Tax advice for investors in failed companies
17 March 2008
Tax advice for investors in failed finance companies
Most investors in failed finance companies will not qualify for a tax write-off, said Inland Revenue Group Tax Counsel Graham Tubb today.
However, a small group of investors who have accrued interest may be eligible, he said. This group includes companies, trusts, and individuals earning more than $100,000 a year in interest.
Mr Tubb said that finance company investors could not claim a capital loss, nor could they claim a ‘’bad debt’’ deduction for income they had already been paid. ’’As a guide, if resident withholding tax has been deducted from interest payments, the interest has been paid to the investor, so it cannot be claimed as a bad debt. ‘’
”However, if investors have been taxed on interest they expected to earn, but which they have not received or re-invested, they might be able to claim a bad debt deduction for it.’’
Investors must claim a deduction in the year they write off the debt, and they must believe there is no commercially realistic possibility of recovering the amount written off.
“Investors need to be able to demonstrate some reasonable basis for the write-off, such as a report from the liquidator,’’ Mr Tubb said. “Just treating a debt as bad does not actually bring the debt to an end, and investors might still recover all or part of the amount from a liquidator or receiver.’’
“We would expect investors to wait to hear what amount they are likely to recover, through the liquidator’s report for example, before making a decision about how much, if any, of the investment is bad.”
Mr Tubb noted that another group of investors, whose business is dealing or trading in finance company term deposits, are governed by a different set of rules.
He said the topic was complex, and urged investors to seek professional advice before deciding to write off debt. For more information, investors can visit the Inland Revenue website at http://www.ird.govt.nz/news-updates/like-to-know-losses-from-finance-co-invests.html or they can call Inland Revenue on 0800 227 774.