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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 98
(1)
A person is allowed a deducon for interest incurred.
(2)
Subsecon (1) does not apply to interest for which a person is denied a deducon under secon DB 1.
(3)
…
(4)
This secon overrides the capital limitaon. The general permission must sll be sasfied and the other general
limitaons sll apply.
Interest is important because:
o
The amount of interest that a business pays is commonly manipulable as most businesses are financed to
some extent by equity and to some extent by debt
o
There are also tax consideraons – in some circumstances, financing your business by debt might be
advantageous from a tax perspecve because interest is deducble while dividends aren’t
Public Trustee v Commissioner of Taxes
[1938] NZLR 436
o
Facts
The taxpayer borrowed money for two disnct purposes – some were to produce assessable income
and others were for other purposes
o
Judgment
Apporonment is appropriate here – if a non-company taxpayer borrows money to produce some
assessable income, the taxpayer can deduct interest expenses to the extent that the money was used
to derive assessable income
Pacific Rendezvous Ltd v Commissioner of Inland Revenue
[1986] 2 NZLR 567 (CA)
o
Facts
The taxpayer wanted to sell off their motel by selling the individual unit as unit tles
However, before doing so, they borrowed money partly to carry on the business of deriving rental
income and partly to make improvements to the units
While the improvements were being worked on, the taxpayer capitalised the interest payments into
the cost of improvements – however, once the work was done, they deducted the remaining interest
payments
o
Judgment
You look to see what the purpose of the expenditure was – in this case, the queson was the use to
which the capital was put at the me the interest was incurred
The assets of the business (the units) were used for the carrying on of the business (rental income)
Since the whole of the motel was used to produce assessable income, and the whole of the
money was used to improve the motel, it is irrelevant that the taxpayer also intended to use
the interest to increase the capital value of the units
Therefore, the whole amount could be deducted
o
Commentary
Note that this case was decided before secon DB 7 – now, a company can deduct interest whether it
is incurred in deriving assessable income or not
However, the case is sll authoritave in regard to the interpretaon of secon DB 6 (i.e. as
regards interest expenditure incurred by a natural person)
The problem with this case is that the landlord was actually borrowing money to make a capital gain
(and thus is not deducble) rather than to derive rental income (which the landlord argued it was
doing, and which would make it deducble) – as long as a landlord can point to the money being
employed in the producon of assessable income, it is deducble and you don’t need to consider the
dual purpose of borrowing the money (to make a capital gain)
This is a problem as the landlord can deduct the interest payments but eventually can make
a non-taxable capital gain using the borrowed money
As a response, landlords will no longer be able to deduct interest payments on residenal
properes they are leasing out – this will be phased in over 5 years
DB 7
Interest: most companies need no nexus with income
(1)
A company is allowed a deducon for interest incurred.
…
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