• “(c) the entity attributes the proceeds from the disposal to investors who are not entitled to the benefit of the dividend.”

“Amounts derived from certain assets

• “(2B) Despite subsections (1) and (2), an amount referred to in section CW 8B (Certain amounts derived from use of assets) is not a payment of rent or another amount for the purposes of this section.”

“CC 1B Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licence

• “When this section applies

  “(1) This section applies when a person (the payee) derives an amount as consideration for the entry by the payee into an agreement for agreement by the payee to the grant, renewal, extension, or transfer of a right (the land right) that is a leasehold estate, or a licence to use land.

  “Exception for payment to holder by transferee

  “(2) This section does not apply to an amount derived—

  • “(a) by the payee as the holder of a land right; and

  • “(b) as consideration for the transfer of the land right to the person paying the amount.

  “Income

  “(3) The amount is income of the payee.

  “Exception for tenant or licensee of residential premises

  “(4) The amount is not income if a payee is a natural person and derives the amount as a tenant or licensee of residential premises whose expenditure on the residential premises does not meet the requirements of the general permission.

  “Relationship with other sections

  “(5) This section is overridden by sections CC 1 and CG 8 (Capital contributions).

  “Defined in this Act: amount, general permission, income, land, leasehold estate, pay”.

“CC 1C Consideration for agreement to surrender leasehold estate or terminate licence

• “When this section applies

  “(1) This section applies when a person (the payee) derives an amount as consideration for the entry by the payee into an agreement, for agreement by the payee to the surrender or termination of a right (the land right) that is a leasehold estate or licence to use land, between and the payee is—

  • “(a) the person who owns the estate in land from which the land right is granted; and:

  • “(b) the person who owns the land right.

  “Income

  “(2) The amount is income of the payee.

  “Exception for tenant or licensee of residential premises

  “(3) The amount is not income if the payee is a natural person and derives the amount as a tenant or licensee of residential premises whose expenditure on the residential premises does not meet the requirements of the general permission.

  “Relationship with other sections

  “(4) This section is overridden by sections CC 1, CC 1B, CC 2, and CG 8 (Capital contributions).

  “Defined in this Act: amount, general permission, income, land, leasehold estate, own”.

“CD 29B Issues to shareholders of rights to subscribe for or sell back shares

• “Issue of rights to subscribe for shares

  “(1) The issue by a company to a shareholder of a right to subscribe for a share, or to sell a share in the company to the company, is not a dividend.

  “Issue of shares under rights to subscribe for shares

  “(2) The issue by a company of a share to a person for consideration less than the market value, immediately before the issue, of a share in the same class of shares, is not a dividend if—

  • “(a) the person subscribes for the share under a right (a subscription right) issued by the company to a shareholder holding shares before the issue of the right; and

  • “(b) the company does not, as part of the issue of the subscription right, give the person a right to dispose of the share to the company.

  “Premiums from issue of rights to subscribe for shares

  “(3) A distribution by a company to a shareholder is not a dividend if—

  • “(a) the company issues to the shareholder a right (the shareholder right) to subscribe for, or dispose of to the company, a share in the company at a given price (the shareholder price); and

  • “(b) the shareholder fails or is ineligible to exercise the shareholder right; and

  • “(c) another person pays to the company an amount—

    • “(i) for the shareholder right:

    • “(ii) greater than the shareholder price, for the issue of a share under the shareholder right; and

  • “(d) the distribution is from the amount of the payment that does not increase the company's available subscribed capital.

  “Defined in this Act: available subscribed capital, bonus issue in lieu, company, consideration, dividend, pay, share, shareholder”.

“When this section does not apply

• “(1B) This section does not apply for contracts that section DZ 10 (General insurance with risk period straddling 1 July 1993) applies to.”

“CV 18 Hedging of currency movements in Australian non-attributing shares and attributing FDR method interests

• The amount of income that a person has under section EM 6 (Income and expenditure for fair dividend rate hedge portions) is income of the person.

  “Defined in this Act: amount, income”.

“CW 8B Certain amounts derived from use of assets

• “When this section applies

  “(1) This section applies when a person derives income from the use of an asset described in section DG 3 (Meaning of asset for this subpart).

  “When person opts out of assets expenditure rules

  “(2) Income that the person derives from the use of the asset is exempt income if—

  • “(a) they meet the requirements of section DG 21 (Opting out of treatment under this subpart); and

  • “(b) they choose under that section to treat the income as exempt income.

  “Below-market use and use by associates

  “(3) An amount of income that the person derives in relation to the private use of an asset as described in section DG 4(1) (Meaning of private use for this subpart) is exempt income.

  “Defined in this Act: amount, asset, exempt income, income ”.

“CW 31 Services for members of Parliament

• An amount is exempt income of a person to the extent to which it is income of the person and is not exempt income under another provision of subpart CW, if the amount is travel, accommodation, attendance, and communication services, as defined in section 20A(7) of the Civil List Act 1979, and,—

  • “(a) the amount is––

    • “(i) referred to in section 20A of that Act:

    • “(ii) paid under section 25 of that Act; and

  • “(b) the amount is––

    • “(i) provided to a person to whom any of section 25(1)(b) to (e) of that Act applies:

    • “(ii) provided to a member of the family of a person described in subparagraph (i).

  “Defined in this Act: amount, exempt income, income”.

• “(i) a PAYE income payment from which the person's employer is required to withhold tax under the PAYE rules:”.

“Restructuring under New Zealand Railways Corporation Restructuring Act 1990

“CW 65 New Zealand Railways Corporation restructure: exempt income

• “Railways vesting and land-related payments

  “(1) The following are exempt income of KiwiRail Holdings Limited and any company in which it directly or indirectly owns 100% of the shares (wholly-owned subsidiary):

  • “(a) an amount derived from the Railways vesting:

  • “(b) an amount derived by KiwiRail Holdings Limited or a wholly-owned subsidiary in relation to––

    • “(i) a disposal or grant of land, if that land is owned on 31 December 2012 by the Crown or New Zealand Railways Corporation:

    • “(ii) the termination or variation of a lease granted by the Crown or New Zealand Railways Corporation over land, if that land is owned on 31 December 2012 by the Crown or New Zealand Railways Corporation.

  “Meaning of Railways vesting

  “(2) In this section, Railways vesting has the same meaning as in section EZ 68 (Definitions).

  “Defined in this Act: amount, company, dispose, exempt income, land, lease, Railways vesting, share”.

“CX 12 Services for members of Parliament

• “When fringe benefit arises

  “(1) A fringe benefit arises when travel, accommodation, attendance, and communications services are exempt income under section CW 31 (Services for members of Parliament).

  “Relationship with sections CX 5 and CX 28

  “(2) This section overrides sections CX 5 and CX 28.

  “Defined in this Act: exempt income, fringe benefit”.

“Relationship with subpart DG

• “(6) Section DG 2(4) (Application of this subpart) may apply to require a company to treat a benefit under this section as a dividend.”

• “(2) Subsection (1) does not apply, and the benefit provided is a fringe benefit, if a charitable organisation provides a benefit to an employee by way of short-term charge facilities and the value of the benefit from the short-term charge facilities for the employee in a tax year is more than the lesser for the tax year of—

  • “(a) 5% of the employee's salary or wages:

  • “(b) $1,200.”

• “(a) enables an employee to obtain goods or services that have no connection with the employer or its operations by—

  • “(i) buying or hiring the goods or services:

  • “(ii) charging the cost of the goods or services to an account:

  • “(iii) providing consideration other than money for the goods or services; and

• “(b) requires the employer to provide some or all of the payment or other consideration for the goods or services; and”.

“CX 33B Benefits for members of Parliament

• Reasonable estimates may be used to determine, for the purposes of the FBT rules, what benefit provided under the Civil List Act 1979 to a member of Parliament is a fringe benefit, or excluded from being a fringe benefit, or valued at zero.

  “Defined in this Act: FBT rules, fringe benefit”.

“DA 5 Treatment of expenditure for commercial fit-out

• When applying the capital limitation to expenditure, to the extent to which the expenditure relates to a building's item of commercial fit-out (the item), the expenditure is treated as relating to the item, and not the building.

  “Defined in this Act: commercial fit-out, expenditure, capital limitation”.

“Relationship with subpart DG

• “(1B) Subpart DG (Expenditure related to use of certain assets) overrides this section for expenditure to which that subpart relates.”

“Relationship with subpart DG

• “(6B) Subpart DG (Expenditure related to use of certain assets) overrides this section for expenditure to which that subpart relates.”

“Relationship with subpart DG

• “(6B) Subpart DG (Expenditure related to use of certain assets) overrides this section for expenditure to which that subpart relates.”

“DB 20B Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licence

• “When this section applies

  “(1) This section applies when—

  • “(a) a person (the payer) incurs an amount of expenditure as consideration for the entry by another person (the payee) into an agreement for agreement by another person (the payee) to the grant, renewal, extension, or transfer of a right (the land right) that is a leasehold estate, or a licence to use land; and

  • “(b) the payer is the person who owns—

    • “(i) the land right:

    • “(ii) the estate in land from which the land right is granted; and

  • “(c) the payee is the person who is obtaining the land right; and.

  • “(d) the amount is not included in the cost of depreciable intangible property.

  “Deduction

  “(2) The payer is allowed a deduction for the amount.

  “Relationship with subpart DA

  “(3) This section overrides the capital limitation. The general permission must still be satisfied and the other general limitations still apply.

  “Defined in this Act: amount, capital limitation, deduction, depreciable intangible property, estate, general limitation, general permission, land, leasehold estate, own”.

“DB 20C Consideration for agreement to surrender leasehold estate or terminate licence

• “When this section applies

  “(1) This section applies when—

  • “(a) a person (the payer) incurs an amount of expenditure to a person (the payee) as consideration for the entry by the payee into an agreement for as consideration for the agreement by another person (the payee) to the surrender or termination of a right (the land right) that is a leasehold estate or licence to use land; and

  • “(b) the payer is a person who owns the land right or a person who owns the estate in land from which the land right is granted; and

  • “(c) the payee is a person who owns the estate in land from which the land right is granted or a person who owns the land right.

  “Deduction

  “(2) The payer is allowed a deduction for the amount.

  “Relationship with subpart DA

  “(3) This section overrides the capital limitation. The general permission must still be satisfied and the other general limitations still apply.

  “Defined in this Act: amount, capital limitation, deduction, estate, general limitation, general permission, land, leasehold estate, own”.

• “(b) in the absence of this section, the person would be allowed a deduction for the relevant capital contribution property, or for the relevant expenditure for the capital contribution property; and”.

“Deductions

• “(2) For the purposes of quantifying the amount of depreciation loss under subpart EE (Depreciation) in relation to the capital contribution property or the amount of deduction under subpart DO (Farming and aquacultural business expenditure) in relation to expenditure for the capital contribution property,––

  • “(a) the capital contribution property's adjusted tax value, base value, cost, or value, as applicable, is reduced by the amount of the capital contribution, under subpart EE:

  • “(b) the relevant expenditure for the capital contribution property is reduced by the amount of the capital contribution, under subpart DO.”

“Subpart DG—Expenditure related to use of certain assets

“Introductory provisions

“DG 1 What this subpart does

• This subpart sets out the rules for the deductibility and apportionment of expenditure incurred for an income year in relation to an asset when the asset is used partly for income-earning purposes and partly for private purposes, and for a time during the income year, the asset is not in use.

  “Defined in this Act: asset, deduction, income, income year

“DG 2 Application of this subpart

• “Asset by asset

  “(1) The rules in this subpart apply on an asset by asset basis.

  “Relationship with sections DB 5, DB 7, and DB 8

  “(2) The rules in this subpart override sections DB 5, DB 7, and DB 8 (which relate to deductions for financing expenditure) in relation to expenditure that this subpart applies to.

  “Relationship with subpart DD

  “(3) Subpart DD (Entertainment expenditure) does not apply to expenditure incurred in relation to the private use of an asset to which this subpart applies.

  “Relationship with FBT rules and dividend rules

  “(4) No liability to pay fringe benefit tax arises from the private use of an asset to which this subpart applies. In circumstances where section CX 17 (Benefits provided to employees who are shareholders or investors) applies to a company to which this subpart also applies, the company must choose to treat a non-cash benefit referred to in that section as a dividend.

  “Application to groups of and interests in companies

  “(5) For the purposes of this subpart,—

  • “(a) a group of companies is treated as a wholly-owned group of companies:

  • “(b)  a voting interest in a company includes a market value interest when a market value circumstance exists for the company.

  “Rules for identifying voting and market value interests

  “(6) In this subpart,—

  • “(a) for the purposes of determining the extent to which a company (company A) has a voting interest or market value interest in another company (company B), the look-through rule in section YC 4 (Look-through rule for corporate shareholders) does not apply to treat company A's voting interest or market value interest as held by company A's shareholders or anyone else; and

  • “(b) for the purposes of determining the extent to which company A has a voting interest or market value interest of more than 10% in an associated company, the look-through rule in section YC 4 does not apply to treat a voting interest or a market value interest of company A in the associated company as held by their respective shareholders or anyone else; and

  • “(c) a zero voting interest is not a voting interest, and a zero market value interest is not a market value interest.

  “Defined in this Act: asset, associated, company, deduction, dividend, fringe benefit tax, group of companies, market value circumstance, market value interest, private use, voting interest, wholly-owned group of companies

“DG 3 Meaning of asset for this subpart

• “Meaning of asset

  “(1) For the purposes of this subpart, an asset, for an income year, means an item of property described in subsection (2) held by a person described in subsection (3) to the extent to which the item—

  • “(a) is used by the person in the income year partly to derive income and partly for private use; and

  • “(b) is not in use—

    • “(i) for at least 62 days in the income year; or

    • “(ii) when the asset is typically used only on working days, for at least 62 working days in the income year.

  “What items of property?

  “(2) Subsection (1) applies to an asset that, in the complete form in which the person uses it for income-earning purposes,—

  • “(a) is 1 of the following:

    • “(i) land, including improvements to land:

    • “(ii) a ship, boat, or craft used in navigation on or under water, whether or not it has a means of propulsion:

    • “(iii) an aircraft; and

  • “(b) for an item referred to in paragraph (a)(ii) and (iii), has—

    • “(i) a cost to the person of $50,000 or more; or

    • “(ii) a market value on the date of acquisition of the asset of $50,000 or more, if the asset was not acquired at market value; and

  • “(c) includes any related items, things, or accessories pertaining to the asset.

  “Which persons?

  “(3) A person excludes a company other than a close company and, for the purposes of this subpart, a reference in the definition of close company to a natural person includes a reference to a trustee.

  “Exclusions

  “(4) Despite subsection (2), an asset is excluded from the operation of the rules in this subpart if—

  • “(a) the use of the asset meets the following criteria:

    • “(i) the private use of the asset is minor; and

    • “(ii) the main use of the asset is use in a business that is not a rental or charter business; and

    • “(iii) for a company or a trustee of a trust, the use of the asset places an obligation on the company or the trustee, as applicable, to pay fringe benefit tax or income tax:

  • “(b) the asset is a residential property and its only income-earning use is as a long-term rental property:

  • “(c) the asset—

    • “(i) is being used in an income year by a person (person A); and

    • “(ii) during the income year, undergoes a change of use; and

    • “(iii) the only uses made of the asset for the income year are the use by person A and the use by another person from which person A derives income.

  “Meaning of market value

  “(5) For the purposes of this subpart subpart, other than subsection (2)(b)(ii), market value means the price at which the asset is provided for use at a particular time or for a particular season—

  • “(a) in the open market; and

  • “(b) freely offered; and

  • “(c) made on ordinary terms; and

  • “(d) to a member of the public at arm's length.

  “Partnerships and look-though through companies

  “(6) For the purposes of this section, if the asset is held through a partnership or a look-though through company, the value of the interests in the asset held by all the partners in the partnership or all the shareholders in the look-though through company, as applicable, is aggregated.

  “What constitutes use

  “(7) For the purposes of this subpart, the use of an asset is the active use of the asset for its intended purpose.

  Example

  Graeme owns a yacht that he used with his family for a 4-week holiday. He also rented the yacht at market rates to other people who were not associates on 4 occasions, totalling 3 weeks. The cost of the yacht (including some capital improvements and items such as lifejackets and a dinghy) is $85,000. The rules in this subpart apply to Graeme.

  “Defined in this Act: amount, asset, business, close company, company, deduction, fringe benefit tax, income, income tax, income year, land, look-through company, market value, partnership, private use, shareholder, tax, trustee, working day

“DG 4 Meaning of private use for this subpart

• “What is private use?

  “(1) For the purposes of this subpart, private use of an asset—

  • “(a) means the use of the asset by a person described in subsection (2), whether or not—

    • “(i) the use is exclusive:

    • “(ii) an amount of income is derived in relation to its use:

  • “(b) includes the use of an asset when income derived in relation to the use of the asset is an amount that is less than 80% of the market value amount:

  • “(c) excludes the use of the asset referred to in subsections (3) to (5).

  “Use by natural persons

  “(2) The person referred to in subsection (1)(a) is a natural person who is—

  • “(a) the person who owns, leases, licences licenses, or otherwise has the asset; or

  • “(b)  a person associated with them.

  “Ordinary business use

  “(3) The use of an asset is not private use if—

  • “(a) the asset is used to derive income for a particular period; and

  • “(b) the person uses the asset during the period solely in the ordinary course of their business.

  “Repairs

  “(4) The use of an asset is not private use if—

  • “(a) the asset is used to derive income for a particular period; and

  • “(b) damage is caused to the asset during the period; and

  • “(c) the damage is not the result of ordinary wear and tear; and

  • “(d) the person uses the asset after the end of the period to repair the damage; and

  • “(e) the use of the asset referred to in paragraph (d) is necessary in order for the person to carry out the repairs.

  “Relocation expenses

  “(5) The use of an asset is not private use if—

  • “(a) the asset is used to derive income for a particular period in an income year; and

  • “(b) the person uses the asset before the start of the period, or after the end of the period, or both, to relocate the asset; and

  • “(c) the use referred to in paragraph (b) and the relocation of the asset are necessary for the income-earning purposes; and

  • “(d) the income the person derives for the income year from the use of the asset includes an amount payable for the cost of relocation.

  “Exempt income

  “(6) Subsections (3) to (5) do not apply if the person derives an amount of exempt income in relation to the use of the asset. For the treatment of certain amounts of income derived from the use of assets as described in this section, see section CW 8B (Certain amounts derived from the use of assets) use of assets).

  Example

  Mary owns a launch. During the course of an income year, she takes her family out on the launch, she lets her brother use the launch (paying the market rate of $200 per day) and she lets her friend use the launch (paying fuel costs only at the rate of $50 per day). All these uses are instances of private use. When Mary rents out the launch to non-associates at market rates, takes the launch to another port for rental to non-associates at $250 per day and then back again to the home port, or takes the launch to a boatyard for repair after damage was caused by a non-associate during a rental period, none of these instances is private use.

  “Defined in this Act: amount, asset, associated person, business, exempt income, income, lease, market value, pay, private use

“DG 5 Meaning and treatment of interest expenditure for this subpart

• “Interest expenditure

  “(1) In this subpart, interest expenditure, for a person to whom this subpart applies, means expenditure on interest, and includes an amount of interest on the sum of the outstanding balances of financial arrangements entered into by the person, if the financial arrangement—

  • “(a) provides funds to the person; and

  • “(b) gives rise to an amount for which the person would have a deduction.

  “Apportionment

  “(2) For the purposes of this subpart,—

  • “(a) if the person is not a company, an amount of interest expenditure incurred in relation to an asset is included in the item expenditure in section DG 9(3)(a):

  • “(b) if the person is a company other than a qualifying company, an amount of interest expenditure incurred in relation to an asset is apportioned under section DG 11:

  • “(c) if the person is a qualifying company, they are treated for the purposes of this subpart as a person that is not a company.

  “Exchange rate fluctuations

  “(3) Interest expenditure does not include a deduction for an amount that arises only from movement in currency exchange rates.

  “Defined in this Act: amount, asset, company, deduction, financial arrangement, interest, interest expenditure, look-though company, partnership, qualifying company

“DG 6 Associated persons: company rule modified

• Despite section YB 3(1), for the purposes of this subpart, a company and a person other than a company are associated persons if—

  • “(a) the person has a voting interest in the company of 5% or more; or

  • “(b) the person's share in the company gives them a right to use the asset.

  “Defined in this Act: asset, associated person, company, share, voting interest

“When assets held simply

“DG 7 Expenditure related to income-earning use

• “Expenditure on certain business and regulatory requirements

  “(1) A person is allowed a deduction for expenditure or loss, including an amount of depreciation loss, to the extent to which the amount incurred—

  • “(a) relates solely to the use of an asset for deriving income of the person, other than exempt income; and

  • “(b) is expenditure—

    • “(i) from which the person would not reasonably expect to receive a personal benefit, or for a company, an associate of the person:

    • “(ii) that the person must reasonably incur to meet a regulatory requirement so that they may use the asset for deriving income and that would not have been incurred but for the requirement.

  “Expenditure that must be apportioned

  “(2) Despite subsection (1) and for the avoidance of doubt, all expenditure on repairs and maintenance incurred in relation to an asset must be treated as expenditure that is limited under section DG 8. However, this subsection does not apply to the cost of repairing damage described in section DG 4(4).

  Example

  John operates a charter boat which he also uses privately. He incurs expenses including costs in meeting Maritime New Zealand survey requirements, advertising costs, and general maintenance costs. The advertising costs are fully deductible because they deliver no personal benefit. The survey costs are fully deductible if they are incurred only for charter purposes. The maintenance costs are not deductible under this provision because they deliver a personal benefit as well as an income-earning benefit. A portion of these maintenance costs may be allowed as a deduction under section DG 8.

  “Defined in this Act: amount, asset, associated person, company, deduction, depreciation loss, exempt income, income

“DG 8 Expenditure limitation rule

• “Limited deduction

  “(1) A person is allowed a deduction for expenditure or loss, including an amount of depreciation loss, that they incur in relation to the income-earning use of an asset to the extent of the amount calculated using the formula in section DG 9(2).

  “Depreciation recovery and loss on disposal

  “(2) In the treatment of assets generally,—

  • “(a) if some or all of the expenditure on an asset is apportioned for tax purposes on the basis of space, floor area, or on another similar basis, that method of apportionment overrides the rules in this subpart to the extent of the amount of the deduction:

  • “(b) depreciation recovery income on disposal is dealt with in section EE 49 (Amount of depreciation recovery income when item partly used for business):

  • “(c) depreciation loss on disposal is dealt with in sections EE 44 to EE 48, and EE 50(6) and (7) (which relate to amounts of depreciation loss).

  “Relationship with other sections

  “(3) This section—

  • “(a) supplements the general permission and overrides the capital limitation and the private limitation, but the other limitations still apply:

  • “(b) overrides section EE 50(2) (Amount of depreciation loss when item partly used to produce income).

  “Defined in this Act: amount, asset, capital limitation, deduction, depreciation loss, depreciation recovery income, general permission, private limitation

“DG 9 Apportionment formula

• “What this section does

  “(1) This section provides the formula for use in sections DG 8 and DG 11 to DG 13 to calculate the way in which an amount of expenditure or loss that a person incurs in relation to an asset is apportioned between its income-earning use and its private or other use.

  “Formula

  “(2) The apportionment formula is—

  expenditure	×	income-earning days
  		(income-earning days + counted days).

  “Definition of items in formula

  “(3) In the formula,—

  • “(a) expenditure is the total expenditure or loss that is incurred by the person for an income year in relation to the asset, and that would be deductible in the absence of this subpart, other than expenditure that is—

    • “(i) related solely to the income-earning use of the asset as described in section DG 7; or

    • “(ii) related solely to the private use of the asset:

  • “(b) income-earning days is the total number of days in the income year for which the person derives income from the use of the asset, other than exempt income under section CW 8B(3) (Certain amounts derived from the use of assets) use of assets), including any days on which—

    • “(i) the use made of the asset is use described in section DG 4(3) to (5):

    • “(ii) the asset has become unavailable for use because another person who had earlier reserved the asset for their own use, subsequently did not take advantage of that reservation:

    • “(iii) a fringe benefit tax liability arises:

  • “(c) counted days is the total number of days in the income year on which the asset is in use, and the day is not an income-earning day as described in paragraph (b).

  “Other units of measurement

  “(4) A unit of measurement of time other than days, whether relating to hours, or nights, or anything else, is to be used in the formula and in subsection (3)(b) and (c), if it achieves a more appropriate apportionment. For this purpose, the same unit must be used in relation to both items in subsection (3)(b) and (c).

  Example

  Jim rents out his aeroplane at market value for 100 hours in an income year, and uses it for his personal enjoyment for 50 hours. Jim incurs expenditure of $10,000 for general repairs and maintenance of the plane. He may deduct two-thirds of the expenditure (section DG 9(2)). The formula is $10,000 × (100/(100 + 50)) = $6,666.67.

  “Defined in this Act: amount, asset, deduction, exempt income, fringe benefit tax, income, income year, market value, private use

“When assets held in corporate structures

“DG 10 Interest expenditure rules

• “Groups of companies

  “(1) Sections DG 11 to DG 14 provide for the apportionment of interest expenditure incurred by a company that has an asset to which this subpart applies, and by other companies that are in the same group of companies as the company, and by shareholders. Companies must provide information disclosure statements under section 30D of the Tax Administration Act 1994 to enable the calculations to be made.

  “Exclusions: group companies

  “(2) A company (company A) that is treated as part of a wholly-owned group under this subpart, but is not part of a wholly-owned group for the other purposes of this Act, is excluded from the interest expenditure rules in sections DG 11 to DG 14 for an income year if—

  • “(a) no private use of an asset of a company in the group has been made in the income year by a shareholder of company A:

  • “(b) no tax losses have been made available under subpart IC (Grouping tax losses) between company A and other companies in the group.

  “Exclusion: corporate shareholders

  “(3) Section DG 13 does not apply to a corporate shareholder if—

  • “(a) the shareholder has a direct or indirect interest of less than 50% in the company that has the asset; and

  • “(b) the shareholder has not enjoyed any private use of the asset.

  “Exclusion: non-corporate shareholders

  “(4) Section DG 14 does not apply to a shareholder if—

  • “(a) the shareholder has a direct or indirect interest of less than 50% in the company that has the asset; and

  • “(b) the shareholder has not enjoyed any private use of the asset.

  “Treatment of qualifying companies

  “(5) The interest expenditure rules apply to a qualifying company in the following way:

  • “(a) the company is treated as if section DG 11(3) applied to it in order to calculate the amount of the company's net asset balance; and

  • “(b) sections DG 12 to DG 14 then apply to determine the amount of the deduction to which the company, another company, or a shareholder is entitled.

  “Associated persons

  “(6) For the purposes of subsections (2), (3), and (4), a reference to a shareholder includes a person associated with the shareholder, unless the associated person is also a shareholder.

  “Defined in this Act: amount, asset, associated person, company, deduction, group of companies, income year, interest expenditure, net asset balance, private use, qualifying company, shareholder, tax loss, wholly-owned group

“DG 11 Interest expenditure: close companies

• “What this section does

  “(1) This section quantifies the amount of a deduction that a close company is allowed for an income year when—

  • “(a) the company has an asset to which this subpart applies; and

  • “(b) the company incurs interest expenditure for the income year.

  “Determining values and deductions

  “(2) The company must first determine the amount of its debt value and its asset value for the income year, and then apply either subsection (3) or subsections (4) to (6).

  “Debt value less than asset value

  “(3) If the debt value for the income year is equal to or less than the asset value for the income year, the company is allowed a deduction of a portion of interest expenditure incurred for the income year—

  • “(a) of an amount calculated using the formula in section DG 9(2); and

  • “(b) treating the company's total interest expenditure for the income year as if it were the item expenditure in the formula.

  “Debt value more than asset value

  “(4) If the debt value for the income year is more than the asset value for the income year, the company must calculate a reduced amount of interest expenditure for the income year using the formula—

  interest expenditure	×	company's asset value
  		company's debt value.

  “Definition of items in formula

  “(5) In the formula,—

  • “(a) interest expenditure is the total amount of interest expenditure incurred by the company for the income year:

  • “(b) company's asset value is the amount of the company's asset value for the income year:

  • “(c) company's debt value is the amount of the company's debt value for the income year.

  “Apportionment of reduced amounts

  “(6) The company is allowed a deduction for the income year of a portion of the reduced amount described in subsection (4),—

  • “(a) of an amount calculated using the formula in section DG 9(2); and

  • “(b) treating the reduced amount as if it were the item expenditure in the formula.

  “Net asset balance

  “(7) When subsection (3) applies for an income year, the amount that remains outstanding after subtracting the debt value for the income year from the asset value for the income year (the net asset balance), must be used under sections DG 12 to DG 14, as applicable.

  “Meaning of asset value

  “(8) For the purposes of this subpart, asset value means the value of the asset at the end of an income year, using—

  • “(a) for land, including an improvement to land, the amount given by the later of either its most recent capital value or annual value (as set by the relevant local authority), or its cost on acquisition (or market value, if the transaction involves an associated person):

  • “(b) for other property, its adjusted tax value.

  “Meaning of debt value

  “(9) For the purposes of this subpart, debt value—

  • “(a) means the average outstanding amount that gives rise to the interest payable by the company, measured by reference to the amounts outstanding at the start of and at the end of an income year; and

  • “(b) for a person who has, in the income year, more than 1 asset to which this subpart applies, is reduced in subsection (5)(c), sections DG 12(6)(c) and DG 13(8)(c), by an amount previously taken into account under this subpart for the income year.

  Example

  Holiday Home Ltd holds a holiday home with a rateable value of $200,000. The company has debt of $40,000, with associated interest expenditure of $4,000. Since the debt value is less than the asset value, all the interest expenditure must be apportioned (section DG 11(3)).

  Boat Ltd has a charter boat whose cost is $60,000. The company has debt of $100,000, with associated interest expenditure of $10,000. Since the debt value is more than the asset value, the company must apportion interest expenditure of $6,000 (section DG 11(4)-(6)). The formula is $10,000 × ($60,000/$100,000) = $6,000.

  “Defined in this Act: adjusted tax value, amount, asset, asset value, associated person, close company, cost, debt value, deduction, income, income year, interest, interest expenditure, land, market value, net asset balance, pay

“DG 12 Interest expenditure: group companies

• “When this section applies

  “(1) This section applies for an income year when—

  • “(a) a close company or a qualifying company (company A) has a net asset balance; and

  • “(b) company A is part of the same group of companies as another company (company B); and

  • “(c) company B has interest expenditure for which it is allowed a deduction.

  “How this section applies: looping rule

  “(2) This section applies sequentially to every group company B until—

  • “(a) the net asset balance for the income year is reduced to zero, or is treated as reduced to zero; or

  • “(b) no other group companies exist to which this section applies.

  “Debt value less than net asset balance

  “(3) If company B's debt value for the income year is equal to or less than the net asset balance for the income year, company B is allowed a deduction of a portion of interest expenditure incurred for the income year,—

  • “(a) of an amount calculated by company A using the formula in section DG 9(2); and

  • “(b) treating company B's total interest expenditure for the income year as if it were the item expenditure in the formula.

  “Recalculation of net asset balance

  “(4) In the application of subsection (3), the amount of the net asset balance must be recalculated on each application, being reduced by an amount equal to each counted group company's debt value.

  “Debt value more than net asset balance

  “(5) If company B's debt value for the income year is more than the net asset balance for the income year, company B must calculate a reduced amount of interest expenditure for the income year using the formula—

  interest expenditure	×	net asset balance
  		company B's debt value.

  “Definition of items in formula

  “(6) In the formula,—

  • “(a) interest expenditure is the total amount of interest expenditure incurred by company B for the income year:

  • “(b) net asset balance is the amount of the net asset balance for the income year:

  • “(c) company B's debt value is the amount of company B's debt value for the income year.

  “Apportionment of reduced amounts

  “(7) Company B is allowed a deduction for the income year of a portion of the reduced amount described in subsection (5),—

  • “(a) of an amount calculated by company A using the formula in section DG 9(2); and

  • “(b) treating the reduced amount as if it were the item expenditure in the formula.

  “Net asset balance zero

  “(8) Once a calculation is made under subsection (5), company B's net asset balance is treated as zero.

  “Net asset balance

  “(9) If a net asset balance remains outstanding after the application of this section for an income year, the amount must be used under sections DG 13 and DG 14, as applicable.

  Example

  Holiday Home Ltd has an asset balance of $160,000 ($200,000 less $40,000) and is wholly owned by Parent Ltd. Parent has debt of $30,000, with associated interest expenditure of $3,000. Since Parent's debt value is less than the asset balance, all of Parent's interest expenditure must be apportioned (section DG 12(3)).

  “Defined in this Act: amount, asset value, close company, company, debt value, deduction, group of companies, income year, interest expenditure, net asset balance, qualifying company

“DG 13 Interest expenditure: corporate shareholders

• “When this section applies

  “(1) This section applies when—

  • “(a) a net asset balance remains outstanding for an income year after the application of—

    • “(i) first, section DG 12, if applicable; or

    • “(ii) secondly, section DG 11; and

  • “(b) 1 or more of the following companies, none of which is part of a group of companies that includes company A, exists:

    • “(i) a company that is a shareholder in company A:

    • “(ii) a company that is a shareholder in a company that is part of the same group of companies as company A and has a voting interest in company A:

    • “(iii) a company that has a voting interest in a company referred to in subparagraph (i) or (ii).

  “How this section applies: looping rule

  “(2) This section applies sequentially as follows:

  • “(a) first, to the companies referred to in subsection (1)(b)(i) and (ii); and

  • “(b) secondly, to the extent to which the debt value of the company for the income year remains less than the company's share of the net asset balance, to the companies that are shareholders in a company referred to in paragraph (a); and

  • “(c) so on, until either—

    • “(i) the company's share of the net asset balance for the income year is reduced to zero or is treated as reduced to zero; or

    • “(ii) no other corporate shareholders exist to which this section applies.

  “Limitation by share in asset balance

  “(3) The deduction that the company is allowed for interest expenditure incurred for the income year is limited by their share of the net asset balance. The share of the asset balance is calculated using the formula—

  net asset balance × company's interest.

  “Definition of items in formula

  “(4) In the formula in subsection (2) subsection (3),—

  • “(a) net asset balance is the amount of the net asset balance after the application of section DG 11 or DG 12, as applicable, and as recalculated under subsection (6):

  • “(b) company's interest is the relevant voting interest in company A, expressed as a percentage.

  “Debt value less than asset balance

  “(5) If the debt value for the company for the income year is equal to or less than its share of the net asset balance for the income year, the company is allowed a deduction of a portion of interest expenditure incurred for the income year,—

  • “(a) of an amount calculated by company A using the formula in section DG 9(2); and

  • “(b) treating the total interest expenditure for the income year as if it were the item expenditure in the formula.

  “Recalculation of asset balance

  “(6) In the application of subsection (5), the amount that is the company's share of the net asset balance must be recalculated on each application, being reduced by an amount equal to each counted company's debt value.

  “Debt value more than asset balance

  “(7) If the debt value for the company for the income year is more than its share of the net asset balance, the company must calculate a reduced amount of interest expenditure incurred for the income year using the formula—

  interest expenditure	×	company's share of net asset balance
  		company's debt value.

  “Definition of items in formula

  “(8) In the formula in subsection (7),—

  • “(a) interest expenditure is the total amount of interest expenditure incurred by the company for the income year:

  • “(b) company's share of net asset balance is the amount calculated for the company under subsection (3):

  • “(c) company's debt value is the amount of the debt value of the company for the income year.

  “Apportionment of reduced amounts

  “(9) The company is allowed a deduction for the income year of a portion of the reduced amount described in subsection (7),—

  • “(a) of an amount calculated by company A using the formula in section DG 9(2); and

  • “(b) treating the reduced amount as if it were the item expenditure in the formula.

  “Net asset balance zero

  “(10) Once a calculation is made under subsection (7), the amount that is the company's share of the net asset balance is treated as zero.

  “Net asset balance

  “(11) If a net asset balance remains outstanding after the application of this section for an income year, the amount must be used under section DG 14.

  Example

  Parent Ltd has two equal corporate shareholders, company Y, which has debt of $20,000 with associated interest expenditure of $2,000, and company Z, which has debt of $70,000 with associated interest expenditure of $7,000. Both companies, share of the net asset balance is $65,000 ($130,000 × 50%). Since company Y's debt value is less than its share of the net asset balance, all its interest expenditure must be apportioned (section DG 13(5)). Company Z's debt value is greater than its share of the net asset balance, so it must apportion interest expenditure of $6,500 (section DG 13(7)-(9)). The formula is $7,000 × ($65,000/$70,000) = $6,500.

  “Defined in this Act: amount, company, debt value, deduction, group of companies, income year, interest expenditure, net asset balance, shareholder, voting interest

“DG 14 Interest expenditure: non-corporate shareholders

• “When this section applies

  “(1) This section applies for an income year when—

  • “(a) a net asset balance remains outstanding for an income year after the application of—

    • “(i) first, section DG 13, if applicable:

    • “(ii) secondly, section DG 12, if applicable:

    • “(iii) thirdly, section DG 11, if neither applies; and

  • “(b) a person exists who—

    • “(i) is not a company, other than a company acting as a trustee; and

    • “(ii) has a voting interest in company A; and

    • “(iii) has interest expenditure for which they are allowed a deduction.

  “Amount to be apportioned

  “(2) For a natural person, the amount of interest expenditure that must be apportioned is only the amount of interest that the person incurs on money borrowed to acquire shares in company A or in a company referred to in section DG 13(1)(b).

  “Method of apportionment

  “(3) The apportionment is made using the rules set out in section DG 13(2) to (10), treating the person as if they were the company.

  Example

  Company Y has two shareholders: Thomas, who has borrowed $200,000 to acquire a 50% interest in the company, and Brent, who has borrowed $10,000 to buy his 50% interest. Each has a share of the remaining net asset balance of $22,500. The formula is ($65,000 − $20,000) × 50% = $22,500. Since Thomas's debt value is greater than his share of the net asset balance, Thomas must apportion 11.25% of his total interest expenditure (sections DG 14 and DG 13(7)-(9)). The formula is 22,500/200,000. Since Brent's debt value is less than his share of the net asset balance, all Brent's interest expenditure must be apportioned (sections DG 14 and DG 13(5)).

  “Defined in this Act: amount, company, deduction, income year, interest, interest expenditure, net asset balance, share, trustee, voting interest

“Quarantined expenditure

“DG 15 Quarantined expenditure rules

• Sections DG 16 and DG 18 provide the rules that limit the amount of a person's deduction under sections DG 7, DG 8, and DG 11 to DG 14 for an income year when the income derived from the use of the asset does not reach a specified threshold. The excess expenditure is quarantined and denied as a deduction for the income year. Sections DG 17 and DG 19 provide for the allocation of the quarantined amount to a later income year when the income derived is sufficient to offset the expenditure. Companies must provide information disclosure statements under section 30D of the Tax Administration Act 1994 to enable the calculations to be made.

  “Defined in this Act: amount, asset, company, deduction, income, income year

“DG 16 Quarantined expenditure when asset activity negative

• “When this section applies

  “(1) This section applies when—

  • “(a) a person incurs expenditure for which they are allowed a deduction that is limited under section DG 7, DG 8, or DG 11, as applicable, for an income year; and

  • “(b) the amount of income derived for the income year from the use of an asset, other than an amount of exempt income, is less than 2% of—

    • “(i) for land, including an improvement to land, the amount given by the later of either its most recent capital value or annual value (as set by the relevant local authority) or its cost on acquisition (or market value, if the transaction involves an associated person):

    • “(ii) for other property to which this subpart applies, its adjusted tax value.

  “Quarantined amount

  “(2) The amount of the person's excess expenditure for the income year is calculated using the formula—

  expenditure – asset income.

  “Definition of items in formula

  “(3) In the formula,—

  • “(a) expenditure is the total of the following amounts:

    • “(i) the total amount of deductions that the person is allowed for the income year under sections DG 7, DG 8, and DG 11, as applicable and after any necessary apportionment; and

    • “(ii) an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:

  • “(b) asset income is the total amount of income, other than an amount of exempt income, derived for the income year from the use of the asset.

  “No deduction for quarantined amount

  “(4) The excess expenditure calculated under subsection (2) is quarantined and denied as a deduction for the income year.

  “Outstanding profit balance

  “(5) If the amount of expenditure for the income year is less than the amount of income for the income year, the excess income is the outstanding profit balance for the income year to be used under section DG 18. If the amount of expenditure for the income year is equal to or more than the amount of income for the income year, the outstanding profit balance is treated as zero.

  “Zero result

  “(6) For the purposes of the formula in subsection (2), if the amount of income for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

  Example

  David has a city apartment with a rateable value of $300,000. He rents out the apartment and also uses it privately. He receives market rate rental of $4,000 from non-associates, and $6,000 from associates. David's total allowable expenditure, under sections DG 7, DG 8, and DG 11, is $15,000. Since David's income from non-associates is less than 2% of the apartment's rateable value, the excess expenditure of $5,000 is denied as a deduction. The amount denied may be allocated to a later income year under section DG 17.

  “Defined in this Act: adjusted tax value, amount, asset, associated person, cost, deduction, exempt income, income, income year, land, market value

“DG 17 Allocation of amounts quarantined under section DG 16

• “When this section applies

  “(1) This section applies for an income year (the current year) when—

  • “(a) a person has an amount of excess expenditure quarantined under section DG 16 in relation to an asset for an income year before the current year; and

  • “(b) the person's income for the current year from the use of the asset is more than the amount of their deductions under sections DG 7, DG 8, and DG 11, as applicable.

  “Deduction and allocation

  “(2) The amount of previously quarantined expenditure that the person is allowed as a deduction for the current year must not be more than the lesser of—

  • “(a) the amount referred to in subsection (1)(a):

  • “(b) the amount calculated using the formula—

  asset income − expenditure.

  “Definition of items in formula

  “(3) In the formula,—

  • “(a) asset income is the total amount of income derived for the current year from the use of the asset:

  • “(b) expenditure is the total amount of deductions that the person is allowed in relation to the asset for the current year under sections DG 7, DG 8, and DG 11, as applicable and after any necessary apportionment.

  “Outstanding profit balance

  “(4) If the lesser amount in subsection (2) is the quarantined amount referred to in subsection (2)(a), an outstanding profit balance arises of an amount that is the difference between the amount of income for the current year and the amount of expenditure for the current year, including the quarantined amount allocated to the current year. The outstanding profit balance is available for use under section DG 19.

  “Zero result

  “(5) For the purposes of the formula in subsection (2), if the amount of expenditure for the current year is greater than the amount of income for the current year, the result of the formula is treated as zero.

  “Modification for certain assets

  “(6) For the purposes of subsection (1)(a), a quarantined amount that is related to an asset may be used in relation to another asset of the person if—

  • “(a) the first asset is damaged, destroyed, or lost, and is no longer held by the person; and

  • “(b) a second asset is acquired to replace the first asset; and

  • “(c) the two 2 assets are identical or substantially the same.

  Example, continued Example, continued from section DG 16

  In the following income year, David derives $10,000 from renting his city apartment at market rates to a non-associate. David's total allowable expenditure, under sections DG 7, DG 8, and DG 11, is $8,000. He also has expenditure of $5,000 quarantined from the previous income year. David is able to deduct $2,000 of that quarantined expenditure. The remaining $3,000 continues to be quarantined and may be allowed as a deduction for a later income year.

  “Defined in this Act: amount, asset, deduction, income, income year

“DG 18 Quarantined expenditure: group companies and shareholders

• “When this section applies

  “(1) This section applies when—

  • “(a) a person incurs expenditure for an income year for which they are allowed a deduction that is limited under 1 or more of sections DG 12 to DG 14; and

  • “(b) the income year is an income year in which section DG 16(1)(b) applies.

  “How this section applies: first looping rule

  “(2) The first application of this section is to every group company B in sequence until no other group companies exist to which this subsection applies.

  “How this section applies: second looping rule

  “(3) The second application of this section is sequentially to—

  • “(a) first, 1 or more of the following persons, none of which is a company referred to in subsection (2):

    • “(i) a person who is a shareholder in company A:

    • “(ii) a person who is a shareholder in a company that is part of the same group of companies as company A and has a voting interest in company A: ; and

  • “(b) secondly, a person who is a shareholder in a company referred to in paragraph (a); and

  • “(c) so on, until no other persons exist to which this subsection applies.

  “Quarantined amount

  “(4) The amount of the person's excess expenditure for the income year is calculated using the formula—

  expenditure – outstanding profit balance.

  “Definition of items in formula

  “(5) In the formula,—

  • “(a) expenditure is the total of the following amounts:

    • “(i) the total amount of deductions that the person is allowed for the income year under sections DG 12 to DG 14, as applicable and after any necessary apportionment; and

    • “(ii) an amount of the person that was quarantined under this section for an earlier income year and is not yet allocated to an income year:

  • “(b) outstanding profit balance,—

    • “(i) for company B, is the amount of the outstanding profit balance referred to in section DG 16(5):

    • “(ii) for a shareholder, is the amount that is the person's share of the outstanding profit balance referred to in section DG 16(5), calculated using the formula in section DG 13(3), treating the outstanding profit balance as if it were the net asset balance.

  “No deduction for quarantined amount

  “(6) The excess expenditure calculated under subsection (4) is either quarantined or remains quarantined, as applicable, and is denied as a deduction for the income year.

  “Recalculation of outstanding profit balance

  “(7) For the purposes of subsections (4) and (5)(b), the amount that is the outstanding profit balance must be recalculated on each application, being reduced by an amount equal to the amount of any deduction counted.

  “Zero result

  “(8) For the purposes of the formula in subsection (4), if the amount of the outstanding profit balance for the income year is greater than the amount of expenditure for the income year, the result of the formula is treated as zero.

  Example

  Aircraft Ltd owns an aircraft to which the rules in this subpart apply; the income derived from the asset in the current year is less than 2% of the cost of the aircraft. The company has calculated an outstanding profit balance of $12,000 after the application of section DG 16. Aircraft is 100% owned by Parent Ltd, which has apportioned interest expenditure of $5,000 calculated under section DG 12. Parent has 2 equal shareholders, Alisa who has apportioned interest expenditure of $8,000, and Hamish who has apportioned interest expenditure of $1,000, both calculated under section DG 14. Parent must apply section DG 18 first, and is not required to quarantine any of its interest expenditure; the outstanding profit balance is reduced to $7,000 ($12,000 - $5,000). Alisa’s and Hamish’s share of the outstanding profit balance is $3,500 each ($7,500 x 50%). Alisa must quarantine $4,500 of interest expenditure ($8,000 - $3,500); Hamish is not required to quarantine any interest expenditure.

  “Defined in this Act: amount, asset, company, deduction, group of companies, income year, net asset balance, shareholder, voting interest

“DG 19 Allocation of amounts quarantined under section DG 18

• “When this section applies

  “(1) This section applies for an income year (the current year) when—

  • “(a) a person has an amount of excess expenditure quarantined under section DG 18 for an income year before the current year; and

  • “(b) an outstanding profit balance referred to in section DG 17(4) is available for use for the current year.

  “How this section applies

  “(2) This section applies sequentially in the order set out in section DG 17 DG 18(2) and (3) until the outstanding profit balance is reduced to zero.

  “Deduction and allocation

  “(3) The amount of previously quarantined expenditure that the person is allowed as a deduction for the current year must not be more than the lesser of—

  • “(a) the quarantined amount referred to in subsection (1)(a):

  • “(b) the amount calculated using the formula—

  outstanding profit balance − expenditure.

  “Definition of items in formula

  “(4) In the formula,—

  • “(a) outstanding profit balance,—

    • “(i) for company B, is the amount of the outstanding profit balance determined for the company for the current year under section DG 18(5), if applicable, or otherwise under section DG 17(4):

    • “(ii) for a shareholder, is the amount that is the person's share of the outstanding profit balance for the current year under section DG 18(5), if applicable, or otherwise under section DG 17(4), calculated using the formula in section DG 13(3), treating the outstanding profit balance as if it were the net asset balance:

  • “(b) expenditure is the total amount of deductions that the person is allowed for the current year under sections DG 12 to DG 14, as applicable and after any necessary apportionment.

  “Recalculation of outstanding profit balance

  “(5) For the purposes of subsections (3) and (4)(a), the amount that is the outstanding profit balance must be recalculated on each application, being reduced by an amount equal to the amount of any deduction for quarantined expenditure counted.

  “Zero result

  “(6) For the purposes of the formula in subsection (3), if the amount of expenditure for the current year is greater than the amount of the outstanding profit balance for the current year, the result of the formula is treated as zero.

  Example, continued Example, continued from section DG 18

  In the following income year, Aircraft has calculated an outstanding profit balance of $16,000 after the application of section DG 18. Section DG 19 does not apply to Parent or Alisa because they have no previously quarantined interest expenditure. However, the section does apply to Hamish because he has $4,500 of quarantined interest expenditure from the previous year. Hamish’s current year apportioned interest expenditure is $7,000, calculated under section DG 14, and his share of the outstanding profit balance is $8,000 ($16,000 x 50%). Hamish is allowed a deduction for $1,000 of previously quarantined expenditure ($8,000 - $7,000). His remaining quarantined expenditure is $3,500 ($4,500 - $1,000).

  “Defined in this Act: amount, company, deduction, income year, net asset balance, shareholder

“Certain modifications to rules

“DG 20 When income cannot be separately attributed

• “Exclusion from rules

  “(1) Sections DG 16 and DG 18 do not apply to the use of an asset for an income year when—

  • “(a) the person derives an amount of income for the income year from the use of the asset in a business activity; and

  • “(b) because of the nature of the activity, an amount cannot be separately attributed to the use of the asset.

  “Re-inclusion

  “(2) Subsection (1) does not apply if—

  • “(a) the person also uses the asset in deriving an amount of income that is separately attributable to the use of the asset; and

  • “(b) the use of the asset referred to in paragraph (a) is at least 80% of the total use of the asset both in the business activity referred to in subsection (1) and as described in paragraph (a).

  Example

  Paul uses a helicopter on his farm to check stock for 50 hours in an income year, rents it out for 50 hours, and also uses it privately. While the income from the rental is clear, the income Paul derives in relation to the use of the helicopter in farming operations is not. The use of the helicopter falls outside the rules under the exclusion in section DG 20(1), and does not meet the requirements for re-inclusion under section DG 20(2) as the use of the helicopter to earn rental income is only 50% of the total income-earning use of the helicopter. Any loss attributable to the helicopter is not quarantined.

  “Defined in this Act: amount, asset, business, income, income year

“DG 21 Opting out of treatment under this subpart

• “Opt-out threshold

  “(1) If the amount of income derived for an income year from the use of an asset is less than $4,000, the person who has the asset may choose to treat the income as exempt income under section CW 8B(2) (Certain amounts derived from use of assets). The threshold amount does not include an amount of income exempt under section CW 8B(3).

  “Quarantined expenditure

  “(2) If, in relation to the use of an asset in an income year, the person has an amount of quarantined expenditure for the income year, they may choose to treat the amount of income derived that gives rise to the quarantined expenditure as exempt income under section CW 8B for the income year.

  “Consequences of opting out

  “(3) When a person who has an asset chooses under subsection (1) or (2) to treat the income derived from the use of the asset as exempt income, any interest expenditure that must be apportioned under section DG 9 is treated as expenditure incurred in deriving exempt income.

  “No application to companies

  “(4) This section does not apply when the person who has the asset is a company.

  Example

  Mike rents his bach out through the internet to a non-associate. The gross amount he receives for an income year is $3,000. Mike can opt out of the rules in this subpart, which would mean that he would not be liable to tax on the amount, but would also not be entitled to claim any deductions in relation to the bach.

  “Defined in this Act: amount, asset, exempt income, income, income year, interest expenditure

“DG 22 Application of rules to part years

• “When this section applies

  “(1) This section applies when the total income-earning use, private use, and non-use of an asset of a person relates to only part of an income year.

  “Non-use period

  “(2) For the purposes of section DG 3(1)(b), the number of days is calculated using the formula—

  days	×	62.
  365

  “When assets acquired during year: debt value

  “(3) For the purposes of section DG 11(9), if the company acquires the asset during the income year, the debt value is treated as the outstanding amount at the end of the income year.

  “When assets disposed of during year: debt value

  “(4) For the purposes of section DG 11(9), if the company disposes of the asset during the income year, the debt value is treated as the outstanding amount at the start of the income year.

  “When assets both acquired and disposed of during year

  “(5) For the purposes of section DG 11(9), if the company both acquires and disposes of the asset during the income year, the debt value is treated as the average of the outstanding amounts on the date on which the asset was acquired and the date of its disposal.

  “When assets acquired during year: interest expenditure

  “(6) For the purposes of sections DG 11 to DG 14, when company A acquires or disposes of an asset during an income year, the amount of interest expenditure that must be apportioned is calculated on a pro rata basis.

  “Ring-fenced losses in part years

  “(7) For the purposes of section DG 16(1)(b), the threshold is calculated using the formula—

  	days	×	2%.
  	365

  “Definition of item in formulas

  “(8) In the formula in subsections (2) and (6) formulas in subsections (2) and (7), days is the number of days in the income year on which the person has the asset, and for the purposes of the calculation, section DG 9(4) similarly applies.

  “Defined in this Act: amount, asset, company, debt value, income year, interest expenditure, private use”.

• “(2) The person is allowed a deduction for expenditure that they incur in planting or maintaining trees or plants, whether or not on the land, for the purpose of—

  • “(a) preventing or combating erosion of the land:

  • “(b) providing shelter to the land:

  • “(c) preventing or mitigating detrimental effects on a watercourse or body of water from the discharge of farming or agricultural contaminants.”

rate × diminished value.

“DV 25 Hedging of currency movements in Australian non-attributing shares and attributing FDR method interests

• “Deduction

  “(1) A person is allowed a deduction for the amount of expenditure that the person has under section EM 6 (Income and expenditure for fair dividend rate hedge portions).

  “Link with subpart DA

  “(2) This section overrides the capital limitation. The general permission must still be satisfied and the other general limitations still apply.

  “Defined in this Act: amount, deduction, general limitation, general permission”.

“When this section does not apply

• “(1B) This section does not apply for contracts that section DZ 10 (General insurance with risk period straddling 1 July 1993) applies to.”

“DZ 21 Expenditure on certain assets before 31 March 2013

• “When this section applies

  “(1) This section applies when—

  • “(a) a company has on 31 March 2013 an asset described in section DG 3 (Meaning of asset for this subpart); and

  • “(b) the asset is transferred before the end of the company's 2013–14 income year to—

    • “(i) 1 or more of the company's shareholders in proportion to their shareholding:

    • “(ii) 1 or more of the shareholders of a shareholder in proportion to their shareholding; and

  • “(c) the company chooses to apply this section.

  “Depreciation recovery income and adjusted tax value

  “(2) For the purposes of sections CG 1 (Amount of depreciation recovery income), EE 1(3) (What this subpart does) EE 21 to EE 24, and EE 55 to EE 60 (which relate to depreciation), the transfer is treated as if it were a disposal and acquisition for an amount equal to the adjusted tax value of the asset on the date of the transfer.

  Example

  BoatCo has a boat on 31 March 2013 which meets the various requirements set out in subpart DG. All the shares in BoatCo are owned by Michelle. The boat has a market value of $75,000, and an adjusted tax value of $55,000. BoatCo transfers the boat to Michelle without payment (which is treated as a dividend of $75,000). For depreciation purposes, BoatCo is treated as disposing of the boat for $55,000, and Michelle is treated as acquiring it for $55,000.

  “Defined in this Act: adjusted tax value, amount, asset, company, income year, shareholder”.

• “(db) a leasehold estate, or licence to use land, to which section EI 4B (Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licence) applies:”.

“EC 4B Compulsory use of herd scheme method for associated persons

• “When this section applies

  “(1) This section applies if, in an income year (the current year), a person (the transferor) disposes of livestock of a type for which they use the herd scheme (the transfer) to an associated person (the transferee), and the transfer is not in the ordinary course of business.

  “When this section does not apply

  “(2) This section does not apply to the transfer of livestock if,––

  • “(a) the transferor and the transferee would not be associated if the transferee or an associate were not the descendants in relation to the transferor or an associate of the transferor; and

  • “(b) the transfer is at market value and the transfer’s consideration is wholly on arm’s length commercial terms and conditions, ignoring terms and conditions relating to financing; and

  • “(c) for the transferor and associates of the transferor, but excluding their descended associates,––

    • “(i) all of their specified livestock in the income year of the transfer have been disposed of; and

    • “(ii) they do not derive income from the disposal of specified livestock that are part of a farming business in the next 4 income years.

  “When this section does not apply: deceased treated as alive and transferor

  “(3) This section does not apply if it would not apply treating a transfer of livestock to or from the estate of a deceased or under a will of a deceased as a transfer made by the deceased immediately before their death to the relevant transferee. However, this subsection does not apply if the will of the deceased creates a life interest in the relevant livestock.

  “Compulsory use of herd scheme method

  “(4) Despite sections EC 7(2), EC 12(1), EC 22(1), and EC 25(1), the transferee is treated as choosing and giving a notice of election, with application beginning for the current year, to use the herd scheme for a type of livestock, if the formula in subsection (5) calculates zero or a positive amount for a class in the type of livestock.

  “A definition and a formula

  “(5) The formula, for the purposes of subsections (1) and (4), is––

  hypothetical end herd scheme amount – minimum herd scheme amount.

  “Definition of items in formula

  “(6) In the formula—

  • “(a) hypothetical end herd scheme amount is the lesser of the following 2 amounts, or the first amount if they are the same:

    • “(i) the number of animals in the current year that the person would have of a class (the relevant class), adding back animals in all transfers described in subsection (1) that this section would apply to:

    • “(ii) the number of animals of the relevant class that the person valued under the herd scheme at the end of the year before the current year:

  • “(b) minimum herd scheme amount is the number of animals of the relevant class that the person has in the current year.

  “Definitions

  “(7) In this section,—

  • “(a) descendant means the son, daughter, or grandchild of the transferor or of an associate of the transferor:

  • “(b) descended associate means––

    • “(i) an associate (the associate) of the transferor that would not be associated if the associate or another associate were not descendants in relation to the transferor or another associate of the transferor:

    • “(ii) an associate (the associate) of the transferor that carries on a farming business separately from the transferor, and would not be associated if the associate or another associate were not relatives in relation to the transferor or another associate of the transferor.

  “Defined in this Act: amount, associated, class, descendant, descended associate, herd scheme, income year, notice

“EC 4C Value and timing of transfers

• “When this section applies

  “(1) This section applies to a transfer (the transfer) of specified livestock that section EC 4B applies to.

  “Same tax year

  “(2) If the transfer occurs in the same tax year for both the transferor and transferee, then the transfer is treated as a disposal and acquisition at the value of the relevant livestock under the herd scheme at the end of the transferor's corresponding income year.

  “Different tax year

  “(3) If the transfer occurs in different tax years for the transferor and transferee, then subsection (4) or (5) applies.

  “Different tax year: transferee earlier

  “(4) If the transferee acquires the relevant livestock in a tax year earlier than the tax year in which the transferor disposes of it, then the transfer is treated as a disposal and acquisition at the value of the relevant livestock under the herd scheme at the beginning of the transferor's corresponding income year.

  “Different tax year: transferee later

  “(5) If the transferee acquires the relevant livestock in a tax year (the later tax year) later than the tax year in which the transferor disposes of it, then,

  • “(a)  the transfer is treated as a disposal and acquisition at the value of the relevant livestock under the herd scheme at the end of the transferor's corresponding income year:

  • “(b) for the purposes of the transferee's opening value under section EC 16, the transferee is treated as owning and valuing the relevant livestock under the herd scheme on the last day of the transferee's income year corresponding to the tax year before the later tax year.

  “Defined in this Act: herd scheme, income year, specified livestock, tax year”.

“Restrictions on use of valuation methods

• “(5) Restrictions apply to the use of valuation methods, as described in sections EC 8 to EC 10.

“Exception to subsection (2): express written notice required in certain cases

• “(6) Subsection (2) does not apply to the extent to which an election requires a notice under section EC 11.”

“EC 8 Restrictions arising from use of herd scheme

• “First restriction

  “(1) A valuation method other than the herd scheme is not available to a person, in an income year after the 2011–12 income year, for a type of specified livestock if the person—

  • “(a) gives a notice of election, with application beginning for or before the income year, to use the herd scheme for the type of specified livestock; and

  • “(b) does not give before 18 August 2011 a later notice of election, with application beginning for or before the income year, to use another valuation method for the type of specified livestock.

  “First exception: election after 18 August 2011 for fattening business

  “(2) Despite subsection (1), a valuation method other than the herd scheme is available to a person in an income year after the 2011–12 income year, if––

  • “(a) the person gives a notice of election as described in subsection (1)(a); and

  • “(b) the person gives, on or after 18 August 2011, a later notice of election to use another valuation method for the relevant type of specified livestock (the livestock); and

  • “(c) the later notice is given, with application beginning for the income year (the starting income year) in which which all female breeding livestock cease being intended to be used for breeding purposes; and

  • “(d) the livestock are used in a fattening farming business for and after the starting income year.

  “Second exception: increase in a class

  “(3) Despite subsection (1), a valuation method other than the herd scheme is available to a person in an income year, to the extent of a person's animals of a class, in an income year (the current year), that are in excess of the amount of animals of the class that the person valued under the herd scheme at the end of the year before the current year.

  “Second restriction

  “(4) A person who values livestock of a particular type under the herd scheme must value all male breeding stock of that type under the herd scheme in an income year if, in the income year, they also value any livestock of that type under the national standard cost scheme or under the cost price method.

  “Defined in this Act: class, cost price, herd scheme, income year, national standard cost scheme”.

“Second exception: increase in a class

• “(3) Despite subsection (1), a valuation method other than the herd scheme is available to a person in an income year, to the extent of a person's animals of a class, in an income year (the current year), that are in excess of the person's class closing animal balance.

“A definition and a formula

• “(4) Class closing animal balance means the number of animals of a class calculated using the formula––

  last year's class amount + associated class transfers.

“Definition of items in formula

• “(5) In the formula,––

  • “(a) last year's class amount is the animals of the relevant class that the person valued under the herd scheme at the end of the year before the current year:

  • “(b) associated class transfers is the amount, if positive, calculated under section EC 4B(5), for the relevant class, that are transferred in the current year to the person to the extent to which section EC 4B(4) applies to the type of animals transferred.

“Second restriction

• “(6) A person who values livestock of a particular type under the herd scheme must value all male breeding stock of that type under the herd scheme in an income year if, in the income year, they also value any livestock of that type under the national standard cost scheme or under the cost price method.”

• “(c) a later election, described in section EC 8(2)(b) and (c), to value livestock of a particular type under a valuation method other than the herd scheme.”

“When this section does and does not apply

• “(1B) This section does not apply when, in an income year, a person's specified livestock is disposed of, and section EC 4B(4) applies to the transfer. However, if section EC 4C(4) applies to the transfer, then this section may apply.”

“ED 4 Valuation of certain excepted financial arrangements denominated in foreign currency

• “Who this section applies to

  “(1) This section applies to a person who, in an income year (the current year),—

  • “(a) has an excepted financial arrangement, of a type (the arrangement type) described in section EW 5(21) to (25) (What is an excepted financial arrangement) arrangement?), denominated in a foreign currency; and

  • “(b) has an amount of foreign currency payable or receivable under the excepted financial arrangement (a foreign currency payment) at the end of the current year.

  “Person may choose valuation timing used for financial statements

  “(2) The person may choose to value a foreign currency payment at the close of trading spot exchange rate applicable at the end of the current year, if the person, in preparing financial statements, determines values at the end of the income year for amounts of foreign currency payable or receivable by the person.

  “Consistent valuation timing for excepted financial arrangement

  “(3) If foreign currency payments under a person's excepted financial arrangement are valued under subsection (2) for an income year, the amounts of foreign currency payable or receivable under all of the person's excepted financial arrangements of the arrangement type are valued in the same way for the income year and later income years.

  “Defined in this Act: amount, close of trading spot exchange rate, excepted financial arrangement, financial arrangement, income year”.

• “(e) excepted financial arrangements other than depreciable intangible property:”.