Branch equivalent tax accounts and losses

Sections MF 4, MF 5, MF8 and MF 10 of the Income Tax Act 1994 and Income Tax Act 2004

Introduction

A number of clarifying or minor corrective amendments have been made to the branch equivalent tax account rules

Background

The Taxation (GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003 made amendments to the branch equivalent tax account rules to:

• ensure that only New Zealand-sourced losses could create branch equivalent tax account credits;
• provide consistency between the treatment of current and past year domestic losses;
• simplify the branch equivalent tax account rules generally.

Key features

• Sections MF 4(2)(a) and MF 8(3)(a) have been amended to omit their reference to paragraph (b) of sections MF 4(1) and MF 8(2) because this paragraph no longer exists following the simplification of the branch equivalent tax account credit rules enacted in 2003.
• Similarly, sections MF 5(2) and MF 10(2) have been repealed because they are no longer considered necessary following the simplification of the branch equivalent tax account rules in 2003.
• Sections MF 5(6B) and MF 10(5B) have been amended to clarify that the excess is grossed up into a loss, rather than the excess being the amount that becomes a loss.
• Section MF 8(2)(a) has been amended to ensure that item d in the formula also includes the foreign tax credits of consolidated group members in section LC 16. Item e in the formula has also been amended to ensure that it includes all branch equivalent tax account debits used to offset the income tax liability of the consolidated group.

Application date

The amendments apply to the 1997-98 and subsequent income years, unless a taxpayer has filed before 26 June 2003 a return of income for the income year, and the return of income relies on the statutory provisions as they were before the enactment of the Taxation (GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003.