Rewrite Advisory Panel remedials

Overview

The following amendments reflect the recommendations of the Rewrite Advisory Panel following its consideration of submissions on the rewritten Income Tax Acts.

The Panel monitors the working of the 2007 Income Tax Act 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.

 

REQUIREMENT TO AMEND ASSESSMENTS ON RECOVERY OF DIVIDENDS FROM SHAREHOLDERS

(Clauses 10 and 173)

Summary of proposed amendment

Section CD 40 of the Income Tax Act 2007 and section CD 29 of the Income Tax Act 2004 are being amended to state more clearly that, if a company recovers a dividend from its shareholders, section 113B of the Tax Administration Act requires the Commissioner to amend the following:

• any income tax assessment and foreign dividend payment assessment of a shareholder to ensure that the dividend and any imputation or foreign dividend payment credit previously attached to the now-recovered dividend are disregarded; and
• any assessment of the company made under the imputation rules, the non-resident withholding tax rules, the resident withholding tax rules or under the supplementary dividend rules in subpart LP, again to ensure that the dividend and any imputation or foreign dividend payment credit previously attached to the now-recovered dividend are disregarded.

Application date

The amendment to section CD 40 of the Income Tax Act 2007 will apply from the beginning of the 2008–09 income year.

The amendment to section CD 29 of the Income Tax Act 2004 will apply from the beginning of the 2005–06 income year.

Background

A submission was made to the Rewrite Advisory Panel (the Panel) that the cross-reference from section CD 29 of the Income Tax Act 2004 to section 113B of the Tax Administration Act 1994 contained an unintended change in outcome. The submission was that after enactment of the Income Tax Act 2004, this cross-reference to section 113B no longer requires the Commissioner to amend an assessment of a company’s imputation credit account on the company recovering a dividend from its shareholders.

If a company recovers a dividend from its shareholders and notifies the Commissioner that the dividend has been recovered, the policy intention is that the Commissioner is obliged to amend any assessment to disregard that recovered dividend.

The Panel did not agree that an unintended change in the law had occurred because the transitional provisions in section YA 3 of the Income Tax Act 2004 enable the correct outcome to be determined. However, the Panel considered that the drafting clarity could be improved so that it should be unnecessary to rely on the transitional provisions in section YA 3.

This issue also arises in the linkage between section CD 40 of the Income Tax Act 2007 and section 113B of the Tax Administration Act 1994, resulting in a similar amendment being made to section CD 40.

 

OPTION TO USE FOREIGN TAX BALANCE DATE

(Clauses 57 and 176)

Summary of proposed amendment

Section EG 1 in both the Income Tax Act 2004 and the Income Tax Act 2007 is amended to ensure that New Zealand-resident taxpayers may elect to include foreign-sourced income (apart from interest, dividends and foreign investment fund income) in the tax year in which the taxpayer’s balance date in the overseas jurisdiction falls.

Application date

The amendment to section EG 1 of the Income Tax Act 2007 applies from the beginning of the 2008–09 income year.

The amendment to section EG 1 of the Income Tax Act 2004 applies from the beginning of the 2005–06 income year.

Background

The amendment arises from a submission to the Rewrite Advisory Panel that section EG 1 of the Income Tax Act 2004 does not permit a taxpayer to elect to include foreign-sourced income (apart from interest, dividends and foreign investment fund income) in the tax year in which the taxpayer’s balance date in the overseas jurisdiction falls.

The submission noted that this election was permitted in the corresponding provision (section EP 1) of the Income Tax Act 1994. The Panel agreed with the submission and recommended that this unintended change should be corrected retrospectively for section EG 1 in both the 2004 and 2007 Acts.

 

FOREIGN COMPANY – MEANING OF DIRECT CONTROL INTEREST

(Clauses 68, 69, 177 and 178)

Summary of proposed amendment

Section EX 5(1)(c) and (d) in both the Income Tax Act 2004 and the Income Tax Act 2007 is being amended to ensure that a direct control interest does not include interests of a person in a foreign company if that person is not entitled to the income or assets and is prohibited from applying the same for their own benefit or interest.

Consequentially, section EX 9(1)(c) and (d) of both Acts is also being amended.

Application date

The amendment to sections EX 5(1) and EX 9(1) of the Income Tax Act 2007 will apply from the beginning of the 2008–09 income year.

The amendment to sections EX 5(1) and EX 9(1) of the Income Tax Act 2004 will apply from the beginning of the 2005–06 income year.

Background

The Rewrite Advisory Panel received a submission that section EX 5 in both the Income Tax Act 2004 and the Income Tax Act 2007 contained an unintended change concerning the calculation of control interests to determine whether a foreign company is a controlled foreign company under the international tax rules. Control interests include direct control interests and indirect control interests.

Section CG 4(4)(c) and (d) of Income Tax Act 1994 was clear that a direct control interest did not include interests held by a person in a controlled foreign company unless the person would have been entitled to have the income or any value of the net assets dealt with in their interest or on their behalf.

The Panel concluded that the provisions were unclear and that the correct outcomes could be obtained only by applying the transitional provisions in section YA 3 of the Income Tax Act 2004 and section ZA 3 of the Income Tax Act 2007. Therefore the Panel recommended that:

• section EX 5(1) be amended in both the 2004 and 2007 Acts to more clearly reflect the outcome under the corresponding provision in the 1994 Act; and
• this amendment apply retrospectively from the first income year to which the 2004 Act applies.

In reviewing this submission, it was also noted that the wording in section EX 9(1)(c) and (d) in both the Income Tax Act 2004 and the Income Tax Act 2007 mirrored the wording in section EX 5(1)(c) and (d). Therefore, section EX 9 in both Acts is amended in the same manner to ensure the two provisions are consistently worded.

 

COMPARATIVE VALUE METHOD FOR CALCULATING FIF INCOME

(Clauses 79 and 179)

Summary of proposed amendment

Section EX 51 of the Income Tax Act 2007 and section EX 44 of the Income Tax Act 2004 are being amended to ensure that expenditure incurred for, or on behalf of the person having the foreign investment fund (FIF) interest is included in the meaning of “cost of a FIF interest” for the purpose of calculating FIF income under the comparative value method.

Application date

The amendment to section EX 51 of the Income Tax Act 2007 will apply from the beginning of the 2008–09 income year.

The amendment to section EX 44 of the Income Tax Act 2004 will apply from the beginning of the 2005–06 income year.

Background

A submission made to the Rewrite Advisory Panel identified an unintended change in outcome in the meaning of “cost of a FIF interest” applied for the purpose of calculating FIF income under the comparative value method. The submission was that since the enactment of the Income Tax Act 2004, the term “cost” for the comparative value method of calculating FIF income, does not include expenditure incurred for or on behalf of the person having the FIF interest.

The policy and legislative history of the provisions show that expenditure incurred on behalf of a person holding a FIF interest is included in the meaning of “cost” for the purpose of calculating FIF income under the comparative value method. For example, if the FIF interest is a shareholding in a foreign company, the cost of an increase in the shareholding made on behalf of the owner of the FIF interest should be included in the value of that cost.

The Panel agreed with the submission and recommended that a remedial amendment be made to both the Income Tax Act 2004 and the Income Tax Act 2007, with application from the beginning of the 2005–06 income year.

 

LAND TRANSFERRED TO A CLOSE RELATIVE

(Clause 86)

Summary of proposed amendment

Section FC 5(3)(b) of the Income Tax Act 2007 is being amended to ensure that if sections CB 9 to CB 11, and CB 14 of the Income Tax Act 2007 apply to the land, costs incurred by the executor or administrator on land within 10 years of acquisition of the land by the deceased person are intended to be included in the cost of land in the estate.

This ensures that the cost of that land allowed as a deduction from the income under the land sales rule can include costs incurred by the executor or administrator

Application date

The amendment to section FC 5(3)(b) will apply from the beginning of the 2008–09 income year.

Background

The Rewrite Advisory Panel considered a submission that in the Income Tax Act 2007, section FC 5 does not include expenditure is incurred by the administrator or executor of the estate as part of the cost of land held in an estate. The submitter states this represents a change from the outcome under the corresponding provisions of the 2004 Act.

Section FI 7(3) of the Income Tax Act 2004 shows that if the transfer of land is subject to the same land sale rules, the cost of land held by an estate is intended to include expenditure incurred on that land by the administrator or executor of that estate if the expenditure is incurred within 10 years of the acquisition of the land by the deceased person.

The Panel agreed with the submission and recommended that the rules for asset transfer on death be retrospectively amended to apply from the beginning of the 2008–09 income year (the first income year to which the 2007 Act applies).

 

LIABILITY WHEN COMPANY LEAVES CONSOLIDATED GROUP

(Clause 99)

Summary of proposed amendment

Section FM 5 of the Income Tax Act 2007 is being amended to ensure that the joint and several liability imposed on all members of a consolidated group to satisfy income tax obligations of the consolidated group does not apply to a company that has left the group, in relation to an increase in an income tax obligation of the group made:

• for a tax year the exiting company was a member of the group; and
• under an amended assessment for that tax year after the exiting company left the group.

Application date

The amendment will apply from the beginning of the 2008–09 income year.

Background

The Panel has considered a submission that when a company exits from a consolidated group, section FM 5 incorrectly results in the exiting company retaining a joint and several liability for increased income tax obligations of the group assessed after the company has left the group.

Section HB 1(2) of the Income Tax Act 2004 removed this joint and several liability for a company that has left a consolidated group for increases in income tax obligations of the consolidated group made:
 

• for a tax year the exiting company was a member of the group; and
• under an amended assessment for that tax year after the exiting company left the group.

The Panel agreed with the submission and recommended that section FM 5(1) be amended retrospectively to apply from the beginning of the 2008–09 income year (the first income year to which the 2007 Act applies).

 

REVOCATION OF DIRECTORS’ ELECTIONS

(Clause 101)

Summary of proposed amendment

Section HA 31(2) is being amended to ensure that that the director’s notice of revocation should take effect from the later of:

• the year in which the notice is received by the Commissioner; or
• the effective year stated in the notice.

Application date

The amendment will apply from the beginning of the 2008–09 income year.

Background

The Panel has agreed with a submission that the 2007 Act rewrite of the notice of revocation of director’s election has permitted retrospective revocation of a director’s election for a company to attain qualifying company status.

The correct policy is that the director’s notice of revocation should take effect from the later of:

• the year in which the notice is received by the Commissioner; or
• the effective year stated in the notice.

Previously, under the Income Tax Act 2004, the revocation of a qualifying company election was provided for in section HG 3(4) and (5). Section HG 3(5) provided that any revocation took effect on the later of the beginning of the income year the notice of revocation was provided or the beginning of such other income year specified in the notice.

The Panel has recommended that section HA 31 be amended retrospectively to the beginning of the 2008–09 income year to correct this unintended change.

 

TREATMENT OF FOREIGN TRUSTS WHEN SETTLOR BECOMES RESIDENT

(Clause 103)

Summary of proposed amendment

Section HC 30(4)(a) of the Income Tax Act 2007 is being amended to ensure that if a settlor of a foreign trust becomes resident in New Zealand, and no election is made within 12 months of the settlor becoming resident, the trust continues to be treated as a foreign trust until the end of that 12-month period.

Application date

The amendment to section HC 30(4) will apply from the beginning of the 2008–09 income year.

Background

The Rewrite Advisory Panel considered a submission that relates to the taxation consequences when a settlor of a foreign trust becomes resident in New Zealand under section HC 30(4) of the 2007 Act. For foreign trusts, a settlor, trustee or beneficiary of that trust may choose that the trust becomes a complying trust if the settlor becomes resident in New Zealand. This election must be made within 12 months of the settlor becoming resident in New Zealand.

The unintended change identified (when compared with section HH 2(3) of the Income Tax Act 2004) is that if the election is not made within the 12-month period after the settlor becomes resident in New Zealand, section HC 30(4) does not clearly result in that trust continuing, in relation to distributions from the trust, to be treated as:

• a foreign trust until the end of that 12-month period; and
• as a non-complying trust after the end of that 12-month period.

The Panel agrees that, if the settlor of a foreign trust does not make this election within one year of becoming resident in New Zealand, the legislation does not clearly result in that trust continuing to be treated as a foreign trust until the end of that 12-month period. The Panel recommended that:

• section HC 30(4)(a) of the 2007 Act be clarified to give the same outcome as its corresponding provision in the 2004 Act; and
• the amendment applies retrospectively from the commencement of the 2007 Act. 

 

SHORTFALL PENALTIES AND GROUPS OF COMPANIES

(Clause 109)

Summary of proposed amendment

Section IW 1(3) of the Income Tax Act 2007 is being amended to ensure that a group of companies may elect to use a tax loss of one company in the group of companies to satisfy a shortfall penalty assessed against any company within the same group of companies.

Application date

The amendment will apply from the beginning of the 2008–09 income year.

Background

The Rewrite Advisory Panel considered a submission that section IW 1(3) of the 2007 Act does not allow a wholly owned group to use tax losses of one company in the group to pay the shortfall penalties of another company in the group. The submission is that this differs from the outcome given by the corresponding provision, section IG 10(1A), of the Income Tax Act 2004.

Section IG 10(1A) of the Income Tax Act 2004 provided for a group of companies to elect a tax loss to satisfy a shortfall penalty assessed against any company within that group of companies.

The policy is that a wholly owned group should be able to use tax losses of one company in the group to pay shortfall penalties of another company in the group.

The Panel agreed with the submission and recommended that:

• the provision be corrected to give the same outcome as the corresponding provision in the 2004 Act; and
• this amendment apply retrospectively from the commencement of the 2007 Act.

 

MINOR MAINTENANCE ITEMS

The following amendments relate to minor maintenance items referred to the Rewrite Advisory Panel as minor maintenance items and retrospectively correct any of the following:

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

Application dates

In the table below:

• amendments to the Income Tax Act 2007 apply retrospectively from the beginning of the 2008–09 income year;
• amendments to the Income Tax Act 2004 apply retrospectively from the beginning of the 2005–06 income year.

Clause	Section	Act	Amendment
2(9), 53(2) 2(6), 175	EE 7 EE 7	2007 Act 2004 Act	Correct cross-referencing Correct cross-referencing
2(9), 77	EX 46(11)	2007 Act	Correct terminology
2(9), 100	GB 34	2007 Act	Correct cross-referencing
2(9), 111	LJ 3	2007 Act	Drafting consistency
2(9), 112	LJ 5(3)(c)	2007 Act	Correct cross-referencing
2(9), 120	RE 14(2)	2007 Act	Error in formula corrected