Non-recourse loans details released

Press, 13 October 1982, Page 11

Non-recourse loans details released

Details of the tax treatment that will apply to nonrecourse loans and other forms of leverage financing have been released by the Government, and apply particularly to the film industry.

The main feature of these loans is that they place no obligation on the borrower to repay should certain pre-determined events not occur.

For example, a potential overseas distributor could provide such finance to a person to spend in the production of a particular article or product. If the exploitation of that product did not produce income above a certain level, then the loan or part of it is not

repayable. In this way. deductions for tax purposes have been gained by the producer of the article for expenditure financed out of funds which the borrower is never personally liable to pay. This type of finance arrangement has been used extensively in the film industry. The Budget said the Government was not prepared to allow it to continue to be used as a tax avoidance measure. However, the Minister in Charge of the Inland Revenue Department, Mr Falloon, said non-recourse loans and other forms of leverage financing had also been used in other industries. For this reason, the legis-

lation had been extended to cover all expenditure financed in this way. The Income Tax Amendment (No. 2) Bill provided that where any expenditure was financed from funds borrowed and the borrower was protected against any loss either by way of non-re-course loan, or by any similar arrangement, a deduction for that expenditure would not be allowed for taxation purposes until the year in which the loan was actually repaid. In this way, expenditure incurred in the conduct of business would in future be deductible only to the extent that the borrower was personally at risk over that expenditure, Mr Falloon said.