Determinations
Issue: Drafting clarifications in clause 21
Clause 21
Submissions
(Corporate Taxpayers Group, Deloitte)
Proposed section CW 17(2B) would require that the expenditure in question is incurred, or an amount paid, because the employee is “performing an obligation” required by their employment or service. This may cause some concerns in the absence of very clear commentary. (Corporate Taxpayers Group)
Proposed paragraphs (b) and (c) should be deleted from proposed new section CW 17(2B) on the basis they would be superfluous to any income nexus requirements which already exist by way of sections DA 1 and DA 2. They could also create uncertainty and possible dispute over whether employees are deriving any or all employment income “through the performance of the obligation” and who should judge the “necessity” of performing the obligation. (Ernst & Young)
Comment
Officials note that while there is some cross-over between the general permissions and limitations on deductibility in sections DA 1 and DA 2 of the Income Tax Act and proposed paragraphs (b) and (c) of proposed new section CW 17(2B), these paragraphs are included for clarity. The drafting of the proposed section is intended to codify the principles from case law in this area, namely that the expense must be connected with the employee carrying out their job.
Recommendation
That the submissions be declined.
Issue: Determinations for a “wide” group of employees
Clause 21
Submissions
(Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)
As drafted, a determination can only be made when the payment is made to or on behalf of a “wide group” of employees. We consider this to be an ambiguous term requiring clarification – either by removing the word “wide” or by way of commentary that gives clarity to the meaning of “wide”. (Corporate Taxpayers Group)
“Wide” should be removed as it is uncertain. (New Zealand Institute of Chartered Accountants)
Comment
The determination-making power is proposed to be available only in respect of payments made to a wide group of employees to ensure that issues on which the Commissioner is asked to make a determination are of sufficient importance to the wider business community. Officials do not consider this to be an issue that requires amendment to the draft legislation, but some clarification could be included in the Tax Information Bulletin following enactment of the bill.
Recommendation
That the submissions be declined subject to officials’ comments regarding the inclusion of some further clarification in the Tax Information Bulletin.
Issue: Determination on communication payments
Clause 21
Submission
(Deloitte)
Given the general uncertainty we recommend that a determination is issued as soon as the bill is enacted clarifying how communication costs (including phone lines, mobile phones and internet connections) should be taxed.
Comment
This submission is noted by officials. The merits of issuing a determination on this issue will be considered on enactment of the legislation and provided an application is made for a determination on this matter.
Recommendation
That the submission be noted.
Issue: Consultation on determinations
Clause 21
Submission
(PricewaterhouseCoopers)
We welcome the ability for the Commissioner to issue determinations and expect there will be a desire for these to be issued shortly after enactment. We would welcome consultation on which determination would be of most benefit to the tax community.
Comment
Officials note the submission. As discussed above, the merits of issuing a particular determination will be considered on enactment and following taxpayer application for a determination on a given payment. Officials are also willing to consult with interested parties on which issues deserve priority.
Recommendation
That the submission be noted.
Issue: Determination power should not be limited as proposed
Clause 21
Submission
(Ernst & Young)
The power to make determinations in this area should not be limited as proposed but rather generalised to cover all employer-provided items, including accommodation, meals and work clothing as well as other matters. The Commissioner of Inland Revenue would then be able to consider and deal expeditiously with various employer and employee situations and issues that may arise from time to time, but which do not fit appropriately within the boundaries already provided by the statutory provisions.
Comment
Before 1994, the Commissioner of Inland Revenue approved whether allowances and other employer payments could be treated as tax-exempt. This process created inconsistencies and was resource-intensive so instead a principles-based approach was included in the Income Tax Act. That approach was based on whether there was a nexus between the payment and the employee’s earning their employment income.
This principles-based approach has raised some issues in particular areas and it was considered greater certainty was needed, so various “bright lines” and other rules have been introduced in this bill, dealing with accommodation, meals and clothing. These cover off all the main issues that were of concern. There is also still the general fall-back rule for other situations. Too wide a discretion could take us back to the pre-1994 approach however, and risk inconsistencies. Therefore a narrow discretion is preferred.
Recommendation
That the submission be declined.