Exemption for allowances paid to military and police personnel serving in operational areas
2006 amendments allow income tax exemption for allowances paid to NZ Defence Force members or the Police for serving in operational areas.
Section CW 19 of the Income Tax Act 2004
Amendments have been made to section CW 19 of the Income Tax Act 2004 to exempt from income tax allowances paid to members of the New Zealand Defence Force or the Police, which are directly and solely paid for serving in operational areas.
A Ministerial Committee will have the ability to exempt from income tax the pay and other allowances paid to members of the New Zealand Defence Force or the Police who serve in operational areas.
Previously, section CW 19 of the Income Tax Act 2004 provided that all pay and allowances received by members of the New Zealand navy, military or air force while serving in an operational area were exempt from income tax. A Ministerial Committee comprising the Prime Minister, the Minister of Finance and the Minister of Defence was responsible for determining if a specified area was an operational area. As the previous exemption applied on an "all or nothing" basis, the Ministerial Committee declined to declare areas to be operational areas. This was because the Committee had considered that allowances paid as a result of a deployment to an operational area should be exempt, but not the full pay and other allowances paid to Defence Force members. Consequently, section CW 19 was never used.
Instead, operational allowances were paid to New Zealand Defence Force members as special assistance under the Social Security Act 1964 in a programme referred to as the Defence Force Allowance Programme. This payment system was adopted to ensure that New Zealand Defence Force members could receive additional allowances associated with operational deployments without any flow-on reduction in entitlements to benefits that they, or their dependents, were receiving. This payment system was intended as a temporary measure only until a longterm payment arrangement for New Zealand Defence Force service allowances could be developed.
The amendments streamline and clarify the operation of section CW 19 and remove the administrative difficulties associated with the previous payment system.
The amendments to section CW 19 will mean that:
- operational allowances, paid to members of the New Zealand Defence Force or the Police as a direct result of their deployment to an operational area, are automatically exempt from income tax; and
- the Ministerial Committee, which includes the Prime Minister, the Minister of Defence, the Minister of Police, the Minister of Finance and the Minister of Foreign Affairs, can determine that any amounts of pay and/or allowances (other than allowances paid as a direct result of the deployment to an operational area), are exempt from income tax.
An "operational area" is an area that satisfies a two-part test. First, the Minister of Defence must order the deployment of New Zealand Defence Force members for a specific mission authorised by the government. Second, the Chief of Defence Force must further define the area in which the mission is to be carried out.
Operational allowances that were paid under the special assistance programme will be exempt under the new section CW 19.
The new exemption takes effect three months after the date of enactment, 18 December 2006.
Other sections in this legislation
| Offshore investment | Tax rules for PIEs | Tax on geothermal wells | Australian superannuation fund exemption | New rules for selecting SSCWT rates | Allowing documents to be removed for inspection | Military and police allowances | New rules for spreading income on the sale of patents | Organisations approved for charitable donee status | Consolidated groups and foreign losses | Assessments by the Commissioner | GST and financial services | GST on fringe benefits | GST grouping rules | Taxation of business environmental expenditure | Family assistance provisions | Rewrite amendments | Tax depreciation treatment of patents | Fringe benefit tax | Depreciation formula | Economic rate of depreciation | Calculating depreciation rates | Election to depreciate | Transitional residents | Death and asset transfers | New GST due date | Limit on refunds and allocations of tax | The imputation system and companies | Reverse takeovers | Changes in GST taxable periods | Miscellaneous technical amendments |