Rewrite advisory panel amendments

The following amendments reflect the recommendations of the Rewrite Advisory Panel’s consideration of submissions on the rewritten Income Tax Acts. The Panel monitors the working of the Income Tax Act 2007 and reviews submissions on what may be unintended changes in the law as a result of its having been rewritten. The Panel recommends legislative action, when necessary, to correct any problems.

Application date

Unless otherwise stated, all of the following rewrite amendments apply retrospectively, with effect from the beginning of the 2008−09 income year.

Valuation of livestock

(Clause 20)

As part of the rewrite of the trading stock rules in subpart EE of the Income Tax Act 1994 into the Income Tax Act 2004, the livestock valuation rules were separated from the general trading stock rules (subpart EB). The livestock valuation rules were placed in a separate subpart (subpart EC). Subpart EC was re-enacted in the Income Tax Act 2007.

However, under section EE 1 of the 1994 Act, the trading stock valuation rules in subpart EE of the Income Tax Act 1994 applied to a person carrying on a business. Therefore in the 1994 Act, the livestock valuation rules applied only to a person carrying on a business and to their livestock held as part of the normal incident of carrying on that business. This aspect of section EE 1 was rewritten into subpart EB but was inadvertently not included in the provisions of subpart EC.

This amendment restores the business nexus to subpart EC in both the 2004 and 2007 Acts. This requirement extends to all livestock for which there is a purpose of sale. The business nexus will normally be satisfied for livestock held over several years, such as dairy cattle, sheep, goats and the like, which are held for their fleece or their progeny (or both). The business nexus would normally be satisfied for this type of livestock because the disposal of these animals beyond their useful life is a normal incident of a farming business.

Application date

The amendment to the livestock valuation rules to restore the business nexus apply from the beginning of the 2005−06 income year. However, a savings provision applies for tax positions taken before 31 May 2011.

Trustee income

(Clause 38)

If income derived by at trustee for an income year is not distributed as beneficiary income, that income is included in the trustee’s taxable income as trustee income. In most circumstances, trustees are taxed on income derived if it is either sourced from New Zealand or derived by a trust having a resident settlor.

Section HC 25 provides support to the settlor basis for taxing trusts by ensuring that a non-resident trustee of a trust having a resident settlor (and certain other trusts) is taxable on income derived from sources outside New Zealand.

The Rewrite Advisory Panel noted that section HC 25(1) contains an ambiguity and could be read as applying to income derived from a source outside Zealand by a non-resident trustee of a trust having a resident settlor even if that income is distributed as beneficiary income.

The Panel also identified that as the Interpretation Act 1999 provided for headings to sections to be relevant indicators for statutory interpretation, there is no unintended change in outcome. Therefore, the Panel concluded it is unnecessary to provide for a retrospective amendment.

This amendment clarifies that section HC 25 applies to income derived by a trustee in an income year that is not also beneficiary income. The Panel considered this amendment will assist the reader in understanding the effect of the provision.

Employment income

(Clause 88(7))

The amendment resolves an ambiguity in the definition of “employment income” and ensures that the definition applies to shareholder-employees.

Employment income is defined in the 2007 Act as income referred to in section CE 1. Under this provision, for shareholder-employees to derive employment income, the income they derive must come within the meaning of salary or wages.

However the definition of “salary and wages” in section RD 5 might not include income of a shareholder-employee who has elected to opt out of the PAYE rules. The election to opt out of the PAYE rules is permitted in relation to drawings taken from the company in anticipation of a salary being subsequently declared.

This amendment ensures that the income of a shareholder-employee who has elected that employment income is not subject to the PAYE rules, remains treated as employment income for the purpose of non-PAYE provisions. Examples of employment income provisions that apply to shareholder-employees are sections CE 1, EA 4 and EI 9.

Minor maintenance items

The bill also contains a series of amendments for minor maintenance items arising from the rewrite of income tax legislation that have been referred to the Rewrite Advisory Panel. These may include any of the following:

• ambiguities;
• compilation errors;
• cross-references;
• drafting consistency, including readers’ aids − for example, the defined terms lists;
• grammar;
• punctuation;
• spelling;
• consequential amendments arising from substantive rewrite amendments; or
• the consistent use of terminology and definitions.

The following minor maintenance items are included in this bill.