2014 legislative amendments from the Rewrite Advisory Panel including recovery of dividends, foreign-sourced income, and more.

The following amendments reflect the recommendations of the Rewrite Advisory Panel following its consideration of submissions on the rewritten Income Tax Acts.

The Panel monitors the working of the Income Tax Act 2007 and reviews submissions on what may be unintended changes in the law as a result of its having been rewritten. The Panel recommends legislative action, when necessary, to correct any problems.

Requirement to amend assessments on recovery of dividends from shareholders

Section CD 40 of the Income Tax Act 2007 and section CD 29 of the Income Tax Act 2004

Section CD 40 of the Income Tax Act 2007 and section CD 29 of the Income Tax Act 2004 provide that, if a company recovers a dividend from its shareholders, section 113B of the Tax Administration Act requires the Commissioner to amend the following:

  • any income tax assessment and foreign dividend payment assessment of a shareholder to ensure that the dividend and any imputation or foreign dividend payment credit previously attached to the now-recovered dividend are disregarded; and
  • any assessment of the company made under the imputation rules, the non-resident withholding tax rules, the resident withholding tax rules or under the supplementary dividend rules in subpart LP. This ensures that the dividend and any imputation or foreign dividend payment credit previously attached to the now-recovered dividend are disregarded.

Application dates

The amendment to section CD 40 of the Income Tax Act 2007 applies from the beginning of the 2008-09 income year.

The amendment to section CD 29 of the Income Tax Act 2004 applies from the beginning of the 2005-06 income year.

Background

A submission made to the Rewrite Advisory Panel (the Panel) that the cross-reference from section CD 29 of the Income Tax Act 2004 to section 113B of the Tax Administration Act 1994 contained an unintended change in outcome. The submission was that after enactment of the Income Tax Act 2004, this cross-reference to section 113B no longer requires the Commissioner to amend an assessment of a company's imputation credit account on the company recovering a dividend from its shareholders.

If a company recovers a dividend from its shareholders and notifies the Commissioner that the dividend has been recovered, the intention is that the Commissioner is obliged to amend any assessment to disregard that recovered dividend.

The Panel considered that the correct outcome could be obtained by relying on the transitional provisions in section YA 3. However, the Panel considered it should be unnecessary to rely on the transitional provisions in section YA 3 and that the legislation should be more clearly drafted.

This issue also arises in the linkage between section CD 40 of the Income Tax Act 2007 and section 113B of the Tax Administration Act 1994, resulting in a similar amendment being made to section CD 40.

Option to use foreign tax balance date

Sections EG 1 of the Income Tax Act 2007 and Income Tax Act 2004

Section EG 1 provides that New Zealand-resident taxpayers may elect to include foreign-sourced income (apart from interest, dividends and foreign investment fund income) in the tax year in which the taxpayer's balance date in the overseas jurisdiction falls.

Application dates

The amendment to section EG 1 of the Income Tax Act 2007 applies from the beginning of the 2008-09 income year.

The amendment to section EG 1 of the Income Tax Act 2004 applies from the beginning of the 2005-06 income year.

Background

The amendment arises from a submission to the Rewrite Advisory Panel that section EG 1 of the Income Tax Act 2004 does not permit a taxpayer to elect to include foreign-sourced income (apart from interest, dividends and foreign investment fund income) in the tax year in which the taxpayer's balance date in the overseas jurisdiction falls. The submission noted that this election was permitted in the corresponding provision (section EP 1) of the Income Tax Act 1994. The Panel agreed with the submission.

Foreign company - meaning of direct control interest

Sections EX 5(1)(c) and (d), EX 9(1)(c), (d) of the Income Tax Act 2007 and Income Tax Act 2004

Section EX 5(1)(c) and (d) in both the Income Tax Act 2004 and the Income Tax Act 2007 provide that a direct control interest does not include interests of a person in a foreign company if that person is not entitled to the income or assets and is prohibited from applying the same for their own benefit or interest.

Consequentially, section EX 9(1)(c) and (d) of both Acts are also amended.

Application dates

The amendments to sections EX 5(1) and EX 9(1) of the Income Tax Act 2007 apply from the beginning of the 2008-09 income year.

The amendments to sections EX 5(1) and EX 9(1) of the Income Tax Act 2004 apply from the beginning of the 2005-06 income year.

Background

The Panel considered a submission that section EX 5 in both the Income Tax Act 2004 and the Income Tax Act 2007 contained an unintended change concerning the calculation of control interests to determine whether a foreign company is a controlled foreign company under the international tax rules. Control interests include direct control interests and indirect control interests.

Section CG 4(4)(c) and (d) of the Income Tax Act 1994 was clear that a direct control interest did not include interests held by a person in a controlled foreign company unless the person would have been entitled to have the income or any value of the net assets dealt with in their interest or on their behalf.

The Panel concluded that the provisions were unclear and that the correct outcomes could be obtained by applying the transitional provisions in section YA 3 of the Income Tax Act 2004 and section YA 3 of the Income Tax Act 2007. The Panel considered that the legislation should be clearer so that reliance on the transitional provisions would be unnecessary.

The wording in section EX 9(1)(c) and (d) in both the Income Tax Act 2004 and the Income Tax Act 2007 mirror the wording in section EX 5(1)(c) and (d). Section EX 9 in both Acts has been amended in the same manner to ensure the two provisions are consistently worded.

Comparative value method for calculating FIF income

Sections EX 51 of the Income Tax Act 2007 and section EX 44 of the Income Tax Act 2004

Section EX 51 of the Income Tax Act 2007 and section EX 44 of the Income Tax Act 2004 provide that expenditure incurred for, or on behalf of the person having the foreign investment fund (FIF) interest is included in the meaning of "cost of a FIF interest" for the purpose of calculating FIF income under the comparative value method.

Application dates

The amendment to section EX 51 of the Income Tax Act 2007 applies from the beginning of the 2008-09 income year.

The amendment to section EX 44 of the Income Tax Act 2004 applies from the beginning of the 2005-06 income year.

Background

A submission made to the Panel identified an unintended change in outcome in the meaning of "cost of a FIF interest" applied for the purpose of calculating FIF income under the comparative value method. The submission was that since the enactment of the Income Tax Act 2004, the term "cost" for the comparative value method of calculating FIF income, does not include expenditure incurred for or on behalf of the person having the FIF interest. The Panel agreed with the submission.

The policy and legislative history of the provisions show that expenditure incurred on behalf of a person holding a FIF interest is included in the meaning of "cost" for the purpose of calculating FIF income under the comparative value method. For example, if the FIF interest is a shareholding in a foreign company, the cost of an increase in the shareholding made on behalf of the owner of the FIF interest should be included in the value of that cost.

Land transferred to a close relative

Section FC 5(3)(b) of the Income Tax Act 2007

Section FC 5(3)(b) of the Income Tax Act 2007 provides for the valuation of the cost of land transmitted into an estate if sections CB 9 to CB 11, and CB 14 of the Income Tax Act 2007 apply to the land.

The amendment ensures that the cost of that land allowed as a deduction from the income under the land sales rule can include costs incurred by the executor or administrator within 10 years following the acquisition of the land by the deceased person.

Application date

The amendment to section FC 5(3)(b) applies from the beginning of the 2008-09 income year.

Background

The Panel considered a submission that section FC 5 of the 2007 Act does not include expenditure incurred by the administrator or executor of the estate as part of the cost of land held in an estate. The submitter states this represents a change from the outcome under the corresponding provisions of the 2004 Act (section FI 7(3) of the 2004 Act). The Panel agreed with the submission.

Section FI 7(3) of the 2004 Act provides that if the transfer of land is subject to the same land sale rules, the cost of land held by an estate is intended to include expenditure incurred on that land by the administrator or executor of that estate if the expenditure is incurred within 10 years following the acquisition of the land by the deceased person.

Liability when company leaves consolidated group

Section FM 5 of the Income Tax Act 2007

Section FM 5 of the Income Tax Act 2007 provides that the joint and several liability imposed on all members of a consolidated group to satisfy income tax obligations of the consolidated group does not apply to a company that has left the group, in relation to an increase in an income tax obligation of the group made:

  • for a tax year the exiting company was a member of the group; and
  • under an amended assessment for that tax year after the exiting company left the group.

Application date

The amendment applies from the beginning of the 2008-09 income year.

Background

The Panel considered a submission that when a company exits from a consolidated group, section FM 5 incorrectly results in the exiting company retaining a joint and several liability for increased income tax obligations of the group assessed after the company has left the group. The Panel agreed with the submission.

In the corresponding provision of the 2004 Act (section HB 1(2)), that joint and several liability was removed for a company that has left a consolidated group for increases in income tax obligations of the consolidated group made:

  • for a tax year the exiting company was a member of the group; and
  • under an amended assessment for that tax year after the exiting company left the group.

Revocation of directors' elections

Section HA 31(2)) of the Income Tax Act 2007

Section HA 31(2) provides that a director's notice of revocation should take effect from the later of:

  • the year in which the notice is received by the Commissioner; or
  • the effective year stated in the notice.

Application date

The amendment applies from the beginning of the 2008-09 income year.

Background

The Panel has agreed with a submission that the 2007 Act rewrite of the notice of revocation of a director's election has inadvertently allowed retrospective revocation of a director's election for a company to attain qualifying company status.

The amendment ensures that the director's notice of revocation should take effect from the later of:

  • the year in which the notice is received by the Commissioner; or
  • the effective year stated in the notice.

Treatment of foreign trusts when settlor becomes resident

Section HC 30(4)(a) of the Income Tax Act 2007

Section HC 30(4)(a) of the Income Tax Act 2007 provides that if a settlor of a foreign trust becomes resident in New Zealand, and no election is made for the trust to become a complying trust within 12 months of the settlor becoming resident, the trust continues to be treated as a foreign trust until the end of that 12-month period. After the expiry of that 12-month period, the trust becomes a non-complying trust.

Application date

The amendment applies from the beginning of the 2008-09 income year.

Background

The Panel considered a submission that relates to the taxation consequences when a settlor of a foreign trust becomes resident in New Zealand under section HC 30(4) of the Income Tax Act 2007 and no election is made within 12 months of the settlor becoming resident. The Panel agreed with the submission.

For foreign trusts, if the settlor becomes resident in New Zealand, the settlor, trustee or any beneficiary may choose that the trust becomes a complying trust. This election must be made within 12 months of the settlor becoming resident in New Zealand, and the trust is treated as a complying trust for distributions made from the date of the election.

If this election trust is not made within the 12-month period, the trust is treated, in relation to distributions from the trust, as:

  • a foreign trust until the end of that 12-month period; and
  • as a non-complying trust after the end of that 12-month period.

Shortfall penalties and groups of companies

Section IW 1(3) of the Income Tax Act 2007

Section IW 1(3) of the Income Tax Act 2007 provides that a group of companies may elect to use a tax loss of one company in the group of companies to satisfy a shortfall penalty assessed against any company within the same group of companies.

Application date

The amendment applies from the beginning of the 2008-09 income year.

Background

The Panel considered a submission that section IW 1(3) of the 2007 Act does not allow a wholly owned group to use tax losses of one company in the group to pay the shortfall penalties of another company in the group. The submission is that this differs from the outcome given by the corresponding provision; section IG 10(1A), of the Income Tax Act 2004. The Panel agreed with the submission.

Section IG 10(1A) of the Income Tax Act 2004 provided for a group of companies to elect a tax loss to satisfy a shortfall penalty assessed against any company within that group of companies.

Minor maintenance items

The following amendments relate to minor maintenance items referred to the Rewrite Advisory Panel as minor maintenance items and retrospectively correct any of the following:

  • ambiguities;
  • compilation errors;
  • cross-references;
  • drafting consistency, including use of terminology, definitions and readers' aids, for example, the defined terms lists;
  • grammar;
  • punctuation;
  • spelling; or
  • consequential amendments arising from substantive rewrite amendments.

Application dates

In the table below:

  • amendments to the Income Tax Act 2007 apply retrospectively from the beginning of the 2008–09 income year;
  • the amendment to the Income Tax Act 2004 applies retrospectively from the beginning of the 2005–06 income year.
Section Act Amendment
EE 7
EE 7
2007 Act
2004 Act
Correct cross-referencing
Correct cross-referencing
EX 46(11) 2007 Act Correct terminology
GB 34 2007 Act Correct cross-referencing
LJ 3 2007 Act Drafting consistency
LJ 5(3)(c) 2007 Act Correct cross-referencing
RE 14(2) 2007 Act Error in formula corrected