PIE credit impairment provisions

Section HL 19B of the Income Tax Act 2004; sections HL 19B and HM 35B of the Income Tax Act 2007

Amendments have been made to the portfolio investment entity (PIE) rules to ensure that multi-rate PIEs are able to claim deductions for credit impairment provisions. The amendments will also ensure that multi-rate PIEs have sufficient authority to claim deductions for expenses and pay tax for income when these are reflected in the PIE's unit price or in its financial statements. The changes are intended to clarify uncertainty in the timing rules over when deductions can be made or income declared.

Key features

New section HM 35B clarifies that multi-rate PIEs are able to claim deductions for expenses and pay tax for income at the point when they are reflected in the PIE's unit price or its financial statements, even if this is before the PIE has legally incurred or derived the expenditure or income. The purpose of this timing rule is to maintain investor equity over time by ensuring that investors exiting a PIE are attributed their correct share of the PIE's tax.

Under this new rule, any future change in an expense or income that has already been deducted or taxed will also be picked up for tax purposes at the point when the change is reflected in the PIE's unit price or financial accounts.

Section HM 35B also ensures that multi-rate PIEs are able to claim deductions for credit impairment provisions when they are reflected in the PIE's unit price or its financial statements. Credit impairment provisions are created to reflect the decline in a financial asset's value due to past events.

A PIE can only claim deductions for credit impairment provisions if it has objective evidence of a loss in an asset's value because of events that have already occurred. Specifically, the criteria set out in NZ IAS 39 will need to be met for the PIE to make such a deduction.

The amendments apply retrospectively from 1 October 2007. Corresponding new sections HL 19B of the Income Tax Act 2004 and HL 19B of the Income Tax Act 2007 have therefore also been inserted with appropriate application dates. However, transitional measures have been included to confirm the tax positions already taken by multi-rate PIEs on the timing of income and expenses, as well as credit impairment provisions. These transitional measures prevent PIEs from making retrospective adjustments to their tax returns following these clarifications.

Application date

The amendments apply from 1 October 2007.