Income Tax Amendment Act 1986

This commentary item was published in Public Information Bulletin Volume 147, May 1986

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Section 1 - Short Title And Commencement

Subsection (1) of this section provides that this Amendment Act is to be known as the Income Tax Amendment Act 1986, and that it should be read with, and form part of, the Income Tax Act 1976. Subsection (2) provides that the date from which the sections in this Act are to apply is the date on which this Act received the Governor-General's assent unless there is a different application date provided in the particular section. The Amendment Act was assented to on March 1986.

It is important to check the date of commencement when applying any of the sections of the Act. The commentary on each provision makes particular mention of the application dates.

Section 2 - Definition - "Expenditure On Account Of An Employee"

Section 2 amends the definition of the term "expenditure on account of an employee" in section 2 of the principal Act. (The effect of that definition is that where an employer makes a payment that comes within the definition of "expenditure on account of an employee" the amount concerned is deemed to be monetary remuneration of the employee and assessable in his or her hands.)

• Life Insurance Premiums This amendment will exclude from that definition premiums of life insurance paid in respect of any group term insurance policy entered into by the employer. This confirms the original intent of the definition, and will have effect from 1 April 1985 being the date from which the definition first applied.
• Major Shareholders of Private Companies This definition is also amended to ensure that where a private company incurs expenditure on behalf of a "major shareholder" (the definition of which is being inserted into section 336N of the principal Act by section 34(4) of this Amendment Act) who is also employed by the company, that expenditure will NOT be deemed to be "expenditure on account of an employee". Instead that expenditure will not be deductible by the company (because of the operation of section 106(1)(j) of the principal Act as amended by section 16 of this Amendment Act) and if that private company is also a "proprietary" company (as defined) that expenditure will be deemed to be a dividend to the shareholder if not repaid to the company. This amendment has effect from the income year that commenced on 1 April 1986, being the date from which all amendments relating to the fringe benefit tax treatment of shareholders of private companies have application.

Section 3 - Meaning of Term "Dividends"

This section amends section 4(1) of the principal Act to ensure that as from the income year that commenced on 1 April 1986, where a private company provides a fringe benefit to a shareholder-employee who is not a "major shareholder", that benefit will not be treated as a dividend to the shareholder. This amendment is one of a number of amendments relating to the treatment of shareholder-employees for fringe benefit tax purposes. A full commentary on the new treatment of shareholders for fringe benefit tax purposes follows the commentary on section 34 of this Amendment Act.

Section 4 - Meaning of Term "Source Deduction Payment"

This section amends section 6 of the principal Act to ensure that the exclusion of certain payments made by companies to shareholders from the definition of the term "source deduction payment" does not apply for fringe benefit tax purposes. The effect of this amendment, which has application from the income year that commenced on 1 April 1986, is to ensure that the provisions of subsections (2) and (3) of section 6, which exclude certain payments made to shareholder-employees from the definition of "source deduction payment" in that section, do not apply for the purposes of determining whether the recipient is an employee as defined in section 336N for fringe benefit tax purposes.

For a full commentary on the amendments relating to the treatment of shareholders for fringe benefit tax purposes, please refer to the commentary following section 34.

Section 5 - Obligation To Pay Tax Where Objection Lodged

Section 5 extends the definition of the expression "day of determination of final liability" in section 34 of the principal Act to include a further two dates. The definition of "day of determination of final liability", which was inserted by section 7(1) of the Income Tax Amendment Act (No 2) 1985, defines the cessation date of the period of deferral in respect of which one-half of the tax in dispute is able to be deferred. The "day of determination of final liability" is the day on which the right of the taxpayer to suspend payment of the amount of deferred tax expires. This definition has now been extended to include:

1. The day on which the two month period, allowed to a taxpayer to exercise the right of further appeal following the formal disallowance of his or her objection by the Commissioner, expires.
2. The day on which the Commissioner gives formal notice to the taxpayer that he has allowed the taxpayer's objection. Where the Commissioner gives notice that only part of the objection is allowed, the new "day of determination of final liability" provision relates to that part only.

This section applies from the original application date of the amended section 34 of the principal Act; it applies to any objection made on or after 1 April 1985.

Section 6 - Interest on Certain Excess Tax

Section 6 amends the definition of the expression "qualifying tax in dispute" in section 34A(1) of the principal Act, to make it clear that a disputed credit of tax (for example an export tax credit) does qualify for the payment of interest where an objection to the determination of that credit has been found in the taxpayer's favour.

Previously the legislation, which was inserted by section 8(1) of the Income Tax Amendment Act (No 2) 1985, required the existence of a "competent objection" for interest to be payable to a taxpayer where a dispute is resolved in his or her favour. The definition of "competent objection" specifically excludes "non-qualifying objections" and as a result excluded a determination of a credit of tax. The effect is that at present interest is not payable by the Commissioner where the dispute involves a credit of tax. This amendment corrects the position.

The section applies from the original application date of section 34A, being with respect to any objection made on or after 1 April 1985.

Section 7 - Visiting Experts Rebate

This section terminates the right of any person to apply for approval as a visiting expert or a new and continuing enterprise in New Zealand under section 43 of the principal Act and therefore effectively commences the phase-out of the visiting experts rebate.

The visiting experts rebate is available in terms of section 43 only to persons or enterprises approved by the Minister of Finance or the Commissioner of Inland Revenue. The expression "approved" is defined in section 43(1) of the principal Act, and section 7 of this Amendment Act amends that definition. The amendment provides that no approval may be given unless ONE OR MORE of the following conditions is met:

1. The application for approval was made in writing to the Commissioner on or before 20 August 1985 (this applies to applications for approval as a visiting expert or for approval of any enterprise or qualifying services); or
2. The application for approval is made in writing to the Commissioner in respect of a PERSON who, on or before 7 November 1985, commenced a visit to New Zealand for the purpose of supplying services as a visiting expert (ie, services of the kind referred to in the definition of the expression "visiting expert" in section 43(1) of the principal Act); or
3. The application is made in writing to the Commissioner in respect of a PERSON who, on or before 7 November 1985, had entered into a binding contract to provide services as a visiting expert (in this instance the visiting expert's visit to New Zealand must commence after 7 November 1985).

Section 8 - Rebate In Respect of Gifts of Money and Payment of School Fees

This section amends section 56 A(2) of the principal Act which specifies the names of approved "overseas charities", donations to which are eligible for the charitable donations rebate for individuals and, consequentially, the deduction (under section 147 of the Tax Act) in calculating the assessable income of public companies.

Subsection (1) of section 8 inserts the Rotary (District 992) Charitable Trust in that list of approved "overseas charities"

Subsection (2) of section 8 provides that the application dates for qualifying donations to the Rotary (District 992) Charitable Trust will be:

• For the purposes of the tax rebate under section 56A of the Tax Act, donations made in the 1986/87 income year (year ending 31 March 1987) and subsequent income years
• For the purposes of the deduction allowable under section 147 in calculating the assessable income of a public company (as defined), the income year that commenced on 1 April 1986 (or equivalent accounting year) and subsequent income years (or equivalent accounting years).

Section 9 - Special Exemption In Respect Of Life Insurance Premiums And Other Specified Contributions

This amendment corrects a drafting error in section 10(1) of the Income Tax Amendment Act 1984. Section 10(1) of the 1984 Amendment Act gave effect to the Government's decision to remove the special exemption for life insurance premiums paid on policies entered into after Budget night 1984. A new definition "policy of pension insurance" was introduced into section 59(1) of the principal Act to ensure that this type of pension policy continued to qualify for special exemption purposes.

Section 9 of this Amendment Act corrects the definition of the expression "policy of pension insurance" by removing the requirement that a policy of pension insurance satisfy the requirements of paragraph (d)(i) of the definition of the expression "policy of life insurance" in section 59(1) of the principal Act.

This amendment has effect from the first day of the income year that commenced on 1 April 1984 (ie, the 1985 tax year).

Section 10 - Exemption of Dividends From Tax

Section 10 of the Amendment Act inserts a new section 63 in the principal Act (section 63 provides the exemption from income tax in New Zealand for the receipt of intercompany dividends).

The amendment gives effect to the Government's announcement in the l985 Statement on Taxation and Benefit Reform of its intention to stem an avenue for international tax avoidance. Such an opportunity to avoid tax could previously arise through an overseas company's ability to claim a deduction for expenditure which would also be exempt income in the hands of a New Zealand recipient company under section 63.

Section 10 provides that income derived by a New Zealand company by way of dividends on preference shares or interest on convertible notes will not be exempt from income tax in New Zealand where the related payment is deductible to the overseas company in any country outside New Zealand. The section applies with respect to dividends derived by New Zealand companies on or after 21 August 1985.

Subsection (1)

• Repeals the existing section 63 and substitutes a new section.
• Subsection (1) of the new section defines income tax (for the purposes of section 63) as meaning any overseas tax which, in the opinion of the Commissioner, is substantially of the same nature as New Zealand income tax imposed under Part IV of the Act. The definition is used only in relation to references in section 63 to income tax payable in any country or territory outside New Zealand. (For example, in subsections (3)(c)(ii) or (3)(d)(ii)).
• Subsection (2) provides an exemption from income tax in New Zealand of intercompany dividends derived by any New Zealand resident company or group investment fund. The only change is the insertion of the words "in New Zealand" after the words "other than from companies that are exempt from income tax". The inclusion of these words makes it clear that the fact that dividends have been received from an overseas company that is exempt from tax overseas does not affect the exemption of those dividends from New Zealand tax under subsection (2) when received by a New Zealand company.
• Subsection (3) provides that the exemption does not apply to:
  1. dividends derived by a company in respect of the business of life insurance carried on by it.
  2. dividends derived from any company where a deduction has been allowed for the dividends paid on certain preference shares pursuant to section 194 of the Income Tax Act 1976. These provisions are the same that applied previously under section 6. The new provisions, contained in paragraphs (c) and (d), are as follows:
  3. The exemption provided by section 63(2) will no longer apply in respect of dividends derived from any non-resident company where:
     1. The dividends are distributed by the company in respectany preference shares or shares that are substantially of the same nature as preference shares
     2. Those dividends are, or were, allowable as a deduction in calculating any liability of that company to income tax in any country or territory outside New Zealand.
  4. Provides that the exemption will (in future) not apply to income that:
     • would not be income from dividends if it was not deemed to be a dividend by section 4(1) AND
     • is derived from any non-resident company AND
     • has been allowed as a deduction in calculating the distributing company's liability to income tax in any country or territory outside New Zealand.

Paragraph (d) applies to income of the kind which section 4(1) of the Income Tax Act deems to be a dividend but which is not a dividend within the ordinary meaning of the word.
The following "dividends" come within this category:

• Section 4(1)(e) - Interest on floating rate debentures and debentures issued in substitution for shares
• Section 4(1)(f) - interest paid under a convertible note issue pursuant to an offer made by a company after 8 September 1960.
• Section 4(1)(g) - A distribution by a unit trust to a unit holder.

• Subsection (4) is designed to prevent taxpayers avoiding subsection 3(c) by routing payments through one or more overseas intermediary companies. The subsection provides that dividends derived by any non-resident company (the specified company) from any other company shall, upon their distribution by the specified company to any of its shareholders, be deemed to be dividends that come within the provisions of subsection (3)(c) if:
  • they are distributed by that other company in respect of any of its preference shares, and
  • they are allowable as a deduction in calculating any liability of that other company to income tax in New Zealand or in any country or territory outside New Zealand, and the income that was the source of the distribution was not subject to income tax in any country or territory outside New Zealand.

EXAMPLES

The following examples illustrate the effect of the provision. For the purposes of these examples:

Company A	is a New Zealand company
Company B	is a 100% owned overseas associate company
Company C	is a 100% owned New Zealand associate company
Company D	is a 100% owned overseas company
Company A and Company C are not the same company.

Example 1

• Company (A) makes a specified preference share distribution to Company (B) and is allowed a deduction under section 194 of the Income Tax Act 1976.
• This distribution is not taxable to company (B) in its country of residence.
• Company (B) distributes the amount received to Company (C) as an ordinary dividend. Without the provisions enacted in subsection (4), the receipt of the dividends by Company (C) from Company (B) would be exempt income, because the dividends were not distributed by Company (B) in respect of preference shares and were not deductible to Company (B). However, the provisions of subsection (4) deem the dividends to have been distributed by Company (B) in respect of preference shares and to have been allowable as a deduction to that company in calculating its overseas tax liability. Subsection (4) applies because the dividends derived by Company (B) from Company prior to their redistribution to Company (C), were distributed by Company (A) in respect of preference shares. were deductible to Company (A) and were not taxed as income of Company (B). The result is that the dividends are taxable income of Company (C).

Example 2

Company (B) makes a preference share distribution to Company (D) and is allowed a deduction in calculating its liability to income tax. Company (D) is not taxable on the dividend received and pays the amount on as an ordinary dividend (for which it receives no tax deduction) to an overseas Company (100% owned by Company (C)) which then on-pays this amount as an ordinary dividend to Company (C).

This example differs from example (1) in that the preference shares distribution is made offshore and is passed through a series of intermediary companies prior to payment to Company (C).

In order to analyse these transactions, it is preferable to break them into their components and apply subsection (4) to each component transaction.

• Company (B) makes a preference share distribution to Company (D)
• Company (B) is allowed a deduction in calculating its liability to income tax.
• Company (D) receives dividends which are not taxable in its hands.

Company (D) is not a New Zealand company and therefore for the purposes of subsection (4) is a "specified company". For the reasons explained in example 1, the specified company is DEEMED to come within the provisions subsection (3)(c) in respect of the distribution of dividends to an overseas company.

The next component, in the application of subsection (4), is as follows:

• Company (D) has been deemed (as explained above) to have distributed a dividend in respect of preference shares to an overseas company.
• Company (D) has been deemed (as explained above) to have been allowed a deduction, in calculating its liability to income tax overseas, for the dividend distributed to an overseas company.
• The overseas company is not liable to income tax on the dividend in its country of residence.

This results in the overseas company, for the purposes of subsection (4), being a "specified company". As such this company is DEEMED to come within the provisions of subsection (3)(c) in respect of the dividends it distributes to Company (C).

The result is that Company (C) receives dividends that come within the provisions of subsection (3)(c) and as such those dividends are not exempt from income tax in New Zealand.

It is important to note that subsection (4) requires the Commissioner to be satisfied that each of the tests contained in the subsection are met, most importantly that the income that was the source of the dividends paid to the New Zealand company was itself a dividend that meets the conditions set out in the subsection. If the funds that comprise the dividends to the New Zealand company were derived from a number of sources only one of which meets the requirements of the subsection, then the subsection can only be applied to that one source. It can only be applied where it is clear that the dividends have been funded in a manner set out in the legislation and in practice it is expected this will occur only where associated companies are involved.

Subsection (5) has a similar effect to subsection (4) in that it is designed to prevent taxpayers avoiding subsection (3)(d) by using intermediary companies. It provides that income derived by any non-resident company (the overseas company) from any other company shall, upon payment by the overseas company to any of its shareholders, be deemed to be income that comes within the provisions of subsection (3)(d) if:

• The income derived by the overseas company that gave rise to the payment was allowable as a deduction to the person from whom it was derived by the overseas company (whether in New Zealand or overseas), and
• The overseas company was not liable to income tax in any country or territory outside New Zealand in respect of that income.

Example 3

• Company (B) makes a convertible note issue to another overseas company (100% owned by Company (C)) and claims a deduction for the interest paid pursuant to the issue in calculating its liability to income tax.
• The interest received by that overseas company is not liable to income tax in the overseas country of residence.
• The overseas company then issues an ordinary dividend to its New Zealand shareholder, Company (C).

Subsection (5) provides that the income derived by the overseas company from Company (B), upon payment by the overseas company to its shareholder (Company (C)), is income that comes within the provisions of section 3(d). This is because:

1. The income paid by Company (B) to the overseas company was an amount that was allowable as a deduction in calculating Company (B)'s liability to income tax; and
2. The overseas company was not liable to income tax on that income.

Like subsection (4) the provision requires the Commissioner to be satisfied that each of the tests are met, most importantly, that the source of the "deemed dividend" paid to the New Zealand company was such that it meets the conditions set out in subsection (5). If the funds that comprise the "dividends" to the New Zealand company were derived from a number of sources only one of which meets the requirements of the subsection then the subsection can only be applied where it is clear that the dividends have been funded from that source. In practice it is expected this will occur only where associated companies are involved.

Subsection (2) of section 10 makes consequential amendments.

Subsection (3) provides that the provisions of the new section apply with respect to dividends and to other income derived by a New Zealand company on or after 21 August 1985.

Section 11 - Profits or Gains From Land Transactions

This section amends section 67 of the principal Act, which deals with the profit or gains from land transactions.

This amendment ensures that when land is sold for a profit by a land developer and that profit has been enhanced by a rezoning betterment factor, the provisions of section 67(4)(ba) and its associated exemptions (s 67(5)) will apply and not section 61(4)(d) and its related exemptions (s 67(6) and s 67(7)).

This amendment will apply in respect of land sales on or after 27 March 7986.

Section 12 - Gains and Losses Due to Exchange Variations In Respect of Repayment of Loans

Section 12 of the Amendment Act replaces subsection (1) of section 71.

Section 71 of the principal Act brings into account, for income tax purposes, realised exchange gains and losses arising on the repayment of certain business loans. This amendment ensures that exchange gains and losses continue to be taxable or deductible following the floating of the New Zealand dollar and the repeal of the Exchange Control Regulations 1978.

The floating of the New Zealand dollar on 4 March 1985 necessitated an amendment to the definition of "exchange variation". The definition previously made explicit reference to the "official exchange rate in New Zealand" which is no longer effectively ascertainable under New Zealand's floating exchange rate regime.

The repeal of the Exchange Control Regulations 1978 by the Exchange Control Regulations 1985 also necessitated an amendment to the definition of "loan". That definition previously specified certain preconditions in relation to money lent to or by any taxpayer. In particular, in certain instances, the consent of the Reserve Bank under the Exchange Control Regulations 1978 was required. With the repeal of the 1978 regulations the Reserve Bank consent is no longer required nor sought. The amended definition of "loan" makes provision for this change.

Subsection (1)

Subsection (1) of the amendment repeals and substitutes subsection (1) of section 71 of the principal Act. The amending subsection provides, for the purposes of section 71. new definitions of the expressions "exchange variation" and "loan".

The definition of "EXCHANGE VARIATION" sets out the method of determining whether an exchange fluctuation to which the section applies has occurred in relation to the repayment of certain loans (excluding interest). It defines the term as being any variation, caused by the fluctuation that occurs in the value of a currency of another country relative to New Zealand currency, between:

1. The amount of the loan repayment, expressed in New Zealand currency at the time at which the repayment was made; and
3. The amount, expressed in New Zealand currency, that would have been required to make that repayment on whichever is the later of 8 August 1975 or the time at which the loan was first made.

The amended definition of "LOAN" is made up of two components:

The first component, which is set out in paragraphs (a) and (b) of the definition relates to money lent to, or by, any taxpayer between 1 January 1974 and 22 January 1985 and makes specific reference to the Exchange Control Regulations 1978 which were in force during that period. These provisions are the same as those in the previous legislation.

The new component, which is set out in paragraphs (c) and (d), relates to money Lent. to or by, any taxpayer on or after 23 January 1985.

"Paragraph (c)" includes within the definition lendings to any taxpayer, on or after 23 January 1985, which are lent in an overseas currency and which are expressed to be repayable in an overseas currency. There is no requirement that the overseas currency borrowed must be an identical currency to the overseas currency in which repayment is to be made.

"Paragraph (d)" includes money lent by any taxpayer on or after 23 January 1985. The money lent must be expressed to be repayable in a currency other than New Zealand currency to come within the new definition.

Subsection (2)

Application date: The new section applies with respect to the repayment, in whole or in part, of any loan made to or by any taxpayer on or after 23 January 1985.

Section 13 - Income Derived From Use or Occupation Of Land

Section 13 makes minor technical amendments to sections 74 and 111A of the principal Act. The effect of the two amendments is to provide that where qualifying forestry plant or machinery is transferred in accordance with a matrimonial agreement, the provisions of section 111A apply.

The amendments result from changes made to forestry taxation last year and therefore take effect from the effective date of those changes (9 November 1984).

Section 14 - Excess Income On Sale of Livestock Where Farmer Forced To Quit Farm, or Farming Business Adversely Affected By Fire, Flood etc

This section amends section 94 of the principal Act which allows excess income from the forced sale of livestock, the forced sale occurring as a result of an adverse event, to be carried forward and set off against the purchase price of replacement livestock in the two years succeeding the year of sale. Section 94 also provides that:

• If a further adverse event is declared before the end of the second income year the period for acquiring livestock can be extended for a third year:
• In the event of further continuation of an adverse event, or the further occurrence of an adverse event, the Minister of Finance may by declaration extend or further extend the period in which the farmer may acquire replacement livestock.

The Amendment extends the provisions of section 94 to allow farmers affected by adverse events to offset the assessable income derived from forced sale of livestock either against the cost of certain capital assets or against the cost of replacement livestock. For this purpose, qualifying capital assets will be certain types of farming and agricultural plant and machinery, horticultural rootstock, and fodder storage buildings that are for use in farming.

This concession will be available to all farmers affected by occurrences that the Minister of Finance declares to be adverse events. It is designed to permit diversification following an adverse event.

Subsection (1 ) inserts into subsection (1) of section 94 a new definition, "qualifying expenditure".

"Qualifying expenditure" means any expenditure of a capital nature incurred by any taxpayer:

1. In acquiring or installing any farming or agricultural plant or machinery for use wholly in a farming or agricultural business carried on by him on land in New Zealand but not including plant or machinery of the kinds referred to subsections (1)(b) and (c) and (2)(a) to (e) of section 122 of the principal Act, viz:
   1. Plant and machinery used in performing services for a farmer on the land used by that farmer for farming or agricultural purposes, ie, agricultural contractors carrying out work on the farmer's land. (Subsection (1)(b)).
   2. Plant and machinery used for:
      • cartage of livestock; or
      • cartage of fertiliser or lime to any farming property or the spreading of fertiliser or lime on the land; or
      • loading of fertiliser or lime into agricultural aerial work aircraft; or
      • the carrying of a vehicle designed for loading fertiliser or lime into agricultural aerial work aircraft and for carrying, in a permanently attached tank, aviation fuel for use in agricultural aerial work aircraft (and for no other purpose): or
      • cartage of goods to and from any farming property. (Subsection (1)(c)).
   3. Any motor car as defined in s 2(1) of the Transport Act 1962; but a utility-type four-wheeled drive vehicle used primarily and principally for farming or agricultural purposes DOES qualify; (subsection (2)(a)).
   4. Cooking appliances; (subsection (2)(b)).
   5. Office plant and machinery; (subsection (2)(c)).
   6. Containers or other articles used for delivering goods; (subsection (2)(d)).
   7. Plant for producing electric current or hydraulic power, unless for the use of qualifying plant; (subsection (2)(e)).
2. In acquiring, erecting or extending any fodder storage building to be used wholly for the purposes of a farming business carried on by the taxpayer.
3. In acquiring or planting any horticultural rootstock to be grown on the land in New Zealand on which the taxpayer carries on a farming or agricultural business.

Subsection (2) repeals subsection (2)(d) of section 94 (except the provisos) and substitutes a new subsection (2)(d). The effect of this amendment is to extend the application of the section to include "qualifying expenditure" (as defined in subsection (1) above) incurred by farmers on or after the 5th of May 1985.

Subsection (3) amends each of the provisos to subsection (2)(d) of section 94 to include the term "qualifying expenditure". This amendment is required as a consequence of extending the application of the section to assets other than livestock (refer subsection (2) above).

Subsection (4) again extends the application of section 94 to include reference to "qualifying expenditure". This provision inserts the words "or the income year in which qualifying expenditure is incurred" after the words "retained by the taxpayer".

Subsection (5) inserts new subsections (7), (8), (9), (10) and (11) into section 94 of the principal Act. These new subsections provide as follows:

Subsection (7) provides that where a taxpayer has incurred "qualifying expenditure" the Commissioner shall allow a deduction in respect of the qualifying expenditure of an amount equal to the lesser of:

1. the qualifying expenditure; or
2. an amount equal to the assessable excess that is deemed, under subsection (3) of section 94, to have been derived in that income year.

Subsection (8) provides that where any taxpayer has been allowed a deduction under section 94 in respect of the cost of any farming or agricultural plant or machinery. the amount allowed as a deduction is deemed to have been a deduction allowed in respect of depreciation. For the purposes of section 108 and section 112 the cost of that farming or agricultural plant or machinery is deemed to be reduced by the amount that has been so allowed as a deduction. This provision is subject to section 117 which provides for depreciation recovery where assets are sold.

Subsection (9) provides for the situation where a taxpayer has been allowed a deduction under section 94 in respect of the cost of any fodder storage building and that building is sold or otherwise disposed of by the taxpayer within five years of the date of acquisition, erection, or extension. Under this provision the amount derived from the sale or disposition of the building is deemed to be assessable income derived by the taxpayer in the income year in which the building is sold or disposed of. The amount deemed to be assessable income is the lesser of:

1. the sale price of the building;
2. the amount of the deduction allowed under section 94 in respect of the cost of that building.

The second proviso to subsection (9) provides that the subsection has no application in any case where the building is transferred in accordance with a matrimonial agreement.

Subsection (10) makes provision for those situations where "qualifying expenditure" is incurred in acquiring, erecting, or extending a fodder storage building and that building is subsequently transferred in accordance with a matrimonial agreement.

The subsection provides that the same rules apply as are set out in section 125(4B) and 125(4C).

The effect of paragraph (a) of subsection (10) is that where a person (the transferor) incurs expenditure of a capital nature in acquiring, erecting or extending any fodder storage building, and that asset is transferred to that person's spouse (the transferee) under a matrimonial agreement in the same year that the expenditure is incurred:

1. The transferee is deemed to have acquired, erected or extended that building on the date on which it was acquired, erected or extended by the transferor.
2. The transferee is deemed to have incurred expenditure of a capital nature in acquiring erecting or extending that building of an amount equal to that incurred by the transferor.
3. The transferor will not be allowed a deduction in respect of the expenditure so incurred.

In other words, the new subsection 10(a) provides that in those cases where the fodder storage building is transferred by any person under a matrimonial agreement in the year in which that person incurs expenditure of a capital nature in acquiring, erecting or extending that building, that expenditure is deemed to have been incurred by the person to whom it is transferred on the date it was incurred by the transferor. Any deduction under section 94 is therefore available to the transferee only, the transferor being deemed not to have incurred the expenditure.

Paragraph (b) of the new subsection (10) caters for the situation where a deduction has been allowed to any person (the transferor) under section 94 in respect of a fodder storage building, and that building is subsequently transferred to a spouse (the transferee) under a matrimonial agreement. It provides that if the building is sold by the transferee within 5 years of the date of acquisition, erection or extension in respect of which a deduction was allowed to the transferor, the lesser of -

• the sale price of the building, or
• the amount allowed as a deduction to the transferor in respect of the cost of the building

is deemed to be assessable income of the transferee in the year of sale.

Subsection (11) provides that every reference to an income year, in relation to those taxpayers who furnish returns of income under section 15 (balance dates other than 31 March), shall be deemed to be a reference to the accounting year corresponding to that income year, and in every such case section 94 shall, with any necessary modifications, apply accordingly.

Subsection (6) of section 14 provides the application date. This amendment applies in respect of "qualifying expenditure" incurred on or after the 8th day of May 1985.

Section 15 - Deduction For Expenditure or Loss Incurred In Providing Fringe Benefits To Minority Shareholders

This section inserts a new section, 105A, into the principal Act.

This new section permits a private company to claim a deduction of expenditure or loss incurred in respect of the costs of providing a benefit (whether or not that benefit constitutes a fringe benefit) to any employee of that company who is a shareholder of the company but is not a "major shareholder". (The term "major shareholder" has been inserted in section 336N(1) by section 34 of this Amendment Act.)

Section 105A has the effect of allowing a private company to claim an income tax deduction in respect of all expenditure incurred in providing benefits to shareholder-employees who are not "major shareholders", irrespective of whether or not the expenditure is incurred to provide a private benefit to the shareholder. It treats the expenditure incurred in providing a private benefit to these shareholder-employees in the same manner as if the benefit were provided to an employee who holds no shares. Such payments will in future be also exposed to fringe benefit tax.

It should be noted that the provision does not apply to benefits provided to shareholders who are not employees of the company. This is because its application is limited to expenditure or loss incurred in providing a benefit "that is or that would, but for the provisions of any of paragraphs (f) to (n) of the definition of the expression "fringe benefit" in section 336N(1) of this Act, be a fringe benefit within the meaning of that definition". To be such a fringe benefit, the benefit must be provided to an "employee" as defined in section 336N for fringe benefit tax purposes. If the shareholder in receipt of the benefit is not an "employee" as so defined, section 105A cannot apply.

The new section has effect from the income year that commenced on 1 April 1986.

A full commentary on the treatment of shareholder-employees for fringe benefit tax purposes follows the commentary on section 34.

Section 16 - Certain Deductions Not Permitted

This section amends section 106(1)(j) of the principal Act which debars certain amounts from being deductible for income tax purposes. This amendment ensures that where a benefit (that is or that would have been a fringe benefit but for certain exemptions within the fringe benefit tax provisions) is provided to a "major shareholder", that expenditure is deemed to be expenditure of a private or domestic nature and not deductible for income tax purposes. This provision removes the argument that would otherwise exist, in certain cases where the shareholder is an employee, that such expenditure should be deductible to the company on the grounds that similar expenditure incurred in relation to employees who are not shareholders is deductible.

This section is one of a number of provisions that deal with the fringe benefit tax treatment of shareholders of private companies. It will have effect from the income year that commenced on 1 April 1986.

For a full commentary on the treatment of shareholder-employees for fringe benefit tax purposes, please refer to the notes following those on section 34.

Section 17- Limitation of Deduction For Motor Vehicles Where Insufficient Records Kept

Section 17 introduces a new section, 106B, into the principal Act to limit the deduction allowable for motor vehicle expenditure and depreciation where the taxpayer does not maintain complete and accurate records of distances travelled for business purposes in a road vehicle that is also used for private purposes.

Subsection (1) of section 17 inserts this new section 106B, discussed fully below.

Subsection (2) provides that this section will apply with respect to the tax on income derived in the 1986/87 income year and every subsequent year. For practical purposes this means that as from 1 April 1986 taxpayers will be required to comply with the new record keeping obligations in order to be able to deduct fully the expenditure and depreciation applicable to the business use of the vehicle. (See later, under "Application of Section 106B" regarding taxpayers with early balance dates).

The New Section 106B:

Subsection (2) of the new section 106B provides effectively that the section applies to the following "taxpayers" only:

• Self employed persons (including partnerships); and
• Private companies, where at any time during the income year any shareholder of the private company is deemed to be a major shareholder within the meaning of "major shareholder" in section 336N(1) of the principal Act.

Note: For details on which shareholders are deemed to be "major shareholders" of a private company, refer to the commentary on section 34 of this Amendment Act.

(Only self-employed persons and such private companies referred to above are "taxpayers" for the purposes of section 106B).

This section does not apply to employees in respect of their travelling expenses. They are covered by sections 73 and 105 of the principal Act and the Fourth Schedule to that Act.

Subsection (1) of section 106B details the requirements of the new record keeping/deduction scheme. Claims for deduction of motor vehicle expenditure and depreciation must in future be capable of substantiation by both expenditure records and records of distances travelled.

The vehicles to which the "distances travelled" recording requirements apply:

• The vehicles concerned are: Every motor vehicle that is a road vehicle, no matter where or how it is used, of the kind ordinarily used for:
  • The carriage of persons; or
  • The transport or delivery of goods or animals, of whatever class or kind.
• Vehicles EXCLUDED are:
  • Trailers
  • Vehicles operated by persons who are not "taxpayers" within the meaning of subsection (2) - see above.
  • Vehicles which, the Commissioner is satisfied, are used in the income year 100 percent for business purposes. (See below, for fuller explanation of this exclusion).

Note: Use for business purposes includes use in providing fringe benefits for employees.

The exclusion of a "100 percent business use" vehicle

Where the vehicle is to be used during the income year wholly for business purposes the taxpayer will not be required to maintain records of distances travelled in that vehicle. However, where there is a possibility that a vehicle will be used for non-business purposes at some time in an income year, complete distance records will need to be maintained at all times in that year. Failure in this regard will expose the taxpayer to the risk of the 25 percent maximum deduction applying in relation to that vehicle.

A vehicle satisfies the "100 percent business use" test where the only "private" use in the income year is by an employee in circumstances which render that use a fringe benefit provided by the employer.

This relief from the obligation to keep records of distances travelled in a 100 percent business use vehicle does not, of course, relieve the taxpayer from his or her obligation to maintain, in the normal course, full detail. Is of the motor vehicle expenditure in respect of which a deduction is claimed.

The nature of the distance records required to be maintained

For every separate vehicle that is subject to the distance recording requirement the records must be in sufficient detail to establish:

• The distance travelled during the year (in each vehicle) in business use; and
• The total distance (miles or kilometres) travelled by that vehicle in the year.

This necessitates the recording, by every driver of the vehicle, in a log book or similar record, of the following details in respect of each business trip:

• The distance travelled on that trip.
• The reason for the trip. (Because private use by an employee is business use in relation to the business, a record of the identity of the driver on each trip should also be maintained).

In the event that a trip has more than one purpose, the predominant purpose should be recorded, except where that predominant purpose is non-business. Details of non-business travel are not required to be maintained.

The record of TOTAL distance travelled in the vehicle on both business and non-business trips during the income year (or, as appropriate, the taxpayer's accounting year) will consist of the odometer reading at the commencement of the income year (eg 1 April in the case of a 31 March balance date) and again at the end of that income year ie at balance date (or at date of purchase and date of sale as appropriate). The total distance travelled will then be self-evident from those two readings.

The effect of failure to keep the required records

Commencing with the 1986/87 income year claims for deduction of motor vehicle expenses and depreciation cannot be based on ESTIMATES of business/private use.

Failure to maintain the records that are required under section 106B will have the following consequence (in respect of every vehicle that is used for non-business purposes) in relation to which that failure occurs:

• The deduction for income tax purposes will be limited to a maximum of 25 percent of the expenditure and depreciation relating to that vehicle. In this context "expenditure" includes the cost of registration, fuel, repairs, insurance, and interest on money borrowed to acquire the vehicle.
• In any case where the Commissioner is of the opinion, based on the facts of the case, that "business" travel in the vehicle was less than 25 percent of total distance travelled in the vehicle in the income year, the deduction will be limited to such percentage (lower than 25 percent) as the Commissioner determines. That percentage could be as low as 1 percent. In this regard, remember that section 106B sets the requirements in respect of vehicles that ARE used, to whatever extent, in the carrying on of the taxpayer's business. In the case of a vehicle that is NOT so used, deduction of expenditure or depreciation is simply NOT permissible in terms of section 104 of the Income Tax Act.

It follows that where the business use of a vehicle in the income year is less than 25 percent of its total usage in that year, the taxpayer's claim for deduction should be based on that lower percentage.

Note: In any event, compliance with the record-keeping requirements of section 106B does NOT automatically guarantee a deduction of MORE than 25 percent of expenditure and depreciation. If the records revealed, for example, that "business" distances travelled in a vehicle in the year totalled only 20 percent of the total distances of all kinds travelled in that vehicle in that year, the deduction would be limited to 20 percent.

Application of Section 106B

Section 106B first applies in respect of the 1986/87 income year. In the case of taxpayers with balance dates other than 31 March, the position is therefore:

• Accounting years commencing after 1 October 1985 and prior to 1 April 1986 As the new section 106B was not enacted until 27 March 1986 a taxpayer whose 1986/87 accounting year commenced prior to 1 April 1986, is not be expected to have maintained the required records in respect of travel undertaken prior to 1 April 1986. In this case records maintained for the period from 1 April 1986 to the taxpayer's balance date will be used as a basis for the apportionment of expenditure and depreciation for the whole year.
• Accounting years commencing after 31 March 1986 and before 2 October 1986 Taxpayers with accounting years that commence at any time between these dates must comply with the new requirements for the whole of their 1986/87 income year. A taxpayer with, for example, a 31 July balance date will be required to comply with this provision as from 1 August 1986 in respect of the accounting year ending 31 July 1987 and subsequent accounting years.

Production and retention of records

The records required to be kept under this section will not have to be forwarded with the annual returns of income. Those records are to be retained by the taxpayer with his or her other business records, including documentation of the motor vehicle expenditure, and to be presented to this Department if requested. The requirements of section 428 of the principal Act regarding the retention of business records apply equally to records kept under section 106B.

It is intended that the annual return of income form will include a panel, to be completed and certified by the taxpayer, identifying those "business" vehicles that are used also for non-business purposes, and stating whether records have been kept in conformity with section 106B.

Section 18 - Repairs, Maintenance and Depreciation

Section 18 amends section 108 of the principal Act to provide that no deduction will be allowed in respect of any repairs, maintenance or any asset to the extent that the asset on which that expenditure or loss was incurred is used in the providing of a benefit (being a benefit that is or that would be a fringe benefit but for the exemptions provided within the fringe benefit tax provisions) to a "major shareholder". Where such an asset is used in providing a benefit to a "major shareholder" the claim for any repairs, maintenance and depreciation must be adjusted accordingly. No deduction will be allowed in respect of the proportion of use relating to that benefit. This amendment harmonises with the amendment effected by section 16 of this Amendment Act. It removes doubts concerning deductibility where the benefit of the expenditure is enjoyed by an employee who is a "major shareholder".

This amendment applies as from the income year that commenced on April 1986 and is consequential to the amendments relating to the treatment of shareholder-employees for fringe benefit tax purposes. A full commentary on this new treatment follows section 34.

Section 19 - Allocation of Expenditure Incurred In the Repair of Flood Damage To Certain Land Used For Farming or Agricultural Purposes

This section inserts a new section 133A in the principal Act.

This section allows to those farmers adversely affected by storm or flood during July 1985, that was declared by the Minister of Finance to be an adverse event, an optional facility for claiming a deduction, for income tax purposes, for the expenditure incurred on restoration work.

This section provides that expenditure incurred on restoration work (as a consequence of the July storm or flood) in any one or more of the 3 income years succeeding the 1984-85 income year may be claimed retrospectively as a deduction in the 1984-85 income year, instead of in the income year in which it is incurred.

Details of the application of the legislation are as follows.

Section 133A

Subsection (1)

This subsection contains the following definitions.

Specified adverse event means the event, being storm or flood that occurred during the month of July 1985 and that for the purposes of section 94 of the Income Tax Act, the Minister declared on 27 August 1985 to be an adverse event.

Specified area means the localities within New Zealand to which the specified adverse event relates. The following areas are affected:

• Cook County; the Kanakanaia, Waipoa, Karaka, Ngatapa and Waihuka Ridings of the Waikohu County: the Waiau, Mangahopai and Mohaka Survey Districts of the Wairoa County; the Waikare, Petane and Puketapu Ridings of the Hawkes Bay County.

"Specified income year" means the income year that ended on 31 March 1985.

Subsection (2)

Provides relief to those farmers whose farms were affected by the July storm and floods, and whose farms are located in the areas set out in subsection (1) above. They will have the option of claiming a retrospective deduction in respect of any restoration expenditure incurred.

If a taxpayer wishes to claim a deduction in the "specified income year" instead of the income year in which the expenditure is incurred the taxpayer is required to forward a written election. The taxpayer's election, which shall be irrevocable, must specify the extent to which the expenditure should be deducted in calculating the assessable income from farming derived by him in the year ended 31 March 1985.

Upon receipt of such an election the Commissioner will allow that deduction and accordingly make or amend any assessment.

Subsection (3)

Provides that every notice of election shall be in writing and shall be given to the Commissioner before the taxpayer is required to furnish his or her return of income for the income year in which the expenditure is incurred, or within such extended time at the Commissioner may allow.

Subsection (4)

Ensures that the provisions of this new section do not overlap with the development expenditure provisions contained in sections 126 and 127 of the Income Tax Act. If an election is made under section 133A the provisions of sections 126 and 127 have no application in relation to that expenditure.

Subsection (5)

Contains provisions to enable the settlement of any dispute arising as to whether;

1. any land is located within the "specified area"; or
2. any damage was caused by the "specified adverse event".

A certificate prepared by a duly authorised officer of the Ministry of Agriculture and Fisheries as to the situation of that land or the cause of the damage shall be final and conclusive evidence for the purpose of the section.

Subsection (6)

Provides that every reference to an income year, in relation to those taxpayers who furnish returns of income under section 15 (balance dates other than 31 March), shall be deemed to be a reference to the accounting year corresponding with that income year, and in every case section 133A shall, with any necessary modifications, apply accordingly.

Section 20 - Expenditure On Scientific Research

This section repeals section 144 of the Income Tax Act and substitutes a new section.

The old section 144 provided that the Commissioner could allow such deduction as he thought fit in respect of any expenditure incurred by a taxpayer during the income year in connection with SCIENTIFIC RESEARCH DIRECTLY RELATED TO THE TRADE OR BUSINESS CARRIED ON BY THE TAXPAYER, except so far as the expenditure related to an asset in respect of which a deduction for depreciation was allowable.

The new section 144 provides that eligible expenditure consists of that incurred in connection with scientific research carried on FOR THE PURPOSE OF DERIVING ASSESSABLE INCOME by the taxpayer, except so far as the expenditure relates to an asset in respect of which a deduction for depreciation is allowable.

The former requirement that the expenditure be directly related to the taxpayer's existing business has thus been eliminated, the new test being that the expenditure must be incurred "for the purpose of deriving assessable income" by the taxpayer. The effect of this change is that subject to the "purpose" test, explained below, any taxpayer may claim a deduction of expenditure incurred in connection with scientific research irrespective of whether the research is in connection with an existing business or a prospective new business activity outside the taxpayer's existing business or employment.

The "purpose" test:

To qualify for a deduction the taxpayer must show that the research is carried out for the express purpose of deriving his or her assessable income. The scientific research would have to be undertaken in a sufficiently competent and professional manner to justify an expectation of income and/or profit resulting from the research. The research programme would need to be arranged, financed, and carried out on a business-like basis and there should be not only the expectation of deriving assessable income but also the prospect of doing so. The "purpose" test, as it will apply in relation to section 144, is a fairly stringent test, and is designed to exclude deductions being allowed to persons indulging in hobbies. (In this regard it is to be noted that the amended section 144 will apply to taxpayers in general, not just to those who are already carrying on a business.)

A consequence of a taxpayer meeting the "purpose" test is that where the cost of research has been allowed as a deduction under the new section 144, ALL receipts derived by the taxpayer from the sale of the fruits of the research will be fully assessable to the taxpayer. The reason for this is that by claiming under section 144 the taxpayer is expressing his intention and the purpose for which the expenditure was incurred.

Development expenditure:

The amendment to section 144 extends the deductibility of expenditure incurred on scientific research but the position in relation to the deductibility of development expenditure relating to scientific development remains unchanged. The amendment does not widen the scope of the allowance to include the costs of developing the results of the research.

Scientific Research

The amendment does not change the nature of the expenditure which is deductible under section 144. There is no definition of scientific research in the Income Tax Act and all expenditure of a scientific nature, which includes industrial research, is deductible if it is incurred for the purpose of deriving assessable income.

Application:

The new section 144 applies from and including the income year that commenced on 1 April 1985 and every subsequent year.

Section 21- Export-Market Development and Tourist-Promotion Incentive

This section makes amendments to section 156F of the principal Act which allows a credit of tax in respect of export-market development expenditure and tourist-promotion expenditure. The effect of the amendments is to extend the incentive to the 1987 year and to phase it out over the 1988, 1989 and 1990 income years as announced by the Minister of Finance in the 1985 Budget and in the August 1985 Statement on Taxation and Benefit Reform.

Without these amendments the terminating date of section 156F would have been 31 March 1986 (see the Third Schedule to the Income Tax Act 1976 as inserted by the Income Tax Amendment Act (No 2) 1985). The rate of tax credit for the 1985/86 income year was 67.5 percent representing 150 percent of the resident company tax rate of 45 percent. The rates of tax credit for the 1987 to 1990 phase-out years reflect the increased resident company tax rate of 48 cents in the dollar, which applies from and including the 1986/87 income year.

Subsection (1) of section 21:

This subsection amends subsection (2) of section 156F by firstly omitting the reference to "terminating date" and substituting a reference to 31 March 1987 and secondly by substituting "69 percent" for "67.5 percent". In other words, for the income year ending 31 March 1987, the rate of tax credit will be 69 percent.

Subsection (2) inserts three new subsections, (2A), (2B), and (2C) in section 156F. The effect of these subsections is to phase out the export market development and tourist-promotion incentives on the following basis:

Income Year Ending	Tax Credit
	%
31 March 1988	64
31 March 1989	58
31 March 1990	53

Subsection (3) makes a consequential amendment to section 156F(6) to ensure that a deduction in calculating assessable income is NOT allowed in respect of any expenditure for which a credit of tax is given during the phase-down period.

Subsection (4) provides that the amendment made by subsection (3) is to apply on and from the first day of the income year commencing on 1 April 1987.

Section 22 - Export-Market Development Activities Incentive For Self-Employed Taxpayers

This section makes two amendments to section 156G of the principal Act, which allows a credit of tax in relation to the value of the time spent by a self-employed person in export-market development activities relating to the supply of certain types of services. (For the 1985/86 income year the credit of tax was 67.5 percent of the value of time).

Subsection 1 amends the definition of "export-market development activities" in subsection (1) of section 156G. As it stood before this amendment, the lead-in to the definition of "export-market development activities" specified that the activities concerned had to be "personally performed by the taxpayer...". Consequent on this amendment, the lead-in reads "personally performed by the taxpayer ON HIS OWN BEHALF OR ON BEHALF OF ANY PARTNERSHIP OF WHICH THE TAXPAYER IS A MEMBER".

The amendment was required because the previous definition allowed a taxpayer to take advantage of the incentive even on those occasions when the promotion concerned the supply of services on behalf of another person with whom the taxpayer was not in business and in relation to whom he or she was no more than an agent. It was never the intention that the incentive should be available in those situations and this amendment restores the original intent of the section by restricting its application to instances where the taxpayer promotes the supply of his or her own services (or the services of a partnership of which he or she is a member) outside New Zealand. This amendment has effect from and including the 1985/86 income year (see subsection (4) below).

Subsections (2) and (3) provide for an extension and phase-out of the incentive on the same basis as for the export-market development and tourist-promotion incentive (explained fully under section 21 above). The phase-out is as follows:

Income Year Ending	Tax Credit
	%
31 March 1987	69
31 March 1988	64
31 March 1989	58
31 March 1990	53

Subsection (4) provides that the amendment to subsection (1) applies on and from the first day of the income year that commenced on 1 April 1985.

Section 23 - Refunds From Income Equalisation Reserve Accounts

This section amends section 179 of the principal Act which provides for refunds of the whole or any part of any amounts deposited under the income equalisation reserve scheme (section 176). The purpose of this amendment is to clarify the particular situations in which the Commissioner may exercise the discretion given to him in relation to an EARLY refund from the income equalisation reserve scheme.

Subsection (1)

Repeals subsection (2) of section 179 of the principal Act and substitutes new subsections (2), (2A) and (2B).

The new subsections to section 119 provide as follows:

Subsection (2)

Provides that subject to sections 180 and 185 no refunds shall be made of any amount that has been on deposit in the income equalisation reserve scheme for a period less than 12 months. This is, however, qualified by the new subsections (2A) and (2B) below.

Subsection (2A)

Qualifies subsection (2) and permits the Commissioner to make a refund of any amount which has been on deposit under section 176 for a period of MORE THAN 6 MONTHS BEFORE THE DATE OF APPLICATION for a refund. The Commissioner may make a refund in these early withdrawal cases where he is satisfied that the refund is required for any of the following purposes:

1. to enable the taxpayer to undertake, immediately after the refund is made, planned development or maintenance work in relation to his or her business (farming, agricultural or fishing) or forestry operation. The work must be undertaken immediately after the refund is made.
2. to enable the taxpayer to purchase, immediately after the refund is made, livestock for use in his or her farming business.
3. to avoid the suffering by the taxpayer of serious hardship.
4. for any other purpose which in the opinion of the Commissioner warrants an early refund.

Subsection (2B)

Further qualifies subsection (2) and permits the Commissioner to make a refund of any amount which has been deposited under section 176, irrespective of the period of time the money has been held on deposit prior to the date of application for a refund. The Commissioner may make a refund where he is satisfied that the refund is required for any of the following purposes:

1. to enable the taxpayer to undertake, immediately after the refund has been made, development or repair work, in relation to his or her business (being a farming, agricultural or fishing business) or forestry operations, where the need to undertake that work was unforseen at the time the deposit was made and resulted from an event that has been declared an adverse event for the purpose of section 94 of the Income Tax Act.
2. to enable the taxpayer to purchase, immediately after the refund is made, livestock for use in his or her farming business, that livestock being purchased for the replacement of livestock lost, sold, or otherwise disposed of as the result of the occurrence of an event that has been declared by the Minister to be an adverse event for the purposes of section 94 of the Income Tax Act.
3. to avoid the suffering by the taxpayer of serious hardship.
4. For any other purpose which in the opinion of the Commissioner warrants an early refund.

Subsection (2)

Deems this section to have come into force on 1 April 1985 and provides that it shall apply on and from that date.

Section 24 - Airport Operators

This section gives effect to the Government's decision that airport authorities are to be taxed, as if they were companies, on their income from airport operations.

Airports are operated by local bodies under joint venture agreements with the Crown. In general there will be an airport authority (the local body which is authorised to operate the airport. The local body will have entered into a joint venture agreement with the Crown (possibly decades ago) on the operation, funding and distribution of profits from the airports. As there will be no one entity that can be said to be the airport, the legislation "creates" an entity, an "airport operator", for the purposes of the Income Tax Act 1976. This is the entity which will be subject to income tax under the new section 197A inserted into the principal Act by section 24 of the Amendment Act.

Section 197A(1)

This subsection provides that section 197A applies notwithstanding anything else in the Income Tax Act. However, to the extent that the remainder of the principal Act does not conflict with section 197A, an "airport operator" (as defined in section 197A(2)) will be subject to income tax as if it were a company (see section 197A(3)(a))

Section 197A(2)

The subsection provides definitions for section 197A.

"Activities as an airport operator" are the activities involved in running an airport under a "joint venture agreement" (an expression defined later in section 197A(2)).

"Airport" has the same meaning as in section 2 of the Airport Authorities Act 1966.

"Airport asset" means, essentially, an asset which:

1. Is used for airport operations and is owned by one or more of the parties to the particular airport's joint-venture agreement (except a hired or rented asset unless leased under a specified lease).
2. Is owned for the purposes of a depreciation sinking fund relating to an airport asset.
3. Is owned for the purposes of a loan redemption sinking fund in relation to the particular "airport operator" (a term defined later in section 197A(1)), but not any loan redemption sinking fund which relates to a loan repayable by only one party to the "joint venture agreement".
4. Has been purchased out of the joint funds of the parties to the joint venture agreement under which the particular airport is operated.

"Airport authority" has the same meaning as in section 2 of the Airport Authorities Act 1966, reproduced below:

'"Airport authority" means a local authority for the time being authorised under section 3 of the Act to establish, maintain, operate, or manage an airport; and includes any person or association of persons authorised under subsection (3) of that section to exercise the powers of a local authority:' "

"'Airport Operator' means the Crown and an airport authority acting as parties to an airport 'Joint venture agreement'. This will usually be the Crown and a local body Council, but only in their capacities as parties to the joint venture agreement under which the airport is operated. No part of the council's other activities is included in this artificial entity, and no part of the Crown's other activities (in particular no part of its activities in relation to other airport joint ventures) is included, but see also the explanation of section 197A(3)(b) below.

"'Joint venture agreement' means the joint venture agreement, between the Crown and the airport authority, and under which the particular airport is operated. Airport joint venture agreements have been made under section 12 of the Civil Aviation Act 1964 and under other legislation. For the purposes of section 197A it does not matter what legislation the particular joint venture agreement was made under."

Section 197A(3)

This subsection contains a number of deeming provisions that are intended to ensure that an "airport operator" shall be subject to income tax as a "company" in the business of operating an airport.

Paragraph (a) deems "airport operators" to be companies.

Paragraph (b) deems the parties to a joint venture agreement to hold shares in the relevant "airport operator". The shares are deemed to be held in the same proportion that profits from the airport, after taking into account any adjustments in respect of previous years, are to be shared between those parties. Thus if the joint venture agreement provides that airport profits, after adjustments in respect of previous years, are to be shared in the proportions 50 percent to the airport authority and 50 percent to the Crown, the shares in the "airport operator" are deemed to be held in the proportions 50 percent by the airport authority and 50 percent by the Crown.

Paragraph (c) deems activities as an airport operator to be a business. This is intended to ensure that sections 65(2)(a), 104(b) and 112, inter alia, apply to airport operators.

Paragraph (d) deems an airport operator to own all assets which are airport assets in relation to the airport.

Paragraph (e) deems airport operators to be separate persons.

Paragraph (f) deems airport operators not to be public or local authorities. This is intended to ensure that section 61(2) will not apply to exempt the income of airport operators from income tax.

Paragraph (h) provides that where:

1. An airport operator has the use of funds provided by one of the parties to the joint venture agreement under which the airport is operated; AND
2. It was expressly agreed (ie, agreed in writing) that those funds are advanced for the purpose of activities as an airport operator; AND
3. The funds are provided in consideration for some provision in the nature of interest -

those funds are deemed to have been borrowed capital employed by the airport operator and the provision in the nature of interest is deemed to be expenditure or a loss in the nature of interest. This paragraph is intended to ensure that section 106(1)(h) will apply to such loans and provisions.

Section 197(4)

This subsection provides that where an airport operator is deemed to own an asset, it is deemed to have incurred expenditure, in acquiring that asset, equal to the amount of the market value of the asset when the airport operator acquired or agreed to use or commenced to have the power to use the asset.

Section 197(5)

This subsection provides that all assets owned by an airport authority on 1 April 1986 are to be accounted for, for income tax purposes, on the basis of the written down book value (or tax purposes that would have applied had the assets been subject to depreciation under section 108 since the date of their purchase.

Section 197A(6)

This subsection provides for the deemed sale of assets which are deemed to be airport assets. If an airport operator has not acquired an asset, but is deemed to have acquired it, the airport operator is deemed to have sold the asset when it ceases to be an airport asset. The sale price is deemed to be the market value of the asset on the day on which it is deemed to be sold.

Section 197(7)

This subsection provides that no deduction is available for any expenditure or loss incurred, or deemed to have been incurred, by an airport authority and chargeable against profits that have been distributed to the joint venture parties.

In simple terms, profits from airport operations under joint ventures are accounted for as follows:

[CCH note: flow chart not reproduced.]

The intention of this subsection is to ensure that no deduction is available for expenditure chargeable against the Airport Authority Appropriation Account or the Crown Appropriation Account.

Section 197(8)

This subsection provides that section 10 of the principal Act will not apply to an airport operator in respect of its activities as an airport operator. This is intended to ensure that the Crown and the airport authority are not required to file a joint or partnership income tax return. An airport operator, being deemed for income tax purposes to be a company and a separate person, is required under section 9 of the principal Act to file a separate IR 4 income tax return. Income tax files for airport operators are to be held on Special Companies section, Wellington District Office.

Application

This section applies from the income year which commenced on 1 April 1986. The first income tax returns will be required from airport operators for the 1987 income year.

Section 25 - Co-operative Dairy, Milk Marketing, and Pig Marketing Companies

Section 25 amends sections 201 to 203 to remove the Secretary to the Treasury from the membership of the Appeal Authorities in respect of the taxation of co-operative dairy, milk marketing, and pig marketing companies.

This amendment takes effect from 1 April 1986.

Section 26 - Trustees of Non-Exempt Superannuation Schemes

In terms of section 225 of the principal Act, where a non-exempt superannuation scheme invests in -

1. a superannuation policy, or
2. another non exempt scheme

double taxation could arise. This is because the income would be taxed when derived by the "investee" trustees and again when distributed to the "investor" trustees. Clause 25 amends section 225 of the principal Act to ensure that any investment income so derived and which has been taxed to the "investee" trustees will not be subject to further tax when distributed. The income derived will now be exempt from income tax when derived by the "investor" superannuation scheme.

Thus if X Company non-exempt superannuation scheme invests in Z non-exempt superannuation scheme, which in turn places the money so received on deposit, -

1. The interest remains assessable when derived by the trustees of Z superannuation scheme; and
2. Amounts distributed by the trustees of Z superannuation scheme to the trustees of X Company superannuation scheme will be exempt from income tax when derived by the trustees of X Company superannuation scheme.

This amendment first applies to income derived in the income year that commenced on 1 April 1983.

Section 27 - Statements To Be Delivered to the Commissioner

Persons who make deductions of non-resident withholding tax (NRWT) are required to file monthly reconciliations of non-resident withholding income paid and NRWT deductions. While this has been a long standing requirement there was no legislative authority for this practice.

Section 27 amends section 316 of the principal Act to require monthly reconciliations for NRWT purposes, but gives the Commissioner a discretion to require an annual reconciliation if he considers it appropriate to do so.

This amendment applies to every deduction of NRWT made on or after 1 April 1986. It also applies to every payment of an amount in respect of NRWT in relation to dividends made in accordance with section 313 of the principal Act on or after l April 1986.

Sections 28 to 33 - National Superannuitant Surcharge

These sections make a series of minor amendments to some of the national superannuitant surcharge provisions in Part XA of the Income Tax Act.

The sections amend (in Part XA) sections 336A, 336B, 336F, 336H, 336I, and 336L of the principal Act. Each of the amendments will apply to the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years (ie from the date the surcharge first applied).

Each section is detailed below:

Section 28 - Interpretation

This section amends section 336A of the Income Tax Act which provides the interpretation provisions of the national superannuitant surcharge.

Subsection (1)

Paragraph (a) amends the definition of the expression "net national superannuation'. Net national superannuation was previously calculated under the following formula:

a - (b - c)

a is gross national superannuation received

b is the tax on all income received

c is the tax on income other than national superannuation and any specified foreign social security pensions received IN RESPECT OF THE INCOME YEAR.

As item "c" above referred to specified foreign social security pensions received in respect of the income year it effectively meant that any BACKPAYMENT of a specified foreign social security pension which spanned two income years was required to be included, in the calculation of item c of net national superannuation, in the EARLIER rather than the later income year.

This was not the original intention of the legislation and this amendment corrects the position by removing the "respect of" from item "c" to require the inclusion of amounts received IN the income year only. It ensures that the liability of such backpayments of foreign social security pensions will be liable for the national superannuitant surcharge in the year of receipt.

Paragraph b amends the definition of the expression "specified income" in section 336A of the principal act to ensure that it refers to a national superannuitant's assessable income other than from source deduction payments. Prior to this amendment the definition referred to "all the income" other than income consisting of source deduction payments of the national superannuitant. The expression "all the income" has a very wide meaning, which includes exempt income and could be considered to include gross receipts (to the extent to which they would be reduced by allowable deductions) - both of which are not income subject to the surcharge. This amendment clarifies the meaning of "specified income" by specifically referring to "ASSESSABLE" income.

Paragraph (c) is a minor drafting amendment. It provides that the definition of "standard deduction entitlement" in relation to a national superannuitant refers to $52 or 2 percent of the GROSS national superannuation, thus removing any doubt as to whether the legislation referred to gross or net superannuation.

Subsection (2) of section 28 adds a proviso to the definition of "standard deduction entitlement", the "standard deduction entitlement" represents that part of the standard deduction which is treated as deductible from a national superannuitant's national superannuation. It is used in section 336B when calculating the amount of a national superannuitant's "other income".

Previously the "standard deduction entitlement" definition did not cater for a national superannuitant who claimed actual employment-related expenses instead of the $52/2% standard deduction.

While employment related expenses cannot be applicable to national superannuation (they would be applicable to other employment-related income), the standard deduction entitlement definition in section 336A treats part of these expenses as relating to the national superannuation payment whenever the other employment-related income is less than $2,600 pa. The definition of "standard deduction entitlement" is therefore amended to ensure that where there is a claim for employment-related expenses under section 105 of the Income Tax Act the standard deduction entitlement is to be treated as nil.

Subsection (3) of this section provides that section 28 is to apply to the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years.

Section 29 - Determination of "Other Income"

This section amends section 336B of the principal Act which determines the amount of "other income" for the purposes of the National Superannuitant Surcharge.

Subsection (1) of section 29 makes a similar amendment to that contained in section 28(1)(a) of this Amendment Act in that it clarifies the treatment of back payments of national superannuation and specified foreign social security pensions. References to gross national superannuation and specified foreign social security pensions in the formula for calculating a national superannuitants "other income" are amended by this subsection to refer to amounts received IN the income year and, NOT the amounts RECEIVED IN RESPECT of the income year. This ensures that the liability of such backpayments for both income tax and surcharge purposes is the same. (ie In the year in which such back payments of national superannuation and specified foreign security pensions are received they are deemed to be "other income" and therefore liable for the national superannuitant surcharge).

Subsection (2)

Paragraph (a) amends section 336B(2)(a) of the principal Act which provides for the calculation of "other income" where national superannuation is received for part only of an income year.

The apportionment of "other income" that is provided under section 336B(2) for those national superannuitants who receive national superannuation for part of an income year was originally designed to be available only to those who permanently departed New Zealand and those who commenced to receive national superannuation. This was intended to prevent national superannuitants from arranging their affairs so that they ceased to receive national superannuation when a large amount of other income was expected and then recommenced to receive national superannuation after the receipt of that income so that the other income would not be subject to the surcharge.

It became apparent, however, that section 336B(2) could have applied to any national superannuitant who, for whatever reason, recommenced to receive national superannuation, not just those who began to receive it for the first time.

The wording in section 336B(2)(a) has therefore been amended to read "... by reason of - (a) His national superannuation commencing FOR THE FIRST TIME after the beginning of the income year ...", thus confirming the application of the provision to the situations for which it was originally intended.

Paragraph (b) of subsection (2) of section 29 amends section 336B(2) of the Tax Act in a manner similar to that in which subsection (1) of this section amended section 336B(1). It clarifies the treatment to be given to backpayments of national superannuation and specified foreign social security pensions by ensuring that these components of the formula for calculating the apportionment of the "other income" of a national superannuitant receiving national superannuation for part only of an income yearare the amounts received IN the income year and not the amounts received IN RESPECT OF the income year.

This amendment reflects the original intention of the legislation in that the treatment of such backpayments for both income tax and surcharge purposes is the same. The effect is that any backpayment of either national superannuation or specified foreign social security pensions does not increase the level of "other income" liable to the surcharge when applying the formulae in section 336B.

Subsection (3) of this section repeals and substitutes section 336B(3). Subsection (3) provides that where any OTHER income of a national superannuitant was received after the date on which the person first commenced to receive national superannuation, and the Commissioner is satisfied it should have been received before that date, the Commissioner may treat it as having been received before that date.

The new subsection provides the Commissioner with the power to determine any payment that is "other income" to be received at a time other than the time at which it was received where he is satisfied that in the normal course of events it would not have been received at that other time. Thus, payment of "other income" that is received after the time the national superannuitant has commenced to receive national superannuation may be deemed to have been received after that time. This discretion can be applied only when the Commissioner is satisfied that:

1. The income would normally have been received on that later or earlier date.
2. The national superannuitant was not party to any arrangement that had the effect of making subsection (3) apply more favourably than would otherwise have been the case.
3. It is in the national superannuitant's interest for the adjustment to be made.

For example, if a national superannuitant who is about to go overseas to take up employment received an advance payment of income from that employment before he had ceased to receive national superannuation that income may be treated as having been received after he ceased to receive national superannuation. A further example would be where the superannuitant was to receive a lump sum retiring allowance from his employer before reaching age 60 but the payment was in fact made shortly after the date of the retirement and commencement of national superannuation. That income may be treated as having been received before he started to receive national superannuation.

Subsection (4) of this section provides that section 29 is to apply the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years.

Section 30 - Election By National Superannuitant In Respect of Payment of Surcharge

This section makes minor drafting amendments to section 336F of the principal Act which relates to the election by a national superannuitant in respect of payment of the surcharge.

Subsection (1) of section 30 which amends section 336F(a)(i), simply corrects the words "gross superannuation" to read, "gross national superannuation".

Subsection (2) repeals and substitutes section 336F(2)(b)(ii). This paragraph gives national superannuitant who estimate that their other income will consist of only source deduction payments the option of paying the national superannuitant surcharge by way of deductions from those source deduction payments.

The amendment re-positions the phrase "in accordance with section 336J of this Act", from the end of section 336F(2)(b)(ii), to appear after the word "deductions". This simply clarifies the meaning of subparagraph (ii) of section 374F(2)(b).

Subsection (3) of this section provides that section 30 is to apply to the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years.

Section 31 - National Superannuitant To Estimate Other Income

Section 31 makes minor amendments to section 336H of the principal Act which provides for a national superannuitant to estimate their other income for the purposes of calculating the amount of national superannuitant surcharge payable.

Subsection (1) amends section 336H(2) which requires a national superannuitant, who has elected (under the provisions of section 336F(2)) to have the surcharge paid by way of deductions from payments of national superannuation, to deliver a form showing an estimate of other income TOGETHER WITH A TAX CODE DECLARATION. As the amount of the deductions is determined on the basis on the estimate of other income when electing to have the surcharge deducted from national superannuation the requirement to furnish a tax code declaration is unnecessary.

The subsection amends section 336H(2) by omitting the expression "together with his tax code declaration".

Subsection (2) makes two amendments to section 336H(3).

Paragraph (a), in line with subsection (1) above, omits the expression "and the tax code declaration" from section 336H(3), thereby empowering the commissioner to determine the amount of surcharge deduction to be made without having to receive a tax code declaration from the national superannuitant.

Paragraph (b) of subsection (2) inserts in section 336H(3) the phrase "in accordance with the tenor of this part of this Act" after the words "the Commissioner shall determine". This requires that the determination, by the Commissioner, of the amount of a national superannuitant's surcharge deductions must be made on a basis consistent with the provisions of the national superannuitant surcharge legislation, as set out in Part XA of the Income Tax Act.

Subsection (3) of this section provides that section 31 is to apply to the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years.

Section 32 - Surcharge Paid As Provisional Tax

Section 336I of the principal Act applies to national superannuitants who elect to pay the national superannuitant surcharge by way of payments of provisional tax in accordance with section 336F(2)(a)(ii). It provides that Part XII of the principal Act - which sets out the requirement for taxpayers to pay provisional tax-applies (with any necessary modifications) to national superannuitants who elect to pay the surcharge by way of PROVISIONAL tax.

Subsection (1):

Paragraph (a) amends section 336I(2) to provide that the amounts of surcharge payable by way of PAYE deductions are to be taken into account when calculating the amount of the surcharge payable as provisional tax. Prior to this amendment section 336I provided that Part XII applied on the basis that the expression "provisional tax" included the amount or surcharge payable and the expression "provisional income" was a reference to the expected specified income of the national superannuitant reduced by his/her specified exemption. This ignored the situation where some of that surcharge was paid by way of PAYE deductions. Thus the national superannuitant could have been required to pay part of her/his surcharge liability twice: once by way of PAYE deductions and again by way of provisional tax.

By inserting, in subsection (2) of section 336I, after the words "any amount payable as the surcharge", the words "(other than deductions from source deduction payments)" the amendment limits theamount of surcharge payable by way of provisional tax to the amount of surcharge that is not paid by way of PAYE deductions.

Paragraph (b) of subsection (1) corrects an incorrect income year reference in section 336I(2). In general, provisional tax is calculated on he basis of the taxpayer's income tax liability in the preceding year. To bring section 336I(2), which requires the national superannuitant to estimate his/her "expected specified income", into line with the payment of provisional tax on account of income tax, the words "expected specified income of that national superannuitant for that income year reduced by his specified exemption" have been amended to read "specified income of that national superannuitant for the IMMEDIATELY PRECEDING INCOME YEAR reduced by his specified exemption for that year.

Paragraph (c) of subsection (1) remedies a minor drafting omission. It inserts into the proviso to section 336I(2), before the word "expected", the word "his".

Subsection (2) of this section provides that section 32 is to apply to the national superannuitant surcharge in respect of other income derived in the 1985/86 income year and subsequent income years.

Section 33 - Application of Surcharge Codes Specified In Tax Code Declarations

Section 33 of this Amendment Act amends Section 336L of the principal Act which provides the circumstances in which the tax codes "MAJ", "SAJ" and "MIN" are to be used. Section 336L provides that the surcharge code "MIN" is to apply to all source deduction payments made to a national superannuitant other than the "largest" source deduction payment, to which the surcharge code "MAJ" or "SAJ" applies.

However, section 336K(2)(b)(i) specifies that the "MIN" surcharge code is to apply to ALL source deduction payments to a superannuitant where:

1. that superannuitant's "other income" comprises both source deduction payments and specified income, (specified income is income other than source deduction payments), and
2. the specified income exceeds the source deduction payments, and
3. the national superannuitant has elected to pay the surcharge against his other income.

Prior to this amendment there was a degree of conflict between sections 336L and 336K(2)(b)(i). When the national superannuitant surcharge provisions were enacted in 1985 it was intended that section 336L would apply to only those national superannuitants to whom section 336K did not apply. To remove any apparent conflict and to reinforce the original intention of the legislation, section 336L of the principal Act is now expressed (following this amendment) as being "Subject to section 336K of this Act". The amendment ensures that the "MIN" code will apply not only to a national superannuitant who has another source deduction payment to which the surcharge code "MAJ" or "SAJ" applies, but also in the limited case where section 336K(2)(b)(i) applies.

Subsection (2) of this section provides that section 33 is to apply to the national superannuitant surcharge in respect of other income derived in the 1985-86 income year and subsequent income year.

Section 34 - Interpretation - Fringe Benefit Tax

Section 34 of this Amendment Act is concerned with the taxation of fringe benefits. A number of amendments have been made to section 336N of the principal Act, which is the interpretation section for Part XB of the Act, that part dealing exclusively with fringe benefit tax.

The major amendment being made in relation to fringe benefit tax is the treatment of shareholders who are employed by a private company. All amendments made by this Amendment Act relating to the treatment of employees for fringe benefit tax purposes, and the resulting change in income tax treatment, are discussed separately at the conclusion of this commentary on section 34.

Subsection (1) of section 34 makes four minor drafting amendments to the definition of the expression "fringe benefit" in section 336N of the principal Act with effect from the commencement of the fringe benefit tax provisions, being 1 April 1985.

Charitable Bodies

Paragraph (a) amends paragraph (h) of the definition of "fringe benefit" to ensure that the exemption from fringe benefit tax applying to non-business activities of certain charitable bodies does not extend to the activities of any local or public authority. This amendment will ensure that bodies such as hospital boards and education boards will not be classified as charitable bodies for fringe benefit tax purposes and will therefore be liable for fringe benefit tax when that board provides a "fringe benefit", as defined, to an employee. This amendment simply clarifies existing treatment and will therefore apply from 1 April 1985.

Minor Amendments

Paragraph (b) makes a grammatical amendment to paragraph (i) of the definition of the term "fringe benefit". This amendment is merely grammatical and accordingly applies from 1 April 1985.

Paragraph (c) amends paragraph (j)(vii) of the term "fringe benefit"

The words "it is a" have been deleted and substituted by the word "any". The amendment is purely grammatical and accordingly applies from 1 April 1985.

Paragraph (d) is also a grammatical amendment. It amends paragraph (j)(x) of the definition of "fringe benefit" by inserting a missing word. As it does not alter the effect of the legislation this amendment also applies from 1 April 1985.

Subsection (2) of section 34 is discussed at the conclusion to this commentary on the amendments being made by section 34. This subsection is concerned with the treatment of shareholders for fringe benefit tax purposes.

Reimbursing Benefits

Subsection (3) amends paragraphs (j)(ii), (iii) and (iv) of the definition of the expression "fringe benefit" in section 336N of the principal Act. These paragraphs provide an exemption from fringe benefit tax in respect of benefits which, if paid in cash, would be exempt from income tax as a reimbursing allowance under Section 73. This amendment ensures that an employer will not be exempt from fringe benefit tax to the extent that a benefit, or an allowance, is provided to an employee on the condition that the benefit or that allowance be used in a particular way so as to provide a benefit to any other employee or employees, or relatives of any employee, of that employer. For example, an employer could provide a divisional manager with an entertainment allowance of $3,000 to enable the manager to put on a Christmas function for the division's staff at a restaurant. Previously this allowance (apart from the portion relating to entertainment of the divisional manager) would have been exempt from fringe benefit tax through the operation of paragraph (j)(ii) of the definition of "Fringe Benefit" in section 336N. Under the amendment, the portion of the allowance that relates to the entertainment of the division's employees will no longer be exempted under that provision. (The part relating to the entertainment of the employee to whom the entertainment allowance was made was never exempt under that provision). However, should that function have been held at the employer's place of business, the benefit to all employees would be exempt from fringe benefit tax through the operation of paragraph (n) of the definition of a "fringe benefit" in section 336N.

This amendment first applies for the quarter that commenced on 1 April 1986.

Definition of "MINIBUS"

Subsection (4) inserts a further three definitions into section 336N(1). The definitions of the expressions "major shareholder" and "private company" are explained in the commentary on the treatment of shareholders for fringe benefit tax purposes at the conclusion to this commentary on section 34.

The term "minibus", used in section 336N, has now been defined to clearly identify those vehicles which may qualify as a "minibus" for fringe benefit tax purposes. Where a vehicle meets the description of a "minibus" it is excluded from the definition of a "motor car" and as a result may come within the scope of the exemption relating to "work related vehicles" (the definition of which is being changed by subsection (5) of this section).

For a vehicle to qualify as a "minibus", as defined, the vehicle must have been designed for the carriage of persons and the interior of that vehicle must contain:

• 3 permanently fixed seats, each of which is designed to seat at least 2 adults; or
• more than 3 seats, of which at least 3 are permanently fixed and designed to seat at least 2 adults.

To meet the "firmly fixed" criterion the seats must be firmly fixed to the vehicle and must be neither collapsible nor capable of being folded down.

(It must be remembered that for an employer to be exempted from fringe benefit tax when a minibus is provided to, or available for the private use of, an employee, all the tests of a "work related vehicle" must be satisfied. If those tests are not completely met, the availability for private use of an employee of the minibus is deemed to be a fringe benefit and the employer is liable for fringe benefit tax on the value of that benefit.)

The definition applies from the quarter that commenced on l April 1986.

• Definition of Work Related Vehicle

Subsection (5) repeals and substitutes the definition of the expression "work related vehicle" with effect from the commencement date of the legislation (1 April 1985).

The purpose of this amendment is to give effect to the Government's announcement earlier this year relating to the placement of the employer's name on the vehicle and the use of logos for the purpose of the work related vehicle exemption.

The new definition requires that a "work related vehicle" must prominently display, on the exterior of the vehicle, the employer's name or other means of identification. Where the vehicle is owned by the employer, the name, logo, or acronym, or other similar identification of the employer which is regularly used in his or her business, must be displayed. Where the vehicle is rented from any person the vehicle must display the name, logo or acronym of either the employer or the person from whom the vehicle is being rented, provided it is identification which is regularly used by the employer or that person in his or her business.

A reasonable approach will be taken to the expression "prominent display on the exterior of the motor vehicle". A sign should be able to be seen and recognised and must not be obscured or hidden.

Subsections (6), (7) and (8) are explained in the commentary on the changes to the treatment to shareholders for fringe benefit tax purposes, which follows the commentary on section 34.

• Goods Sold to Employees

Subsection (9) amends section 336N(5) of the principal Act which provides an exemption from fringe benefit tax when goods, which are "on special" to the public at a price less than the normal retail price (not exceeding $200), are sold to an employee at a staff discount which reduces the price paid below the cost of the goods to the employer.

This amendment limits that exemption to those sales to an employee (or an employee's relative) where:

• the sale price to the employee is not less than the lesser of:
  1. 95 percent of the cost of the goods to the employer:
  2. 95 percent of the "on special" price to members of the public AND
• either immediately before or immediately after that sale to the employee there was a reasonable quantity of identical goods available for purchase by members of the public.

What constitutes a "reasonable quantity" will depend on the facts of the particular case. In determining this, regard is to be given to the type of goods and the size of the business. It will not be satisfactory for the item of goods purchased by the employee to have been the only one of its kind "on special" on that day. What is required is that members of the public must have had a reasonable opportunity to purchase the item that is sold to the employee.

This amendment does not limit the rate of staff discount that an employer may allow but ensures that for the exemption from fringe benefit tax to apply, the price at which the goods are sold to the employee must not fall below the lesser of 95 percent of the cost to the employer or 95 percent of the "on special" price. This means that an employer may provide a staff discount of up to 5 percent on the price paid by the public, where the goods are on sale to the public at less than cost, without attracting liability for fringe benefit tax. Previously, such a sale may have attracted an FBT liability.

This amendment applies from the quarter that commenced on 1 April 1986.

Subsection (10) inserts a new subsection (6) into section 336N. This new subsection provides an exemption from fringe benefit tax for employers when goods (other than goods "on special" to which section 336N(5) applies) are sold to employees for less than the cost of the goods to the employer.

This new exemption is similar to that provided by subsection (5) of section 336N (as amended by section 34(9) explained above) but differs in that it is not limited to goods which are "on special" to the public. This exemption applies when goods are sold at a staff discount to employees, at below cost to the employer.

Before the subsection can apply:

• the goods must be sold in the normal course of the employer's business. (Where, for example, a butcher purchases an electrical product for sale to an employee the exemption would not apply because the butcher's normal business is the sale of meat, not electrical items.)
• the normal retail price at which those goods are sold by the employer must not exceed $200.
• the discount granted by the employer to the staff member must be that which is normally allowed to staff members.
• the amount of the staff discount must not exceed five percent of the price at which those goods are offered to the public.

Subsection (10) also inserts a new subsection (7) into section 336N. This section deems that the exemptions provided by subsections (5) and (6) of section 336N will apply where an employee of one company in a group of companies (as defined in section 2 of the principal Act) purchases goods from another company in that group. Subsections (5) and (6) will apply to that purchase as if the other company was the employee's employer.

These amendments will apply to all purchases made by employees from employers on or after 1 April 1985.

Amendments dealing with the Treatment of Shareholder-Employees for Fringe Benefit Tax and Income Tax purposes

Where an employer provides a benefit to an employee, that employer is subject to the provisions providing for the taxation of fringe benefits contained in Part XB of the Act.

Under the legislation that existed prior to the amendments contained in this Amendment Act, where the employer was a private company and the employee a shareholder in that company, problems arose because of the fact that only benefits provided to an employee by reason of employment are subject to fringe benefit tax. Where a benefit was provided by reason of the person's position as a shareholder in the company that benefit was not subject to fringe benefit tax and the shareholder and the company were subject to an income tax adjustment. The problem with this situation was that it was not always possible to clearly identify the reason for providing the benefit to the shareholder.

To overcome this problem the Amendment Act sets out specific rules regarding the income tax and fringe benefit tax treatment that is to apply to shareholders of private companies. Essentially the income tax and fringe benefit tax treatment of fringe benefits provided to shareholders of private companies on or after 1 April 1986 will be dependent upon the extent of their shareholding in the company. Those who hold or control less than 10 percent of the shares or voting rights will be treated in the same manner as though they held no shares at all. For those who hold 10 percent or more of the shares or voting rights, the private company will be subject to income tax "add back" adjustments and will not be liable for fringe benefit tax.

Private Companies

This new policy will apply in relation to benefits provided to shareholders in private companies only. A definition of the term "private company" has been inserted into section 336N(1) by section 34(4) of this Amendment Act, giving it the same meaning as that contained in the Companies Act 1955.

How the new legislation will operate

Where a private company provides a benefit to any employee who owns, or has the power to control, or has the right to acquire, less than ten percent of any shares or voting rights in that private company, the company will be subject to fringe benefit tax on the same basis as for benefits provided to any other employee. The company will in that instance be able to deduct the expenditure incurred in providing that benefit and the shareholder will NOT be subject to any income tax adjustment under section 4 of the Act in relation to the value of the benefit received. The reason for providing the benefit is no longer a relevant consideration.

Where an employee owns, or has the power to control, or has the right to acquire, ten percent or more of the company's shares or voting rights, he or she is deemed to be a "major shareholder" and the company will NOT be subject to fringe benefit tax in respect of any benefit provided to that employee. Instead the cost of providing that benefit will not be deductible to the company and the benefit, as and where appropriate, will be subject to the dividend provisions of section 4 of the Act.

The treatment of shareholders who are not employees remains unchanged, irrespective of the percentage shareholding in the company. Expenditure incurred in providing private benefits to shareholders who are not employees will continue to be non-deductible to the company for income tax purposes.

Determination of a "major shareholder"

A person who owns, has the power to control (whether directly or indirectly), or has the right to acquire, ten percent or more of the shares in the private company is deemed to be a "major shareholder". A definition of this term has been inserted into the principal Act by section 34(4) of this Amendment Act. The term "major shareholder" is now used in other parts of the principal Act as a result of insertions and amendments made by this Amendment Act.

To determine the percentage of shares or voting rights which a shareholder owns, controls or may acquire, consideration must be given to the interest in that same company held by any relative or nominee of the shareholder. Subsection (6) of section 34 inserts a new subsection (2A) into section 336N of the principal Act. Paragraph (a) of this new subsection provides that any shares or voting rights held by

1. any relative of the shareholder;
2. any nominee of that relative; or
3. any nominee of the shareholder

are deemed to be held by the shareholder along with the shares or voting rights held by the shareholder.

This means that where a benefit is provided to a person who has any interest (shares or voting rights) in the company, the interest (shares or voting rights) held by relatives and nominees will be added to that person's holdings when determining whether or not he or she is a major shareholder in the company.

For example:

Smith & White Ltd
Joe Smith	50%
Joanne Smith	5%
Susan White (wife of Sam)	35%
Sam White (husband of Susan)	5%
Don White (son)	0%
Jan Brown (nominee for Sally White, daughter of Susan and Sam)	5%

• If Joanne Smith was employed by the company and was in receipt of a benefit, the company would not be subject to fringe benefit tax but the employee and company would be subject to an income tax adjustment. This is because when Joanne Smith's interest of 5% is combined with that of Joe Smith (her husband) she holds more than ten percent of the shares in the company.
• Don White could not be deemed a major shareholder of the company. To be deemed a major shareholder the employee must own, have the power to control, or the right to acquire, any of the shares in that company, and only then can any interest held by any relative or nominee be deemed to be held by that person.
• Sally, however, if employed in the company, would be deemed a major shareholder as she indirectly controls 5 percent of the shares in the company (as held by her nominee) and the interest held by her relatives, when combined with that held by her nominee, exceeds ten percent.

Paragraph (b) inserts a tracing provision to deem shares held by subsidiary companies to be held by the individuals who are the beneficial owners of the shares.

Paragraph (c) provides that the term "nominee" includes any person who

• directly acts on behalf of the shareholder in the exercising of his or her voting rights; or
• directly or indirectly holds the shares of the shareholder.

The percentage of shares or voting rights owned, under the control of, or able to be acquired by a person is determined at the end of each quarter. The shares or voting rights which have been owned, controlled or which have been available for purchase at any other time during the quarter are not taken into consideration, unless that shareholder had temporarily disposed of his or her interest for the purposes of defeating the fringe benefit tax legislation. If that occurs the Commissioner may ignore that temporary disposition when determining the percentage of shares or voting rights held by that person.

Treatment of benefits provided to employees who are not major shareholders

Where a benefit is provided to an employee who is not a major shareholder (ie he or she is deemed to have less than a 10 percent interest in the company) the company is subject to fringe benefit tax on the same basis as if the benefit was provided to an employee who is not a shareholder. The cost of providing the benefit is not assessable to the shareholder as a dividend and is deductible to the company.

The amendments to the principal Act which facilitate this treatment are:

Section 336N(3A): This new subsection has been inserted by section 34(8) of the Amendment Act. It provides that benefits granted by a private company to an employee who holds shares in the company, or is deemed to hold shares in the company because of the operation of the new section 336N(2A), are deemed to have been granted to that employee as part of the employee's remuneration and not by reason of his or her shareholding.

This is necessary because the definition of "fringe benefit" in section 336N provides that only benefits granted to employees by reason of employment are subject to the fringe benefit tax provisions. The amendment removes any argument that a benefit is not subject to fringe benefit tax because it was provided to a shareholder-employee by reason of his or her shareholding (rather than as part of his or her remuneration).

(It should be noted that although the new section 336N(3A) deems all benefits provided to shareholder-employees to have been granted by reason of their employment, benefits provided to "major shareholders" are specifically exempted from fringe benefit tax through the operation of the new paragraph (f) of the definition of "fringe benefit" in section 336N(1) of the principal Act (as inserted by section 34(2) of this Amendment Act).)

Section 105A This is a new section which has been inserted by section 15 of the Amendment Act. It permits a deduction to the company in respect of the costs of providing a benefit (whether or not that benefit constitutes a fringe benefit) to any employee who is a shareholder, but is not a "major shareholder", in the company.

This section in effect deems such costs NOT to be costs of a private or domestic nature and permits deductibility as if they were expenditure allowable under section 104 of the principal Act. It removes any argument that the expenditure was not incurred in the production of the company's assessable income because it was incurred in providing a private benefit to a shareholder.

Section 4(1) has been amended by section 3 of this Amendment Act. The amendment ensures that the expenditure incurred by a proprietary company in the providing of a benefit that is a fringe benefit (or that would be a fringe benefit but for the operation of paragraphs (f) to (n) of the definition of a "fringe benefit") to an employee who is NOT a major shareholder cannot be assessed to that shareholder as a dividend. It should be noted that the reference to "fringe benefits" limits the application of this exemption to shareholders who are also employees.

Section 6 has been amended by section 4 of the Amendment Act. This amendment ensures that although certain payments made to a shareholder throughout the income year are deemed not to be "source deduction payments" and PAYE is not required to be deducted therefrom, those payments will still be deemed to be source deduction payments to an "employee" for fringe benefit tax purposes. The purpose of this amendment is to ensure that benefits provided to shareholder-employees are subject to the fringe benefit tax provisions when that shareholder is in receipt of any salary or wages from the company, even though the income in terms of Section 6 is deemed to be income derived otherwise than from source deduction payments for income tax purposes.

Treatment of benefits provided to employees who are major shareholders

Benefits provided to employees who are major shareholders are deemed not to be fringe benefits and are therefore not subject to fringe benefit tax. The costs involved with the provision of the benefit are deemed to be costs of a private or domestic nature and are not deductible to the company. Where the private company is a proprietary company, as defined in section 2 of the principal Act, the costs incurred by the company are treated as a dividend in the hands of the shareholder unless that expenditure is subsequently repaid to the company.

The provisions of the principal Act which facilitate this treatment are:

Section 336N Paragraph (f) of the definition of the term "fringe benefit" has been amended to exclude all benefits granted to a "major shareholder" of a private company. Because these benefits are deemed not to be fringe benefits, they cannot be subject to fringe benefit tax.

Section 106(1)(j) of the principal Act has been amended by section 16 of this Amendment Act. Previously paragraph (j) excluded any deduction to the extent that the expenditure or loss was of a private or domestic nature. The amended paragraph (j) continues to prohibit any deduction of expenditure or loss which is of a private or domestic nature but extends this by deeming any expenditure or loss incurred in the providing of a benefit to a "major shareholder" to be expenditure or loss of a private or domestic nature and therefore not deductible to the company. This extends to include benefits that would, but for the operation of paragraphs (f) to (n) of section 336N(1), be deemed fringe benefits. Benefits that constitute "monetary remuneration", or that are deductible under section 150 (contributions to employee superannuation schemes), are NOT deemed to be private or domestic expenditure and therefore continue to be deductible for income tax purposes.

Section 105A, which has been inserted by section 15 of the Amendment Act, has been explained previously. This section deems expenditure incurred by a private company in the providing of a benefit to an employee who is a shareholder to be deductible expenditure except where that employee is a "major shareholder". It does not, therefore, permit a deduction for expenditure incurred by the company in providing a benefit to a "major shareholder".

Section 4(2) of the principal Act deems expenditure incurred by a proprietary company in providing a benefit to a shareholder to be a dividend to that shareholder, unless that expenditure is subsequently repaid to the company. This "deemed dividend" provision does not apply where the expenditure is deductible to the company. Only expenditure incurred by a company in providing a benefit to an employee who is not a "major shareholder" is deductible to the company. Therefore expenditure incurred in providing a benefit to a "major shareholder" can still come within the provisions of section 4.

Section 2 of the principal Act, which contains the definition of the term "EXPENDITURE ON ACCOUNT OF AN EMPLOYEE", has been amended by section 2 of the Amendment Act. Subsection (2) of the amending section ensures that where a private company incurs expenditure in providing a benefit to an employee who is a "major shareholder", that expenditure cannot also be treated as monetary remuneration of the shareholder.

Section 108 has been amended by section 18 of the Amendment Act and provides that NO deduction for depreciation or repairs and maintenance shall be allowed to the extent that the asset is used in providing a benefit to a "major shareholder".

The extent of use is relevant in determining whether any adjustment should be made. To establish this the type of asset should be considered and the amount of time it has been used in providing a benefit to an employee. Where that asset is used only incidentally in the providing of a benefit (for example a hairdryer when providing an occasional haircut) no adjustment will be required.

Special provisions exist in relation to the private use of motor vehicles by major shareholders of private companies - please refer to the commentary on the new section 106B. (Section 17 of this Amendment Act).

Benefits to which this new legislation relates

The new legislation regarding the treatment of benefits provided to shareholder-employees is to apply to all benefits which come within the definition of the expression "fringe benefit" in section 336N of the principal Act.

Where a benefit in the form of

• the private use or enjoyment of a motor vehicle;
• the availability for private use or enjoyment of a motor vehicle;
• a low interest loan;
• subsidised transport;
• discounted goods and services; or
• any other benefit;

is provided to an employee, who is not a "major shareholder", the employer will be subject to fringe benefit tax on the value of that benefit.

The costs incurred by a private company in providing any of these "benefits" to an employee who is a "major shareholder" will not be subject to fringe benefit tax but will be subject to the income tax adjustments outlined above.

When does this legislation apply

For fringe benefit tax purposes, the application is to the quarter that commenced on 1 April 1986. The income tax amendments first apply to the income year that commenced on 1 April 1986 (or equivalent accounting year).

Section 35 - Value of Fringe Benefit; and Section 44 - Fringe Benefit Values

The fringe benefit tax provisions of the principal Act (Part XB) relating to the valuation of fringe benefits have been amended by sections 35 and 44 of this Amendment Act. These two sections are interrelated and amend the provisions under which a benefit, in the form of a motor vehicle provided to or available for the private use of an employee, is to be valued for fringe benefit tax purposes. This commentary combines the explanation on these sections.

Section 44 replaces the Tenth Schedule to the principal Act with a new Tenth Schedule which is set out in the Second Schedule to this Amendment Act. This Schedule outlines how a benefit in the form of a motor vehicle is to be valued for the purposes of fringe benefit tax.

Paragraph (a) of the new Schedule provides that where the motor vehicle is owned by the employer, the value of the fringe benefit for the purposes of item "Z" of the formula in section 336O(1) of the principal Act is 6 percent of the COST PRICE of that motor vehicle.

Sale and Buy Back Arrangements

A new subsection, (1A), which has been inserted in section 336O by subsection (1) of section 35 of this Amendment Act, specifies the manner in which, for the purposes of the Tenth Schedule, the "cost price" of a motor vehicle is to be determined in certain circumstances.

Those circumstances are:

1. Where the motor vehicle is acquired by a person on or after 23 September 1985 and has within the period of 24 months prior to that acquisition been owned by that person, or by an associated person, the cost price to be used in calculating the value of any fringe benefit consisting of the use or availability of that motor vehicle is the HIGHEST cost for which the motor vehicle has been acquired, by the person or the associated person, at any time since the vehicle was manufactured.
   
   Example
   
   

   Vehicle A
   (1)	Z Ltd purchases	1.8.82	$15,000
   (2)	Sold (under arrangement) to J Motors Ltd	31.3.85	$ 8,000	market value
   (3)	XY Ltd (associate of A Ltd) purchases	1.4.85	$ 8,000
   (4)	Sold to Z Ltd	1.4.86	$ 6,000

   
   
   In transaction (3) the vehicle was acquired prior to 23 September 1985 and therefore subsection (1A) of section 336O does not apply. The cost price for the purpose of paragraph (a) of the Tenth Schedule is, therefore, $8,000. In transaction (4) the vehicle was acquired after 23 September 1985 and had within a period of 24 months been owned by that same person. Subsection (1A) of section 336O deems the "cost price" for the purposes of paragraph (a) of the Tenth Schedule to be the highest cost of that vehicle to that person (or to an associated person) at any time since the vehicle's manufacture. Therefore the cost is deemed to be $15,000. (The significance of the date the 23 September 1985 is that it is the date on which the Government announced that the "sale and buy back" arrangements being entered into by employers to reduce their liability for fringe benefit tax would no longer be accepted).
2. Where the motor vehicle was acquired-
   1. At no cost (for example, by way of gift); or
   2. At less than market value, pursuant to an arrangement entered into for the purpose of defeating the intent and application of the fringe benefit tax provisions; or
   3. In circumstances where, for whatever reason, the cost price (under that acquisition) is unable to be established to the Commissioner's satisfaction;- The cost price for the purposes of valuing the fringe benefit attaching to the vehicle will be based on the VALUE that the Commissioner is satisfied was the market value of the vehicle on the date on which it was acquired. The "market" value will be based on the retail price at which the motor vehicle could have been purchased by the employer in an arms length transaction, from a licensed motor vehicle dealer.
      • Lease by an Associated Person Paragraph (b) of the new Tenth Schedule provides the rules for determining the value of the fringe benefit where the employer leases or rents the motor vehicle from AN ASSOCIATED PERSON. Subparagraph (i) - Where the period of leasing or renting commenced before 23 September 1985, the value of the fringe benefit is equal to 6 percent of the MARKET VALUE of the motor vehicle on the date on which the leasing or renting commenced. Subparagraph (ii) - where the period of renting or leasing commences on or after 23 September 1985 the value of the fringe benefit is equal to 6 percent of the COST PRICE of the motor vehicle to whoever is the owner of the vehicle at the time the period of leasing or renting commenced. The provisions of the new subsection (1A) of section 336O concerning the interpretation of the term cost price, as explained above under paragraph (a), will also apply for the purposes of determining the cost price referred to in this subparagraph.
      • Other Provisions for Determining Value Paragraph (c) of the new Tenth Schedule specifies the value to be used when the motor vehicle is leased or rented under an ARMS LENGTH TRANSACTION, IE, NOT BETWEEN ASSOCIATED PERSONS. In this situation the value to be adopted is 6 percent of the MARKET VALUE of the motor vehicle at the time at which the period of leasing or renting commences. Paragraph (d) gives the Commissioner authority to determine the market value of the motor vehicle where he is not satisfied that the value used by the employer under paragraphs (b)(i) or (c) (explained above) is the true market value. A market value that would be acceptable to the Commissioner would be that described under paragraph (a) above, being the retail price at which the motor vehicle could have been purchased, in an arms length purchase from a licensed motor vehicle dealer, on the date on which the period of leasing or renting of the vehicle commenced. Paragraph (e) provides that where the motor vehicle is one of a pool of vehicles which are available for the private use or enjoyment of an employee the value of the fringe benefit is equal to 6 percent of the average of the cost prices or market values of the motor vehicles as determined in accordance with paragraphs (a) to (d) of the Tenth Schedule as explained above. Subsection (2) of section 35 corrects a minor drafting fault in section 336O(6) of the principal Act by replacing the word "subsection" with the word "section". The amendment applies as from 1 April 1985. Subsection (3) provides that the amendments effected by subsection (1) are to apply to fringe benefits provided on or after 23 September 1985.

Section 36 - Taxable Value of Fringe Benefit

Section 36 amends section 336P(2) of the principal Act which provides an exemption from fringe benefit tax for incidental benefits which arise during business travel by the employee.

When the legislation was originally introduced, the exemption extended only to those benefits to which paragraph (d) of the definition of "fringe benefit" applied (being benefits in the form of subsidised transport). However the intention of the exemption was that it also apply to benefits to which paragraph (e) of that definition applies.

The Department has interpreted section 336P as providing an exemption to those benefits deemed to be "fringe benefits" under paragraphs (d) AND (e) of that definition as that was clearly intended. Section 36 gives effect to this intention and applies from 1 April 1985, being the original application date of section 336P(2).

Section 37 - Payment of Fringe Benefit Tax Every Quarter

Section 37 repeals and substitutes section 336T of the principal Act.

Prior to this amendment, Section 336T required the furnishing to the Commissioner of a fringe benefit return (and payment of the fringe benefit tax) by every employer every quarter.

The new section 336T, which applies with respect to fringe benefits, provided on or after 1 April 1986, provides as follows:

Subsection (1) of section 336T:

Subsection (1) effectively repeats the provisions of section 336T as they were before this substitution. that is, it requires a fringe benefit return to be furnished (and payment of the fringe benefit tax to be made) for every quarter in which a person is an employer.

Subsection (2) of section 336T:

This subsection reinforces the former section 336T, by specifically requiring that, SUBJECT TO SUBSECTION (3), a fringe benefit return must be furnished in respect of every quarter in which the employer has not provided a fringe benefit.

This return will be in fact a "NIL" return. It will apply where fringe benefits are provided in some quarters but not in others.

Subsection (3) of section 336T - Nil Returns

Gives the Commissioner the authority to dispense with the furnishing quarterly of "NIL" fringe benefit returns -

1. the purposes of meeting the special circumstances of any case or class of cases; and
2. Upon or subject to such terms and conditions as the Commissioner requires.

In terms of this provision, the Commissioner will relieve, from the QUARTERLY return furnishing obligation, any employer who satisfies the Commissioner that he or she does not provide any fringe benefits during any year. This relief will be subject to the requirement that the employer furnish a fringe benefit return, at year end, in respect of the full year. It will be subject also to any variation that the Commissioner finds necessary during the year.

Subsection (2) of section 37 provides that this substituted section 336T applies with respect to fringe benefit tax on fringe benefits provided on or after 1 April 1986.

Those taxpayers who may be eligible for relief under subsection (3) of the new section 336T must furnish quarterly returns up to and including the March 1986 quarter. The furnishing of an annual "NIL" fringe benefit return cannot commence until the taxpayer has been given formal notification to that effect by the Department.

Section 38 - Additional Tax To Be Charged If Default Made In Payment of Tax

Subsection (1) of section 38 of this Amendment Act amends an incorrect cross reference in section 398 (Section 398 of the principal Act imposes additional tax and incremental additional tax on amounts of tax that are outstanding after the last date for their payment.) This amendment simply substitutes, for the previous reference to "section 34" in the definition of "specified rate of interest" in subsection (1) of section 398, the correct reference which is "section 34A".

Subsection (2) repeals and substitutes paragraph (b) of the definition of "period of deferral" in subsection (1) of section 398.

Where there is an amount of tax in dispute, that amount is determined by the Commissioner and notified to the taxpayer pursuant to section 34 of the principal Act and the taxpayer is then able to defer payment of one-half of that amount (that half being the "deferrable tax") up until such time as the dispute is finally resolved. The start of that "period of deferral" was intended, when the legislation was introduced by the Income Tax Amendment Act (No 2) 1985, to commence on the later of:

1. The date of the notice of assessment; or
2. The day FOLLOWING the last day for payment.

However, in the 1985 legislation that starting date was expressed as being the later of:

1. The date of the notice of assessment; or
2. The LAST DAY FOR PAYMENT.

This meant that the "period of deferral" could commence on the last day for payment, with the result that where the dispute is found in the Commissioner's favour, "interest based" additional tax would be charged from the date of the commencement of the "period of deferral", that is, from 7 March (in the case of a 31 March balance date) instead of (as should be the case) 8 March.

The amendment made by subsection (2) of section 38 remedies this situation, and ensures that in such circumstances interest can be charged only from the DAY FOLLOWING the last day for payment (eg 8 March) rather than from the last day for payment (eg 7 March).

Subsection (3) specifies the application date of these two amendments. They apply from the commencement of section 40 of the Income Tax Amendment Act (No 2) 1985; that is, with respect to the tax on income derived in the income year that commenced on 1 April 1985.

Section 39 - Deduction of Tax From Payment Due To Defaulters

Section 400 of the principal Act enables the Commissioner to issue, to a person who is in possession of funds which are payable to a taxpayer who owes money to the Department, a notice requiring that person to pay to the Department sufficient of those funds to extinguish the arrears of tax. Such notices to deduct may be issued in respect of various categories of money payable to a taxpayer, including money held in bank accounts.

This section makes several amendments to section 400.

Deduction may be a lump sum or by instalments

Subsection (1) repeals and substitutes subsection (2) of section 400. Subsection (2) is the operative subsection which ensures that where any taxpayer has made a default in the payment of tax, the Commissioner may, from time to time, by notice in writing, require any person to deduct or extract an amount payable in relation to the taxpayer.

Recently, some doubt was expressed about whether the subsection enables the Commissioner to require that deductions be made from a bank account by way of instalments. In the past it was thought that the legislation had always permitted such deductions and notices issued over many years have hitherto been complied with. Recently this practice has been challenged and this amendment is designed to clarify the ambit of the subsection and ensure that a deduction or extraction by way of instalment may be made.

The new subsection (2) is essentially the same as the subsection that it replaces except that it allows two categories of deduction to be made.

Paragraph (a) permits the Commissioner to require a deduction to be made IN ONE SUM from any amount that is an amount payable in relation to the taxpayer while paragraph (b) permits him to require that the deduction be made by way of INSTALMENTS. In all other respects, the subsection is unchanged.

Subsections (2), (4) and (6) of section 39 amend subsections (7), (8) and (9) of section 400 by inserting, after the word "deduction" wherever it occurs, the words "or extraction". These amendments are necessary in order to be consistent with the scheme of subsection (2) which refers to both a "deduction" and "an extraction".

Indemnity

Subsection (3) inserts a new subsection (7A) in section 400. The new subsection provides that any person, acting pursuant to a notice issued under section 400, shall be deemed to be acting on the authority of the taxpayer. It indemnifies any such person in respect of any deduction, extraction or payment made in accordance with a section 400 notice.

This subsection will also overcome any inherent problems caused by conflicting statutory provisions - for example, section 89 of the Law Practitioners Act 1982. These provisions require a solicitor to hold all money received for or on behalf of the client exclusively for the client. The Law Practitioners Act can no longer be cited as a reason for not complying when a Section 400 notices.

The amendment applies to all notices issued by the Commissioner under section 400, whether issued in the current year or in previous or future years.

Bank Accounts - Deductions Held in Trust for the Crown

Subsection (5) inserts a new subsection (8A) into section 400. The new subsection provides that where a section 400 notice requires a bank to deduct money from a taxpayer's bank account, any amount that is payable by the bank to the taxpayer shall, to the extent of the amount required to be deducted, be deemed to be an amount held in trust for the Crown and be recoverable in the same manner in all respects as if it were income tax payable by the bank.

The subsection applies to any notice issued under section 400 that relates to a bank account. It provides that where a deduction is required to be made under such a notice, any money held in the account at the commencement of an instalment period, or deposited in that account during that period, shall be deemed to be held in trust for the Commissioner until the deduction is made. The amount deemed to be held in trust is limited to a maximum of the amount of the instalment required to be deducted at the end of this period.

The instalment period referred to above is defined in paragraphs (a) and (b) of subsection (8A).

Paragraph (a) relates to a notice that requires a bank to deduct or extract an amount in one sum. The period in these cases, commences on the day on which the section 400 notice is given to the person and expires with the day on which the deduction or extraction is required to be made in compliance with the notice.

Paragraph (b) specifies the relevant period in relation to a notice that requires a bank to deduct or extract an amount by way of instalments.

For the sum required to be deducted or extracted in the first instalment, the period in which the money is deemed to be held in trust for the Commissioner is the same as in paragraph (a). For each ensuing instalment the period commences on the day succeeding the day on which the previous deduction or extraction was required to be made and ends on the day on which the relevant instalment is required to be deducted or extracted.

The subsection (8A) is complementary to subsection (8) of section 400. Subsection (8) secures sums deducted or extracted from any amount pursuant to a section 400 notice by deeming such sums to be held in trust for the Crown. Subsection (8A), on the other hand, secures the amount of any instalment (or lump sum) that is required to be deducted or extracted from a bank account at the expiry of a specified period to be held in trust for the Crown until the date on which that deduction or extraction is required to be made.

Offences for Failure to Comply

Subsection (7) inserts a new paragraph (c) in subsection (9) of Section 400. Subsection (9) sets out specific offences against section 400 and this subsection adds a new offence of failure to comply with the new subsection (8A) in section 400.

The subsection is self-explanatory. However it is to be noted that section 42 of this Amendment Act has amended subsection (9), as from 1 April 1986, in such a way that every person who commits an offence specified in subsection 9 of section 400 will in future:

"on the first occasion on which he is convicted of any such offence or more than one such offence, be liable, in respect of that offence or, as the case may be, each of those offences, to a fine not exceeding $15,000."

On every other occasion on which a person is convicted of any such offence or more than one such offence, that person will be liable in respect of that offence, or each of those offences, to a fine not exceeding $25,000.

Subsection (8) consequentially repeals section 40(2) of the Income Tax Amendment Act (No 3) 1983.

Application

Subsections (9) and (10) relate to the APPLICATION DATE:

Subsections (1), (2), (4), (5), (6), (7) and (8) of section 39 shall apply in relation to section 400 notices issued on or after 27 March 1986. (The date on which the legislation received the Governor-General's assent).

Subsection (3) applies in relation to section 400 notices issued at any time, whether before, on, or after the coming into force of the Amendment Act.

Section 40 - Relief From Additional Tax

Section 40 extends the additional tax RELIEF provisions in section 413 of the principal Act by inserting a new subsection, (2A). This new subsection gives the Commissioner the authority to remit additional tax charged for late payment or non-payment of provisional tax in those cases where the income tax payable for an income year, as determined after the end of the income year, is less than the provisional tax that was payable in respect of that year.

This amendment confirms the Department's previous administrative practice of remitting part or all of the additional tax incurred on provisional tax to the extent that the additional tax was calculated on an amount by which the provisional tax exceeded the income tax for that year.

Subsection (1)

The maximum relief that the Commissioner will allow under the new subsection (2A) of section 413 will be equal to the difference between the additional tax charged on the provisional tax payable and that which would have been charged had the provisional tax payable for the year been equal to the income tax for that year as ultimately assessed by the Commissioner. Where there is NO income tax payable for a year, all additional tax on provisional tax for that year will be remitted. Where income tax IS payable for a year, the amounts of the instalments of provisional tax for that year will, for the purpose of recalculating the additional tax thereon, be recalculated, by the Commissioner, to represent the amounts equal to the appropriate proportions (eg 1/3 and 2/3) of the income tax as ultimately assessed.

Example

Income year ending 31.3.87
Taxpayer is required to pay 1987 provisional tax of $9000		In August 1987 Commissioner assesses 1987 income tax at $7,800
		Additional Tax on Provisional Tax		Recalculation of that Provisional Tax and Additional Tax
			$	$
7.8.86	1st instalment due not paid by 7.9.86		3000	2600	(1/3 of $7800)
8.9.86	Additional tax of 10% for non-payment		300*	260	+
			3300	2860
7.2.87	2nd instalment due		6000	5200
	Total due but not paid by 7.3.87		9300	8060
8.3.87	Additional tax for non-payment		930*	806	+
			10230	8866
2.4.87	Provisional tax paid		9000	9000
	Balance (additional tax) owing		1230	134(Cr)
1.8.87	1987 Assessment Issued		7800	7800
	Add: Additional Tax already assessed		1230	1066
			9030	8866
	Prev Tax Paid		9000	9000
	Credit (refund)			134
	Debit (cancelled)		30
	*Additional tax incurred	1230	+Additional tax recalculated
			$l,066

In this example the effect of applying the new relief provision of section 413(2A) is that the amount of additional tax charged is reduced from $1,230 to $1,066.

Subsection (2) of section 40 of this Amendment Act provides effectively that where the amount of additional tax to be remitted under this new relief provision exceeds $1000 the approval of the Minister of Finance must be obtained.

Subsection (3) provides that the amendments made by section 39 apply with respect to the tax on income derived in the income year that commenced on 1 April 1985 and in every subsequent year. Therefore this section applies to 1986 and future years' provisional tax. In those circumstances where this section does not have application ie 1985 and previous years' provisional tax, the Department's previous administrative practice remains in force.

The Basis of Calculating Additional Tax on Provisional Tax

In amplification of the above it is appropriate to comment briefly on the provision which imposes additional tax on provisional tax.

Section 40 of the Income Tax Amendment Act (No 2) 1985 substituted the previous section 398 of the principal Act with a provision that imposes 10% additional tax on any amount of tax outstanding after the last day for payment, and also imposes further additional tax of 10% on balances (including additional tax) that remain outstanding thereafter at six monthly intervals. Subsection (7) of section 398, as so substituted, ensures that further incremental additional tax for late payment of provisional tax cannot be charged on any amount of outstanding provisional tax, or on additional tax charged on that provisional tax, after the day immediately preceding the due date for payment of the income tax that is payable for the income year in relation to which the amount by way of provisional tax was payable. This means that once the income tax for the income year for which the provisional tax was payable becomes due and payable there cannot be any further additional tax charged on the provisional tax in respect of any period ending on or after that due date.

Where the Commissioner allows a taxpayer further time, by way of new due date, to pay an amount of income tax, that new due date will apply only to the payment of that income tax and the calculation of any additional tax thereon. It will not affect the termination date for the charging of additional tax on provisional tax, which remains at the original due date.

Section 41 - Officers And Employees of Corporate Bodies

This section inserts in the principal Act a new section 416A which provides that an officer or employee of a corporate body responsible for furnishing information or income tax returns to the Commissioner commits an offence if he or she fails to do so. The expression "officer" is defined, for the purposes of section 416A, in section 416A(1). The definition is simple and self-explanatory.

The penalty for this new offence is provided in section 416(3) of the principal Act.

The new section 416A applies to offences committed on or after 1 April 1986.

Section 42 - Penalties For Offences

This section gives effect to the Government's decision to increase the maximum penalties for offences against the Income Tax Act. The penalties for all offences are also consolidated in a new section 416B. The maximum penalties provided for offences against the other inland Revenue Acts are not affected by this section.

Section 42(1)

This subsection inserts the new section 416B into the principal Act, increasing the maximum penalties for offences against the principal Act and consolidating them in one section. The new penalties are set out in Appendix 1 to this bulletin.

A feature of the new penalties is that the maximum penalties are increased for persons who have been convicted of offences or an offence against the principal Act on a previous occasion. The maximum penalties do not increase each time a taxpayer commits or is convicted of a single offence. The increase occurs on each occasion on which the taxpayer is convicted of one or more offences against the principal Act.

Example

Example

1. Taxpayer fails to furnish income tax returns for the years ending 31 March 1985, 1986 and 1987. He is prosecuted and convicted of these offences on one occasion. The maximum penalties are:
   
   

   1985	$  500
   1986	$2000
   1987	$2000

2. 
   
   
3. The same taxpayer later fails to furnish income tax returns for the years ending 31 March 1988 and 1989. He is prosecuted and convicted of these offences on one occasion. The maximum penalties are:
   
   

   1988	$4000
   1989	$4000

4. 
   
   
5. The same taxpayer later fails to furnish income tax returns for the years ending 31 March 1990 and 1991. He is prosecuted and convicted of these offences on one occasion. The maximum penalties are:
   
   

   1990	$6000
   1991	$6000

Section 42(2)

This subsection removes from the principal Act all other references to penalties.

Section 42(3)

This subsection repeals amendments to legislation repealed by section 42(2) of this Amendment Act.

Section 42(4)

This subsection provides that the new penalties apply to offences committed on or after 1 April 1986.

Section 42(5)

This subsection provides that the maximum penalties for offences committed before 1 April 1986 are to be those provided in the principal Act prior to the enactment of this Amendment Act.

Section 43 - Terminating Dates of Taxation Incentives

This section repeals the Third Schedule to the principal Act and substitutes a new schedule. The amendment has a two fold effect, it removes references to those export incentives available in terms of sections 156F, 156G and 158A of the principal Act and it extends the terminating date of sections 127, 127A and 128 from 31 March 1986 to 31 March 1987.

Sections 19 and 20 of this Amendment Act insert provisions for the phase out of the export-market development incentives contained in sections 156F and 156G of the principal Act. As the amendments effected by sections 19 and 20 remove the references to the "terminating date" in sections 156F and 156G and substitute specific phase-out provisions, it is necessary to remove the reference to those incentives in the Third Schedule.

Section 158A of the principal Act was repealed by section 26(1) of the Income Tax Amendment Act (No 2) 1985 with effect from the income year that commenced on 1 April 1985. Accordingly the present amendment removes the reference to this incentive in the Third Schedule.

Section 44 - Fringe Benefit Values

This section inserts a new Tenth Schedule into the Act with effect from 23 September 1985.

For the explanation on section 44 refer to the commentary on section 35 of this Amendment Act.

Section 45 - Miscellaneous Amendments

This section makes a series of minor drafting amendments to the principal Act.

Subsection (1) amends section 312(4) of the principal Act by deleting the reference to "paragraph (d)" of section 4(1) of the principal Act. The Income Tax Amendment Act (No 2) 1985 amended section 4 of the principal Act (meaning of term "dividends") by amalgamating paragraphs (b) and (d) of section 4 into a new paragraph (b). Paragraph (d) was thus repealed and the reference to it in section 312 is no longer valid.

Subsection (2) of this section makes similar consequential amendments to section 313 as those made to section 312 by subsection (1). This subsection deletes the reference to "paragraph (d)" of section 4(1) of the principal Act in both places it occurs in section 313 (in subsections (1)(a) and (2)(a).)

Subsections (3), (4) and (5) simply repeal spent provisions in various Amendment Acts from previous years.

Subsection (6) corrects a drafting error in section 2(8)(a) of the Income Tax Amendment Act (No 3) 1985. Paragraph 2(8)(a) should have referred to section 7(1)(c) of the Finance Act (No 2) 1981, NOT section 7(1).

Subsection (6) corrects that error.

Appendix I

Offences Against the Income Tax Act 1976

Section	Offence	Current	New Maximum Fines
		Max.	1st	2nd &	3rd &
		Fine	Conviction	Later Conv	Later Conv
325(1)(a)	Failure to make proper non-resident withholding tax deductions.	$2,000	$15,000	$25,000	-
324(1)(b)	Applying non-resident withholding tax toimproper use.	$2,000	$15,000	$25,000	-
368(1)(a)	Failure by employer to make tax deductions.	$2,000	$15,000	$25,000	-
368(1)(b)	Failure by employer to account for tax deductions.	$2,000*	$15,000*	$25,000*	-
368(1)(c)	Attempting to gain a tax reduction by using a false or misleading tax code declaration or by giving false information.	$2,000	$15,000	$25,000	-
368(1)(d)	Operating more than one primary tax code declaration or tax certificate.	$2,000	$15,000	$25,000	-
368(1)(e)	Alteration or forgery of tax code certificate and similar means of having no PAYE tax deductions or reduced deductions made.	$2,000	$15,000	$25,000	-
368(1)(f)	Altering any tax deduction certificate or attempting to obtain advantage or credit for tax deductions paid in respect of another person.	$2,000	$15,000	$25,000	-
400(9)(a)	Failure to make deductions as required by section 400 order.	$2,000	$15,000	$25,000	-
400(9)(b)	Failure to account for section 400 deductions.	$2,000	$15,000	$25,000	-
400(a)(c)	Permits payment of money held in trust for the Crown to any person other than the Commissioner	-	$15,000	$25,000	-
416(1)(a)	Refusal or failure to furnish any return or information as and when required.	$500	$2,000	$4,000	$6,000
416(1)(b)	Wilfully or negligently making any false return or giving false information or attempting to mislead any officer of the Department.	$2,000	$15,000	$25,000	-
416(1)(c)	Obstructing any officer in the discharge of his duties or in exercising his powers under the Act.	$2,000	$15,000	$25,000	-
416(1)(d)	Acting in contravention of or failing to comply with any provision of the Act.	$2,000	$15,000	$25,000	-
416(1)(e)	Aiding, abetting or inciting any person to commit an offence under the Act.	$2,000	$15,000	$25,000	-
* Plus up to 12 months imprisonment.