Commentary on parts of the act - C to E
Commentary on parts C to E of the Income Tax Act 2007.
Parts C, D, and E (rewritten in the 2004 Act)
The importance of Parts C, D and E as a group is that together they provide the details that enable taxpayers to calculate their income tax liability for a tax year, as required by the core provisions. (For a full commentary on these Parts, see the commentary to the Income Tax Act 2004 in the June 2004 issue of the Tax Information Bulletin).
As a number of insertions have been made into Parts C, D and E since enactment of the 2004 Act, the new Act has required the renumbering of these three Parts.
Income and deduction provisions located in Parts F to N of the 2004 Act have been rewritten as new income provisions in Part C and deduction provisions in Part D. This drafting approach reflects the underlying policy that Part C is an exhaustive list of what is "income" and Part D is a complete list of what is "allowed as a deduction".
- the income and deduction rules for finance leases and consolidated groups of companies;
- section HF 1, which provides that all income derived by a mutual association is income of the association, overriding the principle of mutuality; section HF 1(1) in the 2004 Act has been rewritten as section CB 33, and this provision is signposted in section HE 1;
- sections CV 16, CV 17 and DW 3 in the 2007 Act (relating to non-resident shippers and film renters) are the new location for the operative aspects of sections FC 18 to FC 21 of the 2004 Act;
- section CB 2 (which relates to amounts received on disposal of business assets that include trading stock);
- sections CC 11 to CC 13 (which relate to finance leases and hire purchase agreements);
- section CD 11 (which relates to various avoidance arrangements);
- section DB 10 (which relates to profit-related or substituting debentures); and
- sections DB 57 to DB 59, and DC 5 (which relate to various avoidance arrangements).
The insertion has been made either in an existing rule or as a new section that has an overriding effect on the related rule. No change in outcome is intended.
This has meant that sections CW 44, CX 45, CY 1 and DY 1 of the 2004 Act have been omitted as no longer necessary.
The functions of Part C are:
- to provide an exhaustive list of what is income for income tax purposes;
- to identify the taxpayer to whom the income belongs;
- to provide a catchall provision in section CA 1(2) to pick up any amounts outside these other categories that would be income under ordinary concepts; and
- to define amounts that would be income but may, nevertheless, be exempted or excluded from being included in the calculation of the person's income tax liability.
If an amount arising from a transaction is not income under Part C, that amount does not fall within the scope. An example would be a capital gain arising from the sale of a private residence that does not fall within the land sales rules in subpart CB. This is illustrated in the diagram outlining the process of calculating and satisfying income tax liabilities set out in subpart BC.
A key principle is that, under Part C, income is a global or gross concept that does not depend on the concepts of time, source or residence. However, a specific provision in Part C may take into account the concepts of source or residence as a parameter in determining whether an amount is income. An example in the 2007 Act where residence is relevant to the determination of income is section CQ 2(1)(d) (Attributed CFC income).
An amount of exempt or excluded income may be subject to another form of tax obligation imposed under section BB 2. Generally, the provision signals the linkage to the obligation. For example, section CW 9(2) states that the FDP rules apply to this exempt dividend. This gives a clear signal that, despite the exempt nature of the dividend, a tax obligation remains in relation to the exempt dividend.
The purpose of Part D is to provide a legislative code of when an amount is a deduction. Subpart DA sets out some general rules for deductibility of expenditure or loss.
The legislation has a general deductibility rule, the general permission, which is set out in section DA 1. The rules in section DA 2 Act are general limitations to the general permission.
Section DA 3 sets out the legislative relationship between the specific rules and the general rules. Section DA 4 is a special provision that clarifies at an early stage the relationship between a deduction for an amount of depreciation loss and the capital limitation.
As a consequence of rewriting Parts F to N of the 2004 Act, a number of new deduction provisions provide for rules that were previously set out in a Part other than Part D. For example, in the 2004 Act, sections HF 1(3) and (4) provided a deduction for mutual association rebates. This provision has been rewritten as section DV 19 and signposted in section HE 1, both in the 2007Act.
In the absence of specific timing rules, the core provisions timing rules (sections BD 3 and BD 4) provide for timing to be determined on the basis of when income is "derived" or expenditure is "incurred". Sections BD 3 and BD 4 state that the meaning of "derived" and "incurred" will continue to be determined by case law.
Part E is the location for sets of rules that have a predominant focus on matching or allocation. These rules apply where the policy is to provide a timing result that differs from the result arising from the time at which income is "derived" or expenditure or loss is "incurred".
The most significant specific timing rules are:
- revenue account property, section EA 2 (Other revenue account property);
- accrual expenditure, section EA 3 (Prepayments);
- depreciation (subpart EE);
- the financial arrangement rules (subpart EW) and the old financial arrangement rules in sectionsEZ30 to EZ 49; and
- valuation of trading stock, livestock and bloodstock (section EA 1 and subparts EB, EC and ED).
Not every element of a specific provision that has a timing aspect been shifted to Part E. A simple ancillary rule that clarifies when an amount is derived or incurred remains with the substantive provision creating the income or deduction. From a reader's perspective, to shift an ancillary rule would provide little benefit.
In addition to the rules on depreciable assets, trading stock and revenue account property, Part E also covers areas within which the timing, income and deduction rules cannot easily be separated, such as the accrual rules, the international rules and many of the life insurance rules.