BETA debit rules

Sections OE 7, OE 8, OP 101 and OP 102 of the Income Tax Act 2007

Key features

Sections 115, 116, 119 and 120 of the Taxation (Tax Administration and Remedial Matters) Act 2011 correct an unintended change in law in sections OE 8 and OP 102 and clarify sections OE 7 and OP 101, all being provisions of the Income Tax Act 2007.

In addition, some retrospective technical amendments have been made to the branch equivalent tax account (BETA) rules.

Background

A BETA is a memorandum account designed to prevent the double New Zealand taxation of income earned through offshore subsidiaries. A BETA debit represents New Zealand tax paid on foreign dividends and is intended to offset tax paid under the controlled foreign company (CFC) rules on the underlying profits. Foreign dividends received by companies are now generally exempt and the BETA mechanism for companies is being removed. The technical changes discussed here are therefore relevant mainly to earlier years.

Key features

A number of minor drafting changes have been made to sections OE 7 and OP 101. These improve the clarity of the provisions and achieve consistency with the position under the Income Tax Act 2004.

In addition, sections OE 8 and OP 102 have been repealed. A technical drafting error allowed a company's entire BETA debit balance to be converted into a tax loss, meaning that BETA debits could offset a New Zealand company's income from all sources, and not just from CFCs. This went beyond the intent of the BETA regime, which was only meant to prevent double taxation of CFC income. A law change was made in December 2007 specifically to address this problem. However, the rewritten Income Tax Act 2007 (enacted in November 2007) included, by mistake, provisions that effectively allowed this practice to continue. The repeal of sections OE 8 and OP 102 addresses this issue.