Inland Revenue has released a draft “Questions we’ve been asked” (QWBA) that addresses whether a close company can deduct, in its tax return, interest payable on a shareholder advance where the exact amount is not known until after balance date.
The draft concludes that where the exact amount owing is not known at balance date, to be able to deduct it, a company must show that:
- it has incurred the interest on or before balance date, and
- the amount is calculated based on a previously agreed formula or method.
Key CA ANZ’s recommendations include:
- A shareholder current account may be in-funds or overdrawn and the QWBA should set out the tax treatment for the company and shareholder in each scenario.
- The analysis should consider the financial arrangements rules in section EW of the Income Tax Act 2007.
- The QWBA should explain when RWT should be deducted and paid, and deal with the timing of the related RWT credit
- An explanation should be included of the implications under the investment income reporting rules in subpart 3E of the Tax Administration Act 1994.
- The QWBA should explain the tax implications if interest is not paid at a market rate
- The RWT and investment income reporting issues should be referred to Inland Revenue Policy and Regulatory Stewardship for their consideration.