Introduction and summary of the act
Income Tax Act 2007 - introduction and summary of the Act.
The Income Tax Act 2007, which received Royal assent on 1 November 2007, represents the fourth and final stage in the rewrite of income tax legislation using plain drafting techniques. The bill was introduced on 15 November 2006 and had its first reading on 23 November.
The Finance and Expenditure Committee reported the bill back to Parliament on 16 July 2007. The second reading and committee stages took place in August and the third reading on 25 October. It was the last bill referred to the Governor-General for signature by long-serving Clerk of the House, David McGee QC. It was also the largest bill to be passed by Parliament.
The Act rewrites Parts F to Y of the 2004 Act as well as the schedules to that Act. It also makes consequential amendments to Parts A to E to highlight the relationship between provisions in Parts F to Y with the core provisions, and to move income rules to Part C, deduction rules to Part D, and timing rules to Part E.
The rewriting of these provisions is not intended generally to change the effect of the law. However, there are a few exceptions to this general position, and these are listed as intended legislative changes in Schedule 51.
As the 2007 Act represents the final stage of the rewrite project, this Tax Information Bulletin:
- outlines the main aspects of the Act's scheme, purpose, and structure;
- explains the main consequential amendments to Parts A to E;
- outlines the main drafting improvements in Parts F to R and the schedules;
- outlines the intended legislative changes occurring in each Part;
- summarises the general approach to drafting in the 2007 Act; and
- outlines how the drafting style provides a consistent framework expected to be followed in the drafting of future legislation.
Summary of general structure of the Act
|Parts A and B||A list of taxes and other obligations imposed on a person |
A general scheme and structure that enables people to determine and satisfy their income tax and other obligations
Comprehensive linkages to other Parts that contain the detailed rules
|Part C||An exhaustive list of provisions that state the circumstances in which a transaction or other event gives rise to income|
|Part D||An exhaustive list of general and specific provisions that state the circumstances in which a person has a deduction for an expenditure or loss, including a loss in value, arising from a transaction or event|
|Part E||A list of provisions that modify the general timing rules of derived (for income) and incurred (for expenditure or a loss) amounts and, in a number of cases, quantify that timed amount|
|Part F||A recharacterisation of the outcome of certain transactions for income tax purposes|
|Part G||Avoidance and valuation matters|
|Part H||How certain entities must determine and account for their tax obligations|
|Part I||How tax losses may be used|
The loss grouping rules for groups of companies
|Part L||How a tax credit is used to satisfy a person's income tax liability|
|Part M||How tax credits are paid to persons entitled to particular tax credits|
|Part O||Rules for credit and debit accounts|
|Part R||Rules related to the payment, collection, and refunds of taxes and other payment obligations|
|Part Y||An index of defined terms, as well as the meaning of defined terms that apply across the Act|
|Part Z||Transitional provisions and some savings provisions|
|Schedules||Detailed lists of items relevant to determining a person's income tax liability|
The Income Tax Act 2007 applies from the first day of the 2008-09 tax year or the first day of the corresponding income year of a person who has a tax balance date other than 31 March.
History of the rewrite process
New Zealand's income tax legislation dates back to 1891. Since then, the legislation has significantly expanded the concept of "income tax" to keep pace with the changing nature of income-earning activities in New Zealand. Although income tax legislation was recast several times during the twentieth century, it was not until the 1990s that it was comprehensively reviewed from a structural and presentational perspective.
Various bodies and officials prepared reports and papers that discussed rewriting the income tax legislation, including:
- the Consultative Committee on the Taxation of Income from Capital (the "Valabh Committee");
- the Working Party on the Reorganisation of the Income Tax Act 1976; and
- the Organisational Review of the Inland Revenue Department.
These groups highlighted various weaknesses in the numbering, formatting and reorganisation of the legislation. Problems included:
- failure of the core provisions to integrate with each other and with the rest of the legislation;
- the difficulty of discerning the scheme and purpose of the legislation;
- a lack of logic in both the structure of the legislation and the ordering of some sections;
- the lack of organisation of the legislation and its failure to reflect adequately the legislation's role of quantifying taxable income, imposing a tax liability on that income, and setting out a process of assessment and collection; and
- the inconsistent drafting style and presence of redundant wording, cumbersome sections and repetitive provisions.
These reviews led to the establishment of the project to rewrite the Income Tax Act. The project's first stage was the re-ordering and renumbering of the Income Tax Act 1976, and the subsequent enactment of the 1994 Act and the Tax Administration Act 1994.
The 1994 Act organised the legislation into parts that were structured around a set of core provisions, using an alphanumeric system. There was some consolidation of material by topic, and the definitions were brought together in one section.
The next stage was the rewrite of the Core Provisions Act, which led to the enactment of the Taxation (Core Provisions) Act 1996. The rewritten core provisions contain a clear conceptual scheme for the Act, based on the transactional approach to taxation. This scheme is also integrated with the assessment rules in the Tax Administration Act 1994. This framework is not expected to be disturbed in the future unless structural changes arise out of a review of the entire scheme of the Act.
The 2004 Act contained the rewritten Parts C to E. The main objective was to integrate the income, deduction and timing rules with the framework set out in the core provisions.
Some minor adjustments were made to the core provisions to clarify some aspects of those rules - for example, the development of a structure for the concept of "assessable income". Another key adjustment was the identification of the relationship between each specific deduction rule and both the general permission and the general limitations rules.
Objective of the rewrite project
The rewrite project has consistently focused on the primary aim to produce legislation that clearly and unambiguously states the underlying policy. This objective is regarded as integral to reducing compliance and administrative costs and increasing voluntary compliance with the tax law.
Independent studies were commissioned to examine the readability of the 2004 Act by comparing provisions of the 2004 Act with their corresponding rule in the 1994 Act. The results of these studies generally concluded that provisions in the 2004 Act are easier to read and understand than their corresponding provisions in the 1994 Act.
During the drafting, and in line with New Zealand's generic tax policy process, extensive consultation occurred with specialists within and outside Inland Revenue. The New Zealand Institute of Chartered Accountants and the New Zealand Law Society also made a significant contribution during the consultation and drafting process.
Consultation occurred at several points during the drafting of the Act:
- before and after the release of Inland Revenue's exposure drafts of legislation for Parts F to N of the 2004 Act;
- before the introduction of the Income Tax Bill 2006 in November 2006;
- during submissions and consideration of the bill by the Finance and Expenditure Committee; and
- after the select committee reported back the bill, but before its second reading.
This process was intended to provide assurance that the provisions in the 2007 Act have the same outcomes as those of the 2004 Act, unless a change in outcome is intended and listed in Schedule 51. The government has indicated that it will promote a remedial amendment to correct any provision in the new Act which is found to produce a different result from the outcome under the corresponding provision in the 2004 Act. This process will not apply when an intended change in outcome is noted in Schedule 51. Consultation was also undertaken on the manner of enacting the rewritten provisions. The options for the bill were to:
- amend the 2004 Act by replacing Parts F to the end of the Act with rewritten Parts; or
- produce a new Act containing rewritten Parts F to the end of the Act, including the schedules and consolidated parts A to E.
The second option was preferred in submissions and was supported by the Rewrite Advisory Panel mainly because it minimised confusion over the numbering of sections.
For example, the differences between the two options can be compared by reference to section FC 1 of the 2004 Act. This section is about the tax treatment of profit-related debentures. In the 2007 Act, the subject matter of section FC 1 is quite different from the content of section FC 1 of the 2004 Act. In the 2007 Act, section FC1 describes the operation of subpart FC, which is about the income tax treatment of transfers of certain property on death. Therefore, if the option to amend the 2004 Act had been chosen, readers would have needed to distinguish between two provisions bearing the same reference in the 2004 Act. In referring to section FC 1, a reader would need to make it clear whether the reference was to section FC 1 of the Act before it was amended or section FC 1 of the Act as inserted by the amendment.
Taking the option of a new Income Tax Act meant that readers can identify the provision in this example as section FC 1 of the Income Tax Act 2004 or section FA 2 of the Income Tax Act 2007.
Erroneous interpretations of provisions in the Act
Taxpayers should continue to have regard to the comments of the select committee in its commentary in reporting back the Income Tax Bill 2002 (Income Tax Act 2004). These comments are likely to be equally relevant to the 2007 Act.
In particular, the committee noted at that time, that there was a:
"... risk that some practitioners, having previously misinterpreted some provisions in the old Act, may fail to realise that the rewrite Act clarifies the correct interpretation that applies to those provisions, and continue to apply their erroneous interpretation to the new Act. Such a situation should be minimised as far as possible, and we therefore encourage the Inland Revenue Department to undertake an education programme to inform practitioners that they cannot necessarily rely on their current understanding of the law, and should actively check the provisions contained in the new Act."
This statement remains relevant, as it is clear fromthe commencement and transitional provisions that Parliament intends that readers discern the meaning of aprovision using the normal rules of interpretation.
Transition from the 2004 Act to the 2007 Act
he transitional provisions provide that the 2004 Act may be used as an interpretive guide to the 2007 Act, but only in limited circumstances. The 2007 Act is not intended to contain any changes in policy unless such a change is signalled in Schedule 51.
Reference to the provisions of the 2004 Act will not be required unless either of the following situations arise:
- A provision in the 2007 Act is unclear or leads to an absurdity. In this situation, section ZA 1 ensures that the 2004 Act and associated case law are to be used as the key authoritative interpretive guide.
- A clearly stated provision in the 2007 Act is compared with the corresponding provision and the 2004 Act to determine if that provision contains an unintended policy change. In this situation, the non-legislative process established for the 2004 Act facilitates a review of the factual situation raised and, if necessary, provides for a recommendation to the government for a remedial retrospective legislative change. This process is administered by the Rewrite Advisory Panel, headed by the Rt Hon Sir Ivor Richardson, former President of the Court of Appeal.
Impact on other legislation
The 2007 Act repeals the 2004 Act, but only in relation to tax on income derived in the 2008-09 and later tax years (sections A 2(2) and ZA 1(2)). The 2007 Act also makes consequential amendments to the Tax Administration Act 1994 (Schedule 50) and many other Acts of Parliament (Schedule 49).
The short title and commencement provisions located before Part A and the core provisions in Parts A and B have some consequential but minor changes. These provisions also draw the reader's attention to reliance on concepts contained in the Interpretation Act 1999.
The overall operation of the core provisions is not altered by the 2007 Act. However, a working knowledge of the core provisions and their relationships to the rewritten provisions is fundamental to understanding the scheme and purpose of the Act and the way in which Parts F to R support the operation of the core provisions.
In addition, a number of other improvements to the Act have been made, including:
- the signposting in Part I of all loss rules located in other Parts of the Act;
- the signposting in Part L of all tax credit rules relating to the satisfaction of a person's income tax liability that are located in other Parts of the Act;
- requiring tax withheld at source on prepaid income to be spread forward and matched with the timing of the income;
- the use of tables to provide quicker access to the memorandum account rules;
- the consolidation of the Income Tax (Withholding Payments) Regulations into the PAYE rules in Part R;
- providing for a consistent use of a balance date approach to business rules when transactions affect more than one income year;
- when appropriate, rules relating to particular types of entities or transactions are grouped together rather than being split between Parts F and H - for example, the collection of the consolidated company rules into subpart FM;
- the omission of redundant rules - for example, sections CY 1, DY 1 and DY 2 of the 2004 Act; and
- rationalising provisions that perform similar functions - for example, section OA 7, where a number of common rules deal with the treatment of opening and closing balances of memorandum accounts.
Policy changes and obsolete provisions
All intended changes giving a change in legislative outcome are listed in Schedule 51. These intended changes typically involve clarifications of existing policy where the rules contained an ambiguity that required resolution as part of the rewrite process.
Provisions in the 2004 Act that have also become unnecessary or obsolete have been omitted from the rewritten Act. Schedule 52 identifies these omissions, many of which were located in the "Z" subparts of Parts C, D and E of the 2004 Act.
General principles used in rewrite drafting
The principles used are:
- organising the material from the general to the specific, and using general rules to perform a pivotal role to provide links to the core provisions;
- starting Parts, subparts and sections with more widely used rules and concluding with less widely used rules;
- grouping provisions performing similar functions or having similar subject matter to provide the reader with the relevant context;
- reducing repetition by applying common sets of rules to minimise overlap;
- limiting the subject matter of each section to a single concept;
- adopting a plain language approach;
- using a consistent format to aid accessibility by improving the flow of text.
In general, the drafting approach has been to use subpart A in each Part to provide a link to the core provisions if the Part as a whole supports the operation of the core provisions. This is most evident in Parts I, L, M and R. Parts E to G do not lend themselves to this approach as they focus on a range of transactions or entities which have an effect on the operation of Parts C or D, and sometimes subpart BC in determining a person's schedular income tax liability.
The main drafting changes made in rewriting Parts F to N of the 2004 Act relate mainly to structural relationships, are relatively minor, and are intended to improve the legislation. They fall into five main types:
- the modernisation of the style and language, including the use of tables - for example in Part O to improve access to the memorandum account rules;
- the use of defined terms that capture their subject matter more closely, which has led to changes to some recognised terms (see Table 1);
- the use of acronyms to shorten sentences by minimising long compound phrases as defined terms and to reflect common practice (see Table 2);
- the improvement in the clarity of the law; and
- the removal of redundant material moving some provisions to other Parts of the Act.
Table 1 - Some changes in terminology
|Term||Formerly or now||Primary location|
|Additional income tax||now "imputation additional tax"||OB 71, OB 72|
|Ancillary tax, excluded ancillary tax||new terms|
|Association rebate||use limited to mutual associations||subpart HE|
|Allowable rebate/rebate||now "tax credit"||Parts B and L|
|Basic tax deduction||now "amount of tax" (deduction is used only as a Part D concept)|
|Basic rates||now "basic tax rate"|
|Car||term incorporates old definition of "motorcar"||EZ 16 and FBT rules|
|Certificate of entitlement||now "notice of entitlement"||TAA mainly|
|Charitable or other public benefit gift||formerly "gift of money"||subpart LD|
|Complying trust||formerly "qualifying trust"||subpart HC|
|CTR||acronym - conduit tax relief (also used as a prefix for credit etc)|
|Dividend withholding payment||now "FDP (foreign dividend payment)", prefix used for linked terms|
|Dividend withholding payment deduction||now referred to as a "payment for a foreign dividend"|
|Employer's superannuation contribution||formerly "specified superannuation contribution"|
|Entitlement period||formerly "eligible period"||MC 11|
|ESCT||acronym - employer's superannuation contribution tax, previously SSCWT|
|Family assistance credit||now "abating WFF tax credit (Working for Families tax credit)"||Part M|
|Family support||now "family tax credit"||Part M|
|Family support and family plus||now "WFF tax credit"||Part M|
|Family tax credit||now "minimum family tax credit"||Part M|
|FDP||acronym - foreign dividend payment (also used as a prefix for credit etc)|
|First payment period, second payment period||formerly "first/second PAYE period" (the term "PAYE period" is retained in the TAA)< TD>||Part R, wider term required|
|Foreign dividend||formerly "foreign withholding payment dividend"||RG 2|
|Further FDP||formerly "further dividend withholding payment"||OC 30 to OC 34|
|ICA||acronym - imputation credit account (also used as a prefix for company)|
|Imputation year||now removed, same as tax year|
|In-work tax payment||now "in-work tax credit"||Part M|
|Listed PAYE intermediary claim form||replaced by "subsidy claim form"|
|Memorandum account||new general term for credit and debit accounts||Part O|
|Monthly remittance certificate||now "PAYE income payment form" (see "remittance certificate")|
|New provisional taxpayer||replaced by "person with initial provisional tax liability"||subpart RC|
|Non-complying trust||formerly "non-qualifying trust"||subpart HC|
|Non-resident passive income||formerly "non-resident withholding income"|
|NRWT||formerly "non-resident withholding tax"|
|PAYE income payment||formerly "source deduction payment"||subpart RD|
|PAYE income payment form||formerly "remittance certificate"|
|First/second PAYE period||now "first/second payment period" (the term "PAYE period" is retained in the TAA)||Part R, wider term required|
|PCA||acronym - policyholder credit account (also used as a prefix for credit etc)|
|Prepaid expenditure||formerly "accrual expenditure"||EA 3|
|Public unit trust||formerly "qualifying unit trust"|
|Qualifying amalgamation||now "resident's restricted amalgamation"|
|Qualifying trust||now "complying trust"||subpart HC|
|Qualifying unit trust||now "public unit trust"|
|Rebate||term removed (apart from use as association rebate) now "tax credit"|
|Refundable tax credit||formerly "refundable rebate"|
|Relationship period||formerly "specified period"||MC 11|
|Resident passive income||formerly "resident withholding income"|
|Resident's restricted amalgamation||formerly "qualifying amalgamation"|
|RWT||formerly "resident withholding tax"|
|RWT withholding certificate||formerly"resident withholding tax deduction certificate"||TAA section 25|
|Schedular income subject to final withholding||term absorbed into definition of "schedular income"|
|Schedular payment||formerly "withholding payment"||RD 8|
|Selected period||formerly "elected period"||MF 1|
|Small-business person||formerly "small-business taxpayer"||RC 40|
|Source deduction payment||now "PAYE income payment"||subpart RD|
|Specified superannuation contribution||now "employer's superannuation contribution"|
|Subsidy claim form||formerly listed PAYE intermediary claim form|
|Supplementary dividend holding company||formerly " section LE 3 holding company"|
|WFF tax credit||formerly "family support" and "family plus/family assistance credit"||Part M|
All acronyms are listed as defined terms in section YA 1. Some acronyms are in common usage (for example, GST, PAYE and FBT). Others have a more specialist flavour (for example, NRWT, RWT, CFC, FIF, LAQC, UFTC, ASC and BETA).
The remaining acronyms mostly relate to the memorandum accounts (ASCA, CTRA, FDPA and MACA), where use of an acronym is logical and its use limited in practice. In the case of CTR, ESCT and FDP there is a new or changed acronym.
Table 2 - Acronyms and their meaning
|ASC||available subscribed capital|
|ASCA||available subscribed capital account|
|BETA||branch equivalent tax account|
|CFC||controlled foreign company|
|CTR||conduit tax relief|
|CTRA||conduit tax relief account|
|ESCT||employer's superannuation contribution tax|
|FBT||fringe benefit tax|
|FDP||foreign dividend payment|
|FDPA||foreign dividend payment account|
|FIF||foreign investment fund|
|GST||goods and services tax|
|ICA||imputation credit account|
|LAQC||loss-attributing qualifying company|
|MACA||Maori authority credit account|
|NRWT||non-resident withholding tax|
|PCA||policyholder credit account|
|RWT||resident withholding tax|
|UFTC||underlying foreign tax credit|
Terminating provisions are placed in a separate "Z" subpart at the end of each Part. This continues the practice used in the 2004 Act, but the contents of each subpart have been reviewed and spent provisions or provisions having little future relevance have been omitted. The omission of any of these provisions does not remove their application to relevant past situations. Provisions in the 2004 Act that are omitted from the 2007 Act can be identified by referring to Schedule 52, part A.