3 July 2006
No tax relief for investors in failed finance companies
"Investors in companies that go into receivership need to be aware that the losses on their loan (debenture) are not
deductible for tax purposes," says Craig Macalister, Tax Director of the New Zealand Institute of Chartered Accountants.
The recent publicity on finance companies that have gone into receivership with a possible shortfall of several million
dollars highlights the issue for individual investors who have invested in the finance company, typically by way of a
debenture.
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.
Mr Macalister stated that 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.
Ironically, 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," says Mr Macalister. "
ENDS