Income Tax Amendment Act 1980
Archived legislative commentary on the Income Tax Amendment Act 1980 from PIB vol 113 Jul 1981.
This commentary item was published in Public Information Bulletin Volume 113, July 1981
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Non-Resident Withholding Tax, Royalties and Know-How Payments
1. We have been asked to set out the changes made by the Income Tax Amendment Act 1980 to the Income Tax Act 1976 dealing with the taxation of royalties and know-how payments and how the new provisions compare with the previous position.
2. Position up to 31 March 1980
- Royalties and know-how payments were deemed to be assessable income under sections 65(2)(h) and (i) Income Tax Act 1976. These provisions were repealed last year and replaced by the provisions detailed in paragraph 3 below.
- Repealed 65(2)(h):"All royalties or other like payments dependent upon production from or the use of any real or personal property, whether or not they are instalments of the purchase price of any property."
- Repealed 65(2)(i):"All payments for the supply, in connection with the carrying on of a business, of scientific, technical, industrial, or commercial knowledge, information, or assistance, not being payments which the Commissioner is satisfied constitute wholly reimbursement of expenditure that:
- "(i) is of a kind that is deductible under this Act, and
- "(ii) is incurred, in relation to the payments, by the person to whom the payments are made."
- The repealed section 65(2)(i) dealt with what is generally known as "know-how" payments. The inclusion of the word "assistance" in that section meant that payments which were essentially for services were included in assessable income unless they constituted wholly a reimbursement of expenditure.
3. New Position from 1 April 1980
- The term "royalty" is now comprehensively defined in section 2 of the Income Tax Act 1976 as follows:'Royalty includes a payment of any kind, whether periodical or not and however described or computed, to the extent to which it is derived as consideration for -
- The use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or other like property or right:
- The use of, or the right to use, any mine or quarry:
- The extraction, removal, or other exploitation of, or the right to extract, remove, or otherwise exploit, standing timber or any natural resource:
- The use of, or the right to use:
- Any motion picture film; or
- Any films or videotapes for use in connection with television; or
- Any tapes for use in connection with radio broadcasting:
- The supply of scientific, technical, industrial, or commercial knowledge or information:
- The supply of any assistance which is furnished as a means of enabling the application or enjoyment of anything referred to in any of the paragraphs (a) to (e) of this definition:
- The total or partial forbearance of -
- The use of, or the granting of the right to use, any property or right referred to in any of the paragraphs (a) to (d) of this definition; or
- The supply of any knowledge or information referred to in paragraph (e) of this definition or of any assistance referred to in paragraph (f) of this definition, -
- whether or not that payment is an instalment of the purchase price of any real or personal property.'
- This definition fits in with international practice, New Zealand's double taxation treaties and the policies of the OECD.
- In place of the repealed sections 65(2)(h) and (i) "all royalties" are now deemed to be assessable income by the new section 65(2)(h). Consequential amendments have been made to sections 243(2)(p), 310(2), 317(b) and 318(1) using the newly defined term "royalty" rather than references to sections 65(2)(h) and 65(2)(i) as was done previously.
- To summarise the tax position "royalties" as defined are:
- deemed to be assessable income under section 65(2)(h);
- deemed to be derived from New Zealand under section 243(2)(p);
- defined as non-resident withholding income by section 310(2);
- liable to non-resident withholding tax at a flat rate of 15 percent on gross payments which is:
- a final tax (under section 317(b)) for copyright royalties;
- a minimum tax (under section 318) for other royalties, the tax on which is the greater of:
- the non-resident withholding tax under section 311, i.e., 15 percent on the gross payments, or
- the tax calculated under an annual assessment on the net amount after deducting expenses.
Agreements for the avoidance of double taxation which New Zealand has with other countries may limit the amount of New Zealand tax payable by the residents of these countries. Reference should be made to the particular agreement.
Paragraph (e) of the definition of royalty refers to "know-how" payments and in contrast to the repealed section 65(2)(i) no longer includes the word "assistance". Payments which are essentially for services are no longer included in assessable income except to the extent that the services are connected with the application or enjoyment of "royalties" in the wider sense of the new definition as provided for in paragraph (f).
- This type of payment may only be taxed in New Zealand to the extent that the services are performed in New Zealand. If the services are performed both in New Zealand and overseas an apportionment will be necessary.
- Generally, where an agreement for the avoidance of double taxation is in force a permanent establishment must exist in New Zealand for the services to be taxed here. Reference should be made to the particular agreement.
6. Distinction Between Know-How and Services
- (1) The distinction between a payment for "know-how" and a payment for "services" is not always an easy one and much, of course, will depend on the facts of a particular case, having regard to the contract or agreement entered into between the parties.
- (2) The main distinction between know-how and services is that the former is an asset and, as such, it is something which is already in existence and is not brought into being in pursuance of a particular contract. Thus, if a contract is one for the supply, for the use of the "buyer", of what might be broadly termed here a "product" which is already in existence, or substantially so, it is a contract for the supply of know-how and payments under the contract would be royalties.
- (3) On the other hand, if a contractor is required to supply his special skills and knowledge in order to bring "the product" into existence for the buyer, payments under the contract would be considered to be for services and would not constitute a royalty.
1982 Provisional Tax
In the 1981 IR3 tax guide we pointed out that it is quite acceptable to use the new tax rates which applied from 1 February 1981 in calculating 1982 provisional tax.
However, a quick and simple method is to deduct the following amounts from the tax calculated for 1981.
$5,500 to $12,600 reduce 1981 tax by $100
$12,601 to $17,600 reduce 1981 tax by $200
$17,601 and over reduce 1981 tax by $300
Enter 1982 Provisional Tax in Box 1 of the 1982 Provisional Tax Panel on page 3 with the notation "1982 Rates".
1. Total Z +in Block 5 $ ................. (1982 Rates)