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New Zealand Shuts Lease Tax Loophole

by Mary Swire,, Hong Kong

22 June 2007

The New Zealand authorities are moving to shut down tax schemes involving leases on overseas assets that result in a loss of revenue for the New Zealand government, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced on Wednesday.

“The arrangements in question enable New Zealand parties to claim depreciation deductions for assets in which they have no economic interest that are leased to parties overseas who are not subject to New Zealand tax rules,” they explained.

Under these schemes, the New Zealand party purchases the overseas asset and leases it back to the original owner, who continues to use it and to bear all the economic risks of ownership.

“The only economic benefits of the transaction are the tax deductions, which are shared between the two parties. This is against the intent of the law," the ministers observed.

They continued:

“In these transactions the leases are structured in such a way that they are classified as operating leases for tax purposes, even though they are, in substance, finance leases, which have different tax rules. Under an operating lease the New Zealand lessor can claim the deductions, whereas under a finance lease it is the lessee who claims the deductions."

“We understand that these arrangements are being marketed in New Zealand and could become more widespread unless action is taken to prevent them."

To stop the spread of the scheme, the ministers stated that once enacted, the new laws will have effect from June 20.

The ministers added:

“The finance lease tax rules will be widened to include leases for which the lease asset is located overseas, the lessee’s income from use of the asset is not completely assessable in New Zealand, and the economic risks and benefits of ownership have been transferred to the lessee."

"New leases that come within the scope of these changes will be treated as finance leases for tax purposes from today (June 20)."

“Existing operating leases that come within the scope of these changes will be reclassified as finance leases from the beginning of the next income year, and will be subject to tax on the difference between the net income recognised under the operating lease and the net income that would have been recognised under a finance lease."

“The changes to the finance lease rules will be added to the taxation bill that is currently before Parliament by means of a Supplementary Order Paper. That will ensure an early enactment of the change."

The Ministers concluded:

“The government is making these changes to protect its fiscal position in relation to leases to parties overseas. We will consider wider changes to the finance lease rules, if necessary, to prevent further arrangements of this type arising in relation to domestic arrangements and, of course, the changes will not preclude Inland Revenue considering compliance action in relation to arrangements of this nature that it has identified."

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