Income Tax Amendment Act 1979

This commentary item was published in Public Information Bulletin Volume 100, September 1979

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New Incentive Allowances For Exporters

Introduction

The Income Tax Amendment Act 1979, recently passed by Parliament, introduces a new package of incentive allowances for exporters. The new incentive allowances apply to:

• exporters of goods, manufactured, produced or processed in New Zealand.
• exporters of certain services, such as architects and consultants.
• royalties and know-how received from overseas.
• overseas construction projects.
• tourism.

The aim of the new incentives is to encourage exports which add to New Zealand's overseas exchange earnings. At the same time they give the greatest incentive benefit to those exporters whose goods or services have a substantial amount of domestic value added. In the case of goods it is to reward the further manufacture and processing of goods in New Zealand, which increases the value of the export product.

Tax Credits Instead of Deductions from Assessable Income

An important feature of the new incentives is that they are given as a tax credit against tax payable. Any excess credit is refunded if it exceeds the tax otherwise payable. This provides exporters with a guaranteed rate of benefit on each dollar of export sale and allows exporters to immediately determine the quantum of benefit rather than having to wait until the end of the year.

Tax credits will be claimed in the annual return of income and where the tax credit exceeds the tax otherwise payable, refunds will be given priority as soon as the annual return of income is furnished.

Partnerships

Where an export business is conducted as a partnership the tax credit available will be allocated to the respective partners in the same proportion as their incomes are allocated for tax purposes.

Further details of the new incentives follow:

Export Performance Incentive For Qualifying Goods - Section 156A

An incentive on the total export sales of qualifying goods based upon the domestic value added content of goods exported.

Who May Claim

Any exporter (including an export merchant) of export goods (as defined) except:

• Co-operative dairy, milk and pig marketing companies, unless the sale of export goods gives rise to assessable income.
• Mining companies assessable for tax under section 216.
• Non-resident mineral development companies - section 42 refers.
• Organisations exempt from income tax.

The terms "exporter" and "export merchant" have the same meaning as under the existing increased export incentive allowance -refer PIB 94, page 23.

Export Goods

These are goods specified in the schedule of export goods issued by the Secretary of Trade and Industry as qualifying for the incentive and must be goods which:

• are sold by the taxpayer to an overseas purchaser, and
• are owned by the taxpayer at the time of sale.

They do not include goods:

• exported by way of gift.
• taken out of New Zealand with the intention that they will be brought back to New Zealand.
• sold by duty free shops or other stores to persons departing from New Zealand.
• imported into New Zealand and subsequently exported without some form of processing, grading, or packing in New Zealand.

How it Works

The incentive allowance is given as a tax credit, the rate of which varies according to the local domestic content of the goods exported. Exporters are not required to work out the domestic value added content for their goods as each export commodity has been assigned to a value added band in the schedule of export goods to be issued by the Secretary of Trade and Industry. It is anticipated that a final version of the schedule will be issued early next year.

All you need do is refer to the schedule and see which value added band has been allocated to your particular product. Each value added band represents a specified rate of tax credit which when multiplied by the fob sales of that product gives the total incentive allowance. Any enquiries regarding the schedule should be referred to the Department of Trade and Industry.

An advantage of the new scheme is that there is no base period sales requirement.

The following table shows the domestic value added bands and rates of incentive allowance.

Band	Domestic Value Added %	Mid-Point	Specified Tax Credit Rate %
A	80-100	85	11.9
B	70-80	75	10.5
C	60-70	65	9.1
D	50-60	55	7.7
E	40-50	45	6.3
F	20-40	30	4.2
G	0-20	10	1.4

The rate of incentive for each band has been arrived at by taking 14 percent of the mid-point of the band. (In Band A the mid-point is set at 85 as in practice there are very few export goods with a domestic value added content exceeding 90 percent.)

Example

Assume qualifying goods exported were:

Band	f.o.b. sales ($)
A	100,000
B	200,000
C	300,000
D	400,000

To work out the incentive, multiply:

$	$
100,00 x 11.9% =	11,900
200,00 x 10.5% =	21,000
300,00 x 9.1% =	27,300
400,00 x 7.7% =	30,800
Total incentive tax credit	$91,000

Provision for Individual Assessment

In certain cases where an exporter considers that the domestic value added content allocated to his product is, at the mid-point of the band, too low, he may apply to the Development Finance Corporation for an alternative rate of domestic value added content to be determined.

If the individually assessed rate of domestic value added content is approved, the rate of incentive rebate (referred to as the assigned percentage) will be 14 percent of that individually assessed domestic content.

The individual assessment option will only apply in respect of export goods:

• where the fob sales in that year or in the previous year in respect of those goods exceeds $100,000 or
• the domestic value added content in those goods is more than $50,000 on the basis of the schedule.

Any assigned percentage rate determined by the Corporation will apply to the income year in which the application is made and the four succeeding income years unless a further individual assessment is undertaken in the meantime.

If the assigned rate of incentive credit is less than the rate allowable under the schedule, the specified or schedule rate will be reduced by not more than 0.7 in the first year and will be reduced to the assigned rate in the next succeeding year, e.g. schedule rate 9.1 percent; Assigned percentage 8.0 percent; Assigned percentage 1st year 8.4 percent.

Enquiries about the self-assessment procedures should be made direct to the Department of Trade and Industry which has offices in Auckland, Wellington, Christchurch and Dunedin.

Joint Fishing Ventures with Foreign Boat Owners

The specified rates allocated to each domestic value added band do not apply to goods exported by businesses involved in joint fishing arrangements with foreign boat owners. Parties to these arrangements must apply to the Development Finance Corporation for an individual assessment.

In addition, the option period to move to the new scheme will not apply to joint fishing ventures. These ventures will automatically move to the new incentive scheme in the income year commencing 1 April 1980.

Goods Imported into New Zealand and Re-exported

In the case of imported goods which are subsequently exported after processing and packing in New Zealand, and the landed cost of those goods is 80 percent or more of the fob export value, the specified rate of tax credit is 1.4 percent as for value added Band G. This is irrespective of the type of goods involved.

Artificial Trading Arrangements

As with the previous export incentive allowance, special provisions apply to deter artificial arrangements involving third parties.

How to Claim

Complete form IR320 and attach to your tax return. This form will be available early next year.

Alternative Incentive Allowance for Certain Multinational Companies

In certain circumstances these companies may lose the benefit of New Zealand export incentive allowances when the tax paid in New Zealand on New Zealand profits is allowed as a credit in the country of residence.

Provision exists in these cases for the export incentive tax credits to be granted by way of customs duty relief.

Application should be made to:

Comptroller of Customs, Customs Department,Private Bag,Wellington.

Commencing Date

This incentive will come into force in the income year commencing 1 April 1980, or corresponding accounting year, although there will be an option period whereby exporters will have until the income year commencing 1 April 1983 to move to the new scheme. Exporters of goods who will be better off under the new scheme will no doubt want to move over to the new scheme as from the income year commencing 1 April 1980 whereas other exporters may want to take advantage of the option period in order to adjust to the new scheme. To allow this the previous increased export incentive scheme will not terminate until the income year ending 31 March 1983.

Once an election is made to move to the new scheme, it is on a "once and for all" basis and is irrevocable.

For details of the previous scheme see pages 23 and 24 of Public Information Bulletin No.94 October 1978.

Export Performance Incentive For Qualifying Services - Section 156B

An incentive to encourage the supply overseas of certain services.

Who May Claim

• Any taxpayer carrying on business in New Zealand who supplies qualifying services to overseas clients in relation to overseas projects.
• Any taxpayer who receives royalties and know-how payments either directly or indirectly from outside New Zealand.

Qualifying Services

These will be set out in a schedule to be issued by the Secretary of Trade and Industry and will include those services that presently qualify under the existing incentive scheme, namely:

• Architectural (including contract supervision) services, surveying, valuation, design or planning services.
• Engineering (including contract supervision) services, not being services that qualify under the incentive allowance relating to overseas construction projects.
• Advisory services relating to the establishment of accounting, auditing, management, organisational, training or other systems including the provision of data processing programs in relation to any such system.
• Advisory services relating to the establishment or development of any farming, agricultural, horticultural, fishing or forestry project.
• Royalties and know-how payments in relation to trademarks, copyrights, technical information and assistance that has been developed from work substantially performed in New Zealand.

Additional services may be added from time to time.

How it Works

Allows a tax credit of 11.9 percent of the net foreign currency earnings which are actually remitted to New Zealand through the banking system in respect of those services, or which are paid in New Zealand from funds held in New Zealand otherwise remittable in terms of the Exchange Control Regulations 1978.

Example

Gross fees from qualifying services	$20,000
Less overseas expenditure	$5,000
Net foreign currency earnings	$15,000
Net foreign currency earnings transferred to New Zealand through the New Zealand banking system	$10,000
Tax credit is 11.9% of $10,000	$1,190

How to Claim

Complete form IR318 and attach it to your return of income. This form will be available early next year.

Commencing Date

The new incentive will first apply to the income year commencing 1 April 1980 or corresponding accounting year. As it gives a greater incentive benefit than under the existing incentive scheme, the existing scheme will terminate with the income year ending 31 March 1980 or corresponding accounting year.

Export Performance Incentive For Qualifying Overseas Projects - Section 156D

An incentive to encourage New Zealand firms to undertake engineering, construction and development projects overseas.

Who May Claim

Any taxpayer carrying on business in New Zealand who derives overseas exchange from a qualifying project.

Qualifying Projects

These are the same types of overseas projects which qualify under the existing incentive scheme, namely:

• Construction work such as building, roading, drainage, water reticulation and reclamation.
• The establishment or development of any farming, agricultural, fishing, or forestry project.

How it Works

Allows a tax credit of 11.9 percent of the net foreign currency earnings which are actually remitted to New Zealand in respect of that project, or which are paid in New Zealand from funds held in New Zealand otherwise remittable in terms of the Exchange Control Regulations 1978.

Normally the credit is allowed in the income year in which the obligations under all contracts relating to the qualifying project are completed.

However, there is provision to allow an interim tax credit where a qualifying project extends over a period of two or more income years and there are overseas exchange earnings derived in any income year of the project. Any interim allowance is subject to a "square up" at the end of the project.

Example

Gross fees from qualifying projects	$1,500,000
Less overseas expenditure	$1,300,000
Net foreign currency earnings	$200,000
Net foreign currency earnings transferred to New Zealand through the New Zealand banking system	$140,000
Tax credit is 11.9% of $140,000	$16,660

How to Claim

Complete form IR319 and attach it to your return of income. This form will be available early next year.

Commencing Date

The new incentive comes into force with respect to any qualifying project which COMMENCED on or after the income year commencing 1 April 1980 or corresponding accounting year.

Projects which commenced prior to that date will continue to qualify for the existing incentive deduction under section 158A.

Export Performance Incentive - Tourism - Section 156E

A new incentive to encourage foreign exchange earnings through the tourist industry.

Who May Claim

Any taxpayer carrying on a business in New Zealand as a tourist wholesaler or retailer who sells qualifying tourist services.

Qualifying Tourist Services

These are services of the following kind supplied within New Zealand to tourists from overseas:

• accommodation
• sustenance
• internal transport
• admission to or use of tourist facilities, e.g. ski-hire.

The payment for these services must be made in foreign currency PRIOR to the arrival of the tourist in New Zealand.

How it Works

Allows a tax credit of 10 percent of the net foreign currency earnings which are actually remitted to New Zealand through the banking system in respect of qualifying tourist services, or which are paid in New Zealand from funds held in New Zealand otherwise remittable in terms of the Exchange Control Regulations 1978.

Example

Gross fees from qualifying tourist services	$80,000
Less overseas expenditure	$10,000
Net foreign currency earnings	$70,000
Net foreign currency earnings transferred to New Zealand through the New Zealand banking system	$70,000
Tax credit is 10% of $70,000	$7,000

How to Claim

Complete form IR321 and attach it to the annual return of income. This form will be available early next year.

Commencing Date

The new incentive will first apply to the income year commencing 1 April 1980, or corresponding accounting year.

Export-Market Development And Tourist-Promotion Incentive - Section 156F

An incentive to promote:

• the export of New Zealand goods that have been manufactured, produced, assembled, processed or packed or graded and sorted in New Zealand;
• tourism;
• the export of services in relation to construction projects, courses of educational training or the furnishing of technical advice or assistance;
• the grant or assignment of rights outside New Zealand in connection with patents of:
  • inventions
  • trademarks
  • designs
  • copyrights.

Who May Claim

Any taxpayer who has incurred qualifying export-market development expenditure or tourist-promotion expenditure.

How It Works

The new incentive differs from the existing additional 50 percent deduction incentive in four respects:

• It redefines the list of qualifying export promotion expenditure. Generally, only those costs which are incurred OUTSIDE New Zealand in promoting exports or tourism qualify - this will include remuneration of New Zealand-based employees while travelling abroad on export promotion. Costs incurred within New Zealand, in promoting exports, including salaries and wages, may however, qualify for an Export Programme Grant administered by the Department of Trade and Industry or a Tourism Export Programme Grant administered by the Tourist and Publicity Department.
• The incentive allowance is a tax credit of 67.5 percent of qualifying expenditure.
• Where the incentive tax credit is allowed in respect of qualifying expenditure an ordinary deduction from assessable income is not also allowable in respect of that expenditure.
• Expenditure in respect of which an Export Programme Grant or Tourism Export Programme Grant has been received will not also qualify for the incentive. However, the proportion of the expenditure not REIMBURSED by the grant will be allowed as an ordinary deduction from assessable income.

To qualify for the incentive the export promotion expenditure must -

• be of a kind that would, if it had not been for the specific provision in this section disallowing the deduction, in the normal course qualify as an ordinary deduction for tax purposes (i.e. capital expenditure would not be allowed);
• have been incurred -
  • primarily and principally for the purposes of seeking markets (including the retention of existing markets) or the obtaining of market information or market research, or creating or increasing demand for the export of goods or services as described above, or
  • primarily and principally for the purposes of attracting overseas tourists to New Zealand.

Qualifying and Non-qualifying Expenditure

Qualifying Expenditure	Non-qualifying Expenditure
Overseas travel - fares, accommodation and sustenance incurred by the taxpayer himself, or an employee of either the taxpayer or an associated company.	Entertainment expenses. Holiday expenses, non-working spouse or relatives' travel.
Salaries and wages in respect of the time spent outside New Zealand by an employee including an an employee of an associated company.	Director's fees. Salary and wages in respect of employee's time within New Zealand.
Payments to a New Zealand agent in respect of travel undertaken by that agent outside New Zealand.	Commissions on sales Payments for work carried out in New Zealand.
Payments to an overseas agent for the purposes of activities carried on outside New Zealand.	Commissions on sales.
Expenses outside New Zealand including salaries and wages of a person employed outside New Zealand.	Director's fees. Entertainment expenses.
Expenses (including those incurred in New Zealand) of advertising outside New Zealand.	Costs of advertising inside New Zealand.
Expenses (including costs of delivery) directly attributable to providing samples or technical information to a person outside New Zealand - reduced by any consideration received in respect of those samples or technical information.
Expenses in relation to the furnishing of any bid bond, performance bond, or working capital bond, or interest paid on money borrowed for payment of deposits in lieu of such bonds for the purposes of submitting a tender for the supply of qualifying services.
Expenses of bringing potential customers to New Zealand - includes travel, accommodation and sustenance.	Entertainment expenses.
Costs incurred outside New Zealand in:— the preparation or submission of tenders or quotations.— sales promotion activities or campaigns.	Costs incurred within New Zealand.
Expenses of exhibiting at export trade fairs in New Zealand - to be approved by the Secretary of Trade and Industry.	Non-approved fairs in New Zealand.

Example

Assume that the taxpayer has received an export programme grant of $12,800 in respect of qualifying expenditure of $20,000.

Qualifying Expenditure

Salaries and wages	$17,000
Overseas travel and accommodation	$5,250
Net cost of samples	$750
Advertising overseas	$2,000
Total qualifying expenditure	$25,000
Qualifying expenditure in respect of which grant was made	$20,000
Expenditure which qualifies for tax credit	$5,000
Tax Credit
Tax credit is 67.5% of $5,000 i.e.	$3,375

Note: Of the total expenditure of $25,000 only $7,200 will be allowable as an ordinary deduction from assessable income. The remainder ($17,800) would not be allowable because:

• $12,800 was reimbursed by means of an Export Programme Grant.
• $ 5,000 is eligible for the Export Market Development Incentive.

Salaries and Wages Paid to Shareholder/Employees

Salaries and wages paid to shareholder/employees, to the extent that they are paid in the circumstances in which wages to normal employees would qualify, (generally when engaged in export promotion work overseas) will, in the main, qualify for the incentive. However, the Department will need to be satisfied that the payments are not excessive, i.e. in excess of what would be paid to an arm's length employee suitably qualified to carry out those functions.

How to Claim

Complete form IR323 and attach it to your return of income. This form will be available early next year.

Commencing Date

This incentive will first apply to expenditure incurred in the income year commencing 1 April 1980 or corresponding accounting year.

Export-Market Development Activities Incentive - Self-Employed Taxpayers - Section 156G

An incentive to promote the supply of services outside New Zealand in relation to construction projects, educational training courses, technical advice or assistance.

Who May Claim

Any taxpayer (not being a company) who is in business in New Zealand on his own account or as a member of a partnership and has engaged in export-market development activities performed outside New Zealand.

How It Works

Allows a tax credit of 67.5 percent of the value of time spent on export-market development activities outside New Zealand. The value of time is an assessed rate which is effectively 25 percent of the minimum hourly charge out rate for the particular profession of the taxpayer.

In any case where a person has received an export programme grant or a grant under the existing export-market development grant scheme in respect of the value of time, an adjustment will be required to the tax incentive scheme.

Example

Assume:

• Taxpayer spent 1,000 hours on qualifying export-market development activities.
• The minimum hourly rate customarily charged out for a principal in this profession is $20.
• During the year, taxpayer received an Export Programme Grant in respect of the value of time of $1,920.

Value of Time Calculation

Based on the following formula:

Tax Credit

Tax credit is 67.5 percent of $3,500 = $2,362.50

How To Claim

Complete form IR324 and attach to your return of income. This form will be available early next year.

Special Point To Note

As with the revised export-market development and tourist-promotion incentive scheme, the export promotion activities relate to work performed outside New Zealand. Although work performed in New Zealand does not qualify under the tax incentive scheme, it is possible for such work to qualify under the Export Programme Grants Scheme briefly discussed below.

Commencing Date

This new incentive will first apply to the income year commencing 1 April 1980 or corresponding accounting year.

Export Programme Grants Scheme And Tourism Export Programme Grants Scheme

These are new schemes and replace both the new markets development grants and export-market development grants schemes to the extent that they applied in the past. As announced in the Budget, they have been formulated with the specific aim of encouraging thorough and co-ordinated research into the marketing abroad of New Zealand goods and services including tourism.

Grants will be paid at a rate of 64 percent of qualifying expenditure with the balance of expenditure being ordinarily deductible for tax purposes. This gives a level of assistance of just over 80 cents in the dollar.

Expenditure on which a grant has been based will not also qualify for the new export-market development and tourist-promotion incentive.

Expenditure qualifying for grants will generally be of a wider nature than is available under the tax incentive scheme, and will include costs incurred within New Zealand such as salaries and wages and value of time in promoting overseas markets.

To qualify under the grants schemes the overseas markets must have sufficient potential for future development.

Enquiries about the Export Programme Grants Scheme should be directed to:

Department of Trade and Industry,Private Bag,Wellington.

Enquiries about the Tourism Export Programme Grants Scheme should be directed to:

Tourist and Publicity Department, PO Box 95,Wellington.

Termination Of Old Tax Incentive Schemes

Because of the introduction of the new range of export taxation incentive schemes, the following existing schemes will automatically terminate with the income year ending 31 March 1980 or corresponding accounting year.

• Additional 50 percent export-market and tourist-promotion development expenditure allowance - section 154.
• Export market development incentive for self-employed persons - section 155.
• Export of Qualifying services - section 158.

As discussed earlier in this Bulletin, there are special provisions relating to the phasing out of the increased export incentive scheme for goods and the previous deduction scheme for qualifying overseas projects.

Terminating Dates Of New Incentive Schemes

The Income Tax Amendment Act 1979 introduces a new schedule of Terminating Dates into the principal Act. In terms of that schedule the new export incentives have a terminating date of 31 March 1985 or corresponding accounting year.