2009 remedial changes to the Income Tax Act 2007 and the Income Tax Act 2004, as recommended by the Rewrite Advisory Panel.
The Act includes a number of remedial changes to the Income Tax Act 2007 and the Income Tax Act 2004, at the recommendation of the Rewrite Advisory Panel. The Panel sets out submissions for the Income Tax Act 1994 and the Tax Administration Act 1994 unintended changes on its website www.rewriteadvisory.govt.nz, along with its conclusions and recommendations for each submission.
Rewrite remedial items also include:
- minor drafting matters that have been brought to the attention of the Rewrite Advisory Panel. In general, amendments consist of corrections of ambiguities, compilation errors, cross-references, spelling, punctuation, terminology, formulas and consistency of drafting. The Rewrite Advisory Panel publishes lists of these maintenance items on its website;
- consequential amendments arising from the amendment as recommended by the Rewrite Advisory Panel and the minor drafting items referred to above.
At the time of reporting back the Income Tax Bill 2002, the Finance and Expenditure Committee expressed concern that the new, rewritten, legislation could contain unintended policy changes.
To alleviate that concern, the committee recommended that a panel of taxation specialists review any submission that rewritten income legislation contains an unintended policy change. An unintended policy change is regarded as a change in the drafting of a provision that results in a different legislative outcome from its corresponding provision in earlier income tax legislation. For example, to determine the corresponding provision for a provision in the Income Tax Act 2007, it is necessary at times to trace the legislation back to the Income Tax Act 1976, by examining the history of the provision through the Income Tax Act 2004, the Income Tax Act 1994, and the Taxation (Core Provisions) Act 1995.
The Rewrite Advisory Panel performs this review function. The process for making a submission to the Panel is set out in its statement, RAP 001 which is published on the Panel's website.
In general, the Panel considers whether a change in outcome has occurred, and then recommends that a provision:
- be amended to counter the effect of an unintended change;
- be identified in schedule 51 of the 2007 Act as an intended change; or
- remains unamended, as it contains no change in outcome when compared with its corresponding provision in the earlier Act.
The Finance and Expenditure Committee also noted in its commentary on the Income Tax Bill 2002 that there might be a situation in which:
- ...the Government of the day decides to retain the rewritten law without retrospective amendment.
The Committee went on to say:
- Such a decision would be a change in policy, and the Inland Revenue Department would be obliged to require taxpayers to meet any increased tax. The department has advised us that it intends to inform taxpayers through an appropriate publication that, in such cases, where taxpayers rely on the transitional provisions, they will be required to meet the tax obligation but will not be subject to penalties, and any use-of-money interest incurred will be remitted. The taxpayer must have taken reasonable care and adopted a reasonable tax position under the old law. We agree with this approach.
Inland Revenue has published two standard practice statements setting out how it will apply the penalty and interest rules within the context of the comments of the Finance and Expenditure committee referred to above. Those two statements are SPS 08/03, issued in relation to the 2007 Act (published in the Tax Information Bulletin Vol 20, No 10, December 2008) and SPS 05/02, issued in relation to the 2004 Act (published in the Tax Information Bulletin Vol 17, No 5, July 2005).
Unless otherwise stated, the following amendments apply from the beginning of the 2008-09 income year.
Sections 2(4), 2(10), 4, 6, 7, 9, 10, 13, 14, 16, 17, 21, 22, 26, 29, 31, 42, 44, 53 to 72, 80(1), 84, 85, 86 to 101, 104(1), 104(3), 105 to107, 110 to 113, 117, 118(4), 118(5), 118(9), 118(10 to (14), 118(18), 118(27), 118(29), 118(31), 118(32), 118(37), 119 to 121, 122(1), 122(7), 123(1), 123(4), 125, 126, 135, 149, 157, 158, 160, 161 and 164 of the Income Tax Act 2007
The Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 amends the following provisions of the Income Tax Act 2007, the Income Tax Act 2004, the Income Tax Act 1994 and the Tax Administration Act 1994.
Recommendations of the Rewrite Advisory Panel
Capital gain amount
Section CD 44(11) of the Income Tax Act 2007; section CD 33(11) of the Income Tax Act 2004
The Panel considered that section CD 44(11) could prevent a capital gain amount from passing through a corporate chain and subsequently being distributed, on liquidation of the company, to the ultimate shareholders (not being associated persons of the company).
The Panel noted that this outcome was not possible under the corresponding provisions of the 1994 Act, and that the change had occurred in drafting section CD 33(11) of the 2004 Act. Section CD 33(11) was later re-enacted as section CD 44(11) of the 2007 Act.
Section CD 44(11) (and correspondingly, section CD 33(11) of the 2004 Act) has been amended by adding a cross-reference to subsection (7). This cross-reference clarifies that section CD 44(11) does not limit the application of section CD 44(7). Section CD 44(7) permits capital gain amounts to retain their nature in passing through a corporate chain, if distributed to non-associated shareholders in the course of liquidating the company making the distribution.
The amendment to section CD 33(11) in the 2004 Act applies from the beginning of the 2005-06 income year.
Controlled foreign company carrying on business of life insurance
Section EX 21(26) of the Income Tax Act 2007 and the Income Tax Act 2004
Section EX 21(26) provides that the branch equivalent income (or loss) of a New Zealand resident relating to a controlled foreign company (CFC) carrying on the business of life insurance is the portion of the CFC's net income or net loss actuarially determined to be attributable to the New Zealand resident shareholders of the CFC.
This outcome is different from that given by the corresponding provision in the 1994 Act, section CG 11(19). Section CG 11(19) provided that the branch equivalent income (or loss) of a New Zealand resident relating to a CFC carrying on the business of life insurance would be the portion of the CFC's profit or loss actuarially determined to be attributable to the New Zealand resident shareholders of the CFC.
The amendment restores the effect of section CG 11(19) of the 1994 Act, by ensuring the branch equivalent income (or loss) is actuarially determined by reference to the accounting profit or loss of the CFC.
The amendment to section EX 21(26) in the 2004 Act applies from the beginning of the 2005-06 income year.
Qualifying companies and pre-entry loss balances
Section HA 21 of the Income Tax Act 2007
The Rewrite Advisory Panel considered that section HA 21 was ambiguous, as it could be read as requiring a company that becomes a qualifying company to extinguish its carried forward foreign tax losses only.
The policy is that on entry to the qualifying company rules, all carried forward losses of the company are extinguished.
The amendment to section HA 21 clarifies that on entry to the qualifying company regime, a company cannot carry forward any pre-existing loss balance or any carried forward losses (CFC or FIF losses).
Meaning of "settlor" and "settlement"
Sections HC 27(3) and HZ 7, schedule 51 of the Income Tax Act 2007
The rewrite of the 2004 Income Tax Act's definition of "settlor" (section OB 1) resolved an ambiguity inherent in the wording in paragraph (a)(i) of that definition. The wording of that paragraph stated that the meaning of the term "settlor" included "… a person who makes, or has made at any time, a disposition of property to or for the benefit of the trust or on the terms of the trust for less than market value".
The rewritten definition of "settlor" in section HA 27 clarifies that if a transaction increases the market value of the trustee's net assets without the trustee giving full consideration, the amount of transaction is a settlement for income tax purposes. This policy outcome is a key element of the settlor trust rules to ensure that one person cannot use a trust structure to transfer income from one person to another without an appropriate amount of taxation being paid. The 2007 Act provides a clearer expression of that policy, and the amendment to schedule 51 confirms that the 2007 Act drafting is an intended change in the legislation.
However, the Rewrite Advisory Panel considered that wording of paragraph (a)(i) of the 2004 Act's definition could be interpreted as permitting a person to take into account the market value of a third-party consideration in determining whether a settlement existed. The Panel considered that this interpretation gave rise to an unintended change in outcome in the context of salary sacrifice arrangements in relation to employee share purchase agreements. The Panel was concerned that economic double taxation would arise under the 2007 Act definition of "settlor".
For example, if a deductible employer's contribution to a trust under the terms of an employee share purchase agreement is income of the trustee, economic double taxation occurs as follows:
- to the extent the employer's contribution forms part of a taxable benefit of the employee under section CE 1(d) of the 2007 Act, the employer's contribution is subject to tax; and
- under section HC 7(3), an employer's deductible settlement on the terms of a trust is income of the trustee (under section HC 7(3)).
New section HC 27(3B) provides that an employer is not treated as a settlor in relation to contributions to an employee share purchase agreement to the extent that:
- employer contributions are used to acquire shares under that agreement; and
- an amount that is less than or equal to the employer contribution would be income of the employee under section CE 1(d).
However, the relief under new section HC 27(3B) does not apply to employer contributions made under the terms of the employee share purchase agreement, if those contributions are used by the trustee for any other purpose, such as administration costs of the trustee. Nor does this exclusion apply to employer payments made to employee share purchase schemes, for which no taxable benefit for the employee arises (ie no economic double taxation occurs).
In addition, new section HZ 7 preserves the effect of any binding rulings made in relation to the meaning of "settlement" under the 2004 Act, despite the intended change in legislation to the meaning of "settlor" in the 2007 Act.
The savings provision for these binding rulings applies only up to the date of Royal assent of the Taxation (Consequential Rate Alignment and Remedial Matters) Act. After that date, any existing binding rulings cease to apply, as provided by section 91G of the Tax Administration Act 1994.
Carrying forward attributed CFC net losses and FIF net losses
Section IQ 1B of the Income Tax Act 2007
The Rewrite Advisory Panel considered that the wording of section IQ 1(1) of the 2007 Income Tax Act is inconsistent with the statement in section IA 2(5), and IA 7(1) that sections IA 2, IA 3, and IA 4 do not apply to ring-fenced losses, including an attributed CFC net loss. The Panel concluded that this provision could be read as having the effect of preventing a taxpayer from carrying forward an attributed CFC net loss from one tax year to the next.
Sections IE 3 and IE 4 of the 2004 Act provided that attributed CFC net losses and FIF net losses would be carried forward under the general rules, but the amount able to be offset and the manner of offset was provided for in special ring-fencing rules for attributed CFC net losses and FIF net losses.
In the 2007 Act, the general loss carry-forward rules have been distinguished from the special rules relating to the carry-forward of ring-fenced tax losses, such as attributed CFC net losses. The Panel noted that subpart IQ provides for the amount and manner for the use of carried-forward attributed CFC net losses or FIF net losses, implying that both attributed CFC net losses and FIF net losses would be carried forward.
However, the Panel considered that the absence of a specific carry-forward rule was not consistent with the objective of the Rewrite project of reducing compliance costs through drafting clear legislation.
Therefore, section IQ 1 has been amended to insert section IQ 1B to provide a specific carry-forward rule for attributed CFC net losses or FIF net loss The new section also makes it clear that a company may carry forward an attributed CFC net loss of FIF net loss provided the company satisfies the shareholding continuity requirements.
Family scheme income - adjustment for depreciation recovered
Section MB 1(5C) of the Income Tax Act 2007
A person's family scheme income includes depreciation recovered from the sale of buildings to the extent the recovery relates to depreciation deductions in the 2003–04 income year or a later income year.
However, in the 2004 Act, in calculating a person's family scheme income for the purpose of the Family Scheme rules, section KD 1(1)(e)(v) of the 2004 Act made an adjustment for an amount of depreciation recovered to the extent that recovery related to depreciation deductions for buildings during the 2002-03 and earlier income years.
However, in the 2007 Act, the effect of section KD 1(1)(e)(v) was inadvertently omitted, resulting in an unintended change in legislation. New section MB 1(5C) reinstates the effect of section KD 1(1)(e)(v) of the 2004 Act to ensure that family scheme income is adjusted for depreciation recoveries relating to deduction for depreciation on buildings in the 2002-03 or earlier income years.
Memorandum accounts and breach of shareholder continuity
Section OB 41(1), (3); table O2, row 14, column 3; section OC 24(1), (3); table O4, row 13, column 3; section OE 10(1), (3); table O7, row 5, column 3; section OK 15(1), (3); table O18, row 7, column 3; section OP 42(1), (3); table O20, row 16, column 3; section OP 73(1), (3); table O22, row 11, column 3; section OP 104(1), (3); table O25, row 5, column 3 of the Income Tax Act 2007
The Rewrite Advisory Panel considered that section OB 41 of the 2007 Act had altered the time at which a breach in shareholding continuity gave rise to a debit to a company's imputation credit account (ICA). Under section ME 59(i) of the 2004 Act, the debit to the ICA for loss of continuity was at the "specified time", that is, at the time the loss of continuity occurred.
However, if a company attached imputation credits to a dividend paid on the day (but before) a breach of continuity, section ME 5(i) of the 2004 Act provided that a debit for imputation credits attached to dividends paid was to be made "on the day the dividend is paid". This concept does not provide a specific time, and it is unclear at what time during the day the debit should occur.
However, in CIR v Albany Food Warehouse Ltd (2009) 24 NZTC 23,532, the High Court found that a debit for imputation credits attached to a dividend is to be treated as being attached to the dividend at the time the dividend is paid. This decision resolved this uncertainty.
Consequently, the approach in the rewritten section OB 41 is no longer necessary. The amendment to section OB 41 and other related memorandum account rules restores the effect of the 2004 Act. As a result, all memorandum account rules now provide that the debit to a memorandum account for a breach of shareholding continuity occurs at the time of the breach.
Resident withholding tax - reasonable enquiries test
Section RE 22 of the Income Tax Act 2007
The Rewrite Advisory Panel considered that section RE 22 prevented a payer of resident passive income from relying on a "reasonable enquiries" argument that the payer was not required to withhold resident withholding tax (RWT).
The Panel agreed that section RE 22, as drafted, required the recipient to be a non-resident of New Zealand (section RE 22(1)(a)). The Panel concluded that the "non-resident requirement" is inconsistent with the corresponding provision, section NF 5 of the 2004 Act.
Section NF 5 of the 2007 Act provided that if a payer of resident passive income who has made "reasonable enquiries" about the residency status of the recipient, and concluded that the payer is non-resident, the payer is not required to withhold RWT. If it is subsequently determined that, despite the reasonable enquires, the recipient is resident in New Zealand, the payer can rely on the "reasonable enquires" defence against any imposition of RWT, penalties and interest.
The amendments to section RE 22 restore the effect given by section NF 5 of the 2004 Act.
Withholding taxes and dividend arising under section GB 1
Sections RE 2(5)(i), RF 6(1B), YA 1 and schedule 51 of the Income Tax Act 2007
The Panel considered that it was unclear in the 2004 Act whether the resident withholding tax (RWT) rules or the non-resident withholding tax (NRWT) rules applied to a dividend arising under section GB 1. The Panel noted that the rewritten section GB 1 in the 2007 Act had clarified that the dividend arising was to be treated as part of the consideration paid for the shares.
The amendment to schedule 51 confirms that the rewritten section GB 1, which provides that the dividend arising is treated as part of the consideration paid for the shares, is an intended legislative change.
In addition, the Finance and Expenditure Committee noted that there are practical difficulties in applying the RWT and NRWT rules to the company distributing the dividend, for the following reasons:
- The company treated as paying the dividend may not have knowledge of the circumstances of the person treated as deriving the section GB 1(3) dividend.
- Other dividends arising under other part G rules that are treated as dividends paid, for which a payer can be identified are explicitly excluded from the resident withholding tax rules.
Therefore, the committee recommended that the RWT and NRWT rules should be amended to ensure that the RWT and NRWT rules not apply to a dividend arising under section GB 1. These amendments are reflected in sections RE 2(5)(j) and RF 6(1B).
The definition of "dividend" has also been amended to ensure that:
- the amount of the dividend does not affect the determination of the ratios for the benchmark dividend rules;
- the paying company is not required to issue retrospectively, a shareholder dividend statement; and
- the paying company is not able to attach imputation credits (or other memorandum account credits) to the section GB 1(3) dividend.
The amendment to the definition of "dividend" in section YA 1 is consistent with the policy of the imputation rules that imputation credits cannot be streamed to any particular shareholder, and ensures that the taxation obligation for a section GB 1(3) dividend is imposed entirely on the recipient of the dividend.
However, the person treating as deriving the dividend remains liable for the tax on a dividend arising under section GB 1, under normal assessment processes.
Non-resident withholding tax and the definition of "natural resource"
Section RF 1(2) of the Income Tax Act 2007
The 2007 Act contains a new definition of "natural resource". This term is used extensively in New Zealand's network of double taxation agreements and was undefined in the 2004 Act. The new definition was made in line with the rewrite objective of reducing compliance costs by providing clear legislation. Consequently, the defined term "natural resource" is listed, in schedule 51 of the 2007 Act, as an intended change in legislation.
The new definition of "natural resource" includes land. The Panel considered that, by implication, the exploitation of land would fall within the meaning of "royalty" as an exploitation of a natural resource, and that the new definition may have broadened the application of the non-resident withholding tax rules. An example given was a payment for the right to use an easement, which if paid to a non-resident, would now be subject to non-resident withholding tax.
The new definition of "natural resource" was not intended to be so broad that it would cause amounts derived from rights over land that are no more than a rental stream being subject to non-resident withholding tax.
The amendment to section RF 1(2) clarifies that amounts paid in relation to the exploitation of land (including rights over land) is subject to non-resident withholding tax only if the amounts paid are for either or both of:
- the exploitation of, or right to exploit, plant material or a naturally occurring material or mineral arising in or on the land; or
- the removal of, or right to remove, plant material or a naturally occurring material or mineral arising in or on the land.
The amendments to section RF 1(2) ensure that payments for the use or exploitation of land not of a type listed in section RF 1(2) are not subject to non-resident withholding tax.
Section YB 21(2) of the Income Tax Act 2007
The Rewrite Advisory Panel considered that the meaning of "nominee" in section YB 21 is not sufficiently clear that the term "nominee" includes (for income tax purposes) a person who, although not a nominee at general law, makes a nominal settlement on behalf of another person. The Panel considered that as the definition of "nominee" was not sufficiently clear, the person making a nominal settlement could be treated as a settlor in relation to the nominal settlement, rather than as a nominee.
New section YB 21(3) clarifies that a person making a nominal settlement on behalf of another person is a nominee in relation to the settlement. The amendment ensures when applying section YB 21(1), the principal is treated as the person making the settlement, and not the person making the nominal settlement.
Simplified method for measuring FIF income interests
Section EX 49(6) of the Income Tax Act 2007; section EX 42(5) of the Income Tax Act 2004
Section CG 20(2) of the 1994 Act permitted a person holding FIF interests and using the accounting profits method to calculate the FIF income for their FIF interests to elect to use a simplified method of calculating their income interest in the FIF.
To make the election, the taxpayer was required to meet two requirements. First, the election under section CG 20(2) was only permitted if the FIF interest had been held for at least 12 months. Secondly, the election was to be made for the tax year in which the interest was acquired. As the two requirements were in conflict, in rewriting section CG 20(2) as section 42(5) of the 2004 Act, the requirements were reduced to requiring only that the election be made in relation to a tax year.
The amendment to section EX 42(5) of the 2004 Act and section EX 49(6) of the 2007 Act restores the original policy intention. The original policy intention is that a person using the accounting profits method of calculating FIF income can elect to use a simplified method for measuring the person's income interests in a FIF only if the person has held that income interest for at least 12 months. The election continues to be made by using the simplified method in the person's return of income.
The amendment to the 2004 Act applies from the 2005-06 income year.
Rate of tax for extra pay
Section RD 17(1), (1B) of the Income Tax Act 2007
An amendment to section RD 17(1) and (1B) removes an ambiguity from the provision. Previously, it was possible to read the section as requiring the amount of the extra pay to be counted twice in determining the correct rate of tax to apply to the extra pay.
In section NC 2(5) of the 2004 Act, it was clear that the rate of tax was determined by adding the amount of the extra pay to the annualised amount of all other PAYE income payments received by the person in the four-week period before payment of the extra pay amount.
The amendment to section RD 17(1) and (1B) makes it clear that the employer must determine the rate of tax to apply to the extra pay using the following steps:
- determine the actual amount of the extra pay;
- annualise the aggregate amount of all other types of PAYE income payments (other than the extra pay) during the four-week period before the date the extra pay is paid; and
- add the amount of the extra pay to the annualised amount, and then determine the rate of tax from the application of subsections (2) or (3) of section RD 17.
Other maintenance items
The following maintenance items, most of which come into force on 1 April 2008, have been amended to correct:
- compilation errors
- drafting consistency, including readers' aids, for example, the defined terms lists
- some defined terms
- subsequent amendments arising from substantive rewrite amendments
- terminology and definitions.
These items relate to the following provisions:
Flow chart B2; section CF 1(2)(a), (b); section CZ 9B; section DB 2(2); section DC 14(4); section DP 10(5); section DS 1(2); section DU 2(2)(a); section EW 43(1); section EW 49(1); section EX 32(1)(f); section IA 2(2), (4)(b) to (g), (6), (7); section IA 3(5); section IA 4(1)(b), (2); section IA 5(1), (4), (6); section IA 6(1); section IA 7(1B), (2), (6); section IQ 1(1); section IQ 2(1)(a), (b), (2)(b); section IQ 3((1)(a), (b); section IQ 4(1)(a), (b), (2), (3); section IQ 6(1); section IQ 7(1)(a), (b), (2)(a), (b); section IQ 8(1), (2)(a); section IS 1 (heading), (2), (3); section IS 2(1)(a), (b), (2), (4), (5); section IS 3(1)(a); section IS 5(2); section IT 1(1), (1B), (1C), (2B); section LP 8(2); section OA 18(3); section OB 4(3)(c); section RA 2 compare note; section RE 1(1)(c); section RF 3; section YA 1, definition of employer monthly schedule, paragraph (k); section YA 1, definition of lease, paragraph (f)(ii); section YA 1, definition of lessee, paragraphs (a), (b); section YA 1, definition of lessor, paragraphs (a), (b); section YA 1, definition of loss balance; section YA 1, definition of net mining loss; section YA 1, definition of PIE rules; section YA 1, definition of RWT proxy; section YA 1, definition of share purchase agreement; section YA 1, definition of tax loss; Section YA 1, definition of taxable distribution; section YA 1, definition of timber; section YB 1(8); section YB 14(1); schedule 1, part D, clauses 3 to 6; schedule 2, part A, clause 2; defined terms lists, as amended by schedule 1 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009
Section ME 4(1)(a)(ii)
Section ME 4(1)(a)(ii)
Tax Administration Act 1994