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No tax relief available

Investors in companies that go into receivership need to be aware that the losses on their debentures are not deductible for tax purposes, New Zealand Institute of Chartered Accountants tax director Craig Macalister says.

Wednesday, July 5th 2006, 6:47AM
He says the recent failure of two companies highlights the issue for individual investors.

"Although a deduction is available for any interest income already returned, any loss ultimately incurred on the investment is not deductible for tax purposes unless the person is in the business of lending money," he says.

"Individual lenders need to be aware of this. There is a tendency for investors to think that because any gain on the investment is taxable any losses may be deductible: this is not so."

While the loss on the investor's loan is considered a loss of capital, the same does not apply to the finance company borrower. In the case of the borrower, the rules take an economic substance approach and regard the amount of the loan forgiven in any arrangement with creditors as income.

"So the same amount is treated differently: a non-taxable loss to the lender, but taxable income to the defaulting borrower - the revenue gets to have its cake and eat it too," Macalister says.

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