A new tax bill proposes changes to the way on-balance sheet securitisation vehicles are taxed, making it easier to achieve tax neutrality.
The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill (the Bill), introduced on 28 June 2018, proposes to extend the flow-through tax treatment that currently applies to bank mortgage securitisations to a wider range of securitisation transactions.
New rules apply to on-balance sheet SPVs
The flow-through treatment will be available to "debt funding special purpose vehicles" (SPVs). In broad terms, an SPV:
must operate to guarantee liabilities of an originator, or to raise funds by issuing securities backed by its assets;
must only receive funds that relate to its assets, or are incidental to its sole purpose;
must have interests in assets only for the sole purpose of carrying out the company's or trust's operations;
must prepare its financial statements using IFRS and be audited; and
must be "on balance sheet", meaning that its assets must be treated as held by the relevant originator, or another company in the same wholly-owned group as the originator, for financial reporting purposes.
The SPV may hold financial arrangements (e.g. loans) or any other form of assets, such as operating lease receivables or operating lease assets.
Addressing tax complexity
Under the current tax rules, most securitisation vehicles are not treated as flow-through entities and are taxed under the rules for trusts. The trust rules provide a degree of tax neutrality in that income can be distributed to the beneficiary of the trust, however it is difficult to achieve complete tax neutrality where mismatches between taxable income and accounting income arise (usually caused by the different treatment of credit impairment for tax and accounting purposes).
The proposed amendments look to overcome these difficulties. By ignoring the SPV for tax purposes and treating the originator as holding those assets for tax purposes, no taxable income will arise in the SPV and accordingly tax neutrality is achieved. The transfer of assets to the SPV would also be ignored for tax purposes. The flow-through treatment will also apply for GST purposes, which may assist in reducing GST leakage on supplies of services between the originator and the SPV.
The new rules will place limits on the ability of the IRD to access assets held in a SPV to pay tax liabilities of the originator that do not relate to the SPV. This is to further promote bankruptcy remoteness of the SPV.
The proposed rules will be elective, and will apply from the date the Bill comes into force.
Interested parties will have the opportunity to make submissions on the proposals as the bill progresses, although we expect that most will see the changes as favourable.
One interesting aspect that could impact industry practice is the extension of the flow-through treatment to companies as well as trusts. Trusts have traditionally been used for securitisations to maximise tax neutrality. The proposed rules could open the door for use of ordinary companies as securitisation vehicles.
Please contact our team if you would like any advice or assistance in relation to the matters addressed in this client update.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.