Losses
Attributed PIE loss
An attributed PIE loss is the amount that is less than zero that may be calculated for each investor in an investor class and each day in an attribution period in a quarterly or exit MRP. An investor class has a class net loss in an attribution period if total deductions for the class exceed assessable income for the class.
The investor attributed loss for MRPs that elect to pay provisional tax is zero as they will not attribute losses to investors.
Tax credits
Where an investor with a PIR of 10.5%, 17.5% or 28% in a quarterly or exit MRP has an investor attributed PIE loss or excess New Zealand tax credits, the MRP has a tax credit (rebate).
Example
Investor A holds 2,000 $1 units in a MRP and has a PIR of 28%.
The MRP incurs a loss of $100 for the period.
We credit/refund $28 to the MRP ($100 x 28%)
The MRP then attributes the credit to the investor by adjusting the investor's interest or making a distribution.
Current losses for zero rate investors
The investor attributed PIE loss for an investor taxed at a zero rate in a quarterly or exit MRP is able to be claimed by the investor in their tax return in the income year that includes the end of the MRP's income year.
Formation losses
A formation loss is the net loss arising before the entity becomes a PIE that is able to be carried forward and offset against a PIE's taxable income.
These losses can be made up of three components:
- Losses brought forward (from the year before the transition to a PIE)
- Current period loss (loss arising from the trading year in which the entity becomes a PIE and prior to the commencement of the PIE)
- Transitional loss (arising from deemed disposal and reacquisition).
These losses are ring-fenced at the PIE level and cannot flow through to investors, either directly or indirectly.
Claiming formation losses
Formation loss less than 5%
Where the MRP's formation loss is less than 5% of the total market value of its investments at the time of becoming a PIE, the loss can be attributed to an investor class for an amount that is the lesser of the following:
- the available formation loss, and
- the class net income reduced by the available New Zealand tax credits divided by the basic tax rate.
The formation loss restriction does not apply to non-multi-rate PIEs as the loss cannot flow through to investors.
Formation loss 5% or more
Where the MRP's formation loss is 5% or more than the total market value of its investments at the time of becoming a PIE, the loss can be attributed to an investor class (provided it has not been attributed to an earlier attribution period) and offset against class net income at the rate of 1/1095 for each day (thus spreading the loss over a minimum of three years, except when a leap year is involved).
Any formation loss that cannot be offset against class net income on a day is carried forward to the next day. Once 1,095 days have passed, any remaining formation loss can be offset against class net income reduced by the available New Zealand tax credits (eg imputation credits) divided by the basic tax rate. The loss still cannot flow through to investors.
The following example notes how a formation loss may be attributed for each day:
Example
Facts for scenario
This is an exit MRP and this example only covers the first six days as a PIE.
The formation loss exceeds 5% of the total market value of the MRP's investments. For simplicity the formation loss is $1,095,000.
|
Day 1 |
Day 2 |
Day 3 |
Day 4 |
Day 5 |
|
| Formation loss $1,095,000 |
|
|
|
|
|
| Imputation credit |
$510 |
$250 |
$100 |
$420 |
$240 |
| Resident withholding tax |
$50 |
$60 |
$5 |
$20 |
$50 |
| Income prior to formation loss |
$1,700 |
$2,200 |
$2,200 |
$2,000 |
$2,000 |
Step 1: Establish protected income
New Zealand tax credits are allowed before any formation loss.
The amount available for offset is the total income less the protected income. Protected income calculated at tax credit /.30
|
Day 1 |
Day 2 |
Day 3 |
Day 4 |
Day 5 |
||
| NZ tax credits |
$560 |
$310 |
$105 |
$440 |
$290 |
|
| Protected income /.30 |
(A) |
$1,867 |
$1,033 |
$350 |
$1,467 |
$967 |
| Income prior to formation loss |
(B) |
$1,700 |
$2,200 |
$2,200 |
$2,000 |
$2,000 |
| Income for formation loss offset |
If (A<B) then B-A =(C) |
$0 |
$1,167 |
$1,850 |
$533 |
$1,033 |
Step 2: Offset formation loss against available income
Unused formation loss on each day is available for carry forward to the next day. The total formation loss is then offset against the income available for offset.
|
Day 1 |
Day 2 |
Day 3 |
Day 4 |
Day 5 |
Day 6 |
||
| Formation loss |
$1,095,000 |
|
|
|
|
|
|
| Days |
1,095 |
|
|
|
|
|
|
| Daily formation loss maximum |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
|
| Formation loss brought forward |
$0 |
$1,000 |
$833 |
$0 |
$467 |
$434 |
|
| Combined available formation loss |
(D) |
$1,000 |
$2,000 |
$1,833 |
$1,000 |
$1,467 |
$1,434 |
| Formation loss used | lesser of C and D |
$0 |
$1,167 |
$1,833 |
$533 |
$1,033 |
|
| Unused formation loss carried forward to next day |
$1,000 |
$833 |
$0 |
$467 |
$434 |
|
|
New Zealand tax credit protected income
Formation losses cannot be offset against income associated with New Zealand tax credits preventing refunds of these tax credits being generated.This protected income is identified by grossing up the tax credit by the formula NZ tax credits /.30.
Example
G Gold Limited has income and tax credits for a day of:
- New Zealand interest income of $100 with RWT of $30.
- New Zealand dividend income of $150 with imputation credits of $45.
- FIF income of $400, no foreign tax credits.
The total net income after deductions for the day is $650.
G Gold Ltd has a formation loss qualifying for the 1095 days spread of $547,500. That is, a formation loss available for the day of $500.
Calculation
| Total New Zealand tax credits | $70 ($30 RWT plus $45 ICA credits) |
| Income associated with tax credits 2012 income year | $250 ($70/.28) |
| Maximum loss able to be claimed is: | |
| total net income | $650 |
| less NZ tax credit income | $250 |
| Income available to be offset by formation loss | $400 |
| less available formation loss | $500 |
| Balance after allowing formation loss | $0 |
| Balance added back to the New Zealand tax credit income | $250 |
| Total income to attribute | $250 |
| The unused formation loss of $100 is available to carry forward to the next day. | |
| Total attributed income for the day after formation loss | $250 |
| New Zealand tax credits | $70 |
Losses and notified foreign investors
PIE losses cannot be used to reduce the income of notified foreign investors. Foreign investment PIEs cannot claim deductions for expenditure incurred on income attributed to notified foreign investors. The tax calculations also cannot go below zero for the investor. So no losses will arise.
The calculation of taxable income for notified foreign investors allows losses to be attributed to the investor, but then changes the result of the part of the calculation so that the taxable income equals the assessable income.
Formation losses and class losses are attributed to the notified foreign investor under the normal attribution rules but cannot be used by the PIE in the calculation of the tax liability for a notified foreign investor.
Foreign investment PIEs are not allowed to directly hold land investments so land loss provisions will not apply. If a PIE has a land loss from an earlier period carried forward the notified foreign investor cannot utilise that loss either.
Date published: 30 Aug 2011
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