  • it has an ownership interest in the debtor and the debt is remitted in proportion to the economic ownership of the creditor. 

Similar rules apply to partnerships and look through companies.  In other words the creditor’s proportional investment in the debtor effectively remains unchanged after the debt is remitted.  In such circumstances no remission income arises.

It does not apply where a debtor company forgives money owed to it by a non-resident parent company.  Such a transfer of value remains liable to non-resident withholding tax as a dividend. 

The provisions apply to relieve any debt remission which occurred from 2008-09 or later income years except for an income year before the 2015-16 income year for which the taxpayer has taken a tax position and returned the debt remission income under the old rules.

Whisky Match – Talisker 10 Year Old

Talisker is the only distillery on the Isle of Skye and was mentioned in a Robert Louis Stevenson poem where he described it in 1880 as the “King o’ drinks, as I conceive it”.   It is a worthy dram which has won many awards.  Charles MacLean in his Malt Whisky Complete Guide describes it as elemental and maritime - beaches, seaweed, salt – with spice dried fruits and wood-smoke.  The taste is sweet, with rich fruits and fragrant smoke and a unique chilli-pepper catch in the finish. 

The Talisker is a single malt whisky which will simply not disappoint.  It is a go to whisky for anyone wishing to impress or give as a suitable gift.  The certainty created by the welcome changes to the debt remission rules are worthy of the “Talisker treatment”.