The Issues Log

Section / Provision Income Tax Act 2007

Section / Provision Income Tax Act 2004

Date Received

There appears to have been an unintended change in the Income Tax Act 2007 in relation to the deductibility of interest expenditure for a company that belongs to a consolidated group.

Company A and Company X are both qualifying companies and members of a consolidated group.

Company A borrows money from Company Z (not a member of the consolidated group) and uses the funds to acquire share capital in Company X. 

Company A does not meet the requirements for a deduction of interest under section DB 7 (Interest: Most companies need no nexus with income) but would get a deduction under section DB 8 (Interest: money borrowed to acquire shares in group company) in the absence of section FM 12.

The consolidated group (treated as one company) is not entitled to an interest deduction under section FM 12(2) of the 2007 Act but would be entitled to a deduction under HB 2(1)(d) of the 2004 Act.