Definition of a “controlled foreign company” – sections EX 1(1)(b) of the Income Tax Acts 2004 and 2007
(Clauses 18 and 85)
The Rewrite Advisory Panel agreed with a submission that section EX 1(1)(b) of the 2004 and 2007 Acts did not correctly reflect the outcome given in section CG 4(2)(b) of the 1994 Act. Under the 1994 Act, a foreign company was not a controlled foreign company if a non-resident shareholders control interests were:
- at least equal to or greater than 40 percent; and
- there was no single New Zealand-resident shareholder having control interests greater than the control interests of the non-resident.
The amendment restores the effect of section CG 4(2)(B) of the 1994 Act to section EX 1 in both the 2004 and 2007 Acts. As the provision is retrospective, it will have the effect of validating taxpayers who have continued to:
- disclose their interests in a foreign company as an interest in a controlled foreign company; and
- return their attributed CFC income from controlled foreign companies.
In addition, retrospectivity potentially exposes taxpayers to penalties in relation to:
- non-disclosure of interests in a controlled foreign company; or
- non-inclusion of attributed CFC income in their return of income.
Therefore, the amendment includes a savings provision to protect taxpayers from adverse affects of the retrospective amendment. The savings provision applies to a taxpayer who has taken a tax position in relation to whether the person has an interest in a controlled foreign company:
- in a return of income filed before (the last date of the period to which the savings provision applies); or
- for the purpose of a disclosure requirement occurring before (the last date of the period to which the savings provision applies).
The savings provision applies only if the tax position is based on the wording in section EX 1 of the 2004 or 2007 Acts (as appropriate) before this amendment.
The amendments apply from the beginning of the 2005–06 income year with both the 2004 and 2007 Acts being amended to give effect to this application, subject to the savings provisions described above.
Tax credits of trustees – section HC 24(2)
(Clause 21)
An amendment ensures that a trustee may use tax credits, such as imputation credits, to satisfy the trustee’s income tax liability in relation to trustee income. The amendment clarifies that the provision prevents a trustee from having a tax credit referred to in either subpart LC or subpart LD.
In the 2007 Act, section HC 24(2) prevents a trustee from using any tax credits to satisfy its income tax obligations. The Rewrite Advisory Panel agreed with a submission that this was an unintended change in law, as the 2004 Act did not prevent a trustee from using imputation credits (or other credits under Part L of the 2004 Act) to satisfy its income tax liability in relation to trustee income. The restriction in the 2004 Act was to prevent the trustee from obtaining personal tax credits, such as the low income earner rebate and the rebate for charitable donations.
The amendment applies from the beginning of the 2008–09 income year.
Formula for calculating the maximum amount for the total deduction of a supplementary dividend holding company – section LP 10(1)
(Clause 27)
The amendment corrects the formula in section LP 10(1) to restore the effect of the formula given in the corresponding provision of the 2004 Act (section LE 4(2)). This formula is used to calculate the annual total deduction for an income year of a supplementary dividend holding company.
The Panel also noted that the outcome given by the formula in section LP 10(1) of the 2007 Act may give a total deduction greater than that given by the formula in section LE 4(2) of the 2004 Act. The Panel noted that the recommended retrospective amendment limiting the amount of the total deduction can adversely affect a taxpayer who has filed a 2008–09 return of income for the 2008–09 tax year, applying section LP 10(1) as drafted. Therefore, a savings provisions applies to protect a taxpayer from being adversely affected by the retrospective change, if the taxpayer has relied on the wording of the formula in section LP 10(1) of the 2007 Act in taking a tax position in a return of income filed before the last date of the period for which the savings provision applies.
The amendment applies from the beginning of the 2008–09 income year. However, a savings provision applies, as described above.
Tax pooling – section OB 6
(Clause 28)
An amendment to section OB 6 clarifies that an imputation credit arises for an imputation credit account (ICA) company that receives an entitlement to funds held in a tax pooling account by way of transfer of that entitlement from another ICA company. The amendment provides that the time of the credit occurs at the time of the transfer of the entitlement.
The Rewrite Advisory Panel agreed with a submission that section OB 6 produced a different outcome from section ME 4(2)(ad) of the 2004 Act, in that a credit to the ICA does not arise for the transferee on the transfer of an amount that is an entitlement to funds in a tax pooling account.
The amendment applies from the beginning of the 2008–09 income year.
Definition of “revenue account property” – section YA 1 of the Income Tax Act 2007, section OB 1 of the Income Tax Act 2004
(Clauses 32(10)-(11) and 86(1))
The amendment clarifies the definition of “revenue account property” in both the 2004 and 2007 Acts to ensure that that if “revenue account property” becomes valueless, it does not cease to be revenue account property. This amendment ensures that the cost of revenue account property that becomes valueless may still be deductible under the general permission and allocated to the appropriate income year under section EA 1 (Trading stock) or section EA 2 (Other revenue account property).
The Rewrite Advisory Panel considered the drafting of the definition of “revenue account property” in the 2004 and 2007 Acts could be read as requiring a factual test to be applied. The consequence of that interpretation is that property that becomes valueless, despite initially coming within the meaning of “revenue account property”, would no longer be “revenue account property”. The Panel was concerned that the cost of the property might then not be deductible as a result of the property’s loss in value.
The amendment applies from the beginning of the 2005–06 income year (both the 2004 and 2007 Acts being amended to give effect to this application).
Sections 24M(5) and 24N(5) of the Tax Administration Act 1994
(Clauses 37 and 38)
The amendment corrects wording in section 24M(5), as recommended by the Rewrite Advisory Panel. The Panel’s concern was that section 24M(5) could be read as being in conflict with section 24M(1), effectively negating the use of an exemption certificate issued under section 24M(1). This exemption certificate relieves the payer of schedular payments to withhold tax from the payment.
The same concern as raised in this submission to the Panel for sections 24M(5) also relates to section 24N(5) in relation to a special tax rate certificate issued under section 24N(1).
The amendments to both sections 24M and 24N therefore ensure that:
- subsection (5) does not override the effect of subsection (1), to prevent a zero rate of withholding being applied to schedular payments; and
- a person commits a knowledge offence, under section 143A of the Tax Administration Act, if the person alters an exemption certificate or special rate certificate issued by the Commissioner in relation to schedular payments; and
- a person commits a knowledge offence, under section 143A of the Tax Administration Act, if the person uses or attempts to use an exemption certificate, that has expired or been cancelled by the Commissioner, to obtain a zero rate of withholding from schedular payments made to the person; and
- a person commits a knowledge offence, under section 143A of the Tax Administration Act, if the person uses or attempts to use a special tax rate certificate, that has expired or been cancelled by the Commissioner, to obtain a rate of withholding for schedular payments less than the rate set out in Schedule 4, Part C, clause 1(b) of the 2007 Act.
The amendments apply from the 2008–09 income year.
Tax credits and a person who is an absentee – sections LC 3 and LC 6
(Clauses 25 and 26)
Sections LC 3(1) and LC 6(1) are being amended to make clear, in the text of the provisions, that neither the child’s income tax credit (section LC 3) nor the housekeeping tax credit (LC 6) are available for a person who is an absentee for income tax purposes.
The requirements to obtain the child income tax credit include attendance at school for the tax year, and so this tax credit is inherently not available for an absentee. Section 41A of the Tax Administration Act prevents an absentee from receiving the housekeeper tax credit.
The amendments apply from the 2008–09 income year.