Drafting clarifications
Issue: Use of 15% option after the 2014–15 income year
Clause 25
Submission
(Matter raised by officials)
When a non-compliant taxpayer chooses to use the 15% option in proposed CZ 21B in an income year after 2014–15, they should have their 2014–15 income year reassessed.
Comment
Consider the situation where a non-compliant taxpayer chooses in, say, the 2018–19 income year to use the 15% option in relation a lump sum derived before 1 April 2014.
The current drafting allows the taxpayer to return the 15% in their 2018–19 income tax return. However, the drafting provides that the due date associated with the tax on that 15% would be that of the 2014–15 income year.
This would not be feasible for Inland Revenue’s systems as it would require there to be a split due date for the person’s terminal tax liability in 2018–19 income year.
The drafting should be amended so that in such a scenario, the taxpayer should have their 2014–15 income tax return reassessed by Inland Revenue in order to use the 15% option.
Recommendation
That the submission be accepted.
Issue: DTA and Australian pension override
Clause 8
Submission
(Ernst & Young)
The legislation should expressly provide that the provisions of CF 3 are subject to applicable double tax agreements (DTAs) and the exemptions in CW29 and CW 29B.
Comment
Officials consider that the existing legislation is sufficiently clear that the applicable DTAs and the exemptions in CW29 and CW 29B apply to the proposed regime in CF 3.
The proposed legislation has been drafted so that CF 3(1) identifies which particular events are considered to be taxable.
Officials do not consider it necessary that the proposed legislation should expressly provide that proposed CF 3 is subject to the exemptions in CW 29 and CW 29B.
Subpart CW deals with exempt income. In particular, CW 29 and CW 29B exempt from income tax transfers between certain Australian superannuation schemes and transfers from Australian superannuation schemes into KiwiSaver. It follows that CF 3 would be subject to the provisions of CW.
Double tax agreements have an overriding effect under BH 1 of the Income Tax Act 2007.
However, officials will consider these points for the purposes of any future guidance to be released.
Recommendation
That the submission be noted.
Issue: Explicit legislative clarification that transfers to purchase an annuity are not income
Clause 8
Submission
(Ernst & Young)
The legislation should also expressly provide that withdrawals/transfers/commutations to purchase an annuity from a foreign provider are not income (Ernst & Young).
Comment
Under the proposed rules, the policy intention is that transfers from one foreign scheme to another foreign scheme will not be taxable. (This does not apply to transfers to Australian schemes, because subsequent withdrawals from Australian schemes are generally not taxable under New Zealand law).
The policy intention is that this would also apply where the transfer is made in order to purchase an annuity from another foreign superannuation scheme.
Officials consider that the drafting is sufficiently clear on this point.
Recommendation
That the submission be noted.
Issue: Explicit legislative clarification of events that are not taxable
Clause 8
Submission
(Ernst & Young, KPMG)
The legislation should expressly provide that transfers between foreign superannuation schemes outside Australia are not income (Ernst & Young).
The legislation should clarify that a person who ceases to be a resident of New Zealand does not automatically trigger a taxing event (KPMG).
Comment
The proposed legislation has been drafted so that CF 3(1) identifies which particular events are considered to be taxable.
It is implicit that the cessation of New Zealand residence is not a taxable event and no other part of the Income Tax Act 2007 would impose such an “exit tax”. It is also implicit that transfers between non-Australian foreign superannuation schemes, or where the funds are used to purchase an annuity would not be taxable.
Officials acknowledge that these submitters wish to improve the clarity of the proposed legislation, but consider that adding a specific provision to proposed CF 3 detailing events that are specifically not taxable would add unnecessary complexity to the proposed legislation. It could also create confusion as certain events may not appear in legislation as either taxable or non-taxable.
Recommendation
That the submission be noted.
Issue: Multiple assessable periods
Clause 8
Submission
(Matter raised by officials)
The legislation needs to be amended so that multiple periods of residence are aggregated when calculating a taxpayer’s assessable period, if a taxpayer has more than one period of residence for a given foreign superannuation interest.
Comment
The submission concerns someone who becomes resident with a foreign superannuation interest, ceases to be a resident, then becomes resident again.
The policy intention is at that all periods of residence during which the interest has been held will be aggregated for the purposes of calculating the assessable period.
Officials consider that the current drafting does not achieve this policy intention. If an individual held an interest in a foreign superannuation scheme during two different periods of residence, the current drafting would only calculate the assessable period in reference to the second period of residence. The current wording of the legislation would effectively ignore the first period of residence.
To ensure that the proposed legislation works as intended, a legislative amendment is required.
As the policy intention is that there would only be one assessable period for each foreign superannuation interest belonging to a person, further changes may be required to proposed CF 3(10) and CF 3(15)(d) which refer to “an assessable period”.
Recommendation
That the submission be accepted. The matter has been referred to drafters.
Issue: Ceasing to be a transitional resident and the impact on the exemption period
Clause 8
Submission
(Charter Square Services, Ernst & Young, New Zealand Institute of Chartered Accountants)
Section CF3(3)(a) says “a person who is a transitional resident”, but it should be “qualifies as a transitional resident” (New Zealand Institute of Chartered Accountants).
Someone who is a transitional resident but then ceases to be because they apply for a WINZ benefit will not benefit from a full four-year exemption period under the current drafting (Charter Square Services).
Section CF 3(4)(a) should refer to both HR 8(2) and (3) (Ernst & Young).
Comment
Proposed section CF 3(3)(a) refers to someone who is a transitional resident under HR 8(2) disregarding any choice under HR 8(4). HR 8(2) provides the conditions under which a person may qualify as a transitional resident. HR 8(4) provides that a person is no longer a transitional resident either by choice or if they receive Working for Families tax credits.
One submitter states that if an election to not be treated as a transitional resident is made under HR 8(4), then CF 3(3)(a) would not work in its current form. This is because the person is not a transitional resident (New Zealand Institute of Chartered Accountants).
The policy intention behind CF 3(3)(a) is that a person who otherwise qualifies as a transitional resident but is not a transitional resident because they receive working for families tax credits, should still receive a four-year exemption period. This is why proposed CF 3(3)(a) states “… disregarding any choice under section HR 8(4)”.
Officials acknowledge that the current drafting may not achieve this result. The submitter’s suggestion may solve this issue.
Another submitter states that a person ceases to be a transitional resident when they apply for a benefit from Work and Income New Zealand. They are concerned that if this occurs partway through the four-year period, they would not get the benefit of the full exemption period (Charter Square Services).
Officials note that HR 8(4) and subsequently HR 8(5) do not prevent an individual from being a transitional resident if they are in receipt of a benefit. As such, it is not the benefit from Work and Income New Zealand that disqualifies the person from being a transitional resident. We do note, however, that Work and Income New Zealand may include certain Working for Families tax credits in the benefit that is provided to the individual.
In this scenario, it is intended that the taxpayer would still receive the full four-year exemption period. As stated above, this is why proposed CF 3(3)(a) states “… disregarding any choice under section HR 8(4)”. The alternate wording provided by the New Zealand Institute of Chartered Accountants may also resolve the concern raised by Charter Square Services.
Officials agree that the proposed wording of CF 3(3)(a) may require amendment to reflect that a person who qualifies as a transitional resident but elects not to be one, should still receive a full exemption period.
Officials note that the HR 8(3) provides for the calculation of the period of transitional residence. The timing of the exemption period for taxpayers who qualify as transitional residents (regardless of any choice under HR 8(4)) is the period provided by the transitional residence rules Officials agree that proposed CF 3(4)(a) which provides this should refer to HR 8(3).
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Definition of “exemption commencement” and “exemption period”
Clause 8
Submission
(New Zealand Institute of Chartered Accountants, New Zealand Law Society)
The timing of the “exemption commencement” should be made clearer.
The definitions of “exemption commencement” and “exemption period” should be made clearer as they are difficult to follow as presently drafted. The submitters acknowledge that the intention of the legislation is to have the exemption period begin when the person became resident (either under domestic legislation or for the purposes of a double tax agreement).
The submitters are of the view that the current drafting does not give a specific start date for the exemption period. It should be defined as the date upon which the relevant individual becomes a New Zealand resident who is not a non-resident for the purposes of a double tax agreement.
One submitter has provided possible alternative drafting that could clarify when the exemption period would start (New Zealand Law Society).
Comment
Officials agree that this provision may be able to be made clearer.
Officials also note that the provision as it relates to the start date of exemption period for non-transitional residents could also be improved.
Currently, the bill provides that the start of the exemption period for a person who is not a transitional resident is either 1. when the person becomes a New Zealand resident, or 2. when they “tiebreak” to New Zealand under a DTA (if they are a non-resident under a double tax agreement).
The second part of the provision was included to deal with the situation of a person who is resident under New Zealand’s domestic law, but who is treated as a non-resident of New Zealand under a double tax agreement. For example, they might own a house in New Zealand, then live and work in the UK for 7 years and acquire an interest in a UK scheme (while retaining ownership of their house in New Zealand), and then move back to New Zealand. Without the second part of the provision, it was unclear on which date their exemption period would start.
Officials now consider the concern originally identified would generally no longer arise, because Inland Revenue considers that a person will not retain their New Zealand residence under domestic law solely because they own a house in New Zealand.
As a result, the second part of the provision is no longer relevant.
This would also have the advantage of being more consistent with the exemption period start date for transitional residents.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Definition of “foreign superannuation withdrawal” and “super withdrawal”
Clause 8
Submission
(New Zealand Institute of Chartered Accountants)
The term “super withdrawal”, which is used in sections CF 3(7) and (9) should be replaced with “foreign superannuation withdrawal”, and CF 3(8)(a) and (10)(a) should be repealed.
Comment
The submitter notes that “foreign superannuation withdrawal” is defined in section CF 3(1). “Super withdrawal” is defined in section CF 3(8)(a) and (10)(a) as the amount of foreign superannuation withdrawal, for the purposes of CF 3(7) and (9), respectively.
The submitter appreciates that this drafting may try to improve the clarity of the legislation for readers, but argues that it is unnecessarily convoluted.
Officials note that where “super withdrawal” appears in proposed 3(7) and (9), it is as part of a formula. This means that it is necessary to subsequently state what the terms in each formula are.
Recommendation
That the submission be declined.
Issue: Use of “transit” as a term
Submission
(New Zealand Institute of Chartered Accountants)
In clause 8, section CF 3(11) and (15), the term “opening value” should be used rather than “transit”.
Comment
The term “transit” means the opening value of the person’s interest in the scheme at the beginning of their assessable period. This should be amended to “opening value” instead, which is a term used in other parts of the Income Tax Act 2007, and is more descriptive.
Officials agree with the submitter’s analysis.
Recommendation
That the submission be accepted.
Issue: Definition of assessable period
Clause 8
Submission
(New Zealand Institute of Chartered Accountants)
Clause 8 Section CF 3(5)(a) currently reads “beginning from the last of”. This should read “beginning from the last day”.
Comment
Proposed section CF 3(5)(a) provides when a taxpayer’s assessable period should begin. It takes into account a number of factors such as if a person receives an exemption period, and if not, when they became resident or when they first acquired an interest in a foreign superannuation scheme.
The policy intention is that the assessable period should begin when the last of the events listed in proposed CF 3(5)(a) occurs. Officials consider that wording proposed is appropriate and does not require amendment.
However, officials note that the proposed change to restrict the new rules to interests in foreign superannuation schemes that were first acquired while the taxpayer was non-resident would result in minor amendment to proposed CF 3(5)(a) to ensure that it operates correctly.
Recommendation
That the submission be noted.
Issue: Residence under a double tax agreement
Clause 8
Submission
(Ernst & Young)
The current drafting CF 3(16)(a) refers to a person who “is a New Zealand resident and is a non-resident under no double tax agreement”. It does not read clearly or easily, so it should be amended. In contrast, CF 3(3) refers to “a New Zealand resident who is not a non-resident under a double tax agreement” which is much simpler to read.
Comment
Officials will consider whether the drafting could be improved.
Recommendation
That the submission be noted. The matter has been referred to drafters.
Issue: Definition of “distribution time”
Clause 8
Submission
(New Zealand Law Society)
There should be a general definition of “distribution time”.
Comment
“Distribution time” is defined in the proposed section CF (8)(c)(iii) for the purposes of the formula in the proposed section CF 3(7). However, there is no corresponding definition for that term as it is used in sections CF 3(10) and CF 3(15).
Recommendation
That the submission be accepted. The matter has been referred to drafters.
Issue: Definition of “distributed gain” and “gains out”
Clause 8
Submission
(New Zealand Law Society)
The drafting in relation to the “gains out” definition (proposed section CF 3(10)(b)) is difficult to follow and is at risk of being circular, as “gains out” is a component of the “distributed gain” definition but uses the “distributed gain” definition itself.
Comment
Officials note that the intention of the “gains out” term is to capture what has previously been calculated as the “distributed gain” for withdrawals in previous income years in relation to this taxpayer and foreign superannuation scheme.
As “gains out” captures past calculations of “distributed gain”, the drafting is not circular where lump-sum withdrawals have been in the past. If the taxpayer has not previously taken any lump-sum withdrawals, then the value of “gains out” is zero.
Recommendation
That the submission be declined.
Issue: Definition of “contributions” in CF 3(12)(d)
Clause 8
Submission
(New Zealand Law Society, Ernst & Young)
The definition of “contributions” in proposed section CF 3(12)(d) should refer to “recognised contributions under subsection (16)”.
Comment
The current drafting of CF 3(12)(d) refers to “contributions to the interest in the scheme made before the distribution time”. This is inappropriately broad as it would allow a taxpayer to take a deduction for contributions made before they were New Zealand resident. This would lead to under-taxation.
Officials intended that only contributions made during a person’s assessable period should be deductible, subject to other conditions.
The drafting proposed by the submitter would be consistent with other sections where a deduction for certain contributions is allowed (CF 3(7), the corresponding definition in CF 3(8)(b), CF 3(14), and the corresponding definition in CF 3(15)(d)).
Recommendation
That the submission be accepted.
Issue: Definition of “withdrawals” in CF 3(12)(b)
Clause 8
Submission
(New Zealand Law Society)
Proposed section CF 3(12)(b) should be amended to ensure that only withdrawals in the “assessable period” are taken into account in that definition, for the purposes of calculating the “calculated gains fraction” in CF 3(11).
Comment
The definition of “calculated gains fraction” in proposed section CF 3(11) incorporates “withdrawals” and “contributions”.
A taxpayer is only permitted a deduction for “contributions” where they have been made at a time when the taxpayer was New Zealand resident.
The submitter notes, however, that there is no such requirement for the purposes of the “withdrawals” definition. A corresponding requirement should apply for withdrawals, as any withdrawal made prior to a taxpayer becoming New Zealand resident should not be relevant for the purposes of determining gains accrued during the assessable period.
This would have the effect of overstating the gains that have accrued to the individual while they were New Zealand resident.
Officials agree that this is not the intended result. It was intended that only distributions made during a person’s assessable period would be relevant for the calculated gains fraction.
Recommendation
That the submission be accepted.
Issue: Definition of “accrued total” in CF 3(15)(d)
Clause 8
Submission
(New Zealand Law Society)
Proposed section CF 3(15)(d) should be amended to ensure that only distributions in the “assessable period” are taken into account in that definition.
Comment
This issue is similar to that titled “Definition of “withdrawals” in CF 3(12)(b)”
For the purposes of the formula in CF 3(14), CF 3(15)(d) provides a definition of the term “accrued total”. This term takes into account all previous distributions, but only recognised contributions to the extent that they were made during the person’s assessable period.
This would have the effect of overstating the gains that have accrued to the individual while they were New Zealand resident. This is not an intended result.
Recommendation
That the submission be accepted.
Issue: “Gains out”
Clause 8
Submission
(Ernst & Young, New Zealand Law Society)
“Gains out” is used in two slightly different manners in CF 3(9) and CF 3(15)(a), which could cause confusion. The term in CF 3(15)(a) should instead be “distributed gain” as it refers directly to what was calculated in CF 3(9).
Comment
The dual use of “gains out” is unintended as they do not bear the same meaning. “Gains out” defined in proposed CF 3(15)(a) refers to the formula in CF 3(13).
As the formula method requires the calculation of more than one formula, multiple uses of a term with different meanings may unduly increase the complexity of the method.
Officials agree with the analysis provided by submitters.
Recommendation
That the submission be accepted.
Issue: Incorrect reference to “distributed gain”
Clause 18
Submission
(New Zealand Law Society)
Proposed section CW 28C(a) refers to the “distributed gain” given by section CF 3(7). It should instead refer to the “assessable withdrawal amount” which would be consistent with proposed section CW 28C(b).
Comment
The submission is correct as CW 28C(a) makes reference to CF 3(7), which contains the formula used to calculate the “assessable withdrawal amount”. “Distributed gain” has a different meaning and would be incorrect in this context.
Recommendation
That the submission be accepted..