Issued
2006

Summary of unintended legislative change submissions where Rewrite Advisory Panel considered there was no unintended legislative change

Lists unintended legislative change submissions where Rewrite Advisory Panel considered there was no unintended legislative change to Income Tax Act 2004.

As part of the implementation of the Income Tax Act 2004, a process was developed to refer potential Unintended Legislative Change issues arising as a result of the rewritten parts of the Income Tax Act, to the Rewrite Advisory Panel chaired by Sir Ivor Richardson.

The process is set out in RAP 001 (Tax Information Bulletin Vol 16, No 6 – July 2004) and also on the RAP website at www.rewriteadvisory.govt.nz

The following is a list of potential unintended legislative change submissions where the Rewrite Advisory Panel considered there was no unintended legislative change arising under the Income Tax Act 2004. In other words, the 2004 Act has the same outcome as the corresponding provisions in the 1994 Act or there is a notified policy change set out in Schedule 22A of the 2004 Act. As well as the changes identified below there are a number of submissions where the Panel has agreed that an unintended change has occurred, and these will be set out in the TIBs for the amendment Acts in which the corrections to the law have been made. All legislative references are to the Income Tax Act (both the 1994 and 2004 Acts) unless otherwise specified.

Section 2004: CD 14 (Submission 003)
Section 1994: CF 3 (1)(b)
Description: Section CF 3 (1)(b), when dealing with the carve out for returns of capital by companies, applies to cancellations of shares in whole but not in part. It seems that the reference to cancellation (in whole but not in part) has not been carried over to the 2004 Act.
Outcome: The Panel considers that there is no unintended legislative change under section CD 14 of the Income Tax Act and therefore no amendments are required in respect of CD 14 of the Income Tax Act 2004.
Section 2004: CB 9 (Submission 007)
Section 1994: section CD 1(2)(d)
Description: Example: Trust is set up for Mum, Dad (neither in the property game nor in the business of erecting buildings) and children. Trust buys rental property. Children grow up. Child 2 becomes a builder eventually going into the business of erecting buildings. Twenty years on non-minor improvements are built (not necessarily by Child 2, who could even be resident overseas) on the property. Five years after that the property is sold having been rented out all that time.

Under the ITA 1994, the sale of the property is not taxable as there was no-one in the business of erecting buildings at the time the property was acquired.

Under the ITA 2004 the sale is taxable as:
  • Child 2 is in the business of erecting buildings when the non-minor improvements are begun,
  • Child 2 is associated with the Trust as a beneficiary, and
  • the property is sold within 10 years of the improvements being undertaken.
Outcome: This submission relates to an intended change which is included in Schedule 22A of the ITA 2004. The exposure draft relating to this item can be viewed at
http://pad/external/publications/files/rewrite/index.html
Section 2004: CB 11(1) (Submission 008)
Section 1994: CD 1(2)(g)
Description: Under this section any development work of a significant nature is taxed on the total value of the land transaction, rather than being taxed on the extent of the amount derived from the scheme, as would be the case under the 1994 act. This is clearly an unintentional change.
Outcome: The Panel is not persuaded that an unintended change arises in respect of section CB 11(1) of the ITA 2004.

The Panel:
  1. when all or part of a property enters into a scheme for development and when property is withdrawn from a scheme.
  2. recommends a retrospective amendment to the ITA 2004 if an unintended legislative change is confirmed in the light of the Panel's view of the preceding legislation as capturing only the gain in respect of such property and so on revenue account during that period.
(Refer to Submission 033.)
Section 2004: OB 1 (Submission 010)
Section 1994: OB 1 and definition of person Description: The ITA 2004 no longer includes, in section OB 1, a general definition of "person". Under the ITA 1994, "person" was defined to include "a company and a local or public authority; and also includes an unincorporated body of persons:". The ITA 2004 includes no such definition, which is odd considering the increased emphasis in the new Act on the term "person", rather than "taxpayer".
Outcome: This issue was explained in the Tax Information Bulletin Vol 16, No 5 (June 2004). The definition of "person" in the Interpretation Act applies and given that definition, there is no change in outcome, and no unintended legislative change.
Section 2004: CD 33(2)(c) (Submission 012)
Section 1994: CF (3)(7)
Description: Section CD 33(2)(c) does not specify application of "capital gain amount" and it should link to the definition of "capital gains"
Outcome: The Panel considers that there is no unintended legislative change in respect of section CD 33(2)(c). The Panel considers that the application of "capital gain amount" can be implied from the current definition of "capital gains". However, the Panel has asked Inland Revenue to consider clarifying the legislation by inserting the word "amounts" in the definition of "capital gains" in sectionCD 33(2)(c).

This clarification has been enacted in the Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Act which received the Royal Assent on 3/04/06.
Section 2004: CB 14(2) (Submission 013)
Section 1994: CD 1(3)(b)
Description: Section CB 14(2) of the ITA 2004 states the exclusion applies to: "…the land that has the dwelling house on it." In CD 1(3)(b) of the ITA1994 it was clear the land that was excluded was only the dwelling house itself.

It is unclear if CB 14(2) restricts the exclusion to the dwelling house only as it refers to "the land that has the dwelling house on it". Does this now mean that the exclusion will apply to the dwelling house, or the dwelling house and curtilage or the dwelling house and the land in the certificate of title on which the dwelling house is situated.
Outcome: The Panel considers there is no unintended legislative change in this instance.

However, the Panel recommended that the legislation would benefit from clarification and the submission has been referred to Inland Revenue's Policy Advice Division.
Section 2004: CB 6(1)(c) and CB 9(1) and (2) (Submission 15)
Section 1994: CD 1(2)(d). Section CD 1(2)(d)
Description: The omission of the minor nature clause from CB 6(1)(c) and CB 9(1) and (2) results in an unintended change.
Outcome: The Panel considers there is no unintended legislative change under sections CB 6(1)(c) and CB 9(1) and (2) of the ITA 2004.
Section 2004: CE 1 (Submission 016)
Section 1994: OB 1 definition of monetary remuneration
Description: The definition of monetary remuneration in relation to the provision of accommodation has been narrowed from including "board or lodging, or the use of a house or quarters.." to "the market value of board...". The normal definition of board is much narrower than the words in the old section and would not incorporate the provision of a house.
Outcome: The Panel considers no unintended legislative change arises in this instance.
Section 2004: DB 36 (Submission 21)
Section 1994: Section DJ 22
Description: Under the 1994 Act deductions are denied for bribes paid to all public officials (whether the official is a New Zealand or a foreign public official). Under the 2004 Act deductions are denied for bribes paid to New Zealand officials. However, deduction are only denied for bribes paid to foreign public officials where it is an offence under the laws of the foreign country.
Outcome: The Panel considers no unintended legislative change arises in this instance.
Section 2004: FE 6(5) and (6) and FE 7(1) and (2) (Submission 025)
Section 1994: Sections FE 6 and FE 7
Description: tax year and income year
Outcome: The Panel considers that there is no unintended legislative change in this instance.

The Panel recommends that the terms "tax year" and "income year" be reviewed to ensure that they give the appropriate outcomes in all places where they are used in the Act.
Section 2004: BB 2, LD 7, MB 2, OB 1 ("provisional taxpayer") (Submission 030)
Section 1994: BB 2(2), section LD 7, subpart MB and the definition of "provisional taxpayer" in section OB 1
Description: The ITA 2004's reference to "tax year" in section BB 2(3), section LD 7, subpart MB and in the definition of "provisional taxpayer" in section OB 1 results in an unintended change. The sections should refer to "income year".
Outcome: The Panel considers that there has not been an unintended legislative change in this instance.

Please note, the use of the terms, "tax year" and "income year" in the Income Tax Act 2004 are being reviewed by Inland Revenue's Policy Advice Division.
Section 2004: CB 11(1) (Submission 33)
Section 1994: CD 1(2)(g)
Description: The issue described in submission number 008 also arises in relation to major projects involving the development of land that is to be retained after the completion of the development as a long-term rental investment.
Outcome: The Panel considers that no unintended legislative change arises in this instance. CIR to provide a statement of how he will apply the law.
Section 2004 Section CE2 has been omitted (Submission 034)
Section 1994: Section CE2 was omitted from the ITA 1994. The equivalent section in the 1974 Act was section 74(2)(a).
Description: Section CE2 has been omitted. From 1916 this has been the main assessment section for farmers.

It is not correct to classify farming as a business. The prime objective of the farmer is to maintain the land and the associated assets. A large proportion of a farmer's costs are not directly matched with the specific amounts of income earned each day or period, but apply to future income. It is a very extended argument to accurately arrive at a valid income figure for the farming sector because the 12-month period of assessment does not coincide with most farming cycles.

There are many examples of land use which are quasi-business or not a business, or are of a pioneering nature that today could fail to be classified as a business if this omission is not corrected and such classification is left to the discretion of IRD staff. It is important to note that the technical rulings which IRD staff operate under ie "clause 51.4 BUSINESS CRITERIA" are flawed as it ignored Section CE2 and does not recognise the 1983 Court of Appeal decision Grieve v CIR which clearly set out the operation of the various Acts in this area.
Outcome: The Panel considers that there is no unintended legislative change arising in respect of the omission of section CE 2 from the ITA 2004 Act in respect of the taxation of farming.
Section 2004: DC 9(2) (Submission 036)
Section 1994: DF 10(2)
Description: Section DC 9(2) of the ITA 2004 provides that, if the seller and buyer are not associated persons at the time of the sale, (a) the seller is allowed a deduction, in the income year of the sale, for any part of the amount that remains contingent on the employee continuing in employment or any similar factor; and (b) the seller is treated under section EA 4(4) as having paid the amount at the time of sale. This is a more onerous requirement than that which is set under the 1994 Act.
Outcome: The Panel considers that there has not been an unintended legislative change in this instance.
Section 2004: CB 11(1)(iv) (Submission 038)
Section 1994: CD 1 (2)(g)
Description: The last item in the list of Section CB 11(1)(iv), "roading", contains a trailing comma unlike previous legislation where the comma on the last list item is absent. The effect of this extra comma is that the nexus with major projects is severed and each list item is now independent of the requirement to be contained within the definition of work customarily undertaken in major projects. Thus for example significant expenditure on earthworks alone is enough to be caught by this section.
Outcome: The Panel considers that there has not been an unintended legislative change in this instance.
Section 2004: CG 4 (Submission 039)
Section 1994: DJ 1
Description: Section CG 4 of the Income Tax Act 2004 treats as income amounts recovered when "the person recovers some or all of the expenditure or loss, whether through insurance, indemnity, or otherwise".
Outcome: The Panel considers that there is no unintended legislative change arising in respect of section CG 4(1) of the ITA 2004.
Section 2004: CB 5, CB 6, CB 7, CB 8, CB 9, CB 10, OD 8(4) (Submission 040)
Section 1994: CD1(2)(b) to (g), OD 8(4)
Description: The taxing provisions of CB make reference to the gross income of a person such as CB 6(1)(a)(i) "at the time person A acquired the land they…"

The definitions of taxpayer and person remain the same as those of the 1994 Act.

A taxpayer is defined in OB 1 as "a person who is, or may be liable to perform or comply with an obligation imposed by this Act".

A person is undefined for the purposes of the 2004 Act.
Outcome: The Panel considers that there was no unintended legislative change arising in respect of section CB 6(1)(a) of the ITA 2004.
Section 2004: LD (Submission 041)
Section 1994: OB 1"income year", and Part LD
Description: References to "income year" have been replaced with "tax year" which have different defined meanings. In Part LD this results in unintended changes (and may lead to withholding of credits by the Commissioner).
Outcome: The Panel considers that there has not been an unintended legislative change in this instance.

The Panel recommended that the points raised in the submission be referred to Inland Revenue's Policy Advice Division to consider as part of their review of the terms "tax year" and "income year".