Thin capitalisation threshold may fall in New Zealand

Large, foreign-owned companies in New Zealand may be steered through proposed changes to the tax rules toward a reduced reliance on debt and greater use of equity to fund their operations.

A paper from the Tax Working Group, an advisory body, calls for a change in the thin capitalisation rules by lowering the maximum debt that a company may have, for tax purposes, to 60 per cent of net assets from 75 per cent now.

Thin capitalisation rules are used in many tax jurisdictions to ensure that subsidiaries of foreign companies pay a reasonable level of company tax on their profits by making sure that, at least for the purposes of working out company tax, a balance sheet is not wholly debt funded.

The general theme of the tax reform proposals is to maintain tax competitiveness with Australia, and there is support for a cut in the company tax rate as well as personal tax rates.