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Volume 1

Matters raised by officials

DEFINITION OF “DOCUMENT”

Submission

(Matter raised by officials)

Schedule 2 of the Tax Administration (Form of Warrant) Regulations 2003 (which is the prescribed form for a warrant under section 16C of the Tax Administration Act 1994) should be updated to refer to “documents”.

Comment

A new definition of “document” was inserted into the Tax Administration Act by the Taxation (Taxation Administration and Remedial Matters) Act 2011 replacing the old defined phrase “book and document”. The new definition removed references to redundant technology. The words “book and document” throughout the Inland Revenue Acts were replaced with the new term “document”.

However, Schedule 2 of the Tax Administration (Form of Warrant) Regulations has not been updated with the new terminology.

Schedule 2 of the Tax Administration (Form of Warrant) Regulations should be amended to refer to “documents”.

Recommendation

That the submission be accepted.

AUCKLAND COUNCIL – INDEPENDENT MĀORI STATUTORY BOARD

Submission

(Matter raised by officials)

The Income Tax Act 2007 and the Goods and Services Tax Act 1985 should be amended to deem the Auckland Council Independent Māori Statutory Board to be a “local authority” for the purpose of those Acts. These amendments will mean that the Board is treated in the same way as other advisory-type boards of the Auckland Council.

Comment

Section 81 of the Local Government (Auckland Council) Act 2009 establishes the Board and sets out its purposes. The purpose of the Board is to assist the Auckland Council to make decisions concerning the promotion of cultural, economic, environmental, and social issues of significance to Māori, and to ensure that the Council acts in accordance with statutory provisions referring to the Treaty of Waitangi.

The Board is established as “a body corporate”, separate from the Auckland Council. Consequently, the Board is a separate legal entity that can, and does, act in its own name, including in relation to the acquisition of supplies of goods and services required for its purpose and incurring expenditure in relation to such supplies. In contrast, the Pacific Peoples Advisory Panel and the Ethnic Peoples Advisory Panel established by the Mayor of Auckland Council are not separate legal entities. Their functions are carried out under the Auckland Council umbrella.

Under current income tax law, the Board would be taxed as a normal company. Therefore, there is a possibility that the funding that it receives from the Auckland Council could be viewed as income and, therefore, taxable. Officials note that, had the Board’s functions been carried out by the Auckland Council, as are the functions of other similar Boards, there would have been no question about the tax treatment of the funding stream – the funding would not have been subject to tax.

Under current GST law, the Board would not be able to register for GST purposes. This is because the funding provided by Auckland Council under the Funding Agreement to carry out its functions does not constitute “consideration” for any “taxable supply” by the Board. It is a grant-type funding that enables the Board to fulfil its statutory role, and does not have the requisite link to any reciprocal supply by the Board to Auckland Council. Therefore, the Board is not carrying on a “taxable activity”. Without any form of taxable activity, the Board cannot register for GST purposes and it cannot claim back the GST content of its expenses (such as fees paid to consultants providing advice to the Board).

The question of the tax status of the Board did not arise during policy development on the Local Government (Auckland Council) Act. The general approach adopted for the restructuring was for general tax law to apply to the entities of the Auckland Council restructuring, unless there was significant policy justification for departing from that approach.

Officials consider that a departure from the general restructuring approach in relation to the Board is justified. This support is given on the basis that:

  • the Board is a non-profit body and is carrying out functions similar to other advisory boards of the Auckland Council;
  • the deemed status is consistent with the current tax treatment that applies to other advisory boards of the Auckland Council. The functions of these boards are carried out within the structure of the Council and, therefore, attract the local authority tax treatment; and
  • the deemed status would provide certainty of tax treatment and help to minimise tax compliance costs for the Board and funding costs for the Auckland Council.

The amendments will ensure that:

  • the funding provided by Auckland Council to the Board will not be subject to income tax because local authorities are generally exempt from income tax under section CW 38 of the Income Tax Act; and
  • the Board is able to register for GST purposes and then can claim back the GST content of expenses that it incurs in carrying out its functions. Local authorities are deemed to be carrying on a “taxable activity” under section 6(1)(b) of the GST Act.

Officials also consider that the proposed amendments should be retrospective in application and apply from 1 November 2010, the date on which the Board was established. The proposed amendments are taxpayer-friendly, and we do not expect there to be any adverse consequences associated with retrospective application of the proposed amendments for the Board or Inland Revenue.

The Auckland Council and the Board support the proposed amendments.

Recommendation

That the submission be accepted.

UPDATE TO CROSS-REFERENCE IN DEFINITION OF “SUPERANNUATION SCHEME”

Submission

(Matter raised by officials)

There is an out-dated reference to the repealed Social Security Act 1964 in the superannuation scheme definition in the Income Tax Act 2007. This should be replaced with a reference to the New Zealand Superannuation and Retirement Income Act 2001.

Comment

This cross-reference was overlooked when the New Zealand Superannuation and Retirement Income Act was enacted. The reference should be updated.

Recommendation

That the submission be accepted.

EMISSIONS TRADING

Issue: Definition of “forestry business”

Submission

(Matter raised by officials)

The definition of “forestry business” should be extended to include forestry activities that exist solely for the purpose of receiving emissions units, rather than the production of timber.

Comment

A person who carries on a “forestry business” is allowed an income tax deduction for expenditure they incur on forest establishment and maintenance costs. This overrides the general rule denying deduction for capital expenditure.

“Forestry business” was previously undefined, and there was some uncertainty over whether a forest grown purely with the objective of creating an entitlement to receive emissions units would fall within it. A new definition of forestry business was inserted in 2009, to ensure that foresters who received emissions units under the Permanent Forest Sink Initiative, a scheme under which harvest was restricted, would be entitled to receive deductions.

Some instances have recently emerged of foresters who are registered to receive emissions units under the Emissions Trading Scheme (ETS), but who are unlikely to harvest. These foresters ought to be entitled to the same deductions as any forester whose objective is to harvest timber.

It is consistent with the earlier amendment and the appropriate treatment to extend the definition of “forestry business” to foresters registered to receive emissions units under the ETS.

The proposed change should apply retrospectively from 1 April 2008.

Recommendation

That the submission be accepted.

 

Issue: Tax treatment of allocations of emissions units for removal activities

Submission

(Matter raised by officials)

The accrual accounting rules which apply to industrial allocations of emissions units should be extended to allocation of emissions units for removal activities.

Comment

The ETS includes a number of categories under which those who carry on economic activity in New Zealand might be allocated emissions units by government. The tax rules for the main categories of allocation are well established.

Detailed legislative provisions exist to ensure that income is correctly recognised when businesses have an entitlement to receive industrial allocations of emissions units. These rules deal with two timing issues:

  • Emissions units are allocated on a calendar year basis, and most businesses have income years which are not calendar years.
  • Emissions units are allocated sometimes in advance of, and sometimes subsequent to, the additional cost arising for which the allocation is intended to compensate.

Similar timing issues arise for allocations for removal activities. However, there are no specific tax rules for allocations to businesses for “removal activities” outside the forestry sector. “Removal activities” are activities which result in greenhouse gases being removed from the atmosphere, including by incorporation into products or export.

These timing issues can readily be addressed by extending the existing accrual accounting rules developed for industrial allocations to removal allocations.

The proposed change should apply retrospectively from 1 July 2010, which is the date that businesses first became entitled to removal allocations.

Recommendation

That the submission be accepted.

TRUSTEES QUALIFYING AS A CASH BASIS PERSON

Submission

(Matter raised by officials)

Section HC 24(2)(b) of the Income Tax Act 2007 should be removed to ensure the legislation better reflects the policy objective that trustees should be able to return income tax in relation to financial arrangements on a cash accounting basis, subject to meeting certain thresholds.

Comment

Prior to changes made in 2009, only an individual or a trustee of a deceased estate meeting the criteria under section EW 60 could return income tax in relation to financial arrangements on a cash accounting basis (section EW 60 specifies when a trustee of a deceased’s estate is treated as a “cash basis person” for the purposes of the financial arrangement rules).

In the Taxation (Business Tax Measures) Act 2009, amendments were made to the financial arrangement rules to allow non-individuals, subject to certain thresholds, to return income tax on a cash accounting basis. These changes included broadening the definition of “cash basis person” to include trustees other than trustees meeting the criteria in section EW 60.

However, the requirement in section HC 24(2), that in determining a trustee’s income tax liability, the trustee is not entitled to be a “cash basis person” unless section EW 60 applies, was not removed as part of these amendments.

Recommendation

That the submission be accepted.