Other remedial matters

REPEAL OF SIMPLIFYING FILING REQUIREMENTS FOR INDIVIDUALS LEGISLATION

(Clauses 225(4) and (8), 240 and 243)

Summary of proposed amendment

Amendments are being made to the Tax Administration Act 1994 to repeal legislation aimed at simplifying filing requirements for individuals.  The legislation was enacted in November 2012 but is not due to take effect until the 2016–17 income year.  Implementing the filing simplification legislation is no longer a sound investment given Inland Revenue’s Business Transformation (BT) programme as the expected benefits from the earlier simplification legislation will be better delivered as part of the BT programme.

Application date

The amendments will apply from the beginning of the 2016–17 tax year.

Key features

Several amendments are being made to section 33AA of the Tax Administration Act 1994 to ensure that after 1 April 2016:

  • Individuals who are not required to file a tax return but choose to do so anyway can continue to file tax returns for each of the four tax years immediately preceding the tax year in which the individual decides to file a tax return.  The result will be that individuals will continue to have the ability to choose the years in which they file a tax return.
  • Recipients of Working for Families (WFF) tax credits (and their partners) must continue to file a tax return or receive a personal tax summary but only if they receive their WFF entitlements from Inland Revenue.

Consequential amendments are also being made to section 120B, which relates to use-of-money interest, and to section 139B, which relates to late payment penalty of the Tax Administration Act 1994.

Background

Filing simplification for individual taxpayers legislation was enacted in November 2012 as part of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill introduced in September 2011 and is due to take effect from the 2016–17 income year.  This legislation contained the following two initiatives:

  • 4 + 1 square-up:  Individuals who are not required to file a tax return, but who choose to do so anyway, will be required to file tax returns for the previous four years in addition to the year in which they have chosen to file; and
  • WFF delinking:  The link between the receipt of WFF tax credits and the requirement to file an annual income tax return was removed.

The policy underlying that legislation was set three years ago.  At that time, the Government was concerned about the inherent tension between individuals who are not required to file a tax return and those who are.  Individuals who are required to file a tax return may have a tax debt in one year and receive a refund in another year.  For individuals who are not required to file, however, there is no incentive to file a tax return in order to square-up in years of tax debt, but they can easily claim any available refunds.  The practice of filing tax returns in those years in which an individual is due a refund is referred to as “cherry picking”.  This practice has also resulted in a situation where large amounts of revenue are being paid out in refunds, without a reciprocal obligation to pay any tax debt.

The simplified filing legislation addressed concerns of fairness by removing the ability for people to “cherry pick” and removing the requirement for others to file tax returns.  These initiatives were seen as a “back-end” solution (that is, stopping people from cherry picking the years in which they file a tax return) to a “front-end” problem of inaccurate PAYE deductions during the year, leading to the need to square-up and file a tax return at the end of the year.

At the time the filing simplification legislation was enacted in 2012, Inland Revenue’s Business Transformation programme was in its very early stages.  Inland Revenue’s current BT thinking is for more streamlined processes with salary and wage earners’ information being provided by third parties such as employers and banks to Inland Revenue, and Inland Revenue undertaking the necessary calculations.  This should lead to a more accurate PAYE structure, which means fewer people in a refund or tax-debt position at the end of the year.  The problem of “cherry picking” would become redundant.

Inland Revenue’s review of the implementation of the filing simplification legislation has concluded that the legislation is no longer a sound investment, given Inland Revenue’s BT programme.  Inland Revenue considers that on current plan the BT programme will deliver the benefits (that is, more accurate PAYE) that are expected from the simplification initiatives from the 2019–20 year, and in a more coherent way that aligns with the vision of a proactive and efficient tax system.

In response to the findings of the Inland Revenue review, the Government agreed to repeal the filing simplification legislation.

EXTENDING THE GRACE-PERIOD OF THE TAX ON NET ASSETS FOR DEREGISTERED CHARITIES

(Clause 264)

Summary of proposed amendment

Section 129(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 is being amended to defer the application of the new tax on net assets for deregistered charities who provide housing as their main or primary purpose.  This deferral is needed to provide more time for officials to finalise the eligibility requirements for the new tax exemption for community housing entities and for Charities Services to complete its review of the charitable status of community housing providers.

Application date

The amendment will apply beginning on 14 April 2014.

Key features

The amendment ensures that new section HR 12 of the Income Tax Act 2007, which imposes a tax on the net assets of deregistered charities, does not apply to entities that provide housing as their main or primary purpose and who have been deregistered by Charities Services before 1 April 2017.

Background

The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 introduced a new set of tax rules for entities removed from the Charities Register (or deregistered).  These rules are now in effect.

One of these rules (new section HR 12 of the Income Tax Act 2007), imposes obligations in relation to accumulated income and assets of a deregistered charity.  In the year after the entity is deregistered, it can choose to either:

  • distribute or apply the income and assets:
    • for charitable purposes; or
    • in accordance with the entity’s rules (as contained in the Charities Register).
  • become liable to pay tax on the value of its net assets.

This rule has split application dates.  It applied from 14 April 2014 to any entity which requested to be removed from the Charities Register.  It is due to apply beginning on 1 April 2015 to any other entity which is removed from the Charities Register.

The split application dates were introduced to deal with the possibility that some community housing providers might be deregistered.  Charities Services undertook to review all registered charities which provided housing as their main or primary purpose following the Queenstown Lakes Community Housing Trust High Court decision.  The grace-period for the net assets tax was set at 1 April 2015 to allow time for entities to be deregistered without being affected by the new obligations in relation to accumulated income and assets.  It was also expected that by 1 April 2015 it would be clear how these deregistered charities were to be treated for tax purposes under the new tax exemption for community housing entities.

However, delays in finalising the tax exemption for community housing entities have meant it has not been possible for Charities Services to advance its review.  Consequently, the Government has agreed to extend the grace-period for the tax on net assets for deregistered charities who provide housing as their main or primary purpose from 1 April 2015 to 1 April 2017.

MEANING OF “CHARITABLE OR OTHER PUBLIC BENEFIT GIFT”

(Clauses 183(1), (2), (3) and (6))

Summary of proposed amendment

Section LD 3 of the Income Tax Act 2007 is being amended to clarify that for a subscription to be treated as a “charitable or other public benefit gift”, it must, in addition to not conferring any rights arising from its membership:

  • be an amount of $5 or more; and
  • be paid to an entity that is not carried on for the private pecuniary profit of an individual, and whose funds are wholly or mainly applied to charitable, benevolent, philanthropic or cultural purpose within New Zealand; or
  • be an organisation listed in schedule 32.

Application date

The amendment will apply from 1 April 2008, when the Income Tax Act 2007 came into force.

Background

Currently, income tax relief is provided to individuals, companies and Māori authorities for gifts of money to a charitable or other public benefit entity (“a charitable or other public benefit gift”).

Under section LD 3 of the Income Tax Act 2007, there are two categories of “charitable or other public benefit gift”:

  • a gift of $5 or more paid to a society, institution, association, organisation, trust or fund (an entity) that is not carried on for the private pecuniary profit of an individual, and whose funds are wholly or mainly applied to charitable, benevolent, philanthropic or cultural purpose within New Zealand, or an organisation listed in schedule 32 of the Income Tax Act 2007 (generally an overseas donee organisation); and
  • a subscription paid to an entity, only if the subscription does not confer any rights arising from its membership.

Based on current wording, the legislation does not require a subscription paid to an entity to be:

  • an amount of $5 or more; and
  • the entity to be one that is not carried on for the private pecuniary profit of an individual wholly or mainly to charitable, benevolent, philanthropic or cultural purpose within New Zealand, or listed in schedule 32.

This is contrary to the original policy intent.  The corresponding provision in the Income Tax Act 2004 clearly set out these requirements for subscription paid to be treated as a “charitable or other public benefit gift”.

It would appear that this is a drafting oversight which arose as part of the rewrite of the Income Tax Act 2004.

The implication is that in the absence of the proposed amendment, individuals would be able to claim tax relief for subscriptions paid to a non-charitable or public benefit entity, provided the subscription did not confer any rights arising from membership.

TAX STATUS OF TERTIARY EDUCATION INSTITUTE SUBSIDIARIES

(Clauses 76, 183(4), (5) and (6), and 213(67) and (75))

Summary of proposed amendment

The bill proposes that the income tax exemption for a Tertiary Education Institute (TEI) be widened to include income earned by a business, such as a subsidiary, for the benefit of the TEI.

Application date

The proposed amendment applies beginning on 1 July 2008.

Key features

The amendment extends the scope of section CW 55BA, relating to income derived by a TEI, to include TEI subsidiaries.  This would mean that income from a business carried on for the benefit of a TEI is also exempt.

This restores the position that existed for TEI subsidiaries before enactment of section CW 55BA in the Income Tax Act 2007 which explicitly provided TEIs with an income tax exemption.

Background

TEIs and subsidiaries that applied their income for the purposes of the TEI were generally income tax-exempt as charities until 1 July 2008, when a requirement was introduced for charities to be registered with the Charities Commission[4] in order to be tax-exempt.  Because the TEIs would have been subject to multiple reporting and monitoring requirements, a specific exemption was enacted for them, but this did not cover their subsidiaries.

The amendment will restore the position that existed for TEI subsidiaries before the Charities Commission registration requirement.  This means subsidiaries that were tax- exempt before 1 July 2008 will retain this position.

DEFINITION OF “REMUNERATION” IN VALUATION RULE FOR ACCOMMODATION PROVIDED TO MINISTERS BY RELIGIOUS ORGANISATIONS

(Clause 70)

Summary of proposed amendment

The proposed amendment clarifies the valuation rule for accommodation to ministers provided by religious organisations under section CE 1E of the Income Tax Act 2007.

Application date

The amendment will apply beginning on 1 April 2015.

Background

Section CE 1E of the Income Tax Act 2007 (inserted by section 15 of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014) contains a specific valuation rule for accommodation provided to ministers of religion.  The rule provides that the taxable value of the accommodation is 10 percent of the minister’s “remuneration”.  This rule is a codification of a longstanding administrative practice.

Historically, the administrative practice involved valuing the accommodation for taxation purposes at 10 percent of the stipend provided to the minister.  In codifying this rule it was agreed that the legislation should cover not only stipends but also equivalent remuneration to reflect changes to the way religious bodies have remunerated their ministers over the years.  Some churches, for example, now pay their ministers market-related salaries.  Accordingly, the valuation formula in the Income Tax Act uses the term “remuneration”.  A technical question has arisen over whether the term “remuneration” could be interpreted to include the value of the accommodation being provided to the minister.  This outcome is not within the policy intent as it is inconsistent with previous administrative practice.

To avoid doubt, the proposed amendment makes it clear that the value of accommodation is not included in the minister’s “remuneration” for the purpose of calculating the taxable value of the accommodation in accordance with section CE 1E.

COMMENCEMENT DATE FOR ACCOMMODATION PROVISIONS APPLYING TO MINISTERS OF RELIGION

(Clause 81)

Summary of proposed amendment

The proposed amendment ensures that the new accommodation provisions introduced in the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 that relate to accommodation provided by religious organisations to their ministers of religion will apply from 1 July 2013, as originally intended.

Application date

The amendment will apply on 1 July 2013 to 31 March 2015.

Background

The accommodation provisions relating to ministers of religion were reorganised in response to submissions made to the Finance and Expenditure Committee.  During that reorganisation, the commencement date of the relevant provisions was inadvertently changed from 1 July 2013 to 1 April 2015.  To rectify this error, a transitional provision is now proposed, that will cover the intervening period.

The transitional provision essentially replicates the requirements of section CE 1E which applies on 1 April 2015.  Section CE 1E sets out the 10 percent of “remuneration” formula for determining the taxable value of accommodation provided to ministers of religion.  The only difference in the transitional provision is that its formula does not include the “excess rental” as that adjustment was only intended to come into force on 1 April 2015.  The “excess rental” is the difference between the market value of the accommodation provided and the market value of accommodation that is reasonably commensurate with the duties of the minister and the location in which he or she performs those duties.

FOREIGN SUPERANNUATION

(Clauses 71, 75, 96, 133, 145, 213, 256 and 260)

Summary of proposed amendments

A number of remedial changes are proposed to the tax treatment of foreign superannuation interests held by New Zealand residents in the Income Tax Act 2007.  They clarify various aspects of the rules applying to foreign superannuation interests and ensure that the new rules operate as intended.

Application date

All but one of the proposed remedial amendments will apply on and from 1 April 2014, which aligns with the start date of the new rules.

The other proposed change relating to the $50,000 foreign investment fund (FIF) minimum threshold when a person has a FIF superannuation interest will apply beginning on 1 April 2015.

Key features

The proposed changes:

  • ensure that the foreign superannuation rules (rather than the FIF rules) apply to interests acquired while a person was a New Zealand tax resident under domestic law, but not resident in New Zealand under a double tax agreement (DTA);
  • reintroduce the exclusion from the FIF rules for interests in registered Australian superannuation schemes acquired while a person was a New Zealand resident;
  • ensure that the schedule method in the foreign superannuation rules applies to lump-sum withdrawals and transfers from a foreign superannuation interest if a taxpayer has less than $50,000 of FIF interests;
  • ensure that a person who transfers their interest from one foreign superannuation scheme to another foreign superannuation scheme continues to be subject to the foreign superannuation rules rather than the FIF rules; and
  • resolve historic non-compliance with the FIF rules for persons who return pension income in their income tax return.

Background

The tax rules applying to foreign superannuation interests held by New Zealand residents were substantially reformed in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014.

The previous rules for interests in foreign superannuation schemes were complex and it was not always clear that they produced an appropriate result.  In some cases, the interest was subject to the FIF rules and tax was required to be paid on accrual.  When the FIF rules did not apply, tax generally needed to be paid under other tax rules when a distribution was received (such as the rules for pensions, or other tax rules such as the rules for distributions from trusts or companies).

From 1 April 2014, under the new rules, interests in most foreign superannuation schemes are taxed only on receipt.  Pensions received from a foreign superannuation scheme continue to be taxed in full.  For lump-sum withdrawals (and transfers to New Zealand and Australian superannuation schemes), generally a proportion of the amount is taxed depending on how long the person has been resident in New Zealand.

The FIF rules no longer apply to interests in foreign superannuation schemes unless the interest is grandparented or the interest is acquired while the person is a New Zealand tax resident.

A concessionary rule to help individuals meet their historic tax obligations was also introduced as part of the reforms.  If a person made a lump-sum withdrawal or transfer between 1 January 2000 and 31 March 2014 and did not comply with their tax obligations at the time, they have the option to pay tax on 15 percent of the withdrawn or transferred amount.  Otherwise, they remain liable under the rules that applied to their scheme at the time of withdrawal or transfer (either the FIF rules or other tax rules that may apply to their interest).

The changes proposed in the current bill ensure that the new rules for taxing foreign superannuation interests work as intended.  The changes therefore largely confirm or clarify existing policy settings.

Detailed analysis

Interests in foreign superannuation schemes acquired while not resident in New Zealand under a double tax agreement

Under the new rules for taxing interests in foreign superannuation schemes, the FIF rules continue to apply if a person acquires their interest while they are New Zealand-resident.  This is to ensure that the FIF rules that apply to foreign portfolio investments held by New Zealand residents are not undermined.

In certain circumstances, a New Zealander who goes overseas to work for several years (for example, on their OE) could still remain a New Zealand tax resident.  Currently, a person in this situation with a foreign superannuation interest which was first acquired during this period is deemed to have a FIF superannuation interest and is required to account for tax under the FIF rules.

This result is not appropriate if the person is also tax resident in another country and “tiebreaks” to that other country under a double tax agreement (generally, if the person’s affairs are more closely linked to the other country) at the time that they first acquired the foreign superannuation interest.  Amendments are being proposed to the definition of FIF superannuation interest to exclude from the FIF rules interests in foreign superannuation schemes acquired while the person is not resident in New Zealand under a double tax agreement (treaty non-resident).  When a foreign superannuation interest is acquired in such circumstances, it is proposed that the interest is taxable on receipt – in particular, using the rules in section CF 3 for foreign superannuation withdrawals and the ordinary rules for pensions.  This is provided for in proposed new section CF 3(1)(a).

Under the proposed change, an interest in a foreign superannuation scheme acquired while the scheme holder is treaty non-resident would not have an exemption period set out in section CF 3(5) and (6).  Instead, the assessable period as set out in section CF 3(8) would begin when the person is treated as New Zealand-resident under all double tax agreements for the first time while owning the interest in the scheme.  This is achieved by new section CF 3(8)(ab).

A consequential amendment is also being made to the rules providing for rollover relief in the case of a transfer following death or a relationship split.  Where an interest in a foreign superannuation scheme passes to a person’s spouse under a relationship agreement following death or relationship split, both the transferor and transferee would need to be resident under all double tax agreements for rollover relief to be provided.  This is a consequential amendment to maintain revenue integrity.

The proposed change would apply beginning on 1 April 2014, which is when section CF 3 came into force.

Example

Mary is a New Zealand tax resident but has been working in Germany for the past few years.  For the purposes of the Germany-New Zealand double tax agreement, Mary is considered to be a resident of Germany.  While working in Germany, she contributes to a German pension scheme.  Mary moves back to New Zealand and from 14 October 2014 is considered to be resident in New Zealand for the purposes of the Germany-New Zealand double tax agreement.

Mary does not have a FIF superannuation interest as she was non-resident under the Germany-New Zealand double tax agreement when she acquired the rights in her pension scheme.  Under section CF 3, Mary’s assessable period for her interest in the German pension scheme begins on 14 October 2014.

 Application of the $50,000 FIF threshold to FIF superannuation interests

Under the new rules for taxing interests in foreign superannuation schemes, the FIF rules continue to apply if a person acquires their interest while they are New Zealand-resident.  This is to ensure that the FIF rules that apply to foreign portfolio investments held by New Zealand residents are not undermined.

However, there is a minimum threshold under the FIF rules for certain taxpayers who have only relatively small foreign portfolio investments.  The minimum threshold is intended to reduce compliance costs for these taxpayers.

Under the FIF rules, a person has no FIF income or loss if the total cost of their interests in FIFs is less than $50,000.  This is provided for in sections CQ 5(1)(d)(i) and DN 6(1)(d)(i).  When a person falls within the scope of this FIF threshold and they have not opted to pay tax under the FIF rules, tax is paid on receipt of any distributions from their FIFs under other tax rules that may apply to their interest (such as the rules for distributions from trusts or companies).

A problem can therefore arise for an individual who is below this $50,000 FIF threshold and owns a foreign superannuation interest they acquired while they were a New Zealand tax resident, as neither the new rules for foreign superannuation interests nor the FIF rules will apply to them.  In this situation, they would need to consider other tax rules that may apply to distributions from their interest, such as the rules for distributions from companies or trusts.  That is to say, some of the complication of the previous rules remains.  This is not consistent with the intent of the new rules for taxing foreign superannuation interests, which was to provide a relatively simple set of rules for taxpayers to follow.

The proposed change addresses this concern by ensuring that the schedule method in the foreign superannuation rules (rather than other tax rules such as the rules for distributions from companies) applies to lump-sum withdrawals (and transfers to New Zealand or Australian superannuation schemes) made from a foreign superannuation interest that was acquired while a taxpayer was a New Zealand resident, where the taxpayer has less than $50,000 of FIF interests.

It will require those with no FIF income or loss due to the operation of sections CQ 5(1)(d) and DN 6(1)(d) to account for tax on any lump-sum withdrawals and transfers received from their foreign superannuation interest using the schedule method, as set out in section CF 3(10), (11) and (19).

This proposed change introduces the concept of a “low-value FIF superannuation interest” in section CF 3(1)(b) which determines when section CF 3 applies.

Note that proposed new section CF 3(1)(b) refers to sections CQ 5(1)(d) and DN 6(1)(d) in their entirety, which means that the proposed change would only apply if the person has not opted out of the FIF minimum threshold and into the FIF rules through sections CQ 5(1)(d)(ii), (iii), and DN 6(1)(d)(ii) and (iii).

A person with a low-value FIF superannuation interest would not be eligible for an exemption period set out in section CF 3(5) and (6).  An amendment to section CF 3(5) provides clarity that this is the case.

The assessable period for a low-value FIF superannuation interest begins when the person first acquired the rights in the scheme.  This is achieved by the proposed new wording of section CF 3(8) and new section CF 3(8)(ac).

In addition, they would not be permitted to use the formula method set out in section CF 3(12) – (19) to calculate their taxable income arising from a foreign superannuation withdrawal.  New section CF 3(9)(b)(ib) reflects this.

The proposed change applies from 1 April 2015 to ensure that taxpayers who have taken action on the basis of the current legislation are not disadvantaged.

Example

George is a New Zealand tax resident.  He travels to the United Kingdom for one year for his OE.  While working in the United Kingdom he contributes to a pension scheme.  During that time he remains a New Zealand tax resident and does not “tiebreak” to the United Kingdom under the New Zealand-United Kingdom double tax agreement.  At face value, George has a FIF superannuation interest.  However, George has no other foreign investments and the interest in his pension scheme is worth $5,000.  Under sections CQ 5(1)(d) and DN 6(1)(d), George has no FIF income or loss and so is not required to account for tax on his foreign superannuation interest under the FIF rules.

George transfers his pension scheme to a New Zealand superannuation scheme and calculates his tax liability on the transfer using the schedule method as set out in section CF 3.

Previous FIF exemption for Australian regulated superannuation savings: section EX 33

Previously, section EX 33 provided an exemption from the FIF rules for Australian regulated superannuation savings.  This was repealed in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014.  Consequential references to section EX 33 in sections CQ 5(1)(c)(iii) and DN 6(1)(c)(iii) were also repealed by that Act.

This was not intended.  It is therefore proposed that sections EX 33, CQ 5(1)(c)(iii), and DN 6(1)(c)(iii) be reinstated, effective from the date the of the repeal, 1 April 2014.

There is also a proposed amendment to the definition of “FIF superannuation interest” to ensure that a FIF superannuation interest does not include an Australian superannuation interest referred to in section EX 33.

Example

Natalie is a New Zealand tax resident but works in Australia.  She contributes to a regulated superannuation fund while working in Australia.  Under section EX 33, Natalie’s interest in an Australian regulated superannuation fund is not an attributing interest in a FIF.

Transfers between foreign superannuation schemes

Under the rules in section CF 3, a transfer from one foreign superannuation scheme to another (non-Australian) foreign superannuation scheme is not taxable income.  This is achieved through omission in section CF 3(2) which lists the types of foreign superannuation withdrawals that are considered to be income.

Rollover relief is provided until a person receives a foreign superannuation withdrawal that is income, but the assessable period takes into account the number of years the person held the original interest while they were New Zealand-resident.

When a transfer from one foreign superannuation scheme to another occurs, a problem arises because the interest in the new scheme is not adequately carved out of the FIF rules.  This is due to a missing reference to section CF 3(21)(b) in the definition of “FIF superannuation interest”.

The bill proposes that the definition of “FIF superannuation interest” be amended to include a reference to section CF 3(21)(b).  The proposed change would apply from 1 April 2014.

Periodic pensions and historic FIF non-compliance

When the FIF rules ceased to apply from 1 April 2014, any historic non-compliance under the FIF rules is overridden if the person uses the formula or schedule method for lump-sum withdrawals and transfers made on or after 1 April 2014, if the person’s assessable period began before 1 April 2014.  The rule is provided for in section CF 3(22) to ensure that the person is not double taxed.

However, section CF 3(22) only applies when a person receives foreign superannuation withdrawals.  If there is historic FIF non-compliance, but the person does not receive any foreign superannuation withdrawals and only receives a pension, there is no corresponding provision to override the FIF non-compliance.

This problem applies to people who mistakenly included their pension income in their tax return before 1 April 2014 when they should have complied with the FIF rules, as well as those who will start to receive a pension after 1 April 2014.

To resolve this problem, the bill proposes to introduce new section EZ 32G to override non-compliance under the FIF rules in two situations.  The first is where the person derived no payments from their foreign superannuation interest before 1 April 2014 and receives only pension payments from 1 April 2014.  The second situation is when the person received only pension payments from the foreign superannuation scheme before 1 April 2014 and included all of these pension payments in their income tax returns for the appropriate income years by the due date for each of those returns.

Corresponding sections are also being introduced in the Income Tax Act 1994 (proposed new section CC 5) and Income Tax Act 2004 (proposed new section CF 4).

This change is proposed to apply from 1 April 2014 and would apply to pension payments made from 1 January 2000.  This would be in line with the override in section CZ 21B available for certain lump-sum withdrawals and transfers.

Example

Eva has an interest in a foreign superannuation scheme, which, before 1 April 2014, was an attributing interest in a FIF.  Eva did not realise that she had to return her FIF income or loss in her income tax return every year.

In 2009, Eva started to receive pension payments from her foreign superannuation interest and assumed she should be paying New Zealand tax on her foreign pension, so she included all of these pension payments in her income tax return each year.

From 1 April 2014, Eva’s interest in her foreign superannuation scheme does not meet the definition of “a FIF superannuation interest”, so her interest is no longer an attributing interest in a FIF.  This means that from 1 April 2014, Eva should be including her pension payments in her income tax return.

New sections EZ 32G and CF 4 in the Income Tax Act 2004, and section CC 5 in the Income Tax Act 1994 provide that because Eva included all of pre-1 April 2014 pension payments in her income tax returns (albeit mistakenly), the FIF income and losses that she should have actually returned before 1 April 2014 have been overridden.

Example

Leo has an interest in a foreign superannuation scheme which, before 1 April 2014, was an attributing interest in a FIF.  Leo did not realise that he had to return his FIF income or loss in his income tax return every year.

Leo received no distributions from his scheme before 1 April 2014.

From 1 April 2014, Leo’s interest is not a FIF superannuation interest and so it is no longer an attributing interest in a FIF.

In January 2015, Leo starts to receive a periodic pension from his foreign superannuation scheme.  He is required to include these as income in his income tax returns.

New sections EZ 32G and CF 4 in the Income Tax Act 2004), and section CC 5 in the Income Tax Act 1994 provide that Leo has no FIF income or loss arising from his foreign superannuation interest before 1 April 2014.

TAX POOLING AND INTEREST LIABILITIES

(Clauses 207 to 212)

Summary of proposed amendment

The amendment proposes to enable purchased tax pooling funds to be used to meet outstanding interest liabilities on increased amounts of tax resulting from an amended assessment or the resolution of a tax dispute that is subject to challenge proceedings.

The current rules allow taxpayers to transfer purchased funds from a tax pool to cover the increased tax owed as a result of an amended assessment, or the resolution of a dispute which is subject to challenge proceedings but not any interest that might be due on these amounts.  This change addresses this.

Application date

The amendment will apply on and from 3 July 2014, being the date of the Government’s announcement of its intent to change the legislation.

Taxpayers who had an amended assessment issued or challenge proceedings resolved before 3 July 2014 will be able to access tax pooling funds to pay the interest outstanding if the 60-day period to access tax pooling funds was current on 3 July 2014.

Key features

Section RP 17(1) currently enables tax pooling funds to be used to meet an obligation to pay provisional tax, terminal tax or an increased amount of tax.  The proposed change will enable purchased tax pooling funds to be used to pay interest outstanding on increased amounts of tax resulting from an amended assessment or the resolution of a dispute that is subject to challenge proceedings.

Changes are also proposed to sections RP 17B(2), (5), (6) and (7), RP 17B(10) and RP 19B(5) to insert after the term “increased amount of tax”, a reference to “interest payable under Part 7 of the Tax Administration Act 1994 on the increased amount of tax”.  Amendments are also proposed in these sections to insert after the term “deferrable tax” a reference to “interest payable under Part 7 of the Tax Administration Act on the deferrable tax”.

Section RP 19(1B) is being amended to clarify that this section only applies to the payment of provisional tax or terminal tax.  This section determines the order in which the provisional tax payment is applied and ensures this is consistent with the specific provisions relating to provisional tax set out (as applicable) in sections 120J to 120V of the Tax Administration Act 1994.  For non-income tax revenues, the normal ordering rule in section 120F of the Tax Administration Act 1994 applies.

A transitional provision is proposed to be inserted in section RZ 12.  This will enable minor errors to be corrected in the calculation of the amount of interest required to be accessed from a tax pooling intermediary during the period from the date of the Ministerial announcement (3 July 2014) until the legislation is enacted.  Taxpayers will have 60 days from the date of the enactment of the legislation to amend the previously requested interest amount.

Background

The tax pooling rules were introduced in 2003 to deal with concerns with the difference between the interest rates charged on underpayments of tax and paid on overpayments of tax.  In essence, the tax pooling rules enable tax pooling intermediaries to provide a market for businesses to pool their tax with that of other businesses, so that underpayments can be offset by overpayments within the pool, and the taxpayers receive a more attractive interest rate than would be available through Inland Revenue.

The current rules enable taxpayers to transfer funds from a tax pool to pay increased amounts of tax resulting from either an amended assessment of their tax liability or the resolution of a tax dispute that is subject to challenge proceedings.

The intent of this change was to stop further interest from accruing on these payments once funds were accessed from a tax pool.  However, the interaction of two legislative provisions in the Taxation Acts has resulted in interest continuing to be charged, namely:

  • in the case of purchased funds that can be accessed from a tax pooling intermediary, these are limited to the amount of tax outstanding, and do not include any interest outstanding; and
  • payments of tax are first applied to interest and then any remainder is applied to the tax outstanding.

This results in a shortfall in tax that then attracts interest until further payments are made.

The following example illustrates this situation.

Example

A provisional taxpayer's tax liability for the 2010–11 tax year has been reassessed, resulting in an increased liability of $9,000.  For use-of-money interest purposes this amount was due in three equal instalments of $3,000 on 28 August 2010, 15 January 2011 and 7 May 2011.  The taxpayer applies to a tax pooling intermediary to purchase backdated funds, but funds are only available on 7 April 2013.  The taxpayer is therefore subject to use-of-money interest (of say $1,000) for the period 29 August 2010 to 7 April 2013.

The legislation restricts the amount of purchased funds that can be accessed by a taxpayer from a tax pooling intermediary to the tax of $9,000.  However, once this amount is transferred to Inland Revenue to pay the taxpayer's outstanding tax as at 7 April 2013, the legislation requires the amount to be first applied to the payment of interest ($1,000), and the remaining $8,000 is applied to tax.  This leaves a shortfall of $1,000 in tax, which would continue to attract interest from 8 April 2013 until the $1,000 tax and all further accrued interest is paid in full.

The proposed amendment will enable the taxpayer in the above example to purchase both the tax of $9,000 and use-of-money interest of $1,000 on 7 April 2013 and thereby fully pay the tax and interest owing as at that date.

MIXED-USE ASSETS

(Clauses 89 to 95)

Summary of proposed amendment

The bill proposes several remedial changes to the mixed-use asset rules in subpart DG of the Income Tax Act 2007.

Application date

The amendments apply for the 2013–14 and later income years for land and improvements, and the 2014–15 and later income years for aircraft and boats.

Key features

 The amendments:

  • clarify the basis for interest apportionment for close companies that have excessive debt;
  • ensure that the share of interest expenditure of a close company related to the capital use of an asset is allowed as a deduction; and
  • clarify that the use of a mixed-use asset by an associated-person employee in the course of their employment is not private use.

Background

The mixed-use asset rules were introduced as new subpart DG and related provisions by the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013.

The rules generally apply from the 2013–14 income year to prevent excessive deductions for assets that have a significant element of private use, as well as income-earning use, and periods of non-use.  An example of such mixed-use is a bach that is used privately and rented out to third parties, but remains empty for most of the year.

Detailed analysis

Interest expenditure of a close company

Under section DG 11(3), if a company’s debt is equal to or less than the value of its mixed-use asset, it is assumed that the debt relates solely to the mixed-use asset and all interest is apportioned under the formula in section DG 9(2).

Conversely, under section DG 11(4), if the company’s debt is more than the value of the mixed-use asset, the debt is first allocated to the mixed-use asset and then the balance is assumed to relate to other assets held by the company.  Only interest expenditure arising from the debt allocated to the mixed-use asset is subject to the apportionment formula in section DG 9(2) (see section DG 11(6)).

The interest expenditure related to the balance of the debt should be deductible under normal principles, which for a company, usually means it is fully deductible under section DB 7.

This policy intention is not clearly achieved by the current rules as there is some ambiguity regarding the treatment of the balance of the debt and associated interest expense.

Accordingly, the remedial amendment clarifies that this balance is dealt with under the general interest deductibility rules for companies.

Interest expenditure of a close company related to capital use of an asset

The primary expenditure apportionment formula is contained in section DG 9(2).  This formula was amended by the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 to deal with situations when there is capital use of an asset (such as use of an airplane to travel to assess potential capital acquisitions), as well as income-earning use and private use.  The amendment ensured that an appropriate proportion of mixed-use expenditure was denied when it related to capital and private use of an asset, but allowed when it related to income-earning use.

A related amendment is needed in the apportionment rule for interest expenditure incurred by a close company – contained in section DG 11(3).

In contrast to the recent amendments, the rules relating to deductibility of interest will be amended to ensure that a proportionate share of interest expenditure of a close company related to capital use of an asset is allowed as a deduction.  This is necessary to ensure that, except in relation to private use of the asset, the mixed-use asset interest deduction rule for companies aligns with the general interest deductibility rule for companies.  This means all interest for a company is automatically deductible and, unlike other expenditure, there is no denial of deductions when the expenditure relates to a matter of capital.

This will ensure a company that owns a mixed-use asset is no worse-off than a company that does not own a mixed-use asset in relation to deductions for interest that relate to capital matters.  The mixed-use asset-owning company will still be denied interest deductions for private use of that asset, which was the purpose of the mixed-use asset reforms.

For example, assume an airplane owned by a close company is:

  • used 30 days for income-earning purposes;
  • used 30 days for private purposes;
  • used 30 days for capital purposes; and
  • not in use for 275 days.

There is $1,000 of insurance, $1,000 of hangar fees and $1,000 interest expense that should be apportioned under the mixed-use asset rules.

The hangar fees and insurance should be apportioned allowing deductions for income-earning days only.

The formula in section DG 9(2) achieves this as follows:

$2,000 expenditure × 30 income-earning days
  (30 income-earning days + 60 counted days)
= $667  

In contrast, for a close company the interest expense should be apportioned allowing deductions for income earning days and capital days.

The formula in section DG 9(2) currently does not achieve this outcome – under the current rules the outcome would be as follows:

$1,000 expenditure × 30 income-earning days
  (30 income-earning days + 60 counted days)
= $333  

To address this issue, the proposed new formula in section DG 11 will apportion the interest expense of a close company as follows:

$1,000 expenditure × 30 income-earning days + 30 capital-use days
  30 income-earning days + 60 counted days)
= $667  

We note that if the airplane was held by an individual or trust (or any entity other than a company), the standard apportionment formula would apply and there would be no deductions for capital-use days.

Use of an asset by an associated person employee

Currently, if an associate of the asset owner (for example, a 25 percent shareholder in the asset-owning company) uses the asset in the course of their employment, this will be deemed to be private use even though it relates to an income-earning use of the asset.  Treating this use as private use results in more deductions being denied than was intended.  It could also mean that certain assets are subject to the mixed-use asset rules when they should not be (for example, because there is minimal or no true private use).

An example of this is a company (“Asset Co”) owning an aircraft that is used in Asset Co’s business.  Asset Co’s two individual shareholders are also employees of Asset Co.  When the aircraft is used in the business, this use requires the shareholder-employees to travel on the aircraft to various work destinations.

Even though this use is entirely for business purposes (and for the shareholder-employees, for the purpose of deriving their employment income), the mixed-use asset rules currently treat this as private use.  This may lead to the asset being subject to the mixed-use asset rules when it would not have been otherwise.  It may also lead to an inappropriately high proportion of expenditure of Asset Co being denied as a deduction.

There is currently an exclusion from the definition of “private use” for assets used solely in the ordinary course of a taxpayer’s business (section DG 4(3)); this does not, however, extend to employees.

Accordingly, the bill proposes that the current exclusion be extended to cover all situations when the asset is being used to derive assessable income of the natural person using the asset, including fees earned as a contractor, and employment income.

The bill also makes an associated minor clarifying amendment to the description of the “person” who has private use of an asset in section DG 4(2)(b).  Section DG 4(2) currently states that “the person referred to in subsection 1(a) is a natural person who is:

(a)     the person who owns, leases, licences, or otherwise has the asset; or

(b)     a person associated with them.” [emphasis added]

The use of the term “them” in paragraph (b), seems to refer to the person referred to in paragraph (a) that is, a natural person who owns, leases, licences or otherwise has the asset.  If the asset is owned, leased, licensed, or otherwise held by a non-natural person (for example, a company) it is arguable that use of that asset by a natural person associated with the non-natural person owner, lessee, licensee or holder of the asset will not be caught by paragraph (b), when it is intended it should be.

The amendment clarifies that use of an asset by a natural person associated with the non-natural person (for example, company or trust) owner of the asset is considered to be private use.

PROPERTY TRANSFER RULES

(Clauses 149 to 152, 213(53), (54) and (62))

Summary of proposed amendments

Subparts FB and FC of the Income Tax Act 2007 specify the tax treatment of property transfers in certain circumstances, including: transfer under a settlement of relationship property, transfer upon death, transfer by a trustee of a trust to a beneficiary, and the making of a gift.

A number of areas have been identified where the rules in subparts FB and FC do not clearly achieve the intended policy and may have unintended consequences.  The proposed remedial amendments address these areas; all of these proposed amendments are consistent with the policy intent of the property transfer rules.

Application date

The amendments apply from 1 April 2008, the date that the Income Tax Act 2007 came into force.

Key features

The amendments propose the following changes:

  • In the case of distributions of property from a trustee of a trust to a beneficiary of the trust, section FC 2(1) will only apply to deem the transfer to occur at market value if another provision in the Income Tax Act 2007 does not already provide a value for the property.
  • Subpart FB will contain a default rule for the treatment of property transfers under a settlement of relationship property when none of the specific provisions in sections FB 2 to FB 21 apply.  Currently, there is no clear provision in subpart FB that applies to certain types of property – for example, attributing foreign investment fund (FIF) interests – and accordingly, there is scope for uncertainty about the outcome of certain transfers.
  • Other clarifying amendments to remove uncertainty – the headings of sections FB 1 and FC 1 will be changed to reflect their operative nature (the headings are currently those of purpose provisions), the definition of “settlement of relationship property” has been clarified; an incomplete section cross-reference in section FC 4(1)(b) will be corrected and cross-references to relevant sections in subpart FB will be included in applicable sections in subpart FC to assist readers.

Background

The Income Tax Act 2007 intends to accord concessionary treatment to certain types of property transfers, such as a transfer under a settlement of relationship property or a transfer upon death to a close relative or spouse in certain circumstances (see subpart FB and section FC 3).  Broadly speaking, this concessionary treatment involves deferring any tax consequences of transfer until the transferee ultimately disposes of the property.  This is often referred to as “rollover relief”.  It generally involves two steps:

  • deeming the transferor to have no tax consequences on disposal; and
  • deeming the transferee to acquire not only the property, but all the characteristics of the transferor with respect to that property – for example, the date of acquisition, cost at acquisition and intention of acquisition.

This treatment contrasts with the general treatment under subpart FC which crystallises tax consequences on transfer between parties not accorded the concessionary treatment.  Section FC 2 achieves this by deeming the transfer to be a disposal by the transferor and acquisition by the transferee at market value.  Subpart FC was introduced as a generic set of rules to clarify the income tax treatment of “in kind” or “in specie” distributions and gifts – in particular, but not limited to, upon death.

A number of areas have been identified where the rules in subparts FB and FC do not clearly achieve the policy intent and may have unintended consequences.  The proposed remedial amendments described below deal with these problems.

Detailed analysis

Transfer by a trustee of a trust where another provision provides an appropriate transfer value

Under sections FC 1(1)(c) and FC 2(1), a distribution of property from a trustee to a beneficiary of the trust will be deemed to be a disposal and acquisition at market value.  In some circumstances this is an inappropriate outcome.

For example, an investor purchases shares for $2,000 and settles those shares on a fixed trust.  The shares are distributed to the investor two years later, at which time they are worth $3,000.  The cost base of the shares under sections FC 1(1)(c) and FC 2(1) would be $3,000, rather than the $2,000 the investor actually paid for the shares.  This means that if the shares are held on revenue account, upon sale of those shares, the investor will be taxable on the difference between the sale price and the higher cost base.  So for example, if the shares further increased in value to $4,000 and the investor sold them, they would, under current law, be subject to tax on $1,000 ($4,000 sale proceeds – $3,000 new cost base) but should be subject to tax on $2,000 ($4,000 sale proceeds – $2,000 original cost base).

The reverse is also possible.  If the value of the shares falls to $1,000, the shares are distributed (thus setting a $1,000 cost base) and are subsequently sold for $1,250, the investor will derive $250 of assessable income even though they have made a $750 economic loss.

The cost base in these circumstances should be the amount the investor paid for the shares, not the market value of the shares on the date of distribution, as this more correctly reflects the economic cost of acquiring the shares.  Further, if the current law was correct, there would be a difference in tax treatment between acquiring shares under a structure that involves the shares being held in trust for a period of time – for example, as part of a security arrangement – and acquiring them directly, but with restrictive covenants attached which restrict dealing in the shares for the same period as under the trust arrangement.  These arrangements are economically substitutable, yet currently have different tax treatments, which is undesirable.

Accordingly, the proposed amendment will ensure section FC 1(1)(c) will apply unless the tax treatment is determined under another provision.  In the example above, the cost of revenue account property provision (section DB 23) would provide an appropriate cost base for the shares.  This is consistent with the intent of subpart FC, which was to provide a cost base for certain transfers when there was no clear cost base provided by the Act.

Clarifying the treatment of certain types of property not covered specifically by sections FB 2 – FB 21

There is currently uncertainty over the tax treatment of transfers of certain types of property (for example, attributing FIF interests) on a person’s death in circumstances when the transfer qualifies for concessionary rollover relief.  This is because the relevant provisions in subpart FC (for example, section FC 3(2)) refer to subpart FB to determine the treatment of the transfer – that is, subpart FC feeds into the existing provisions in subpart FB in certain cases.  Because subpart FB deals with specific types of property in each section,[5] without a clear catch-all provision, some types of property covered by subpart FC (such as an attributing interests in a FIF) do not have a clear corresponding provision in subpart FB.  While the policy intent of the legislation is clear, the provisions do not currently achieve that intent.

While it is arguable that section FB 1(2) could be seen as a default provision for property not otherwise covered by a specific provision, there are a number of issues with this provision.  First, it is currently structured as a purpose, rather than an operative, provision (see the discussion of other changes below).  Secondly, it currently only specifies the tax consequences of the transfer for the transferee and is silent on the position of the transferor (even though the section FB 1(2) heading purports to cover both positions).  Thirdly, it states that the tax consequences for the transferee on a settlement of relationship property are the same as if the transferor had continued to hold the property.  Read literally, this would mean that when the transferee disposes of the property, there are no tax consequences for them because the transferor is deemed to still hold the property.  This is contrary to the policy intent of the rollover relief intended to be provided by subpart FB.

These issues make it undesirable to rely on section FB 1(2), as currently drafted, as a default provision.

Accordingly, the amendments re-write section FB 1(2) as an operative default rollover relief provision (now contained in section FB 1C) to deal with property that does not have a corresponding specific provision in sections FB 2 to FB 21.  The default provision ensures:

  • the transferor has no tax consequences on disposal; and
  • the transferee acquires not only the property, but all the characteristics of the transferor with respect to that property – for example, date of acquisition, cost at acquisition, and intention of acquisition.

Other clarifying changes

The current headings of sections FB 1 and FC 1 (“What this subpart does”) are headings more appropriate for general purpose provisions, rather than operative provisions.  Accordingly, they will be changed to reflect the operative nature of the provisions.

The definition of “settlement of relationship property” (currently in section FB 1(3) and to be included in new section FB 1B) has been amended to remove a potentially circular reference to a relationship agreement that creates a disposal and acquisition of property “under this subpart”.  The reference to a transaction “between parties” to a relationship agreement has also been removed in case the transfer of property occurs between one of the parties to the agreement and a third party (say, a family trust).

An incomplete section cross-reference in section FC 4(1)(b) will be corrected.  The policy underlying section FC 4 is to accord rollover relief to property transferred on a person’s death to a beneficiary who is a close relative or a charity.  However, the wording refers to “a person exempt under section CW 43”.  The problem is that charities are not generally exempt under section CW 43.  Instead, the section exempts the income of a deceased person’s executor or administrator when it relates to a charitable bequest.  It is sections CW 41 and CW 42 that exempt income derived by tax charities.

Accordingly, the reference in section FC 4(1) to section CW 43 will be extended to persons “exempt under sections CW 41, CW 42 or CW 43”.

To help readers find the correct corresponding provision in subpart FB, cross-references to the relevant sections will be included in applicable sections in subpart FC (for example, a cross-reference in section FC 6 “Forestry assets transferred to close relatives” will cross-refer to sections FB 6 and FB 7).

FOREIGN INVESTMENT PIES: ACCESS TO LOWER TREATY RATE

(Clause 215)

Summary of proposed amendment

The bill amends the treatment of unimputed dividends derived from New Zealand-resident companies that are attributed to non-resident investors in a foreign investment variable-rate portfolio investment entity (PIE).  This will ensure they are subject to the same rate of tax as if the shares were held directly by the non-resident.

Application date

The amendment will apply for the 2012–13 and later income years to align with the application date of the foreign investment PIE rules.

A “savings” provision will apply for taxpayers who filed returns based on the current wording of table 1B in schedule 6 up until the date of introduction of the bill.

Key features

The amendment restricts access to the lower 15% rate to investors in foreign investment PIEs who reside in a country that has a DTA with New Zealand that reduces the dividend NRWT rate.  This is achieved by amending the relevant rows in table 1B in schedule 6 of the Income Tax Act 2007.  The amendment is consistent with the policy intent of the foreign investment PIE rules.

Background

A non-resident investor in a foreign investment variable-rate PIE is subject to a 30% tax rate on all unimputed New Zealand dividends if they do not reside in a country that has a double tax agreement (DTA) with New Zealand.  This rate is reduced to 15% if the investor resides in a country that has a DTA with New Zealand.

These rates were chosen so that a non-resident investor owning New Zealand shares through a foreign investment variable-rate PIE would be subject to the same amount of tax as if they owned the shares directly and were subject to non-resident withholding tax (NRWT) on the dividends.  The non-DTA rate of NRWT on unimputed dividends is 30%; this rate is normally reduced to 15% under a double tax agreement (for portfolio dividends).

New Zealand has DTAs with certain countries which do not reduce the rate of tax on dividends – for example, those that only facilitate the exchange of information.  When an investor from one of these countries holds New Zealand-resident company shares directly any unimputed dividends received will be subject to a NRWT rate of 30%.

INCOME STATEMENTS AND INCOME TAX FILING EXEMPTIONS

(Clauses 231 and 225 to 226)

Summary of proposed amendments

The bill introduces a number of amendments to the Tax Administration Act 1994 relating to when the Commissioner is required to issue an income statement and when an individual is required to file an income tax return.

Application dates

The amendment to income statements for IR 56 taxpayers and the amendment to the schedular payment filing exemption will apply on 1 April 2014.

The amendments for an employee’s obligations and other section 33AA amendments will have the same application date as the current section 33AA, which is scheduled to come into force on 1 April 2016.

Key features

Income statements for IR 56 taxpayers

The Taxation (Annual Rates, GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003 removed the requirement for most IR 56 taxpayers to file end-of-year income tax returns.[6]  Instead the Commissioner was required to issue an income statement to IR 56 taxpayers.  The drafting of this provision did not, however, make it clear that it was only intended to apply to IR 56 taxpayers, leaving open the possibility that income statements could be required to be issued to many other taxpayers, including those who would not otherwise have to file an income tax return.  An amendment in this bill clarifies the application of the relevant provision.

Schedular payment filing exemption

The bill aligns the legislation with the current practice that an individual, who is not otherwise required to file an income tax return, will only have to do so when they derive more than $200 of schedular payments, irrespective of their total income.  This replaces the current requirement that an individual, who is not otherwise required to file an income tax return, will have to do so if their total income is more than $200 and they derive any amount of schedular payments.

Employee’s obligations

Section 33A of the Tax Administration Act 1994 – which sets out when an individual is not required to file an income tax return – is scheduled to be replaced by section 33AA with effect from 1 April 2016.  One provision within section 33A requires an individual to file a return if the employee’s obligations are not met.  The equivalent provision in section 33AA requires an individual to file a return if the employer’s or PAYE intermediary’s obligations are not met.  An employer has additional obligations to those of an employee, such as having to pay to Inland Revenue tax that has been withheld.  To maintain current policy settings this bill includes an amendment so that section 33AA will refer to the employee’s (rather than employer’s) obligations not being met.

Exceptions to requirement for return of income

An individual is required to consider whether their income falls within the criteria in section 33AA(1) to (3) of the Tax Administration Act 1994 to determine whether they are required to file an income tax return.  The bill includes amendments to these three subsections which will simplify their interpretation without changing their application.

GST RATIO METHOD FOR CALCULATING PROVISIONAL TAX

(Clauses 200 and 201)

Summary of proposed amendments

An amendment clarifies that a person must stop using the GST ratio method to determine the amount of provisional tax payable for a tax year, if:

  • the person files a return of income during that tax year; and
  • the residual income tax (RIT) calculated in that return of income means the taxpayer no longer meets the requirements of section RC 16(2) and (5) of the Income Tax Act 2007.

The person must cease using the GST ratio method from the date on which the return of income is filed.  The taxpayer must then apply either the estimation method or a standard method for calculating their provisional tax.  The method used depends on whether the return of income was filed before or after the due date for Instalment A of provisional tax.

Application date

The amendments apply from the beginning of the 2016–17 income year.

Background

A taxpayer may choose to use the GST ratio method to calculate provisional tax payable for a tax year if all of the following requirements in section RC 16 are satisfied:

  • RIT for the preceding year from which the GST ratio is calculated must be within the range of $2,501 to $150,000 for the year;
  • they must be GST-registered for the entire prior year; and
  • their ratio of RIT to total taxable supplies for the prior year (GST ratio) must not exceed 100 percent or be less than 0 percent.  The GST ratio is applied to taxable supplies (turnover) in each GST period to determine the provisional tax payable.

Once a year has started, if a taxpayer does not satisfy the above requirements, the GST ratio method for calculating provisional tax is not intended to continue to be available to the taxpayer.  At present, the legislation does not clearly address this issue if RIT calculated in a return of income for an earlier tax year and filed during the current tax year means that the above requirements are not satisfied.

Detailed analysis

The residual income tax calculated in an income tax return filed for an earlier tax year may result in either the RIT or GST ratio falling outside the required thresholds to use the GST ratio method for calculating provisional tax.  This is illustrated in the following example.

Example

For provisional tax payments for the 2014–15 tax year, a taxpayer having an extension-of-time arrangement for filing the income tax return for the 2013–14 year, might not file the return until 31 March 2015.

For due dates for payment of provisional tax falling before this return is filed, the taxpayer would not know the RIT and annual turnover figures from the 2013–14 tax year.  The taxpayer is then permitted to use the RIT and annual turnover data from the 2012–13 year to calculate provisional tax due for the 2014–15 tax year.

After filing the 2013–14 annual return of income, if the RIT for the 2013–14 tax year exceeds the $150,000 threshold, the taxpayer becomes ineligible to use the GST ratio method for the 2014–15 year.

In this case, the proposed amendment clarifies that the taxpayer must cease to use the GST ratio method for calculating provisional tax.  Instead, they must use either:

  • the standard or estimation method of determining provisional tax, if the return is filed before the due date for Instalment A of provisional tax for the tax year.  In this case, the taxpayer is also treated as never having elected to apply the GST ratio method for the tax year; or
  • the estimation method, if the return is filed after Instalment A of provisional tax for the tax year.

Some minor consequential amendments are also proposed to clarify that:

  • the date the taxpayer is treated as ceasing to use the GST ratio method is the date on which the relevant return of income is filed; and
  • if the taxpayer is a borrower under the Student Loan Scheme Act 2011, the requirement to cease using the GST ratio method for calculating provisional tax does not change the due dates for student loan repayments.

REPORTING REQUIREMENTS OF EMPLOYERS IN THE AGRICULTURE, HORTICULTURE AND VITICULTURE INDUSTRIES

(Clause 224)

Summary of proposed amendment

The bill repeals section 24O of the Tax Administration Act 1994 that obligates employers in the agricultural, horticultural or viticultural industries to provide Inland Revenue with information about employees covered by an exemption certificate or special tax rate certificate.

These requirements would have imposed unreasonable costs on employers and Inland Revenue while not being effective at identifying non-compliant employees.  Accordingly, the provision has not been enforced and instead employers can check the validity of an employee’s certificate directly with Inland Revenue.

Application date

The amendment applies for the 2008–09 and later income years to align with the original introduction of this provision.

REPEAL OF REDUNDANT COST OF TIMBER PROVISION

(Clause 237)

Summary of proposed amendment

The bill repeals section 92AAA of the Tax Administration Act 1994, which requires the Commissioner to issue a determination on the cost of timber incurred.  This provision was introduced when the cost of timber was recorded in a separate account and carried forward to be offset against future forestry income.

The cost of timber is now deductible in the year incurred without the need for the Commissioner to issue a determination, rendering section 92AAA redundant.

Application date

The amendment will apply for the 2015–16 and later income years.

NON-MONETARY CONSIDERATION IN THE CONTEXT OF SALES

(Clauses 102 and 219)

Summary of proposed amendments

The bill amends a number of references to “sale” and similar terms in the Income Tax Act 2007 to ensure that transfers or supplies in exchange for non-monetary consideration are covered by the relevant provisions.  These amendments address concerns that references to “sale” and similar terms may require an exchange of money and may therefore exclude transactions involving an exchange for non-monetary consideration such as a disposal of shares in exchange for a financial arrangement.

The terms that have been amended include “sale”, “buy”, “purchase” and variations of these terms.

Application date

The amendments will apply for the 2015–16 and later income years.

FINANCIAL MARKETS (REPEALS AND AMENDMENTS) ACT 2013 – RELATED CHANGES

(Clauses 213(55) and 266)

Summary of proposed amendments

The bill makes several amendments relating to the Financial Markets (Repeals and Amendments) Act 2013.

Application date

The amendments will come into force on the date of enactment.

Key features

Approved unit trusts

The Financial Markets (Repeals and Amendments) Act 2013 amended the definition of an “approved unit trust” in the Finance Act (No 2) 1990 to refer to the definition of a unit trust in the Income Tax Act 2007 rather than the Unit Trusts Act 1960, which is to be repealed.

A further amendment is proposed so that the definition in the Finance Act (No 2) 1990 excludes paragraph b(x) of the unit trust definition in the Income Tax Act 2007.  Paragraph b(x) excludes an approved unit trust from being a unit trust so this amendment is necessary to allow an approved unit trust to meet the Finance Act (No 2) 1990 definition.

Public unit trusts

The Financial Markets (Repeals and Amendments) Act 2013 amended the definition of a “public unit trust” in the Income Tax Act 2007 to refer to regulated offers made under the Financial Markets Conduct Act 2013 rather than securities offered to the public under the Securities Act 1978, which is to be repealed.  A regulated offer under the Financial Markets Conduct Act 2013 is not a direct equivalent to an offer of securities to the public under the Securities Act 1978; as a result, this amendment altered the scope of what could qualify as a public unit trust.

A further amendment to the definition of a public unit trust in the Income Tax Act 2007 is proposed, to remove the requirement that regulated offers are made under the Financial Markets Conduct Act 2013 (there being no equivalent concept of offers to the public in the Financial Markets Conduct Act 2013).  Paragraph (a) of the public unit trust definition will now require 100 or more unit holders, treating all associated persons as one person, who meet the current requirements in subparagraphs (i) to (iii).  Paragraph (b)(vi) and (vii) will have their thresholds reduced from 25 percent to 5 percent to ensure public unit trusts qualifying under these provisions are sufficiently widely held.

THIN CAPITALISATION

(Clauses 153 to 156 and 158)

Summary of proposed amendment

The changes to the thin capitalisation rules in the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 included a provision to deem the worldwide group of a New Zealand company to be the same as its New Zealand group in certain situations.  These are when the company is subject to the thin capitalisation rules only because it:

  • is controlled by a non-resident owning body; or
  • is controlled by a trustee that is subject to the thin capitalisation rules.

This section does not operate as intended in every situation.  Accordingly the bill proposes a re-drafting of the provision to ensure it operates as described above.

The bill also corrects minor errors such as cross-references in their clauses.

Application date

The amendments will apply from the beginning of the 2015–16 income year, the application date of the thin capitalisation changes introduced in the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014.

RESPONSE PERIOD FOLLOWING DISPUTES RESOLUTION PROCESS DOCUMENT

(Clauses 234 and 235)

Summary of proposed amendments

The proposed amendments will clarify that the Commissioner’s response period when a taxpayer is late in issuing a disputes document starts from the time when it is decided that “exceptional circumstances” exist and the taxpayer’s late dispute document is to be allowed.

Application date

The amendments will come into force on the date of enactment.

Key features

Amendments to section 89AB of the Tax Administration Act 1994 will clarify that the Commissioner’s response period when a taxpayer is late in issuing a disputes document starts from the time when it is decided that “exceptional circumstances” exist and the taxpayer’s late document is to be allowed.  If the response period applied while a decision was being reached, the Commissioner would be required to issue a substantive response to a dispute that may not have a procedural basis.

Background

Certain documents that form part of tax disputes procedures are subject to mandatory response periods.  A breach of a response period can see a disputant forfeit their right to begin or continue with a dispute.  If exceptional circumstances are found to exist, however, a notice issued by the taxpayer that is late will be treated as if it had been given within the required response period.

The decision about whether there are “exceptional circumstances” is at the discretion of the Commissioner.  A taxpayer may challenge the Commissioner’s refusal notice by filing proceedings with the Taxation Review Authority within two months of the notice being issued.

The proposed change clarifies uncertainty in the current law, where it could be argued that if a taxpayer issues an initiating document late, the Commissioner may be required to file a response document prior to the establishment of any exceptional circumstances that would allow the dispute to continue.

COMMISSIONER’S ABILITY TO TRUNCATE THE DISPUTES PROCESS UNDER A TAXPAYER-INITIATED DISPUTE

(Clauses 236 and 241)

Summary of proposed amendments

The proposed amendments ensure that truncation is allowed in a taxpayer-initiated dispute after the taxpayer has issued a Statement of Position without requiring the Commissioner to first issue a Statement of Position.

Application date

The amendments will come into force on the date of enactment.

Key features

An amendment to section 89M(6BA) of the Tax Administration Act 1994 will ensure that after the taxpayer has issued a Statement of Position the Commissioner and the taxpayer can agree in accordance with section 89N(1)(c)(viii) to submit the dispute to the court or Taxation Review Authority without requiring the Commissioner to issue a Statement of Position.  The change is only relevant for taxpayer-initiated disputes.

An amendment to section 138G will mean that if a taxpayer-initiated dispute proceeds in this way, the taxpayer will be bound by the exclusion rule and the Commissioner will not.  This avoids the Commissioner not being able to raise any issues in the challenge and ensures the Commissioner can rely on information that would otherwise have been included in her Statement of Position.

Background

In a taxpayer-initiated dispute, the completion of the disputes procedures is either by the Commissioner agreeing to make any amended assessment or by issuing a challenge notice at which point the disputant is able to file challenge proceedings in the High Court or Taxation Review Authority.

Section 89P(3) of the Tax Administration Act 1994 provides that the Commissioner cannot issue a challenge notice without Statements of Position being exchanged.  An exception to this rule is when the Commissioner and taxpayer agree in writing not to follow the full disputes procedures and go directly to court.  However, section 89M(6BA) states that the Commissioner is required to issue a Statement of Position when the taxpayer has issued a Statement of Position.

The combination of these provisions means that, under the current law, the Commissioner must issue a Statement of Position in response to a taxpayer’s Statement of Position even though both parties agree that the dispute should proceed to the challenge phase.  This has the potential to delay a dispute unnecessarily and also impose unnecessary administration costs.

PETROLEUM MINING RULES

(Clauses 97, 98, 100, 101, 213(49), (50), (72) and (73))

Summary of proposed amendment

Amendments to the definitions of “mining permit”, “petroleum exploration expenditure” and “existing privilege”:

  • correct unintended legislative changes made in rewriting those definitions into the Income Tax Act 2007; and
  • implement a “savings” provision for taxpayers to protect tax positions taken in relation to the definition of petroleum exploration expenditure on arrangements entered into before the introduction of the bill.

Application date

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

Key features

The Rewrite Advisory Panel has agreed with a submission that the petroleum mining rules contain unintended legislative changes in the definitions of “mining permit” and “petroleum exploration expenditure”.  The submitter noted that the use of the term “existing privilege” was potentially ambiguous as it refers to both mineral mining and petroleum mining privileges issued under the 1937 Act.

The change identified is that these definitions inadvertently do not refer to petroleum mining privileges issued under the Petroleum Act 1937 (1937 Act).  The policy intention is that the tax treatment for costs relating to mining privileges issued under the 1937 Act is intended to be determined under the petroleum mining rules.

The bill amends the definitions of “mining permit” and “petroleum exploration expenditure” to clarify that they include petroleum mining privileges issued under the 1937 Act.  The use of the definition of “existing privilege” is clarified in the bill to distinguish more clearly when it refers to petroleum privileges issued under the 1937 Act.

The “savings” provisions protect a taxpayer’s tax position taken in relation to an arrangement for the acquisition of a petroleum mining asset that was entered into before the introduction of the bill.

TREATMENT OF EXPENDITURE FOR COMMERCIAL FIT-OUT

(Clauses 82 and 83)

 Summary of proposed amendment

A specific rule relating to expenditure on items of commercial fit-out (section DA 5) is proposed to be removed from a subpart intended for general provisions relating to deductions and re-enacted in a more appropriate place (section DB 22B).

No change in effect of the provision is intended.

Application date

The amendment applies from the beginning of the 2011–12 income year.

Background

Section DA 5 is concerned with how the capital limitation rule applies to certain expenditure incurred on commercial fit-out.  In particular, it is intended to ensure that:

  • capital expenditure incurred for commercial fit-out is not immediately deductible as repairs and maintenance on the building; and
  • the replacement or improvement of a previously separately depreciated item of commercial fit-out is capitalised and depreciated over its estimated useful life.

The Rewrite Advisory Panel noted that section DA 5 is inconsistent with the scheme and purpose of subpart DA, which:

  • contains the general permission; and
  • sets out principles and rules for understanding the relationship of the general permission with specific deduction provisions in Part D.

The Rewrite Advisory Panel noted that the risks of retaining the current section DA 5 in subpart DA are the potential for:

  • misunderstanding and misinterpretation of the scheme and purpose for subpart DA; and
  • section DA 5 to be cited as an example/precedent in support of placing other targeted provisions in subpart DA.

ELECTION TO BE A COMPLYING TRUST

(Clauses 167 and 170)

Summary of proposed amendment

Amendments to sections HC 10 and HC 33 of the Income Tax Act 2007 (election to be a complying trust):

  • correct an unintended legislative change made in relation to an election to be a complying trust; and
  • allow a trust to continue to be treated as a complying trust after the settlor migrates from New Zealand if, since that time, the trustee has continued to comply fully with New Zealand income tax obligations.

Application date

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

Key features

Rewrite matter

The Rewrite Advisory Panel has agreed with a submission that the rules relating to the election for a trust to be a complying trust (sections HC 10 and HC 33 of the Income Tax Act 2007):

  • are partially ineffective and this is caused by an unintended legislative change; and
  • do not reflect the policy intention.

A complying trust is a trust for which the trustees:

  • are liable for tax at the trustee rate on all their world-wide trustee income; and
  • have always met their income tax compliance obligations.

A foreign trust is a trust which does not have a settlor resident in New Zealand at all times since the trust was formed, but is not a complying trust because the trustee either:

  • is not liable for tax at the trustee rate on foreign-sourced income; or
  • derives non-resident passive income that is not subject to full rates of tax in New Zealand.

It is intended that a foreign trust may be treated as a complying trust if:

  • a settlor, trustee or beneficiary of the trust elects for the trust to pay tax at the trustee rate on its world-wide trustee income; and
  • the trustees continue to meet their income tax compliance obligations.

However, due to the unintended legislative change, a foreign trust is restricted to choosing to satisfy the income tax liability for taxable income of the trust.  The taxable income of a foreign trust does not normally include foreign-sourced income.  This unintended legislative change could prevent the trust from meeting the requirements to be a complying trust.  The amendment ensures that the election to be a complying trust relates to paying tax at the trustee rate on the world-wide trustee income of the trust.

Remedial matter

The amendments also address a minor remedial matter, mainly relating to situations that have arisen for trustee companies, such as the Public Trust.  These trustees act for many trusts and are not always made aware when a settlor's residence changes.

If the trustee is not aware when a settlor migrates from New Zealand, the trustee may:

  • continue to treat the trust as a complying trust, calculating and paying tax at the trustee rate on the world-wide trustee income of the trustee; and
  • indicate in the annual return of income that the trust is a complying trust.

The amendment clarifies that if a settlor of a complying trust migrates from New Zealand, the trust will continue to be treated as a complying trust if:

  • the trustee continues to pay New Zealand tax at the trustee rate on the world-wide trustee income of the trust; and
  • the trustee indicates in the annual return of income the intention for the trust to be a complying trust.

BAD DEBT DEDUCTION AND CAPITAL LIMITATION

(Clauses 84(4), (7) and 257)

Summary of proposed amendment

The amendment to section DB 31(6)(b)(iii) of the Income Tax Act 2007 (and section DB 23 (6)(b)(iii) of the Income Tax Act 2004) clarifies that the capital limitation does not prevent a deduction for a bad debt of the principal amount of a financial arrangement entered into in the normal course of business.

This amendment does not alter the current treatment of debts owed by associated persons.

Application date

The amendments will apply from the beginning of the 2008–09 income year (2007 Act) and the 2005–06 income year (2004 Act).

Key features

The Rewrite Advisory Panel has agreed with a submission that there is an unintended legislative change in the bad debt deduction rule relating to taxpayers carrying on a business of holding or dealing in financial arrangements (business holder or dealer).

The Panel recommended that the unintended legislative change to the bad debt deduction rule should be corrected retrospectively to the beginning of the 2005–06 income year (the first year to which the 2004 Act applied).

The retrospective remedial amendment addresses the potential adverse consequence identified by the Panel that the bad debt rule in section DB 31 may deny a deduction to a business holder or dealer for the principal amount of a financial arrangement.  An example of this possible adverse consequence is for a holder of securitised financial arrangements, if those securitised assets are entered into in the normal course of business.

The policy intent for the bad debt deduction rule for a business holder or dealer is to allow a bad debt deduction to a business holder or dealer for both accrued interest and the principal amount of a debt entered into in the ordinary course of business.

This policy stems from the 1987 recommendations of the Consultative Committee on Accrual Tax Treatment of Income and Expenditure (the Brash Committee)[7] to maintain the common law position in relation to bad debt deductions, except for bad debts entered into between associated persons.

Under the common law,[8] a bad debt suffered by a business holder or dealer which related to a financial arrangement entered into in the ordinary course of business was considered to be on revenue account.  In this circumstance, the common law held that a bad debt deduction was allowed for a loss of principal and accrued interest, provided some procedural requirements were satisfied.

The common law also considered that a debt entered into outside the normal or ordinary course of business would be usually treated as a non-deductible capital loss as a result of applying the capital/revenue tests.

The bad debt deduction rule has always been intended to replicate this common law effect for business holders and dealers.

The Brash Committee also considered that the common law treatment for bad debts should not apply to debts between associated persons.  The policy concern identified was that the common law treatment of bad debts could allow associated persons to convert truly capital losses into revenue deductions simply by substituting what would ordinarily be equity capital for a debt instrument.

Current legislation ensures that the principal amount of a debt between associated persons is not deductible as a bad debt.  The amendment does not change that outcome.

TRANSFER OF FINANCIAL ARRANGEMENTS ON AMALGAMATION

(Clause 160)

Summary of proposed amendment

The proposed amendment will ensure that when two companies amalgamate, the income or expenditure arising in the year of amalgamation under a financial arrangement held by the amalgamating company (the company that ceases to exist) is allocated on a fair and reasonable basis between the amalgamating company and the amalgamated company (the company that continues to exist).

Application date

The proposed amendment will apply to amalgamations occurring in the 2008–09 and later income years.  There will be a “savings” provision for tax positions taken by taxpayers in these income years based on the current legislative wording.

Key features

When two companies amalgamate, and as a result, a financial arrangement is transferred by the amalgamating company to the amalgamated company, in most cases the amalgamating company must perform a base price adjustment (BPA).

In calculating the BPA, the amalgamation rules intend to ensure that the amalgamating company is allowed a deduction for expenses incurred (or returns any income derived) up until the date of the amalgamation.  Any amounts incurred or derived after this point should be incurred/derived by the amalgamated company.  This ensures that the rules give the correct amount of expenditure or income over the remaining life of the financial arrangement.

The current wording of section FO 13(2) of the Income Tax Act 2007 does not achieve this result.  This is because section FO 13(2) provides the incorrect amount of “consideration” to be included in the BPA formula.  The BPA formula (found in section EW 31) is:

BPA = consideration − income + expenditure + amount remitted

Section FO 13(2) states:

The amalgamating company is treated as having disposed of the financial arrangement.  In calculating the base price adjustment, the consideration [emphasis added] is the amount that would fairly and reasonably represent the income or expenditure that the amalgamating company would have derived or would have incurred in the income year if the amalgamation had not taken place.

Before 1999 (section FE 7(3) of the Income Tax Act 1994 and section 191 WD(17)(b) and (18)(b) of the Income Tax Act 1976), the provision read:

The consideration for which the succession has taken place shall be deemed to be equal to such amount as will result in the base price adjustment [emphasis added] in relation to the amalgamating company calculated in respect of the succession under section EH 4 being such amount (whether negative, positive, or a nil amount) as will result effectively in a fair and reasonable allocation, having regard to the tenor of section EH 1, between the amalgamating company and the amalgamated company, of the expenditure or gross income which would have been deemed to be incurred or derived by the amalgamating company in respect of the financial arrangement in the income year in which the amalgamation takes place had the amalgamation not taken place.

The difference between the sections is that the pre-1999 legislation deemed the result of the BPA to be a fair and reasonable allocation of income and expenditure between the amalgamating and amalgamated companies.  The post-1999 provision deems the consideration component in the BPA formula to be a fair and reasonable allocation of income and expenditure between the amalgamating and amalgamated companies.

As demonstrated by the example below, the latter approach gives the incorrect result and will sometimes result in too much income being derived and sometimes result in excessive deductions.

The proposed amendment restores section FO 13(2) to the pre-1999 position.

Example

An amalgamating company borrows $100 and pays interest in year 1 of $3, in year 2 of $3 and in year 3 an amalgamation takes place and the amalgamating company only pays $1.50 interest.  The amalgamated company pays the remaining $1.50 for year 3.

Under the current drafting of section FO 13, the BPA for the amalgamating company gives the following result:

 

BPA = consideration − income + expenditure + amount remitted

 

 

= –$1.50 – $0 + $6 + $0

 

 

= $4.50

 

Accordingly, the amalgamating company has $4.50 income in the year of amalgamation, whereas it should receive a $1.50 deduction.

Under the proposed amendment, section FO 13 will give the following result under the BPA for the amalgamating company:

 

Result of the BPA = –$1.50

 

Therefore, the amalgamating company will be entitled to a $1.50 deduction in the year of amalgamation.  The amalgamated company will also be entitled to a $1.50 deduction in the year of amalgamation.

TRANSITIONAL RESIDENT DEFINITION

(Clause 176)

Summary of proposed amendment

Amendments to section HR 8 are proposed to clarify the position that persons who would otherwise be transitional residents are not treated as such if they have elected not to be a transitional resident.  This was clear in the Income Tax Act 2004 and the proposed amendments will make this clear for the Income Tax Act 2007.

Other wording changes to section HR 8(2) to (4) are proposed to improve clarity in the section as a whole.

Application date

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

DRAFTING AMENDMENT TO SECTION 10(7A) OF THE GOODS AND SERVICES TAX ACT 1985

(Clause 251)

Summary of proposed amendment

Currently, section 10(7A) requires that if goods and services are deemed to be supplied by a person under sections 5(3) and (3B), the consideration in money for the supply is treated as being the open market value of the supply.  However, section 5(3) and (3B) would never apply simultaneously.  Instead, the value of the supply should be at market value where either 5(3) or (3B) apply [emphasis added].

Application date

The amendment will apply beginning on 1 April 2014.

HERD SCHEME LIVESTOCK PURCHASED OR SOLD BY COMPANIES

(Clause 69)

Summary of proposed amendment

Herd scheme livestock are held on capital account.  Section CD 44 of the Income Tax Act 2007 provides that the net tax-free herd scheme gains of a company are a capital profit, and therefore tax-free upon a liquidation of the company, to prevent their eventual taxation as a dividend.  A consequential amendment is proposed, to ensure that new capital amounts created by the recent livestock valuation reforms are also tax-free upon their eventual distribution by a company.

Application date

The amendment will apply from 28 March 2012, the date the original amendments came into effect.

Key features

Section CD 44 is being amended to extend the definition of “capital gain” to ensure that new capital amounts created by the livestock valuation reforms are tax-free upon liquidation of a company.  This is necessary to recognise that the recent amendment that provides that herd scheme livestock transfers between associated parties are at herd values for taxation purposes.  However, the parties may have agreed a different valuation for the actual transaction and this amendment provides that the difference between the valuations, which is on capital account, is regarded as a capital gain or a capital loss by parties to the transaction that are corporates.

REMOVAL OF SPENT TERMINOLOGY

(Clauses 77, 123, 213, 245 and 252)

Summary of proposed amendment

References to “new start grants” are being repealed in the Inland Revenue Acts as they are no longer part of the suite of responses the Government uses for primary sector adverse events.

Application date

The amendments will apply from the day after the date of enactment.

BAD DEBTS REMEDIAL

(Clause 84)

Summary of proposed amendment

Amendments were made to the tax rules last year to ensure taxpayers take bad debt deductions only when they suffer economic losses.  Further technical amendments are required to ensure that the correct outcomes are achieved.

Application date

These amendments will apply from 20 May 2013 to align with the application of the original amendments.

Key features

The new base maintenance rules included in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 for deductions for bad debts for financial arrangements had the policy objective of ensuring taxpayers take bad debt deductions only when they suffer economic losses.  The operation of the rules is quite complex, and as currently drafted, the application of subsections DB 31(4B) to (4E) does not give the intended result.  The proposed amendments ensure that the subsections give the correct bad debt deductions at appropriate times, consistent with the policy objective.

The requirement for these changes was signalled to taxpayers in the Tax Information Bulletin published in May 2014, which discussed the original amendments.

FINANCIAL ARRANGEMENT REMEDIAL – SPREADING INCOME

(Clauses 121 and 146)

Summary of proposed amendments

In very limited circumstances, International Financial Reporting Standards (IFRS) allow an amount associated with a financial arrangement to be taken directly to equity as a contribution to capital, and not be further dealt with.  Accordingly it is then argued that this amount is not recognised for taxation purposes.  The proposed amendment requires the amount to be recognised as taxable income, and provides for a catch-up calculation for past years, to be completed by companies that have taken this position.

Application date

The core amendment will apply from the start of the 2014–15 tax year.  The catch-up will be required to be done in the 2015–16 tax year.

Key features

Most types of debt are taxed under the financial arrangement rules.  These rules require taxpayers to spread the income or expenditure that is expected to arise over the term of the debt.

There is an issue with how the IFRS financial reporting spreading method operates because of a particular transaction between two companies.  Under the specific wording of that spreading method, one of the companies can exclude a portion of its income from the ambit of the spreading method (technically, because the company has been able to treat the income as a contribution to capital).  This means the company will not be required to pay tax on the income until the debt expires, which will provide it with a significant timing advantage.  This is inappropriate.

Technical amendments are proposed to section EW 15D of the Income Tax Act 2007 to address this.

When a catch-up is necessary, proposed section EZ 36B will provide for this.

REWRITE AND OTHER MINOR TECHNICAL AMENDMENTS

(Clauses as shown)

Summary of proposed amendments

The following amendments reflect minor technical maintenance items arising from both the rewrite of Income Tax legislation and subsequent changes.

Until its disestablishment on 2 December 2014, the Rewrite Advisory Panel monitored the working of the Income Tax Act 2007 and reviewed submissions on what may have been unintended changes in the law as a result of its having been rewritten.  The Panel recommended legislative action, when necessary, to correct any problems.  Since the Panel’s disestablishment, this process is being managed by Inland Revenue within its normal remedial tax policy work programme.

Application dates

Unless otherwise stated, all the amendments to the Income Tax Act 2007 (2007 Act) will apply retrospectively, with effect from the beginning of the 2008–09 income year.

Minor maintenance items

The following amendments relate to minor maintenance items to correct 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.
Clause Section Act Amendment Commencement date
68

CD 39

2007 Act

Repeal redundant provisions

Assent

74(2)

CQ 2

2007 Act

Repeal redundant provisions

Assent
78

CX 56C

2007 Act

Terminology corrected

1 April 2010

79

CZ 10

2007 Act

Repeal redundant provision

Assent
80

CZ 29(3)

2007 Act

Insert subsection heading

4 September 2010

86

DB 35

2007 Act

Terminology corrected

1 April 2015

103

EC 41

2007 Act

Terminology corrected

 
108

EE 32

2007 Act

Terminology corrected

 
120

EW 9

2007 Act

Cross-references corrected

 
131

EX 25

2007 Act

Repeal redundant provisions

Assent
144

EZ 5

2007 Act

Terminology corrected

 
157

FE 28

2007 Act

Grammar corrected

 
159

FO 12

2007 Act

Ambiguity and cross-reference corrected

 

161-164

GB 8, GB 9, GB 11, GB 13

2007 Act

Repeal redundant provisions

Assent
185

LP 6

2007 Act

Repeal redundant heading

Assent
186

LU 1

2007 Act

Terminology corrected

1 April 2014

193

OB 1

2007 Act

Drafting consistency

 

196-198

OP 27, OP 50, Table O19

2007 Act

Terminology corrected

 
199

RC 7

2007 Act

Terminology corrected

 

202

RD 27

2007 Act

Terminology corrected

 

213(16), (17)

YA 1 “employee”, “employer"

2007 Act

Cross-reference corrected

5 Jan 2010

213(33)

YA 1 “mineral miner”

2007 Act

Insert index entry for definition

1 April 2014

213(41), (42)

YA 1 “non-filing taxpayer”

2007 Act

Cross-reference corrected

 

213(64), (65)

YA 1 “tax position”, “tax situation”

2007 Act

Cross-reference and terminology corrected

Assent
190

MC 5

2007 Act

Terminology corrected

 

 


 

 

[4] Now Charities Services – Department of Internal Affairs.

[5] Sections FB 2 to FB 21 of the Income Tax Act 2007.

[6] These taxpayers include private domestic workers, staff of foreign consulates and embassies, New Zealand-based representatives of foreign companies and Operation Deep Freeze personnel.

[7] Report of the Consultative Committee on Accrual Tax Treatment of Income and Expenditure, April 1987, paras 32-41, comment on drafting para 2.632-41, comment on drafting para 2.6.

[8] Summarised in Levin and Co., Ltd. v Commissioner of Inland Revenue [1963] NZLR 801.