Income Tax Amendment Act (No 2) 1985

This commentary item was published in Public Information Bulletin Volume 136, May 1985

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Section 1: Short Title

This provides for the Amendment Act to be read with and form part of the Income Tax Act 1976.

Section 2: Application

The provisions of this Amendment Act apply to tax on income derived in the income year which commenced on the 1st day of April 1984, unless otherwise stated in the Amendment Act. Some provisions in the Amendment Act have effect from the date on which it received the Governor-General's assent. The Amendment Act was assented to on 23 March 1985.

It is important to check the commencement date when applying any of the amending sections. The commentary which follows will bring this out.

Section 3: Interpretation

Subsection (1) of this section repeals the definition of "basic rates" and substitutes a new definition. This substituted definition omits all reference to bonus issue tax which was repealed in the 1982 legislation.

Subsection (2) - Definition of the expression "money lent".

In 1983 definitions of the expressions "interest" and "money lent" were introduced to the Income Tax Act 1976 by the Income Tax Amendment Act 1983 (refer TPC 84/2, Part I for explanation).

This subsection amends the definition of "money lent" to make it clear, in respect the types of transaction covered by paragraph (d) of the definition, that where the money lent is applied for the benefit of or on behalf of a person rather than directly to him, there is nevertheless "money lent" from which "interest" arises.

Example:

• A person has a debt of $100,000.
• He goes to a financier to whom he sells a promise to pay $120,000 in six months, for $100,000.
• He uses the $100,000, received from the financier for his promise, to pay his debt.
• Six months later he pays the financier $120,000 in accordance with his promise.

In terms of the definition of "money lent" as it was immediately before this amendment and as it is under the new paragraph (d), the $100,000 is clearly "money lent" and consequently the $20,000 received by the financier at the end of the six months over and above the $100,000 originally provided, is "interest".

However, if the example is changed so that instead of the financier paying the $100,000 to the person giving the promise to pay, the person arranges for the financier to pay the $100,000 directly to the person's creditor in return for the same promise, the old paragraph (d) of "money lent" did not catch such a transaction. The amended paragraph (d) of the definition of "money lent" ensures that even where, as in this example, the person giving the promise to pay a greater amount in the future does not receive the amount paid for the promise but the amount is paid "for the benefit of, or on behalf of, or dealt with in the interest of or on behalf of" that person giving the promise, that amount is nevertheless "money lent" and the "profit" ($20,000 in the example) to the person who paid for the promise and received its proceeds, is "interest".

Subsection (3) of section 3 provides that the amendment to the definition of "money lent" made under subsection (2) is to apply with respect to income which is interest that is derived from money lent under a binding contract entered into on or after 29 July 1983. This date is the original application date for the definition of "money lent" and accordingly the new form of paragraph (d) applies from the beginning of the interest regime and the definition of money lent as introduced by the Income Tax Amendment Act 1983.

Section 4: Dividends

(a) Amalgamation of Two Existing Paragraphs

Subsection (1) amends the definition of dividends in section 4 of the . principal Act.

Paragraph (b) of section 4(1) of the principal Act which dealt with company distributions of property to shareholders, and paragraph (d) of the same section, concerning the sale of company property to shareholders for inadequate consideration, have been repealed and replaced by a new paragraph (b). The new paragraph clarifies the position of non-cash distributions.

Where property is distributed to shareholders in any manner the market price of the property, on the day it is distributed, is deemed to be a dividend. Where company property is distributed to a shareholder for inadequate consideration, the difference between the market price and any consideration provided will be deemed to be a dividend in the shareholder's hands. If, for any reason the market price is not available, a determination will be made by the Department.

This subsection applies on and from the date of assent of this Amendment Act by the Governor-General, (23 March 1985).

(b) "In Specie" Distributions

Subsections (2), (3), (5) and (6) provide that the capital gain content of an "in specie" distribution to shareholders in the winding up of a company is exempt from tax.

Prior to the amendment where an "in specie" distribution of assets was made to shareholders on the winding up of a private company, the distribution was taxed as a dividend to the shareholders to the extent that the current value of assets distributed exceeded the amount of the company's paid up capital. This treatment was considered to be anomalous compared with the situation where assets were realised on winding up. In those circumstances the excess selling price over cost would not be treated as a dividend, in terms of the proviso to section 4(5A).

Subsection (2) adds a proviso to paragraph (c) of section 4(1). The amendment provides that the portion of the market price of the asset transferred to the shareholder which exceeds:

• The cost price of the asset, plus
• Any capital losses incurred in the year in which the distribution is made -

will not be deemed to be a dividend.

Example:

Paid up capital of X Ltd (500 shares of $1)  $500

Shares held by:

Mr A: 499

Mrs A: 1

Assets	Cost Price	Market Price
Building 1	30,000	50,000
Building 2	40,000	30,000

On 1 April 1985 Building 2 is sold for $30,000, ie, a capital loss of $10,000 is incurred. On 30 June 1985 the company is wound up. Mr A receives Building 1 in return for his shares. The amount deemed to be a dividend is calculated as follows:

Market Price of Building 1					$ 50,000
Less paid up value of shares
(Allowable under section 4(1)(c))					499
					$49,501
Less adjustment in terms of
provisio to section 4(1)(c) Market Price:			50,000
Less Cost Price:	30,000
Capital Losses:		10,000	40,000	10,000 (Capital Profit)
Dividend taxable in Mr A's hands					39,501

Note:

If a loss is deductible for income tax purposes, or against capital profit in terms of sections 4(5) or 3(3) it should be ignored in the above example.

Subsection (3) adds a third proviso to section 4(1). Where a non-taxable bonus issue has previously been made from an asset revaluation reserve the "cost price" of the asset for the purposes of section 4(1)(c) is deemed to be increased by the amount of the revaluation.

Subsections (5) and (6) amend sections 4(5) and 3(3) respectively to provide that where a capital loss is offset against the market price in terms of section 4(1)(c), it should not also be offset against other capital profits.

Application - Subsections (2), (3), (5) and (6) apply for the income year that commenced on 1 April 1982 and subsequent income years.

(c) Deemed Dividends

Subsection 4 concerns "deemed dividends" arising by virtue of section 4(2) of the principal Act. The wording of the Act prior to this amendment meant that the department had no alternative, where any type of private expenditure was paid for by a company, other than to treat the amount as a dividend in the shareholders' hands unless it was not claimed as a deduction by the company and was charged to the shareholders current account with the company. As the expenditure was disallowed to the company, it was also effectively taxed at the company rate, and in some cases could bear tax combined at a rate in excess of 100 percent.

This treatment was considered to be particularly harsh where an adjustment was necessary because a company had incorrectly apportioned dual purpose expenditure, or had made some other technical error. These situations were not generally viewed as attempts at tax evasion, and it was decided to amend section 4(2) to allow the shareholder and the company the opportunity to make good the error without incurring any penalty by way of "double" taxation.

The amendment provides that where the deemed dividend arose through innocent error on the part of all of the shareholders in believing that the expenditure was not private expenditure of any person other than the company, and the amount of the deemed dividend has been repaid to the company, an amended assessment may be issued to the shareholder excluding the dividend.

NOTE: That failure in the first place to conscientiously consider the question of apportionment of expenditure will not constitute an "innocent error".

In many cases the necessary adjustments may be made before an assessment is issued.

The amendment is effective from the income year that commenced on 1 April 1984.

Section 5: Extension of Time Arrangements

This section amends section 17 of the principal Act, which deals with the dates by which annual income tax returns are required to be furnished. The amendment resulted from recommendations made by a Joint Working Party of Inland Revenue Department officials and members of the New Zealand Society of Accountants on extension of time arrangements.

The amendment provides that where:

• a person carrying on a professional public practice; or
• a person carrying on a business which includes preparing annual income tax returns; or
• the Maori Trustee -
• prepares income tax returns for 10 or more persons the Commissioner may allow an extension of time for furnishing any of those returns if it is not possible or not reasonable to furnish them at the times required by the Act. However, the Commissioner may not allow an extension of time beyond the 31st of March immediately following the end of the income tax year for which the return is being furnished. In other words:
• The date for furnishing the income tax return of a taxpayer with an early balance date (1 October to 30 March) may not be extended beyond the second 31 March which follows the end of the taxpayer's accounting year.
• The date for furnishing the income tax return of a taxpayer with a 31 March balance date may not be extended beyond the next 31 March which follows the end of the taxpayer's accounting year.
• The date for furnishing the income tax return of a taxpayer with a late balance date (1 April to 30 September) may not be extended beyond the next 31 March which follows the end of the taxpayer's accounting year.

For example, the Commissioner may not extend the time for furnishing any 1985 income tax return beyond 31 March 1986. Thus the return of a taxpayer whose balance date is 1 October 1984 may be furnished, with approval, as late as 31 March 1986 (up to 18 months after balance date), and the return of a taxpayer whose balance date is 30 September 1985 must also be furnished no later than 31 March 1986 (no more than six months after balance date) even if an extension of time is granted.

The extension of time arrangements for income tax practitioners are explained in the booklet IR 271 Tax Practitioner's Handbook for 1985. TPC 85/95 sets out the Commissioner's policy and the details of extension of time arrangements.

This section applies to income tax returns for 1985 and for all subsequent income years.

Section 6: Commissioner To Make Assessments, Determinations of Loss, and Other Determinations

Section 6 amends section 19 of the principal Act which authorises the Commissioner to make an assessment, a determination of loss, and other determinations.

This amendment repeals and substitutes subsection (2) of section 19 and enables the Commissioner to make a determination of loss in all instances where a loss for an income year has been ascertained.

Prior to this amendment, where a taxpayer had furnished a return of income showing either a profit or nil income, and the result for the income year had been ascertained by the Commissioner to be in fact a loss, the Commissioner had no authority under section 19 to make a determination of that loss, and therefore had no authority under section 29 to issue a notice of determination of loss. As there was no authority to issue such notice the taxpayer had no right to object to the ascertained loss.

This amendment has rectified this situation and now enables the Commissioner to make a determination of loss where a loss has been ascertained, regardless of the position shown in the return of income furnished.

This section of the Amendment Act has effect as from the income year that commenced on 1 April 1984.

Section 7: Obligation to Pay Tax not Suspended by Objection or Appeal

Comments on this section are contained in Part II of Appendix A.

Section 8: Interest on Certain Excess Tax

Comments on this section are contained in Part II of Appendix A.

Section 9: Rebate in Respect of Gifts of Money and Payment of School Fees

The effect of this section is three-fold.

Examination Fees

First, subsection (1) of this section amends the definition of the expression "fees" in section 56A(1) of the principal Act to make it clear that external examination fees (such as School Certificate, University Entrance) paid in respect of pupils at private or integrated schools do not qualify for the school fees rebate.

The original purpose of the school fees rebate was to provide some assistance to those parents who meet the costs of educating their children outside the State school system. The rebate was intended to apply to tuition fees payable to private and integrated private schools.

However, in Taxation Review Authority cases (Nos 82/104 and 82/105) the Authority determined that School Certificate fees paid in respect of pupils at private or integrated schools qualified for the school fees rebate. The Authority decided that under the wording of section 56A(3) the rebate for school fees was not limited merely to attendance fees and noted that the dictionary definition of "fees" included "entrance money for examinations". This meant that contrary to the original intention of the legislation all external examination fees paid in respect of any child attending a private or integrated school would qualify for the school fees rebate, while at the same time external examination fees paid in respect of any child attending a State school did not qualify.

The purpose of this amendment is, therefore, to merely clarify and confirm the original intent of the legislation, so that in no circumstances will external examination fees qualify for the section 56A rebate in the future.

The amendment applies with respect to the income year that commenced on 1 April 1984 and subsequent income years. This means that within the rebate limits specified in section 56A external examination fees paid in the 1983/84 income year in respectof any pupil attending a private or an integrated private school were eligible for the rebate but that eligibility will not apply in relation to the 1985 income year and future years. Any rebate claims made for examination fees paid during an income year earlier than the 1984/85 income year will not be allowed unless it is the initial claim, in a return of income furnished late, or the previous disallowance of such claims was the subject of a live objection at the time the Authority gave its decision. Late objections based on the Authority's decision will not be accepted.

CORSO

Secondly, subsection (2) reincludes Corso in the section 56A(2) list of donee overseas aid organisations for the purposes of the charitable donations rebate. By virtue of its reinclusion in section 56A(2), donations made by public companies to Corso will also qualify for the deduction provided by section 147(2).

The reinclusion of CORSO as a qualifying donee organisation applies with respect to the tax on income derived in the income year commencing on the 1st day of April 1985 and in every subsequent year.

OPERATION HOPE

Thirdly, subsection (3) of this section adds "Operation Hope" (Aid Ship to Africa) to the list of qualifying donee organisations in section 56A(2) of the principal Act. This subsection has no specific application date and therefore applies from the general application date in section 2 of this Act being the income year commencing 1 April 1984. All donations to Operation Hope will be eligible for the charitable donations rebate under section 56A or the deduction from assessable income allowable to donor public companies under section 147, subject to the limits set out in those sections.

Refer also to section 44 of this Amendment Act which sets out the requirements which approved overseas aid organisations must meet in terms of record keeping and the furnishing of returns showing the sources and application of their funds.

Section 10: Incomes Wholly Exempt from Tax - Charitable Organisations and Thalidomide Trusts

This section makes a number of amendments to section 61 of the principal Act which is the main provision listing the categories of income which are exempt from income tax.

The amendments made in subsections (1) to (3) relate to the exemption afforded to the income of charitable organisations, whereas that in subsection (4) relates to the income derived by trustees of trusts set up for the benefit of thalidomide victims. Each subsection is discussed below.

Subsection (1):

Non-Business Income

This subsection repeals and substitutes paragraph 61(25) of the principal Act which deals with the exemption afforded to the non-business income of charitable organisations.

The effect of the rewarding in that paragraph is to clarify the interaction between paragraphs 61(25) and 61(27). In the past these two paragraphs have simply dealt with non-business and business income respectively. However, since the introduction of the second proviso to section 61(27) in 1982, it was not clear which paragraph applied in the case of rental income in particular.

This is because, on the one band, as the scale of rental activities may not be sufficient to constitute a "business" (as defined in section 2) in many cases, this would indicate that the exemption of the rental income should be considered under section 61(25). On the other hand, the operation of paragraph (f) of the second proviso to section 61(27) indicates that the exemption of rental income should be considered under that section. In the absence of an amendment, it was not clear which section took precedence.

The effect of this amendment is to ensure that the provisions of section 61(27) take precedence thereby restoring the original intention of the 1982 legislation. Thus the exemption of the rental income of charitable organisations from income tax should be considered under section 61(27).

Subsection (2):

Business Income

This subsection remedies an anomaly which had arisen in the operation of the second proviso to section 61(27) which deals with the exemption afforded to the business income (and rental income - see the commentary above) of charitable organisations.

The intention of the second proviso to that section, when it was introduced in 1982, was to restrict the use of charitable organisations for tax avoidance purposes. Of particular concern was the practice of the setting up of "one man charities" which could then be used to circumvent the limitations of the charitable donations tax rebate.

While the provisions appear to have been effective in relation to charitable companies, this is not necessarily the case with charitable trusts. This is because the tax legislation which applies to trusts generally can override the provisions of section 61(27).

In particular, income derived by a trust which is paid or applied to or for the benefit of the charitable beneficiaries during, or within six months after the end of, the income year (or corresponding accounting year) in which it is earned, becomes "beneficiaries' income" for tax purposes. Where the beneficiary is a recognised charity (which is normally the case with one man charities) there is no tax payable by the beneficiary in respect of the income received from the trust, as that income is specifically exempted by section 61(25). The second proviso to section 61(27) thus effectively applied only to the income of a trust to the extent that income was retained within the charitable trust and not distributed or that there was no beneficiary entitled in possession to receipt of the income.

This amendment ensures that where the second proviso to section 61(27) applies to a charitable trust, the whole of its income, not just the portion that is retained as undistributed income of the trustees, will be liable to income tax and will be taxed as if it were trustees income. Thus the section 61(27) provision will now effectively override the general trust taxation provisions.

It should also be noted that the new wording added to the legislation refers to the provisions of section 230 (which relates to non-specified trusts) only. This is because, by virtue of the definition in section 226(1)(b), charitable trusts cannot be specified trusts.

This amendment applies with effect from the income year which commenced on 1 April 1984 by virtue of the general application provision in the Amendment Act. This means that for the 1983/84 income year, being the year in which the second proviso to section 61(27) first applied, that proviso can only be applied to the income:

• (a)Which was not distributed, and
• (b)To which no charitable beneficiary was entitled in possession.

Subsection (3):

Disposition of Assets

This section amends paragraphs (e) and (f) of the second proviso to section 61(27). These paragraphs specify the consequence for a charitable trust in respect of the exemption of its business income (and rental income - see the commentary on subsection (1) above) where a person disposes of an asset to the trust and retains an interest in that asset.

When these paragraphs (and the rest of the second proviso) were introduced in 1982, it was the intention that they apply from the commencement of the 1983/84 income year to all charitable trusts irrespective of the date on which the assets were so disposed of to the trust. The use in the 1982 legislation in paragraphs (e) and (f) - "disposes of, to the trust, any asset" - of the present tense suggested that the provisions may only apply where the assets have been disposed of since the commencement of the 1983/84 income year.

This amendment, by introducing the words "has disposed of or", makes it clear that paragraphs (e) and (f) apply irrespective of the date on which the asset was disposed of to the trust.

It applies, by virtue of subsection (5), from the income year which commenced on 1 April 1983, the same date from which the entire second proviso to section 61(27) applied.

Subsection (4):

• Thalidomide Trusts

Section 61(49) of the Income Tax Act provides an exemption from income tax for income derived by, or distributed to beneficiaries by, the trustees of any trust created under an order of Court under the Minors Contracts Act 1969 for the benefit of "Thalidomide" victims. This section was specifically designed to aid the beneficiaries of a trust set up in New Zealand with funds paid in compensation by the manufacturers of the drug "Thalidomide".

However the section did not cover the situation of a person resident in New Zealand and who was a beneficiary of a thalidomide trust established overseas.

Section 61(49) has been amended to allow the exemption in respect of any thalidomide compensation trust set up overseas on a similar basis and for the same purpose as the trust to which the section was previously applicable.

This subsection applies with respect to the tax on income derived in any income year.

Subsections (5) and (6):

These subsections simply provide for the application dates of subsections (3) and (4) which are different than the general application date of the Amendment Act.

Section 11: Exemption from Tax for Certain International Aircraft Operators

This section has introduced into the principal Act a new section, 64A, which gives the Commissioner the power to exempt from income tax income derived from air transport from New Zealand by non-resident aircraft operators. This exemption applies only where the Commissioner is satisfied that in corresponding circumstances a New Zealand resident aircraft operator would similarly be not liable for, or would be exempt from, income tax under the laws of the overseas country.

Only income derived from air transport from New Zealand can be exempted. The term "air transport from New Zealand" has been defined to mean the carriage outside New Zealand, by any aircraft, of merchandise, goods, livestock, mails or passengers emplaned or embarked in New Zealand. The definition deems carriage on the whole journey to be "carriage outside New Zealand" notwithstanding that the aircraft calls at any one or more other airports in New Zealand before finally leaving New Zealand on that flight.

Reciprocal Arrangements

To be eligible for the exemption it is necessary that the laws of the country, in which the aircraft operator is resident, provide that if corresponding circumstances existed, any New Zealand resident aircraft operator would be not liable for, or would be exempted from, income tax, (being any tax which is substantially of the same nature as income tax in New Zealand) in that country or territory. Based upon those laws the Commissioner may, if satisfied, exempt either in whole or in part that operator or operators from income tax in New Zealand.

A copy of the relevant overseas legislation, together with a suitable declaration from the Taxation Authorities in the overseas country, would need to be provided in support of any submission that reciprocal exemption exists in that overseas country.

Double Tax Agreements

It should be noted that if there is a Double Taxation Agreement between New Zealand and the country in which airline company is resident, and this agreement extends to air transport, then section 64A gives no additional benefits. It is only where there is no Double Taxation Agreement or where such an agreement does not cover income from air transport that section 64A needs to be considered.

Section 12: Items Included in Assessable Income

Ex-gratia Pensions

Subsection (1) of this section extends section 65 of the principal Act by adding a new subsection, (1B) which includes as a "pension";

"any ex-gratia payment (not being a payment to which any of subsections (2) to (4A) and (6) of section 68 of this Act applies) received by any taxpayer from any person for whom the taxpayer or a spouse or a parent or a child or a dependant of the taxpayer has rendered past services, being a payment which, in the opinion of the Commissioner, would not have been made by that person if those past services had not been rendered by, as the case may be, the taxpayer or the said spouse or parent or child or dependant."

In order to adjust for the effects of inflation on the current value of pensions many companies pay annual supplements to the pensions paid to former employees or relatives of former employees. Where these supplements are received as of right by the taxpayer they are taxable as "pensions" under section 65(2)(j). However, where such supplements are paid on a voluntary basis it has been established that because the company is under no legal obligation to make such payments those payments may not be "pensions" and thus may not be subject to tax under section 65(2)(j).

This amendment now clarifies the position by providing that any ex-gratia payment made to a former employee (or a relative of that former employee) by reason of that person's past employment is a "pension" for the purposes of section 65(2)(j) and is thus taxable in the hands of the recipient.

Subsection (2) of this section extends the definition of "salary and wages" to include any ex-gratia payments that are treated as "pensions" under section 65(1B). This amendment is necessary to ensure that such payments are subject to PAYE tax.

Subsection (3) extends section 243 of the principal Act so that any ex-gratia payments that are treated as "pensions" under section 65 are deemed to have been derived from New Zealand.

Subsection (4) provides that the section came into force on the day on which the Act received the Governor-General's assent (23 March 1985) and applies with respect to payments received on or after that day.

Section 13: Taxation of Retirement Allowances

This section makes minor amendments to section 68 of the principal Act. Under section 68 only 5 percent of any bonus, gratuity or retiring allowance paid on the retirement (or redundancy) of a taxpayer is subject to income tax.

A Resignation is Not a Retirement

Subsection (2) of section 68 has been amended to ensure that the tax concession applies only to true retirements and not to resignations other than those that are part and parcel of the process of true retirement. Although this has been the Department's longstanding policy, amendments made in 1983 to the section (those amendments applying from 1 April 1984) may have enabled a different interpretation to be given to the wording in subsection (2). Basically, the 1983 amendments removed the requirement that the employee must have attained the "appropriate retiring age" (55 for women, 60 for men). This meant that, from 1 April 1984, the only principal requirement was that the employee must have "retired from that employment or service". It had been argued that those words effectively afforded the 5 percent concessionary treatment to persons who received lump sum payments on resigning from a particular employment (as opposed to retiring). This is because it could be said that a resignation is a "retirement from that employment or service".

The matter has now been clarified by providing that, to qualify for the tax concession, the payment must be made "on the termination of that employment or service, that termination being the occasion of his retirement". This means therefore that, subject to the other provisions of section 68, the concessionary treatment can apply to a taxpayer on only one occasion of true retirement, although, as explained below it may apply also on the occasion of termination of a post-retirement employment.

More than one Retirement

Subsection (3) of section 68 has been amended to make it consistent with the amendment made in subsection (2). Subsection (3), in effect, allows what could be classed as "post-retirement retirements" to qualify for the tax concession, an example being an army officer who retires at the appropriate military retirement age, takes up further employment and then subsequently retires from that further employment. The problem was that the subsection as it previously existed referred to retirements and "subsequent retirements" and this wording would have been inconsistent with the now amended subsection (2) which reflects that retirement is an event that does not occur more than once. Although the effect of subsection (3) is the same, the wording has now been amended to provide that where a taxpayer retires and then takes up further employment, any retiring allowance received on the termination of that further employment is deemed to be a payment to which subsection (2) applies subject to the service-recognition limitation imposed on subsection (2).

Redundancy/Death Deemed to be a Retirement

Subsections (4) and (4A) of section 68 allow lump sum payments made on the occasion of the redundancy or death of a taxpayer to qualify for the tax concession. Those subsections have now been amended to provide that the date of redundancy or death is the deemed date of retirement of the taxpayer. Such a provision was inadvertently omitted from each subsection when amendments to those subsections were made in 1982.

All amendments to section 68 have effect with respect to any payments made on or after 1 April 1984.

Section 14: Excess Income on Sale of Livestock Due to an Adverse Event

This section amends section 94 of the principal Act which allows excess income from the forced sale of livestock, as a result of an adverse event, to be carried forward and set off against the purchase price of replacement livestock in the two succeeding years after the year of sale. The section also provides that, if before the end of the second income year a further adverse event is declared, the period for acquiring livestock can be extended for a third year after the forced sale.

Section 14 of this Amendment Act new provides that in the event of still further prolongation 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 must acquire replacement livestock. The extension will be to the end of such later income year as the Minister specifies.

The Ministry Agriculture and Fisheries will identify any cases where it is considered the adverse event relief period requires extension and advise the Commissioner. A recommendation will then be made to the Minister of Finance.

As with the declaration of an adverse event, any declaration of an extension to the relief period under section 94 will be publicised in a Public Information Bulletin as well as in a Technical Policy Circular.

Section 15: Deduction for Expenditure or Loss Incurred in Production of Income from Employment

This section repeals and substitutes section 105 of the principal Act. The purpose of this amendment is two-fold:

(a) To make it clear that the only deductible expenditure or loss incurred in deriving "income from employment", allowable to a person deriving such income, is the expenditure that is specified in section 105 as being the "qualifying amount" (and, as appropriate, in conjunction with the Fourth Schedule to the Act):

(b) To make clear what evidence is necessary to support a claim to deduct any expenditure or loss.

Prior to this new version of section 105, it was possible to argue that a person deriving "income from employment" as defined in section 105(1) could be allowed deductions other than those which were allowable under section 104 and also other than those limited to the extent provided in section 105 and the Fourth Schedule. For example, it could have been argued that a person could claim depreciation, in respect of an item of equipment used in the production of income from employment, under section 108 because that section allows a deduction for depreciation in calculating assessable income independently of section 104 and consequently is not subject to the limitations of section 105 and the Fourth Schedule.

Allowable Deductions Limited to Section 105

The new section 105 ensures that where a person derives "income from employment" the only deductions allowable in respect of that income from employment are those provided in the section and the Fourth Schedule to the Act. This has been achieved by amending subsection (2) in two ways and by adding a new subsection (4).

First, subsection (2) now applies notwithstanding the whole of section 106, rather than just subsection (1)(d) of that section as in the former section 105. The effect of making section 105 operate notwithstanding section 106 is to prevent taxpayers being able to claim deductions under any of the tests of deductibility which appear in various paragraphs in section 106(1), eg, interest, and which are independent of the section 104 tests.

Secondly, it has been made explicit that section 105 and the Fourth Schedule limit the breadth of the deductions that may be allowed pursuant to the tests of section 104 in respect of the income from employment derived by the taxpayer. Section 105 now applies notwithstanding section 106 - previously section 106 contained (in subsection (l)(i)) the provision which limited income from employment-related deductions to those provided in section 105 and the Fourth Schedule. Consequently, for expenditure or loss incurred in relation to income from employment to be deductible it must meet the tests of section 104 and the relevant tests in section 105 and the Fourth Schedule. To the extent to which items of expenditure in respect of income from employment meet the tests of section 104 but do not come within section 105 and the Fourth Schedule, this amendment ensures that those items are not deductible.

Depreciation

Similarly, the new subsection (4) prevents a taxpayer from claiming depreciation in respect of an asset used in the production of income from employment except where the asset is one used in and for the purpose of travel, where the expenditure on that travel is deductible to the taxpayer in terms of Clause 6 of the Fourth Schedule.

Application

The above amendments apply from and including the income year which commenced on 1 April 1984 (1985 tax returns).

Evidence in Support of Expenditure

The Other main change to section 105 (in subsection (3)) is to ensure that evidence supporting a claim for a deduction under the provisions of the Fourth Schedule is in writing - either by way of A receipt or some other written evidence - and that the written evidence documents the incuring of the expenditure rather than just the existence of the item in respect of which the claim is made. This change follows Taxation Review Authority decisions in which it was held effectively that where an objector produced the actual asset acquired in support of his claim to deducting then the requirements of the former subsection (3) as to evidence, were satisfied.

Application of Subsection (3)

Unlike the other subsections of the new section 105, the new subsection (3) does not apply to the 1985 income year, ie, that beginning 1 April 1984. For that income year subsection (3) of the old section 105 will to continue to apply. The new subsection (3) will apply for income years beginning on or after 1 April 1985 (1986 and subsequent tax returns).

Consequential amendments

Subsection (2) of section 15 repeals section 106(1)(i) of the principal Act and is consequential on the changes made to subsection (2) of section 105 as explained above.

Subsection (3) of this section of the Amendment Act is consequential upon the repeal of section 106(1)(i), and the amendments to section 105. Subsection (3) repeals and substitutes clause 8 of the Fourth Schedule to specify that any expenditure which a taxpayer seeks to claim under that clause cannot be expenditure of any of the kinds referred to in section 106. This will mean, for example, that even if a taxpayer incurs expenditure which has been incurred as a condition of and for the purpose of his employment it will not be deductible if it is of a private or domestic nature.

Subsection (4) of this section makes minor consequential repeals.

Section 16: Amendments Consequential upon Enactment of Fisheries Act 1983

Various sections of the principal Act have been amended so as to make reference to the Fisheries Act 1983 which came into force on 1 October 1983. All amendments which this section of the Amendment Act makes to the principal Act are deemed to have come into force on that date.

Section 109, which allows for certain repairs to fishing boats to be claimed as a deduction, has been amended by replacing the definition of the expression "fishing boat". The substituted definition makes reference to a boat that is registered as a fishing boat under the Fisheries Amendment Act 1963, and also to a boat that is registered as a fishing vessel under Part IV of the Fisheries Act 1983.

The general provisions relating to investment allowances, in section 118, have been amended by also including, in the definition of "fishing boat", reference to a boat that is registered as a fishing vessel under Part IV of the Fisheries Act 1983.

Section 156A, which provides for export performance incentives for qualifying goods, has been similarly amended by the inclusion of a reference to Part IV of the Fisheries Act 1983 in the definition of the expression "foreign owned fishing vessel".

The above amendments are of a consequential nature only.

Section 17: Depreciation Allowances, etc, on Motor Cars

Section 17 rectifies a drafting error made when section 110 of the principal Act was amended in 1982 to ensure that depreciation could be claimed on both the "specified cost" of a motor car and the cost of an assembly line installation to burn (CNG) or LPG.

In the making of that amendment to section 110, the word "and" was inadvertently inserted between paragraphs (b) and (c) of the definition of "expenditure", and this resulted in the virtual impossibility of both of those paragraphs having to apply, rather than each standing alone.

Section 17 repeals (b) and (c), and substitutes one paragraph, (a), to make it clear that "expenditure" for the purposes of section 110 is the amount of capital expenditure incurred in the purchase of the motor car, less any energy conservation expenditure that in relation to the motorcar has been allowed as a deduction under section 125 or the cost of any assembly line CNG or LPG installation, in relation to the motorcar, that is depreciable under section 114B.

Application

The amendment applies from and including the income year that commenced on 1 April 1982.

Section 18: First Year Depreciation Allowance on Plant and Machinery and on Certain Buildings

Section 112 of the principal Act previously provided for a First Year Depreciation Allowance where expenditure was incurred on buildings in the meat export industry. That allowance ceased to apply where such expenditure was incurred after 30 September 1981.

Section 18 of the Amendment Act removes from section 112 and the Fifth Schedule to the principal Act all references to that former allowance.

Section 19: Investment Allowance on New Plant and Machinery Used in High Priority Activity

This section repeals section 121A of the principal Act, the allowance pursuant to which terminated on 31 March 1984. Section 121A provided an allowance where new assets were used in an approved high priority activity.

Because high priority activity approvals had effect in respect of the expenditure incurred during the following twelve months, and, as the allowance is claimed in the year in which the asset is first used, it is possible that the high priority activity allowance could be claimed in 1985 returns of income by those qualifying taxpayers with early balance dates. Accordingly, the repeal of this spent provision does not apply until the 1986 income year.

Sections 121(3)(a) and 122(5) of the principal Act have also been amended to remove reference to the repealed section 121A, as has section 19 of the Income Tax Amendment Act (No 2) 1977.

The amendments apply with effect from the income year that commenced on 1 April 1985.

Section 20: Farming and Agricultural Investment Allowance

This section contains transitional provisions in relation to the phasing out of the Farming and Agricultural Investment Allowance(section 122 of the principal Act) which expired on 31 March 1985.

Binding Contracts

Provision is made as announced in the 1984 Budget to allow the investment allowance in respect of qualifying expenditure incurred after 31 March 1985 providing certain conditions are met. These conditions are:

1. The taxpayer must have entered into, on or before 8 November 1984, a binding contract to purchase, or a binding agreement to lease, qualifying plant and machinery, and
2. The qualifying expenditure pursuant to that binding contract must be incurred within a reasonable time after 31 March 1985.

The determining of what constitutes a reasonable time after 31 March 1985 will involve some discretion having regard to the nature of the undertaking involved in the performance of the contract or agreement.

There are therefore, two categories of taxpayers that will be affected by the termination of the investment allowance:

1. Taxpayers who have entered into binding contracts prior to 8 November 1984. The transitional provisions will apply, ie, expenditure must be incurred within a reasonable time after 31 March 1985.
2. Taxpayers who have NOT entered into a binding contract prior to 8 November 1984. The expenditure must be incurred on or before 31 March 1985.

When Expenditure is Incurred

As the date the expenditure is incurred is all important to taxpayers in the second category it is appropriate that the Department's interpretation of the word "incurred" be restated:

The expenditure will be incurred at the point(s) at which, in the course of the fulfilment of the contract, the purchaser becomes firmly liable to pay the supplier. This timing of the incurring of the expenditure would not be affected by the fact that payment by the purchaser may be made by instalments in the period subsequent to that firm liability arising. Further, the expenditure may be incurred prior to the terminating date notwithstanding that the asset is delivered subsequent to the terminating date. However a mere order of plant prior to 31 March would not be sufficient as generally the obligation to pay would not arise until fulfilment of the order by the supplier, ie, delivery.

The question of when expenditure is incurred is therefore one of fact, and details of the contract may need to be considered.

The investment allowance will be allowable, as at present, in the year of first use of the qualifying plant or machinery, notwithstanding that this first use may be after the terminating date.

Section 21: Year in Which Accident Compensation Levy is Deductible

This amendment inserts a new section, 140A, in the principal Act. The purpose of the new section is to make it clear that Accident Compensation levy paid by employers and self-employed persons is deductible for income tax purposes in the year in which it becomes due and payable (generally also the year in which it is in fact paid).

The amendment standardises the income tax treatment of Accident Compensation levies.

Background

When the Accident Compensation scheme was introduced in 1974 the Accident Compensation Act 1972 provided, amongst other things, for the payment of levies by employers (on the basis of their payrolls) and self-employed persons (on the basis of their income).

Although the Accident Compensation legislation contained no provisions relating levy payments to specific cover years, there was a widespread belief among levy payers, based on the factors below, that levies were payable during the year for which cover was provided:

1. In respect of established employers and self-employed persons, the first payment of Accident Compensation levy was paid in the first year in which the Accident Compensation scheme was in existence. The levy was however calculated using payroll information (in the case of employers) and income information (in the case of self-employed persons) from the previous year.
2. In respect of new employers and persons commencing self-employment, there was a system of "start-up" levies payable (initially) on a provisional basis.
3. In respect of all employers and self-employed persons, a provision existed for the granting of levy adjustments on the occasion of an employer ceasing to employ or a self-employed person ceasing business (cessation adjustments).
4. The forms that required completion by the levy payer, indicated that levy was being paid in respect of the year of the levy payment.

Accordingly, there was a general acceptance that levies were payable in the year in respect of which Accident Compensation cover was obtained and that the levies were deductible for income tax purposes in the year in which the levy became due and payable (which was generally also the year in which the levy payment was made).

Subsequent developments in the form of amendments to the Accident Compensation Act effectively created two categories of employer and self-employed persons, each of which was subject to differing Accident Compensation levy treatment.

(1) Category One

In the first category, are those employers who had commenced employing prior to 1 April 1980 and those self-employed persons who had commenced business prior to 1 October 1979.

These employers and self-employed persons had, until 1982, continued to deduct their levies, for income tax purposes, in the year in which they became due and payable.

In December 1982, arising from the amalgamation of the employer Accident Compensation levy and IR 68 annual tax deduction reconciliation systems and the enactment of the consolidated Accident Compensation Act 1982, the Accident Compensation Corporation advised that cessation adjustments for these levy payers could no longer be made.

During the course of 1983, as levy payers became aware of this change, many submissions were received which maintained that because they (the levy payers) had either initially paid start-up levies or had paid a levy in respect of a year in which the Accident Compensation scheme had not been in existence, those levy payers were being penalised.

After reviewing the many submissions received, the Government decided to re-introduce cessation adjustments in respect of levy payers in this category.

However, the initial removal of cessation adjustments in December 1982 was seen as indicating a change in philosophy from a "payment in advance" to a "payment relating back" basis. Accordingly many levy payers took the opportunity to change their basis of deduction for income tax purposes from the cash basis to an accruals basis. For the majority of these levy payers this change was made in the 1983 income year (or corresponding accounting year) thereby effectively entitling them to a "double" deduction of levy in that year.

(2) Category Two

In this category are all employers who commenced employing on or after 1 April 1980 and self-employed persons who commenced business on or after 1 October 1979.

As a result of changes made in recent years, levy payers in this category have not been required to pay start-up levies. Similarly, they are not entitled to levy adjustments on cessation. Instead, levy payers in this category pay their levies on a "relating back" basis, (ie, on the basis of the past year's payroll (in the case of employers) or past year's income (in the case of self-employed persons)). Accordingly it is possible that an employer can be in business for up to 14 months before he is required to pay a levy. Similarly, in the case of self-employed persons (with 31 March balance dates) the period can be up to 23 months.

In these circumstances, the liability for levy was clearly seen, from an accounting viewpoint, as constituting an accrual. That is, the liability was seen as arising as wage payments were made or as income was earned, particularly since there is no possibility of the liability being extinguished at a later date (as is the case where cessation adjustments are involved).

Comment

As the background to the levy treatment of employers and the self-employed is somewhat complex and has been subject to many changes over the years, there has grown a diversity of practices among levy payers as to the timing of the deductions of levies in their annual accounts. Those practices range from the deducting of levies on an accruals basis by making provision in the accounts before levies became due and payable, to claiming the levies in the year they are paid.

In 1983 a review was undertaken of the current income tax treatment of Accident Compensation levies with a view to clarifying the position and ensuring that all levy payers adopted a common basis of approach in the claiming of levies as a deductible expense item.

The new basis for deducting Accident Compensation levies is contained in the new section 140A as inserted by section 21 of this Amendment Act. The section provides that any amount of Accident Compensation levy that becomes due and payable in any income year is deemed to be expenditure incurred in that income year and in no other income year.

The following example illustrates the correct treatment in the case of an employer with a 31 March balance date.

The levy on wages paid to 31 March 1985 is due and payable by 31 May 1985. Section 140A states that the levy is deductible in terms of section 104 of the Income Tax Act 1976, in the year ended 31 March 1986 (the year which includes the date 31 May 1985).

The proviso to subsection (2) ensures that those levy payers who have previously obtained a deduction advantage, either when changing from a cash to an accruals basis or in first adopting an accruals basis, will lose that advantage in the year of change back. It also validates the varying income tax treatment practices adopted by employers and self-employed persons prior to the application of the new section.

Application Date

The new section 140A will apply in respect of levies that become due from, and payable by, any taxpayer on or after 1 April 1985 irrespective of a taxpayer's accounting year. The 1 April 1985 application date gives an early warning to those levy payers who have previously changed to the accruals basis (and received a "double" deduction in the year of changeover) of the future requirements for the deduction of levy payments, which will generally mean that they will not receive a deduction in the year which the new basis commences.

Sections 22-25: Phase Out of Export Incentives

These sections make amendments to sections 156A, 156B, 156D and 156E of the principal Act. The effect of the amendments is to phase out the export performance incentives for qualifying goods, services, overseas projects and tourist services.

Briefly the position will be as follows:

PHASE OUT OF EXPORT PERFORMANCE INCENTIVES
Income Years Ending On
Incentive	31.3.1985	31.3.1986	31.3.1987
Qualifying Goods:	Specified percentage or assigned percentage of consideration receivable	50% of specified percentage or assigned percentage of consideration receivable	25% of specified percentage or assigned percentage of consideration receivable
References:
Amendment Act	S 22(1)	S 22(2)	S 22(2)
Principal Act	S 156A(3)	S 156A(3A)	S 156A(3B)
Income Years Ending On
Incentive	31.3.1985	31.3.1986	31.3.1987
Qualifying Services	11.9% of net foreign currency earnings	5.95% of net foreign currency earnings	2.975% of net foreign currency earnings
References:
Amendment Act	S 23(1)	S 23(2)	S 23(2)
Principal Act	S 156B(2)	S 156B(2A)	S 156B(2B)
Projects Commencing During Income Years Ending On
Incentive	31.3.1985	31.3.1986	31.3.1987
Qualifying Overseas Projects:	11.9% of net foreign currency earnings	5.95% of net foreign currency earnings	2.975% of net foreign currency earnings
Amendment Act	S 24(3)(a)	S 24(4)	S 24(4)
Principal Act	S 156D(3)	S 156D(3A)	S 156D(3B)
(Deductions will continue until projects are completed.)
Income Years Ending On
Incentive	31.3.1985	31.3.1986	31.3.1987
Qualifying Tourist Services:	10% of net foreign currency earnings	5% of net foreign currency earnings	2.5% of net foreign currency earnings
References:
Amendment Act	S 25(1)(a)	S 25(2)	S 25(2)
Principal Act	S 156E(2)	S 156E(2A)	S 156E(2B)

Other amendments are as follows.

Section 22: Qualifying Goods

Subsection (3) makes an amendment to section 156A(4) and provides that taxpayers will not be able to apply to the Development Finance Corporation for an assigned percentage after the end of the income year ending on 31 March 1985.

Subsection (4) deletes the reference in section 156A(4)(d) to a period of five years for the application of an assigned percentage. Assigned percentages in force as at 31 March 1985 will continue to apply until the effect of the legislation expires.

Subsection (5) adds an anti-avoidance subsection, (9A), to section 156A. The Commissioner has discretion, where goods are acquired by an export merchant with a late balance date, from a taxpayer with an earlier balance date, to limit any tax credit for the year ending 31 March 1985, or subsequent years, to an amount which would have been allowed if the goods had been exported by the original owner.

The subsection will apply when, during an income year commencing on or after 1 April 1984, the export merchant has exported goods acquired from a person who:

1. Was engaged in the business of selling or otherwise disposing of goods during the income years ending on or prior to 31 March 1984, or
2. Acquired a business during the income year ending 31 March 1985 or subsequent years, which was engaged in selling or disposing of goods during the income years ending on or prior to 31 March 1984.

However, transactions have been exempted from this provision where:

1. The goods are of a kind that the export merchant had acquired, for export by himself, from the same person in any income year commencing on or prior to 1 April 1983, or
2. The goods were acquired by the export merchant, for export by himself, from a manufacturer, producer or processor, and goods had been acquired from the same source for export, in any income year which commenced on or before 1 April 1983.

Year in Which Goods Incentive will Apply

It should be noted that for the purposes of section 156A an export sale is made when the contract of sale is finalised and becomes binding on both parties. This means that the tax credit will be allowed to the export merchant in the income year in which the contract of sale becomes binding, irrespective of when:

• the goods are physically exported (provided they are at some stage exported), or
• the consideration for the sale is received by the exporter.

Section 23: Qualifying Services

In addition to phasing out the incentive, the amendment provides that payment of fees in New Zealand currency will qualify for the incentive if the funds held in New Zealand would otherwise be remittable from this country in terms of the Exchange Control Regulations 1985 (in the same way as funds remittable in terms of the Exchange Control Regulations 1978 qualify).

Section 24: Qualifying Overseas Projects

Subsection (1) makes amendments to the definition of "qualifying project". The effect of the amendments is that only projects commencing to be performed between 1 April 1980 and 31 March 1987 will qualify for the tax incentive, and certain non-qualifying services are excluded.

"Non-qualifying services" are defined in subsection (2). The definition includes any services, the fees for which would qualify in terms of section 156B, or would have qualified if the fees had been derived prior to 31 March 1987.

Subsection (3) makes amendments to subsection (3) of section 156D. The effects of the amendments are:

1. Only projects commencing to be performed during the income year ending on 31 March 1985 or a prior year will qualify for a tax credit of 11.9 percent of the amount of foreign currency earnings.
2. Where projects commence to be performed during the income year ending 31 March 1985, the Commissioner must be satisfied that the project is performed with expedition for the whole duration of the contract. Similar provisions are included in subsection (4) concerning contracts which commence during the income years ending 31 March 1986 and 1987.
3. Fees paid in New Zealand currency from funds which would otherwise be remittable from this country in terms of the Exchange Control Regulations 1985 will qualify for the incentive.

Years During Which the Incentive can be Claimed

It is important to note that all projects which commence prior to 31 March 1985 will qualify for an incentive equal to 11.9 percent of net foreign currency earnings until the project is completed. Likewise projects commencing during the 1986 and 1987 income years will qualify for an incentive equal to 5.95 percent, or 2.975 percent respectively, of net foreign currency earnings until those projects are completed. This means that projects can qualify for the overseas projects incentives during the income year commencing on 1 April 1987 or subsequent years.

Section 25: Qualifying Tourist Services

Similar amendments to those made in section 23 and 24 regarding the Exchange Control Regulations 1985 have been made in respect of this incentive.

Exchange Control Regulations 1985

As mentioned above, amendments have been made to sections 156B, 156D and 156E as a result of the Exchange Control Regulations 1978 having been replaced by the Exchange Control Regulations 1985.

The 1978 Regulations required that income from the export of goods be remitted to New Zealand through the banking system. They did not contain the same requirement in respect of fees or foreign currency earnings for services or projects performed and undertaken outside New Zealand. For this reason, and to maintain consistency, the export performance taxation incentives for services, overseas projects and tourist services were brought into line with the Exchange Control Regulations requirement for goods, by requiring the remittance of earnings back to New Zealand.

The Exchange Control Regulations 1985 do not require that income derived from the export of goods be remitted to New Zealand through the banking system. There is no longer any requirement for anyone to return funds to New Zealand where they are earned overseas from any of these sources. However, in order to qualify for the tax credits for services, overseas projects, or tourist services, it will continue to be necessary for the foreign currency earnings to be transferred to the credit of the taxpayer:

1. By the transfer of foreign currency to New Zealand through the New Zealand banking system, or
2. By payment in New Zealand, in New Zealand currency, from funds held in New Zealand which would otherwise be remittable from New Zealand in terms of the Exchange Control Regulations 1978, or the Exchange Control Regulations 1985.

This requirement will continue, even though, from 22 January 1985 in order for a taxpayer to qualify for the export performance incentive for qualifying goods (in terms of section 156A) there will not be any requirement under the Exchange Control Regulations for funds to be remitted to New Zealand.

Section 26: Export Earnings from Qualifying Overseas Projects

This section repeals section 158A of the principal Act which provided for an incentive for qualifying overseas projects. The termination date for entering into a qualifying overseas project was 31 March 1980 with the incentive continuing to apply until contractors' obligations under existing qualifying projects were completed

It has now been established that all qualifying projects have been completed and therefore the incentive no longer has any application. It has accordingly been repealed.

Various sections of Amendment Acts, which either inserted section 158A into the principal Act or amended that section, have also been repealed. These sections are:

1. section 26, Income Tax Amendment Act (No 2) 1977;
2. section 23, Income Tax Amendment Act 1979;
3. section 26, Income Tax Amendment Act (No 3) 1983;

The repeal of section 158A and the consequential amendments to other provisions have effect from the income year that commenced on 1 April 1985.

Section 27: Payments to Partners for Services Performed for the Partnership

Section 167B of the principal Act was inserted by section 28 of the Income Tax Amendment Act (No 3) 1983. It enabled payments akin to salary and wages made by a partnership to a working partner under a written contract of service to be allowable as a deduction in calculating the assessable income derived, or losses incurred, by the partners in a partnership.

Section 27 of this amendment Act relaxes some of the conditions which have to be satisfied before a deduction can be allowed.

Bonus Payments

Subsections (1) and (3) amend the existing provision whereby any deduction for qualifying payments to be partner would be limited to the amount of a payment specified in the "contract of service".

The legislation enacted in 1983 permits the deduction only where the amount of remuneration to be paid is specified in the contract of service and then only for payments to the extent that they do not exceed the amount specified in the contract. End of year bonuses could be deductible but only if the dollar amount of the bonus had been specified in the contract.

It has since been submitted that these provisions did not recognise the payment of end of year bonuses to working partners based on the results of the partnership for the year. This amendment provides that such bonuses will be deductible and subsections (1) and (3) ensure that provided the contract of service provides authority for the payment of a bonus, the full amount of any bonus paid will be deductible if the other conditions of the legislation are met.

Subsection (1) repeals the former definition of "contract of service" and substitutes a new definition. The new definition qualifies the requirement that the contract must specify the amount payable to the partner by providing that the amount so specified can include a bonus, or that a bonus can be provided for in addition to the remuneration specified in the contract.

Subsection (3) then inserts a new subsection (2) into section 167B to provide that where the payment of a bonus is provided for in a contract of service, the maximum deduction allowable is the sum of:

• the remuneration specified in the contract; and
• any bonus or additional bonus paid.

Effectively, where the payment of a bonus is provided for in the contract, any amount paid as a bonus will be deductible in terms of section 167B.

Definition of Working Partner

Subsection (2) of this amendment Act relaxes another condition. The amendment provides that the words "as his principal occupation" be omitted from the definition of "working partner". This means that payments made to part-time employees or to a working partner who is engaged by more than one partnership are deductible, provided the other requirements of section 167B are met.

Application

Subsection (4) provides that this section shall apply with respect to the tax on income derived in the income year that commenced on the 1st day of April 1984 and in every subsequent year insofar as the payment by the partnership was or is made on or after the 16th day of December 1983, being the date on which the Income Tax Amendment Act (No 3) 1983 received the Governor-General's assent.

Section 28: Specified Suspensory Loans

Section 28 of the Amendment Act amends section 172 of the principal Act which deals with specified suspensory loans made for various purposes by Public Authorities. Specified suspensory loans are loans which are remitted only if certain conditions are attained within some specified period after the loan is made. A specified suspensory loan has income tax consequences only when the loan (or part of the loan) is remitted, with the amount so remitted being deemed to be assessable income. The various types of loans that are treated as specified suspensory loans are listed in section 172.

Section 28 of the Amendment Act adds two paragraphs to the definition of "specified suspensory loan" in section 172:

Paragraph (c) adds a new "Liquified Petroleum Gas (LPG) Distribution Suspensory Loan" which is to be administered by the Ministry of Energy and must be designated as being an LPG Distribution Suspensory Loan for the provisions of section 172 to be applied.

Paragraph (d) provides that a "specified suspensory loan" includes:

"any other loan made by a Public Authority and designated by that Public Authority as a specified suspensory loan."

This amendment means that, in future, it will not be necessary to amend section 172 each time a new specified suspensory loan is created. However, as with the loans already listed, it will be necessary for the loan to be designated as a "specified suspensory loan" by the lender for the provisions of section 172 to be applied.

Application

This section applies to tax on income derived in the income year that commenced on 1 April 1984 and every subsequent year.

Section 29: Grant-Related Suspensory Loans

Section 29 of the Amendment Act amends section 173 of the principal Act which deals with grant-related suspensory loans made for various purposes by Public Authorities. Grant-related suspensory loans are loans where the conditions which will entitle the loan to be converted eventually to a grant have been achieved at the time the loan is made and those conditions merely have to be sustained for a specified period to fulfil conversion entitlement. A grant-related suspensory loan has immediate tax implications as any amount otherwise deductible in calculating assessable income in respect of expenditure incurred is reduced by the amount of the loan. Provisions exist for the restoration of the full deductions in the event the loan is required to be repaid. The various types of loans that are treated as a grant-related suspensory loan are listed in section 173 and, as in section 172, the loans must be designated as being one of those particular loans before the provisions of section 173 can be applied.

Section 29 of the Amendment Act adds a further paragraph to the definition of a "grant-related suspensory loan" to provide that it includes:

• "(d) Any other loan, made by a Public Authority, (not being a loan to which section 172 of this Act applies) pursuant to the terms of which the liability of the borrower in respect of that loan may be remitted in whole or in part."

This amendment is necessary to ensure that a suspensory loan does not escape all income tax consequences simply by the lender inadvertently failing to designate the loan as being one of those listed in either section 172 or section 173. In future, any suspensory loan that is not designated as either a "specified suspensory loan" (section 172) or a "grant-related suspensory loan" (section 173) will be subject to the provisions of section 173.

Application

This section applies to tax on income derived in the income year that commenced on 1 April 1984 and every subsequent year.

Section 30: Loss Incurred in specified Activities (section 188A)

This section makes two amendments to section 188A (loss containment provisions) of the principal Act.

Three subsections of section 188A (subsections 4(b)(i), 5A and 7(g)) contain a provision which allows the taxpayer to make an election, within a specified time limit, for certain provisions of the section to apply.

Subsection 1 of this amendment now brings section 188A into line with other sections of the Act by giving the Commissioner discretion to extend the time limit for the making of such an election. Generally such an extension would be granted in order to coincide with any extension of time granted for the furnishing of the annual return of income.

Subsection 2 amends the proviso to subsection 5A of section 189A. Subsection 5A allows a taxpayer to offset against any income arising, on the sale of land, from the application of section 129 (interest and development expenditure recovery provisions) any loss arising from the conduct of a specified activity on the land sold, to the extent that the loss has not already been offset against other income "derived by the taxpayer".

A problem arose where losses from a specified activity of a company had been offset against income of another company in the same group of companies (section 191(5)). As the losses so offset had not been offset against the assessable income "derived by the taxpayer", such a company could have had the unintended ability to offset against the section 129 recovery an amount of loss that had already been set off against that other company in the group.

This problem has now been rectified by providing that the offset of any losses against income arising from a section 129 recovery is restricted to so much of those losses as has not been, and will not be offset against the taxpayer's income or the income of any other taxpayer.

Application

This section applies to tax on income derived in the income year that commenced on 1 April 1984 and every subsequent year.

Section 31: Companies Engaged in Exploring, or Searching for, or Mining Petroleum

Section 31 corrects a minor error. It amends section 214B(9)(1)(i) of the principal Act to correct a minor drafting error. Prior to the amendment that section read "paragraph (c)(i) of this paragraph ". The amendment now corrects this to read "paragraph (c)(i) of this subsection".

This Amendment applies with effect from the income year that commenced on 1 April 1979, which was the original application of section 214B.

Section 32: Non-Resident Withholding Tax Imposed

Section 32 corrects a minor error. It amends section 311(b) of the principal Act, by altering the words "paragraph (a) of this subsection" to read "paragraph (a) of this section".

This amendment applies with respect to non-resident withholding income derived on or after 1 April 1982 which was the application of section 311 as substituted in 1980.

Section 33: Additional tax for default in making or paying deductions non-resident withholding tax

Comments on this section are contained in Part I of Appendix A.

Section 34: Fringe Benefit Tax

This section introduces the new fringe benefit tax, with effect from 1 April 1985. The tax, which is assessed at the rate of 45 percent of the value of fringe benefits provided to employees, is payable quarterly, the date for filing quarterly returns and paying the tax being the 20th of the month following the end of the quarters ending June, September, December and March. Fringe benefit tax not paid, or returns not filed, by that date will be subject to the same penalty and other provisions as apply to the payment of income tax and the filing of income tax returns.

Details of the tax are set out in the preliminary booklet to employers which was followed by the distribution of a more detailed explanatory guide in late May (IR 409A). A full explanation of the new tax is set out in Appendix B to this TPC.

Section 35: PAYE Deductions Where the Employee Contributes to a Superannuation Scheme

This section amends section 341 of the principal Act, which provides for the annual special exemption for superannuation contributions to be taken into account on a pay period basis by means of reduced tax deductions.

Section 341 previously required that where an employee made contributions to a qualifying superannuation fund the employer should, for the purpose of determining the amount liable for PAYE deductions, deduct from the employee's gross pay, the lesser of the amount of the superannuation contributions or the portion of the maximum special exemption that related to that pay period, (eg, $23.07 per week, $46.14 per fortnight, etc) It was discovered that some employees who expected substantial end-of-year debits preferred not to take the special exemption on a pay period basis so that their expected end-of-year debit would be reduced by the amount of the special exemption claimed in the income tax return but not allowed for in PAYE deductions. Employees of a large employing organisation had adopted such a practice over a period of years .

The section has been amended to authorise the Commissioner to allow such a practice in any case or class of cases in which it is the wish of the employee not to take advantage of the special exemption on a pay period basis. Written request must be made to the Commissioner by the employee, or by the employer on behalf of named employees.

In addition the amendments state, explicitly and in terms similar to those used in section 59 of the principal Act, the types of superannuation funds to which contributions qualifying for the special exemption on a pay period basis may be made.

This amendment has effect from the date of the Governor General's assent, 23 March 1985, in relation to superannuation contributions for pay periods ending on or after that date.

Section 36: Application of Tax Codes Specified in Tax Code Declaration and Tax Code Certificates

(a) PAYE Deductions - Taxation of Shearers and Shearing Shed Hands

(Subsections 1, 3, 4, 5 and 6)

Two new tax codes have been added to the codes listed in section 344(1)(b) of the principal Act. These will enable shearers and shearing shed hands to have PAYE tax deductions made at the new flat rates of tax that apply to their earnings from 1 April 1985. The new rates were introduced in the Income Tax Amendment Act 1984.

The effect of subsection (1) of this section is two-fold. First, it adds the "SHR" and "SSH" tax deduction codes to the codes listed in section 344(1)(b).

The new tax codes are as follows:

"SHR" signifying employment as a shearer;

"SSH" signifying employment as a shearing shed hand.

Secondly, it clarifies the position regarding the use of the "S" tax code by shearers and shearing shed hands. While all relevant publicity and forms issued by the Department in the past have stressed that shearers and shed hands are not to use a "S" code in respect of their shearing or shed hand income it has never been embodied in legislation. The "S" tax code in section 344(1)(b) has therefore been amended to provide that it is to apply to secondary employment earnings, but not to a source deduction payment in respect of employment as a shearer or shearing shed hand notwithstanding that this may in fact be a taxpayer's secondary source of income.

As a consequence of these new tax codes and the flat rates of PAYE deductions, shearers and shearing shed hands will only receive the benefit of the family or principal income earner rebate in the annual return of income unless they obtain a special tax code from the Department incorporating those rebates for PAYE purposes.

Subsections (3) and (4) add the "SHR" and "SSH" tax deduction codes to the codes listed in section 344(9), 344(10), and 379 respectively.

Subsection (6) ensures that the amendments made by subsections (1), (3), (4) and (5) of this section apply to every source deduction payment made for any pay period ending on or after the 1st day of April 1985, the date on which the new basis for determining PAYE tax deductions for shearers and shearing shed hands came into force.

(b) Consequent on the housekeeper rebate (section 54 of the principal Act) being no longer available on a pay period basis subsection (4) of section 344 was repealed in 1983.

A reference to that subsection still existed, however, in section 344(3).

Subsection (2) of this section now removes the reference in subsection 344(3) to a tax code determined by the Commissioner under the repealed subsection (4). That removal has effect from and including the 1984/85 income year.

Section 37: Tax of Pay Period Taxpayers to be Determined by Amount of Tax Deduction

This section amends section 357 of the principal Act to provide that where pay period taxpayers furnish a return of income the amount of their liability shall be the smaller of the following amounts:

1. The total amount of tax deducted under PAYE deductions made in the proper amount for each pay period.
2. The amount of income tax assessed under Part IV of the principal Act, on an annual basis.

The pay period taxpayer concept provides that a return is not required from a salary or wage earner where, in the income year concerned:

• The taxpayer's total income does not exceed $11,500 per annum, and
• the taxpayer's interest and dividend income does not exceed $200, and
• the taxpayer has no rental, business, or partnership income, and
• the taxpayer has no income from withholding payments, and
• the taxpayer did not earn income as a shearer or shearing shedhand, and
• the taxpayer is not an absentee, and
• neither the taxpayer nor his or her spouse has claimed the family rebate introduced from 1 October 1982, and
• the taxpayer has operated a correct tax code in respect of his salary and wage income, and
• the taxpayer has not operated a Special Tax Code issued by the Inland Revenue Department, and
• the taxpayer has been continuously employed throughout the year.

At present section 357 provides that the amount of income tax for which a pay period taxpayer is liable is determined exclusively and finally by the total amount of tax deductions required to have been deducted under PAYE, except that where a pay period taxpayer unnecessarily furnishes a return even though he is not required to do so, his liability is required to be determined under Part IV of the principal Act.

The amendment which this section of the Amendment Act makes to section 357 is designed to protect pay period taxpayers who unnecessarily furnish returns of income when they are not obliged under current law to do so. They may have a small amount of tax to pay simply as a consequence of furnishing that return. This situation is clearly anomalous when compared with a pay period taxpayer in the same position who, correctly, does not furnish a return. (In such cases the liability is established by the amount of PAYE actually properly, deducted.)

It is expected that the major group of taxpayers to benefit from this amendment will be national superannuitants who have no income other than National Superannuation, who claim no rebates, and who have used the correct tax code.

The amendment applies to the tax on income derived during the 1983/84 income year and succeeding years.

Section 38: Recovery of Tax Deductions from Employers

Section 370 of the principal Act provides for a 10 percent penalty for the late or non payment of tax deductions. Section 369 provides for the imposition of penal tax in respect of tax deductions. Both sections provide that any penalty or penal tax imposed shall be of the same nature as the deficient tax deduction.

The effect (prior to this Amendment) of those provisions, in conjunction with section 365 of the principal Act, was that where a company went into liquidation, or an individual employer became bankrupt or made an assignment for the benefit of creditors, any tax deductions unpaid (including penalty and penal tax) were to rank as debts second in priority only to salary or wages owed to employees.

Penalty and penal tax imposed in respect of late-paid or now-paid tax deductions are a penalty on the employer for failing to comply with the requirements of the Income Tax Act. Those penalties are not in respect of any act or omission of the employee and they are not money held in trust for the Crown by the employer. It was considered that the former penalties ranking of the penalty and penal tax was inappropriate.

Section 38 of the Amendment Act therefore introduces amendments to section 365 of the principal Act to alter the position.

Subsection (1) repeals the existing subsection (1) of section 365 of the principal Act and substitutes a new subsection (1A). The effects are:

• The definition of a floating charge (previously section 365(4)) is now set out in section 365(1)(8). The old section 365(4) is repealed by Subsection 2 of section 38 of the Amendment Act. No change in interpretation is involved.
• Section 365(1)(b) provides that for the purposes of section 365 "tax deductions" shall not include penalty or penal tax.
• The old section 365(1) now becomes subsection (1A).

The overall effect is that only the actual tax deduction will be given priority ranking above other debts apart from any salary or wages which may be owing.

Penalty and penal tax will rank "pari passu" along with other debts according to whether the penalty taxes are secured or unsecured.

Subsection (3) makes a consequential amendment to the Income Tax Amendment Act 1981 by repealing section 27 of that Amendment Act.

Application

Subsection (4) provides that section 38 applies from the date this Amendment Act has assented to by the Governor-General, ie, 23 March 1985.

Section 39: Additional tax for default in making tax deductions or in paying any amount due to the Commissioner

A full commentary on this section is contained in Part 1 of Appendix A to this TPC.

Section 40: Additional tax to be charged if default made in payment of tax

A full commentary on this section is contained in both Parts I and II of Appendix A to this TPC.

Section 41: Deduction of Tax from Payment Due to Defaulters

Section 400(1) of the principal Act has been amended to update two references in the definition of "bank", consequent on the enactment of the Trustee Banks Act 1983, and the Private Savings Banks Act 1983.

Paragraph (b) of the definition of the expression "bank" now refers to "any trustee bank established under the Trustee Banks Act 1983:" while paragraph (b) refers to "any private savings bank carried on under the Private Savings Banks Act 1983:". These replace the former references to the Trustee Banks Act 1948 and the Private Savings Banks Act 1964, with effect from the 1984/85 income year.

Section 42: Relief from Additional Tax

A full commentary on this section is contained in Part 1 of Appendix A to this TPC.

Section 43: Publication of Names of Tax Evaders

This section extends section 427 of the principal Act to permit the Commissioner to include for publication in the Gazette, the names of those persons charged with penal tax for default in making or paying deductions of non-resident withholding tax under section 323.

This amendment ensures that those persons who have been charged with penal tax under section 323 are treated in the same manner as those persons charged under any of the other penal provisions of the Act, as regards the publication of names.

This section takes effect from the date on which the Governor-General gave his assent to this Amendment Act (23 March 1985), and applies with respect to persons charged with penal tax on or after that date.

Section 44: Records and Returns for Certain Charitable Organisations

This section adds a new section 432A to the principal Act and is a corollary to section 9 of this Amendment Act which amends section 56A of the principal Act.

Subsection 2 of this section requires those organisations specifically named in section 56A(2) of the Act to keep in New Zealand and in the English language records sufficient to enable the Commissioner to ascertain the sources of its funds and the application of those funds within New Zealand or any other country.

Subsection (3) of this section gives the Commissioner the power to require any of these organisations to furnish a return, of its funds derived or received in any income year and the source and application of those funds. Subsection (4) gives the Commissioner the power to notify the Minister if such organisations are applying funds for purposes other than the charitable etc purposes outlined in section 56A(2) of the Act. That notification must not however name any donor to the organisation.

These provisions apply with effect from the 1984/85 income year.

Sections 45 and 46: Payments to Shearers and Shearing Shed Hands

These sections amend, by the repeal and substitution of clauses 7 and 7A, the basic tax deduction provisions for the Second Schedule to the principal Act, for shearers and shearing shed hands respectively in recognition of the new tax deduction codes introduced for them in section 36 of this Amendment Act.

Clause 7 has been amended to provide that the basic tax deduction in respect of a 'SHR' tax code shall be calculated on the amount of the payment at the rate of 25c per $1.

Clause 7A has been amended to provide that the basic tax deduction in respect of a "SSH' tax code shall be calculated on the amount of the payment at the rate of 20c per $1.

These sections are to apply to every source deduction payment made for any pay period ending on or after the 1st day of April 1985.

Section 47: Termination Dates of Taxation Incentives

The Third Schedule of the principal Act, which outlines the terminating dates of various taxation incentives has been repealed and replaced by the new Third Schedule as contained in the Second Schedule to this Amendment Act.

NEW THIRD SCHEDULE
Section of Act	General Description	Terminating Date
119	Regional Investment Allowance	31 March 1983
120	Export Investment Allowance	31 March 1983
121	Industrial Development Plan Investment Allowance	31 March 1986
121A	High Priority Activity Investment Allowance	31 March 1984
122	Farming and Agriculture Investment Allowance	31 March 1985
123	Fishing Investment Allowance	31 March 1983
127	Development Expenditure on Farming or Agricultural Land	31 March 1986
127A	Development Expenditure on Forestry	31 March 1986
128	Development Expenditure on Aquaculture	31 March 1986
156F	Export-Market Development and Tourist Promotion Incentive	31 March 1986
156G	Export-Market Development (Self-Employed Taxpayers) Incentive	31 March 1986
158A	Export Earnings from Qualifying Overseas Projects	31 March 1980

The reference in the second column of this Schedule to the nature of the deduction is by way of general description only and is not to be construed as limiting or extending the deduction under the section referred to in the first column of this Schedule.

Section 48: Travel in the Course of Employment

Clause 6 of the Fourth Schedule to the principal Act allows a deduction in calculating the assessable income of an employee taxpayer, of expenditure incurred by him on travel in the course of his employment. The deductible expenditure does not include travel from home to work except where the taxpayer's base of work is his home or he has no fixed place of work.

The positioning of the commas in Clause 6, prior to this amendment gave rise to ambiguity of meaning. Clause 6 has therefore been repealed and substituted by section 48 of this Amendment Act, in a manner which removes that ambiguity, with effect from the 1984/85 income year.

Section 49: Increased Export of Goods

Part C of the Seventh Schedule (now repealed) was amended by Order in Council 1979/269. The effect of the amendment was to delete "cereals" from the qualifying scheduled goods and replace it with "milled cereals".

This amendment now confirms that Order in Council. It applies from the income year which commenced on 1 April 1980 to the date of effect of the repeal of section 156 of the principal Act (income year commencing on 1 April 1984). As the amendment has the same period of application as the Order in Council, it does not affect on past or present practice in giving effect to the Order in Council as it stood since 1979.

Section 50: Repeal of Spent Provisions

Section 50 repeals spent provisions in various Income Tax Amendment Acts. The sections involved and the dates from which the amendments have effect are as follows:

• Section 10 of the Income Tax Amendment Act (No 2) 1977, with effect from the income year that commenced on 1 April 1979.
• Section 22 of the Income Tax Amendment Act (No 2) 1977, with effect from 1 April 1983.
• Section 9 of the Income Tax Amendment Act 1980, with effect from the income year that commenced on 1 April 1982.
• Section 27 of the Income Tax Amendment Act 1980, with effect from 1 April 1983.
• The First Schedule of the Income Tax Amendment Act 1982 with effect from 1 April 1984.

Appendix A - Part I

Additional Tax/Penalty for Late Payment of Tax

This Part of this Appendix comments on the following sections of the Income Tax Amendment Act (No 2) 1985.

• Section 33 - Additional tax for default in making or paying deductions of non-resident withholding tax (amends section 322 of the principal Act).
• Section 39 - Additional tax for default in making tax deduction or in paying any amount due to Commissioner (amends section 370 of the principal Act).
• Section 40 - Additional tax to be charged if default made in payment of tax (amends section 398 of the principal Act).
• Section 42 - Relief from additional tax (amends section 413 of the principal Act).

1 Introduction

The above sections of this Amendment Act amend the provisions contained in the Income Tax Act 1976 relating to additional tax for default in payment of income tax and penalty for default in payment of tax deductions and non-resident withholding tax. Also amended is the provision allowing relief from the additional tax incurred.

The amendments result from the announcement made in the 1984 Budget, which stated that commencing 1 April 1985, the penalty for the late payment of tax and Accident Compensation employer and self-employed levies will be increased.

The effect of the announcement is to increase the late payment additional tax/penalty from a 10 percent flat additional tax/penalty to a 10 percent flat additional tax/penalty plus an incremental additional compounding 10 percent additional tax/penalty for each six months on the balance outstanding, ie, additional tax will be added to so much of both the tax and any additional tax previously as remains unpaid at the expiry of the relevant six months period.

The new additional tax/penalty provisions will apply where payment is late in respect of:

1. Income Tax
2. Provisional Tax
3. PAYE Tax Deductions
4. Excess Retention Tax
5. Non-Resident Withholding Tax
6. Withdrawal Tax
7. Penal Tax
8. National Superannuitant Surcharge
9. Fringe Benefit Tax
10. Land Tax
11. Accident Compensation Employer and Self-Employed Levies

Additional tax, as distinct from a penalty, accrues by law for late payment of all the above revenues except PAYE tax deductions, non-resident withholding tax and AC levies, in which cases a penalty is imposed. This difference is referred to throughout this Appendix.

As a result of the amendments made to the additional tax provisions, section 413 of the Act, the provisions of which relate to the remission of additional tax, has been amended. Under the new provisions the first accrual of 10 percent additional tax will still require written application before remission can be considered, but the subsequent imposition of additional tax (referred to in this Appendix as incremental tax) will be remitted automatically where the outstanding tax is payable in accordance with an arrangement entered into with the Department, where the arrangement has been faithfully adhered to. The incremental tax will also be remitted automatically where the outstanding tax is payable in accordance with a section 400 notice and the terms of the notice are faithfully adhered to.

2 Application

The application of the new additional tax/penalty provisions along with the first possible application of the "incremental" additional tax/penalty in respect of each revenue, ie, the 10 percent additional tax charged on the balance unpaid six months after the last day for payment, is listed below.

The provisions will first apply in respect of outstanding:

(1) Income Tax - on income derived during the income year commencing 1 April 1985 (1985/1986 accounting year). The effect for a taxpayer with a 31 March balance date is:

Terminal Income Tax for 1985/86 - due and payable 7 February 1987

• 10 percent additional tax on the amount unpaid by 7 March 1987.
• 10 percent additional tax imposed on the amount, including additional tax previously imposed that is unpaid by 7 September 1987.
• 10 percent additional tax on so much of the balance, including additional tax previously imposed, as remains unpaid at the end of each successive six months period, ie, 7 March 1986, 7 September 1968, and so on.
• The first possible application of the new additional tax is in respect of tax assessed for an October 1965 balance date (1965/86 accounting year) where the terminal tax is due and payable 7 September 1986. Additional tax would be imposed on the tax unpaid by 7 October 1986 with "incremental" additional tax being imposed on the amount unpaid by 7 April 1987, 7 September 1987, and so on.

(2) Provisional Tax - relating to the income year commencing 1 April 1985, that is, 1986 provisional tax. The effect for a taxpayer with 31 March 1986 balance date who is liable to pay 1986 provisional tax, is:

First Instalment 1966 Provisional Tax

Due and payable 7 August 1985.

• 10 percent additional tax on any amount unpaid by 7 September 1985.
• 10 percent "incremental" additional tax on any amount of first instalment and first 10 percent additional tax thereon that is unpaid by 7 March 1986; and
• 10 percent "incremental" additional tax on any balance of the foregoing provisional tax and additional tax that is unpaid by 7 September 1986.

Second Instalment 1986 Provisional Tax

Due and payable 7 February 1986.

• 10 percent additional tax on any amount unpaid by 7 March 1986.
• 10 percent "incremental" additional tax on any amount of second instalment and first 10 percent additional tax thereon that is unpaid by 7 September 1986.

Under this new scheme, the six months "incremental" periods in relation to provisional tax unpaid can be only such six months periods as end on or before the day preceding the day the income tax for the year concerned becomes due and payable. In other words, in the case of the above example, further additional tax on provisional tax unpaid cannot be added after 7 September 1986, as that is the last six months sequential period that can end before 7 February 1987. For further comment refer to comment on subsection (7) of section 40.

• Under this new scheme, the first possible imposition of "incremental" additional tax for provisional tax payable will be in respect of an October 1985 balance date (1985/86 accounting year). In this case the first instalment of provisional tax was due and payable 7 February 1985. 10 percent additional tax would have been imposed on that instalment of provisional tax unpaid by 7 March 1985 with the first "incremental" additional tax arising on 7 September 1985, ie, seven months after the due date for payment of the first instalment.

(3) PAYE Tax Deductions - made or required to be made on or after April 1985:

• First possible application of the "incremental" penalty would be in respect of April 1985 tax deductions, due and payable on 20 May 1985, the incremental penalty being imposed on the amount of those deductions, and the 10 percent penalty first imposed, remaining unpaid on 20 November 1985, ie, six months after the due date for payment. Section 370 of the Act, which imposes the penalty for late payment of tax deductions, does not allow one month between the due date and the day the first 10 percent penalty is imposed. Therefore the first incremental penalty is imposed six months after the due date as distinct from seven months in the case of income tax.

(4) Excess Retention Tax - for the year of assessment ending 31 March 1986 (excess retention tax is deemed to be income tax therefore subject to the provisions of section 398 of the Act).

• First possible application of the "incremental" additional tax would be in reset of a private investment company with an October 1985 balance date. The earliest possible due date for excess retention tax would be 7 December 1986, with "incremental" additional tax being imposed on the amount of excess retention tax, and the 10 percent additional tax first imposed, remaining unpaid on 7 July 1987.

Although the earliest possible application of the incremental tax is as given above, in practice it is more than likely that the due date will be subsequent to that given.

(5) Non-Resident Withholding Tax - imposed on non-resident withholding income derived on or after 1 April 1985.

• First possible application of "incremental" penalty would be in respect of non-resident withholding income derived in April 1985 with the due date for payment being 20 May 1985. Same 10 percent penalty application as for PAYE tax deductions - refer (3) above.

(6) Withdrawal Tax - on withdrawal income derived during the income year commencing 1 April 1985 (under section 336 of the Income Tax Act, the additional tax provisions in section 398 apply as if withdrawal tax were income tax).

• First possible application of "incremental" additional tax would be in respect of withdrawal income derived in April 1985, due and payable 20 May 1985, where the withdrawal tax and/or the 10 percent additional tax imposed on the 20 May 1985, is not paid by 20 November 1985.

(7) Penal Tax - assessed on tax imposed on income derived during the income year commencing 1 April 1965. (Penal tax is deemed to be tax of the same nature as the deficient tax in relation to which it is assessed. It is deemed to be payable in and for the same year of assessment as the deficient tax.)

• First possible application of "incremental" additional tax in relation to penal tax would be in respect of an assessment of penal tax in relation to an October 1985 balance date.

(8) National Superannuitant Surcharge - on income derived in the income year commencing 1 April 1985.

• First possible application of "incremental" additional tax would be in respect of an October 1985 balance date, the due date for payment of the surcharge being 7 September 1966. "Incremental" additional tax would be incurred, on the surcharge and the 10 percent additional tax imposed on 7 October 1986, on 7 April 1987.

(9) Fringe Benefit Tax - on any fringe benefit provided to any employee on or after 1 April 1985.

• First possible application of "incremental" additional tax would be in respect of the quarter ending 30 June 1985, due date for payment 20 July 1985. "Incremental" additional tax would be incurred on any fringe benefit tax unpaid at 20 January 1986.

Note: The additional tax provisions in relation to fringe benefit tax are contained in section 336U of the Act, as introduced by section 34 of this Amendment Act.

(10) Land Tax assessed in the year of assessment beginning 1 April 1985 (on land value of land held at noon on 31 March 1965).

• First "incremental" additional tax in respect of 1985 land tax due and payable 7 October 1985, with the last day for payment 7 November 1985, would be incurred on the amount of land tax, including additional tax previously imposed, that is unpaid by 7 May 1986.

(11) Accident Compensation levies where:

1. Earnings as an employee are paid by the employer on or after 1 April 1985:
   • First "incremental" penalty in respect of 1986 employer levy, due and to be paid by 31 May 1986, would be 30 November 1986.
2. Earnings as a self-employed person derived in the income year commencing 1 April 1985:
   • first "incremental" penalty on AC self-employed levy, due 7 February 1987 and to be paid by 7 March 1987, would be 7 September 1987.

3 Implementation

Full details of the amendments to the sections covered in this Appendix are given below. Details of the amendments made to the Land Tax Act 1976 and the Accident Compensation Act 1982 relating to the new additional tax/penalty provisions are included in separate parts of this TPC.

Section 33: Additional Tax for Default in Making or Paying Deductions of Non-Residential Withholding Tax

This section amends section 322 of the principal Act which imposes a penalty for default in making or paying non-resident withholding tax. This amendment provides that the new incremental penalty, as announced in the Budget, is to be imposed in respect of non-resident withholding tax.

Subsection (1)

This subsection repeals and substitutes subsection (1) of section 322.

It provides for a penalty to be imposed under this section for default in making or paying non-resident withholding tax.

Paragraphs (a) to (c) of this subsection effectively remain unchanged. They determine for the purposes of imposing a penalty under this section when a default in the making or paying of non-resident withholding tax occurs.

If a default occurs the person is liable, unless the Commissioner is satisfied that the person has not been guilty of wilful neglect or default, to a penalty which is calculated in accordance with paragraphs (d) to (f) of this subsection.

The penalty is imposed on the expiry of the day on which the failure occurs, this day being the due date for payment. In most instances the due date is the 20th of the month immediately following the month in which the deductions have been made. There is not a period of grace, as there is in the case of income tax, of one month after the due date before the imposition of the penalty.

• Paragraph (d) imposes a penalty equal to 10 percent of the amount in respect of which default has been made, on the expiry of the day on which the failure occurs.
• Paragraph (e) adds a 10 percent penalty on the amount in default, plus any penalty added under paragraph (d) of this subsection, which remains unpaid six months after the day on which the original failure occurred.
• Paragraph (f) adds a further 10 percent penalty on the amount in default, plus any penalty added to that amount under paragraphs (d) and (e) of this subsection and penalty added under this paragraph, which remains unpaid for any of the periods of six months that consecutively succeed the period of six months referred to in paragraph (e).

Example:

Non-resident withholding increase derived July 1986.

Non-resident withholding tax on the above income due and payable 20 August 1986, amounting to $500

	CR	DR	Balance of Account
	$	$	$
NRWT due and payable 20.8.86			500
Penalty imposed if not paid by20.8.86 (pursuant to paragraph (d))		50	550
Penalty imposed if not paid by 20.2.87 (pursuant to paragraph (e))		55	605
and so on, on the amount remaining unpaid.

Subsection (2)

Application - This section will apply with respect to non-resident withholding tax payable in respect of non-resident withholding income derived on or after 1 April 1985; refer paragraph 2(5) of this circular.

Section 39: Additional Tax for Default in Making Tax Deduction or in Paying Any Amount Due to Commissioner

This section amends section 370 of the principal Act which imposes a penalty for default in making or paying PAYE tax deductions to the Commissioner.

The section provides that the incremental penalty is to apply in respect of tax deductions. It also removes the provision that the Commissioner cannot impose the penalty unless he is satisfied that the taxpayer has been guilty of wilful neglect or default, and adds to the section the right for taxpayers to have recourse under the provisions of section 413 of the Act to request relief from the penalty imposed under this section.

Subsection (1)

Paragraphs (a) to (c) of this subsection determine when a default occurs in making or paying PAYE tax deductions to the Commissioner.

When a default has occurred pursuant to any of paragraphs (a) to (c), on the day the failure occurs the employer or the person who failed to make or pay the tax deductions is liable to the penalty imposed pursuant to paragraphs (d) to (f) of this subsection.

Tax deductions are due and payable on the 20th day of the month immediately following the month in which the tax deductions are made. Each month is treated separately and penalties will accrue for each month there is default in making or paying the tax deductions.

Paragraph (d) imposes a penalty equal to 10 percent of the amount in respect of which default has been made, on the expiry of the day on which the failure occurs.

Paragraph (e) adds a 10 percent penalty on the amount in default, and on any penalty added under paragraph (d) of this subsection, which remains unpaid six months after the day on which the failure occurs.

Paragraph (f) adds a further 10 percent penalty on the amount in default, and on any penalty added to that amount under paragraphs (d) and (e) of this subsection and on penalty added under this paragraph, which remains unpaid for any of the periods of six months that consecutively succeed the period of six months referred to in paragraph (e) of this subsection.

Subsection (2)

This subsection amends subsection (4) of section 370 by omitting the words "section 398" and substituting the words "section 398(2)(a)".

The effect of this amendment, by deeming the penalty imposed under this section to be additional tax imposed under section 398(2)(a) of the Act, is to give the employer or person who has incurred the penalty or additional penalty the right to request relief in terms of section 413(2) of the Act. Section 413(2) (as amended) requires the taxpayer to apply for relief from additional tax in writing. The provisions in section 413(3) relating to the automatic remission of additional tax where the taxpayer makes and adheres to an arrangement with the Commissioner for the payment of tax arrears, will not apply to the penalty imposed under section 370.

Subsection (3)

Application - This section will apply with respect to tax deductions made or required to be made in respect of the tax on income derived in the income year commencing 1 April 1985. Refer paragraph 2(3) of this circular.

Section 40: Additional Tax To Be Charged If Default Made In Payment of Tax

Section 40 amends section 398 of the principal Act, which imposes additional tax if a default is made in the payment of income tax. The amendment repeals section 398 and substitutes a new section 398.

The new section can be broken down into two areas:

1. The inclusion of new "incremental" additional tax provisions along with a continuation of the provisions as they existed in section 398 relating to due dates for payment - subsections (2), (5), (6), (7) and (8) of the substituted section 398.
2. The inclusion of an "in lieu" additional tax calculated at an annual interest rate in respect of "deferrable tax", as defined in the new section 34 of the principal Act (as substituted by section 7 of this Amendment Act) - subsections (1), (3) and (4) of the substituted section 398.

The comment on section 40 in this Part of this Appendix is limited to the first area, ie, subsections (2), (5), (6), (7), and (8). Comment on the second area, ie, subsections (1), (3), and (4), is included in Part II of this Appendix, which covers the collection and payment of tax in dispute.

Subsection (2) of the new section 398

Introduction

This subsection sets out the amount of additional tax to be imposed for default in payment of income tax and the recurring six monthly liability for further "incremental" additional tax.

It should be noted that subsection (2) does not impose additional tax in respect of "deferrable tax" during the period of deferral, the additional tax for deferrable tax being imposed under subsection (4) of this section.

If a taxpayer has incurred additional tax for late payment of tax, that tax not being "deferrable tax", the additional tax will be added under subsection (2).

If at the same time the taxpayer has an amount of "deferrable tax", additional tax will be added to the "deferrable tax" under subsection (4), thus a taxpayer could have additional tax being imposed under both subsections (2) and (4).

As already mentioned, full details of the additional tax to be imposed in respect of "deferrable tax" are included in Part II of this Appendix.

Subsection (2) of section 398 applies to income tax and the revenues which are deemed to be income tax for the collection and recovery purposes of the principal Act. The provisions which impose penalty for late payment of non-resident withholding tax and tax deductions have already been commented on - refer to the explanations under sections 33 and 39 respectively. Additional tax in respect of default in payment of Fringe Benefit Tax is imposed in accordance with the provisions of section 336U of the principal Act, as enacted by section 34 of this Amendment Act.

Implementation

Subsection (2) deems any additional tax calculated in accordance with this section to be added to the tax remaining unpaid, and to be payable accordingly. (Note that the additional tax is incurred and imposed automatically, by operation of the law, immediately the time for payment has expired.)

Additional tax imposed becomes automatically income tax, and additional tax is to be recovered accordingly as income tax.

Paragraph (a) of Subsection (2 )

Provides that additional tax of 10 percent will be added to any tax remaining unpaid on the expiry of one month immediately following either the due date for payment or the date of demand of the tax, whichever is applicable.

"Date of demand" relates to special assessments issued pursuant to section 12 of the principal Act and to assessments of penal tax, where the tax assessed is payable to the Commissioner on demand.

Paragraph (b) of Subsection (2)

Provides that additional tax of 10 percent will be added to so much of the tax, including the additional tax added under paragraph (a), as remains unpaid on the expiry of seven months immediately following either the due date for payment or the date of demand of the tax, whichever is applicable.

Paragraph (c) of Subsection (2)

Provides that additional tax of 10 percent will be added to so much tax, including additional tax added under paragraphs (a) and (b), as remains unpaid on the expiry of the six months immediately the end of the period of seven months referred to in paragraph (b).

Paragraph (d) of Subsection (2)

Provides that additional tax of 10 percent will be added to so much of the tax, including any additional tax added under paragraphs (a), (b) and (c), and under this paragraph, as remains unpaid at the expiry of any of the periods of six months that, consecutively, succeed the six months period referred to in paragraph (c).

This paragraph provides for the continuing imposition of 10 percent additional tax for each six months period that the tax remains unpaid.

Example

		CR	DR	Balance of Account
		$	$	$
	1986 Income Tax due and payable 7.2.87			1,000
1.	10 percent additional tax added if unpaid by 7.3.87 (pursuant to paragraph (a))		100	1,100
2.	10 percent additional tax added if unpaid by 7.9.87 (pursuant to paragraph (b))		110	1,210
3.	10 percent additional tax added if unpaid by 7.3.88 (pursuant to paragraph (c))		121	1,331
4.	10 percent additional tax added if unpaid by 7.9.86 (pursuant to paragraph (d))		133.10	1,464.10
5.	10 percent additional tax added if unpaid by 7.3.85 (pursuant to paragraph (d))		146.41	1,610.51

(and so on, at the expiry of each subsequent period of six months.)

When a payment is made against tax in arrears the incremental additional tax is calculated on the balance that remains unpaid at the date the incremental additional tax accrues by law pursuant to subsection (2) of section 398.

Example:

		CR	DR	Balance of Account
		$	$	$
	1986 Income Tax due and payable 7.2.87			1,000
1.	10 percent additional tax added if unpaid by 7.3.87 (pursuant to paragraph (a))		100	1,100
	Payment received 20.7.87	500		600
2.	10 percent additional tax added if unpaid by 7.9.87 (pursuant to paragraph (b))		60	660
	Payment received 20.11.87	500		160
3.	10 percent additional tax added if unpaid by 7.3.88 (pursuant to paragraph (c))		16	176
	Payment received 4.9.88	176		Nil

Subsection (3) and Subsection (4)

For comment on these two subsections refer to Part II of this Appendix.

Subsection (5) of the new section 398

This is merely a repeat of the provision which was previously contained in subsection (2) of section 398. It allows the Commissioner, when an assessment is not made until after the due date for payment or the tax is increased after the due date for payment, to fix a new due date for the tax or the increase. A new due date can be fixed only when the Commissioner is satisfied that the taxpayer has not been guilty of wilful neglect or default in completing his return of income, in respect of which the tax is payable.

Any due date fixed under this section is deemed to be the due date for purposes of calculating the additional tax under subsections (2) and (4).

Subsection (6) of the new section 398

This repeats the provision which was previously subsection (2A) of section 398. It provides that additional tax for late payment will be incurred if the tax is not paid in time, irrespective of whether the return of income has been furnished.

Subsection (7) of the new section 398

This is a new provision.

This subsection ensures that further incremental additional tax for late payment of provisional tax cannot be charged on any amount of the provisional tax that is still outstanding after the due date for of the terminal tax for the income year in respect of which the provisional tax is payable.

This provision has become necessary only as a result of the introduction of the "incremental" additional tax. The previous legislation made no provision for the additional tax on outstanding provisional tax to cease to be imposed when the due date for payment of the terminal tax had been reached, because the former additional tax of a flat and final 10 percent meant that such a provision was unnecessary.

Provisional tax is not income tax; it is an amount payable under Part XII of the principal Act and, if paid, is allowed as a credit against the income tax payable for the year concerned. The new provision, referred to above, will ensure that further incremental additional tax on provisional tax will not be incurred 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 provisional tax was payable. Any outstanding additional tax already incurred in respect of an unpaid or late paid amount by way of provisional tax will of course still be payable.

Commencing with the expiry of one month after the due date for payment of the income tax for the incline year concerned, the "10 percent flat, plus 10 percent incremental" system of additional tax will apply to any of that income tax that is not paid in time.

Example:

To show how the new provision will operate:

1987 income year.

1st instalment of provisional tax due and payable 7.8.86			$300
2nd instalment of provisional tax due and payable 7.2.87			$60
Income tax due and payable 7.2.88			$1,000
	1st Instalment of Provisional Tax:		Balance
			$
	not paid by
	7.9.86 10 percent additional tax incurred:	$30	300
	7.3.87 10 percent additional tax incurred:	$33	363
	7.9.87 10 percent additional tax incurred:	$36.30	399.30
		$99.30
	2nd Instalment of Provisional Tax:		Balance
			$
	not paid by
	7.3.87 10 percent additional tax incurred:	$60	600
	7.9.87 10 percent additional tax incurred:	$66	660
		$126	726
	Total additional tax	$225.30

In this example the provisional tax has not been paid and additional tax of $225.30 has been incurred. The unpaid provisional tax and unpaid additional tax will not attract further additional tax at any time beyond 7 September 1987, ie, the last day of the final full six months incremental period that precedes the due date for payment of the terminal tax, 7 February 1988.

3.	Income Tax (Terminal Tax)		Balance
			$1,000
	not paid by
	7.3.88 10 percent additional tax	$100	$1,100

(and so on, at the expiry of each subsequent period of six months.)

As provisional tax has not been paid no credit is given, in the assessment, against the amount of terminal tax assessed. The $1,000 terminal tax will have additional tax imposed on the full amount if not paid by 7 March 1988, and incremental additional tax will be added for each six months period the tax remains unpaid. The additional tax of $225.30, incurred for non payment of the provisional tax, is still payable.

Subsection (8) of the new section 398

This subsection rewrites the former subsection (3) of section 398 of the Act.

It provides that the Commissioner shall extend the due date for tax payable by non-residents by up to six months after the due date.

The subsection deems the extended due date to be the due date for the purposes of subsection (2)(a) of this section, thus ensuring that additional tax on tax unpaid will not commence to accrue by law until the expiry of one month after the extended due date.

Application

This section of the Amendment Act applies with respect to the tax on income derived in the income year commencing on 1 April 1985, and in every subsequent year. Refer to paragraph 2 of this Appendix for further details.

Section 42: Relief From Additional Tax

This section repeals section 413 of the principal Act and substitutes a new section 413. Section 413 provides for remission by the Commissioner, in specified circumstances, of additional tax incurred under section 398 of the principal Act, as substituted by section 40 of this Amendment Act.

Section 413 has been amended to require that the Commissioner remit the additional tax added to the tax remaining unpaid seven months onwards after the due date for payment, where the outstanding tax is payable by instalments in accordance with an arrangement entered into between the Commissioner and the taxpayer, or in accordance with a section 400 notice, and where that arrangement, or notice has been faithfully adhered to in every respect. Taxpayers will NOT need to make an application for the remission of additional tax in such cases.

The provisions of section 413 will not apply to additional tax imposed pursuant to subsection (4) of section 398, ie, the additional tax calculation in respect of "deferrable tax" as defined in section 34 of the Act, (as now amended). Taxpayers will not have the right to request remission of this additional tax. For further details refer to Part II of this Appendix.

Subsection (1):

This subsection defines, for the purposes of section 413 only, the term "incremental tax". "Incremental tax" means the additional tax added to unpaid tax in accordance with the provisions of section 398(2)(b) or 398(2)(c) or 398(2)(d) of the Act, ie, the additional tax incurred 7 months and onwards after the due date for payment, not the additional tax incurred 1 month after the due date.

The purpose of this definition is to distinguish between the 10 percent additional tax incurred in respect of unpaid tax one month after the due date for payment and the additional tax incurred thereafter .

Subsection (2):

Provides that the Commissioner may grant relief to the taxpayer by way of remission of additional tax added to unpaid tax under section 398(2)(a) of the Act, ie, the 10 percent additional tax added one month after the due date, and "incremental tax", as defined.

This subsection merely extends the former provisions, to incorporate "incremental tax" and extends the right of taxpayers to apply for the remission of "incremental tax" where the "incremental tax" is not subject to the automatic remission provisions contained in subsection (3) of this section (refer below).

The other provisions of the section remain unchanged in that the taxpayer or his agent must apply for relief from the additional tax or incremental tax in writing, and the Commissioner if, having regard to the circumstances of the case, thinks it is equitable, may grant relief to the taxpayer by the remission of the whole or a part of the additional tax or the "incremental tax" and, if appropriate, make refund accordingly.

Subsection (3):

This subsection introduces a new provision whereby the Commissioner is required, in specified circumstances, to remit the "incremental tax" without written application from the taxpayer. This provision will apply only where the taxpayer has entered into an arrangement with the Commissioner to pay the tax, or the tax is paid pursuant to a notice under section 460 of the Act.

The provision has been introduced with the view to encouraging taxpayers who find that they cannot pay their tax in time to enter into an instalment arrangement with the Commissioner and thus avoid incurring the "incremental" additional tax. For this automatic remission to apply it is essential that every payment pursuant to the instalment arrangement or the section 400 notice be made within the time specified. (Fuller notes on this automatic remission are given below. )

It will apply only to the incremental tax which accrues during the period of the instalment arrangement or the duration of the section 400 notice. It does not apply to the first imposition of additional tax, ie, the 10 percent additional tax imposed one month after the due date for payment, that additional tax being subject to the right to request remission under subsection (2) of this section.

Example:

		Balance of Account
1.	Tax due and payable 7.2.86	200
2.	Tax not paid by 7.3.86 10 percent tax added $20	220
3.	Tax not paid by 7.9.86 10 percent incremental tax added $22	242

4. Taxpayer enters an arrangement to pay the arrears of tax on 1.12.86. Arrangement is to pay $50 per month from 1.1.87 to 1.4.87 with the balance of $42 payable on 1.5.87.

In this example the "incremental" additional tax to be charged on 7 March 1987 will be remitted without written application from the taxpayer if the instalments are paid by the taxpayer pursuant to the terms of the arrangement. The additional tax charged on 7 March 1986 and the incremental tax charged on 7 September 1987 will not be remitted under subsection (3). However, the taxpayer will have recourse under the provisions of subsection (2) of section 413 to request, in writing to the Commissioner, relief from the additional tax and incremental tax that does not qualify for the automatic remission resulting from "instalment compliance".

This automatic remission provision will apply where the incremental tax in relation to which the taxpayer has incurred liability for payment during the term of the instalment arrangement is:

1. Tax that is payable in two or more instalments pursuant to an arrangement entered into between the taxpayer and the Commissioner; or
2. Tax in respect of which deductions are required to be made, and paid to the Commissioner, pursuant to a notice issued under section 406(2) of the principal Act;

and where every one of the instalments has been faithfully adhered to pursuant to the terms of the arrangement or where every one of the deductions and payments has been adhered to pursuant to the section 406 notice.

The subsection provides that where these provisions are complied with, the Commissioner shall remit the incremental tax. If that incremental tax has been paid, the Commissioner will refund it, so far as may be appropriate.

Subsection (4):

This subsection provides that for any case or class of cases, additional tax or incremental tax in respect of which the taxpayer has applied for remission under subsection (2) of this section, cannot be remitted or refunded, if the amount exceeds $1,000, without the Minister's approval.

By the reference to subsection (2) in this subsection, incremental tax remitted automatically under subsection (3) of this section does not fall within this restriction and amounts in excess of $1,000 can be remitted without the Minister's approval.

Application

This section (as amended) will apply with respect to the tax on income derived in the income year commencing on the 1st day of April 1985, and in every subsequent year.

Appendix A - Part II

Payment and Collection of Tax In Dispute

This Part of this Appendix comments on the following sections of the Income Tax Amendment Act (No 2) 1985.

• Section 7 - Obligation to pay tax where objection lodged (amends section 34 of the principal Act).
• Section 8 - interest on certain excess tax (inserts a new section 34A to the principal Act).
• Section 40 - Additional tax to be charged if default made in payment of tax (amends section 398 of the principal Act).

Introduction

It was announced in the 1984 Budget that new provisions were to be introduced for tax payable which is the subject of a dispute. The original intention was to require the objector to pay the whole of the tax assessed by the ordinary due date, and that where a dispute was resolved in the taxpayer's favour interest would be paid on any tax overpayment which was refunded.

As a result of the deliberations on the Income Tax Amendment Bill (No 2) 1984 by the Parliamentary Select Committee, the procedures for the collection and payment of tax in dispute were amended.

The new procedures are:

• Taxpayers who have lodged a qualifying ("competent") objection or an appeal in relation to an assessment of tax will be able to defer payment of one half of the amount of tax which is in dispute, until the date of final resolution of the case - section 7 of this Amendment Act.
• The amount of tax which is not in dispute and the remaining half amount of tax in dispute which is not able to be deferred, will be payable by the ordinary due date and subject to the normal recovery procedures for the late or non-payment of tax - section 7 of this Amendment Act.
• The right to defer payment of tax in dispute will not be available in relation to objections to assessments which have been lodged on the grounds that the taxpayer has omitted to claim a rebate, or a work related expense, or other similar circumstances - section 7 of this Amendment Act.
• The Commissioner will have the right to seek and enforce judgment for the recovery of the amount of tax not in dispute and the amount of tax in dispute not able to be deferred, as separate debts, and also in due course to seek and enforce judgment for the amount of tax which has been deferred and which is ultimately determined to be payable - section 7 of this Amendment Act.
• Where the objection is resolved in the taxpayer's favour and an overpayment of tax is established, interest will be paid by the Commissioner on the amount of the overpayment - section 8 of this Amendment Act.
• Where and to the extent that the objection is resolved in the Commissioner's favour, the additional tax incurred during the period of deferral in respect of the amount of tax which has been deferred (and which is determined ultimately to be payable) will be remitted, but will be replaced by an additional tax calculated on a daily basis during the period of deferral, at the same rate of interest as that which will be paid by the Commissioner where an overpayment of disputed tax is established - section 40 of this Amendment Act.
• This "interest-based" additional tax, plus the amount of tax which has been deferred will, if not paid within one month after the resolution of the case, incur the 10 percent additional tax plus the subsequent incremental additional tax for late or non-payment - section 40 of this Amendment Act.
• The rate of interest to be used by the Commissioner for the payment of interest, and for the calculation of additional tax has been set for the period of 12 consecutive months commencing 1 April 1985 at 20 percent per annum, as specified in the Income Tax (Specified Rate of Interest) Notice 1985, notified in the Gazette on 28 March 1985.

The comment included in this Part of the Appendix relating to section 40 of the Amendment Act is only in respect of subsections (1), (3) and (4) of section 40. These subsections provide for the imposition of the "interest-based" additional tax in respect of the deferred amount of tax.

Comment on the other provisions of section 40 are included in Part I of this Appendix - Additional Tax/Penalty for Late Payment of Tax.

APPLICATION

A. Right to Defer Payment of One Half of Tax in Dispute

The right to defer payment of one half of the amount of tax in dispute is contained in section 7 of the Amendment Act (amends section 34 of the principal Act).

Section 7 will apply in respect of objections to assessments, notices of which are issued on or after the 1st day of April 1985, ie, it will apply to any income year where an objection has been lodged in respect of an assessment the notice of which is issued on or after 1 April 1985 in respect of that income year. This includes an amended assessment the notice of which is issued after 1 April 1985.

The right to defer payment of one half of the amount of tax in dispute will apply to:

• Income tax, including excess retention tax, withdrawal tax, penal tax, National Superannuitant surcharge, fringe benefit tax.
• Land tax, by virtue of section 45 of the Land Tax Act 1976 which by reference, adopts the same deferral provisions.

The ability to defer payment of one-half of the amount of tax in dispute will not apply to taxpayers who have objected to an assessment of Non-Resident Withholding Tax. The full amount of non-resident withholding tax in dispute will be required to be paid by the original due date.

The ability to defer will also not apply to provisional tax assessments by virtue of the fact that a notice of assessment is not issued for provisional tax (which, by law, is not "income tax").

Provisional tax will still be required to be based on the tax payable, on the provisional income, that would have been payable had there not been a 50 percent deferral, with the taxpayer also having the right to estimate and re-estimate provisional tax in the normal course.

PAYE tax deductions cannot be objected to until an assessment of income tax was been made and a notice of assessment given to the taxpayer. The tax deductions form part of the assessment to which the taxpayer can object; a taxpayer cannot object to the tax deductions made.

B. Commissioner to Pay Interest on Overpaid Tax in Dispute

The provision whereby the Commissioner is to pay interest on any overpaid amount of tax in dispute is in section 8 of the Amendment Act (inserts section 34A into the principal Act).

Section 8 has the same application date as section 7, ie, it will apply in respect of objections to assessments, notices of which are issued on or after the 1st day of April 1985.

This section differs from the application of section 7 in that interest will be paid on overpaid tax, where the objection has been found in the taxpayer's favour, in respect of:

• Income tax, including excess retention tax, withdrawal tax, penal tax, National Superannuitant surcharge, fringe benefit tax, and non-resident withholding tax.
• Land tax by virtue of section 45 of the Land Tax Act 1976 (as amended ).
• Provisional tax by virtue of the definition of "qualifying tax in dispute" in section 8.

C. Imposition of "Interest Based" Additional Tax in Respect of Deferrable Tax

Section 40 of the Amendment Act (amends section 398 of the principal Act) provides that any additional tax imposed during the period of deferral in respect of the deferrable tax shall be calculated at a daily interest rate, equivalent to the interest rate per annum which will be used to calculate interest paid by the Commissioner for overpaid tax in dispute, pursuant to section 34A of the Act, as inserted by section 8 of the Amendment Act.

Section 40 applies with respect to the tax on income derived in the income year commencing on the 1st day of April 1985 and in every subsequent year, ie, 1985/86 income year or equivalent accounting year.

This application date differs from the application date that applies to sections 7 and 8 of this Amendment Act.

The effect of the differing application dates is to have three different systems, determined by reference to time, for the collection and payment of tax in dispute. The application of each system, outlined below, will depend on when the notice of assessment, in respect of which the taxpayer has objected, was given or issued to the taxpayer.

This provision will apply to the same revenues as those to which section 7 of this Amendment Act applies.

D. Rules Operating for the Collection and Payment of Tax in Dispute

System 1: Objections to assessments, notices of which were given prior to 1 April 1985

The collection and payment of tax in dispute for objections to assessments, notices of which were issued prior to 1 April 1985 will follow the rules promulgated in PIB 109, issued in February 1981, viz:

In the case of objections to be determined by the Taxation Review Authority or the High Court the Department will approve deferments of tax on the following basis:

Except where the objection is frivolous the tax on the income in dispute may be deferred for a limited period, in accordance with the following rules:

• Deferment of the tax in dispute will be approved for a period of twelve months after the original last day for payment or until the objection is decided, whichever occurs first.
• If the objection has still not been disposed of by the end of the twelve months deferment period then one half of the tax in dispute must be paid. Payment of the balance of the tax will continue to be deferred until the objection has been decided.
• Where only some of the income is in dispute a notional assessment will be made and the tax on the income not in dispute must be paid by the original last day for payment.

If the Department's assessment is upheld, the additional tax accrued for late payment of the tax assessed will be reduced to an amount equal to interest at 5 percent per annum, calculated on a daily basis from the last day for payment of tax. Payment of the balance of the tax owing is required immediately on determination of the objection.

If the objection is decided in the taxpayer's favour any tax paid is to be refunded promptly.

System 2: Objections to assessments, notices of which are given on or after 1 April 1985, relating to the 1985 or a prior income year

The provisions of both sections 34 and 34A (as amended and inserted by sections 7 and 8 of this Amendment Act) will apply to objections to assessments, notices of which are given on or after 1 April 1985.

However, as the new provisions of section 398 (as amended by section 40 of this Amendment Act) will apply with respect to tax on income derived in the income year commencing on 1 April 1985, ie, the 1986 income year, section 40 will not apply to objections to assessments where the assessments relate to the 1985 or a prior income year, regardless of when notice of those assessments is given.

There is therefore a different system for the collection and payment of tax in dispute, where the notice of assessment is given on or after 1 April 1985, but the assessment relates to the 1985 or a prior income year.

The effect is:

• Taxpayers will have the right to defer one-half of the amount of tax in dispute in respect of a competent objection.
• If the taxpayer succeeds with his objection the Commissioner will pay interest on the amount of tax to be refunded.
• If the taxpayer does not succeed with his objection, additional tax for late payment will be imposed on the amount of tax deferred. The additional tax will accrue on the expiry of the period of one month after the due date for payment of the tax, and will be the amount of additional tax which applies to the tax on income derived in pre-1985/86 income years, ie, a flat 10 percent on the amount of tax paid late, with no subsequent incremental penalty.
• Any amount of the tax, not able to be deferred, which is not paid within one month after the due date for payment will likewise be subject to an impost of additional tax at 10 percent flat and final.

System 3: Objections to assessments, notices of which are given on or after 1 April 1985, relating to the 1986 or subsequent income years

The essential difference between the rules of System 3 and those outlined in System 2 is that the new provisions of section 398 (as amended by section 40 of this Amendment Act) will apply under System 3.

The effect in respect of objections to assessments where those assessments relate to the 1986 or subsequent income years is:

• Taxpayers will have the right to defer one-half of the amount of tax in dispute in respect of a competent objection - that half is the "deferrable tax".
• If the taxpayer succeeds with his objection the Commissioner will pay interest on the amount of tax to be refunded.
• If the taxpayer does not succeed with his objection additional tax will accrue on:
  • the amount of the deferrable tax, for the periods of deferral (as defined), calculated at a daily interest rate (the "interest-based" additional tax),
  • the amount of the deferrable tax, plus the "interest-based" additional tax, which remains unpaid one month after the resolution of the case, at the new rate of additional tax, ie, 10 percent flat, followed by 10 percent incremental for each six months period the tax remains unpaid,
  • the amount of tax not in dispute plus the amount of tax in dispute not able to be deferred, that is not paid within one month after the due date for payment, on the new 10 percent flat plus incremental basis.

IMPLEMENTATION

Section 7: Obligation to Pay Tax Where Objection Lodged

Section 7 repeals section 34 of the principal Act and substitutes a new section 34.

This section provides the rules for the payment and collection of tax under dispute, where the taxpayer has lodged an objection in respect of an assessment of tax.

The section applies to objections to assessments notices of which are issued on or after 1 April 1985.

Subsection (1): Definitions

"Competent objection"

This definition defines the type of objection which qualifies a taxpayer to defer one-half of the tax in dispute, and the type of objection where, if the taxpayer succeeds with his case, the (Commissioner will pay interest on the amount of the tax refunded. The points to note are:

• The objection must be made by the person to an assessment made under the Act

Note: There is no provision to issue a notice of assessment for provisional tax or for PAYE tax deductions, which means that provisional tax and PAYE tax deductions are not within the scope of section 34.

• The objection must be made in accordance with the provisions of section 30 of the Act, ie,
  1. The taxpayer may object to the assessment by delivering or posting to the Commissioner a written notice of objection within one month after the date of the notice of assessment.
  2. The Commissioner can accept late objections depending on the circumstances of the case.
  3. Where an amended assessment has been issued taxpayers have a further right of objection where a fresh liability is imposed or an existing liability is increased.
• Competent objection does not include any "non-qualifying objection". This is a defined term and is referred to below.

"Day of determination of final liability"

This definition defines the cessation of the period of deferral (period of deferral is defined in section 40 of this Amendment Act) in respect of the one-half of the tax in dispute which has been 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 deferrable tax expires. The definition relates only to deferrable tax and is defined as being the day on which:

1. The Commissioner receives from the taxpayer a notice in writing of the taxpayer's withdrawal of his objection.
2. The Taxation Review Authority determines the objection, where the objection is determined by the Taxation review Authority and not by the Courts. Where a determination by the Taxation Review Authority is taken to appeal, paragraph (c) of this definition will apply.
3. The objection is determined by the Courts, either by proceedings taken in any Court or by way of appeal, such as to the Court of Appeal or the Privy Council.

The Commissioner cannot take action to recover any amount of deferrable tax until after the day of determination of final liability.

The day of determination of final liability cannot be determined until the expiry of the period allowed by law in which to lodge an appeal to a higher authority.

Example 1:

1. Taxpayer receives a formal notice of disallowance from the Commissioner on 31 May 1986.
2. Taxpayer accepts that the Commissioner is correct and decides not to appeal the Commissioner's decision. Taxpayer does not advise the Commissioner that he has decided not to appeal further.

In this case the day of determination of final liability would be 31 July 1986, the day on which the two months period in which to appeal further to either the Taxation Review Authority or the High Court expires.

Example 2:

1. Taxpayer has requested that his case be heard by the High Court.
2. The High Court decides the case in the Commissioner's favour, 19 February 1987.
3. Taxpayer decides to appeal the High Court decision, to the Court of Appeal.
4. Taxpayer withdraws his appeal before the case is heard by the Court of Appeal.

In this case the day of determination of final liability is 19 February 1987, the day on which the High Court decision was made. If the taxpayer had taken his appeal, the day of determination of final liability would have been the day on which the Court of Appeal made its decision.

"Deferrable tax"

This definition defines the amount of tax in dispute which may be deferred as being:

• An amount equal to one-half of the amount, of the tax assessed, by which if the taxpayer succeeded in a hearing with the Taxation Review Authority or the Courts with the whole or part of his objection, his assessment would be reduced, eg,
  1. Taxpayer objects to an item of income, amounting to $2,000 being included in his assessment. His marginal tax rate is 66 cents in the dollar.
  2. If the taxpayer succeeded with his objection, in a hearing or determination by either the Taxation Review Authority or the High Court, the assessment would be reduced by $1,320.
  3. $1,320 is the total amount of tax in dispute, the deferrable tax being one-half of that amount, $660.

Points to note are:

• Deferrable tax cannot be determined unless a taxpayer has lodged an objection which is a competent objection, as defined - refer above.
• Deferrable tax cannot relate to an assessment made in accordance with section 321 of the Act. (Section 321 allows the Commissioner to make an assessment in relation to Part IX of the Act in respect of non-resident withholding tax.)
• The amount of deferrable tax cannot be determined by the Commissioner until the Commissioner has formally disallowed the taxpayer's objection, in whole or in part.
• The amount of deferrable tax is to be determined by the Commissioner and notified to the taxpayer by the Commissioner in writing.
• The amount of deferrable tax can be an amount of tax already paid and held in credit, eg, the assessment, to which the taxpayer has lodged an objection, resulted in a lesser amount of refund of tax to the taxpayer than he would otherwise have received.

This reduction in the amount of tax in credit will be the amount of tax in dispute, one-half of which will be deferrable tax.

Where the deferrable tax has been paid to the Commissioner either direct by the taxpayer or through the PAYE system, before the formal disallowance of the objection, the taxpayer will have the right to request that the amount of deferrable tax be refunded.

NB: Deferrable tax cannot consist of a credit of tax that results from a determination made by the Commissioner under section 19(4) of the Tax Act, for example, an export tax credit.

The deferrable tax will be calculated as follows:

Example One: Debit Assessment

Step 1
Assessable income $11,000
Tax payable on assessable income	$2,762.50
Less rebates	$1,000.00
Tax payable per assessment	$1,762.50
Step 2
Assessable income	$11,000
less amount of income
under dispute	$1,000
	$10,000
Tax payable on income not under dispute	$2,450
less rebates	$1,000
Tax payable not in dispute	$1,450
Step 3
Tax in dispute = tax payable in Step 1	$1,762.50
less tax payable in Step 2	$1,450.00
	$ 312.50
Deferrable tax = 1/2 $312.50 = $156.25
Step 4
Tax assessed by Commissioner	$1,762.50
less PAYE deductions	$1,262.50
Tax payable	$ 500.00
less deferrable tax	$156.25
Tax payable by due date for payment	$ 343.75
Payment of deferrable tax and the right of the Commissioner to recover the deferrable tax is suspended until expiry of the day of determination of final liability.
Example Two: Credit Assessment
Step 1
Assessable income	$11,000
Tax payable on assessable
income	$2,762.50
less rebates allowed by
Commissioner	$1,000.00
Tax payable per assessment	$1,762.50
Step 2
Assessable income	$11,000
less amount of income
under dispute	$ 1,000
	$10,000
Tax payable on income not under dispute	$2,450
less rebates claimed by taxpayer	$1,500
Tax payable not in dispute	$ 950
Step 3
Tax in dispute =	$1,762.50
	-$ 950.00
	$ 812.50
Deferrable tax = $406.25
Step 4
Tax assessed by Commissioner	$1,762.50
less PAYE deductions	$2,183.50
Amount of tax in credit	$ 421.00
plus amount of deferrable tax	$ 406.25
Total tax refundable (before hearing of case stated)	$ 827.25
less amount already refunded	$ 421.00
Deferrable tax to be refunded to the taxpayer at the taxpayer's request	$ 406.25

"Non-qualifying objection"

This defines the grounds of objection, to assessments, which cannot be "competent objections" and in respect of which the Commissioner cannot therefore determine an amount of deferrable tax.

(Note that by definition a "competent objection" cannot include a non-qualifying objection.)

A non-qualifying objection is an objection to an assessment, made in accordance with the provisions of section 30 of the Act, where and to the extent that any ground of objection stated by the taxpayer is:

1. That the taxpayer's return of income or the particulars supplied with that return, in respect of which an assessment has been made by the Commissioner, were deficient or insufficient. This will exclude objections such as those made by taxpayers where;
   1. They have omitted a claim in their return of income such as a rebate or an employment related expense;
   2. The Commissioner has disallowed a donation claim made in the return of income in the absence of a receipt for that donation and the taxpayer then forwards the receipt to the Commissioner;
2. The assessment was issued pursuant to section 21 of the Act, in the absence of the return or the particulars on which had it or they been furnished, the assessment would have been based. (Section 21 is the section which empowers the Commissioner to make "estimated" assessments in certain circumstances.)

• For example:
• The Commissioner has requested further information and has disallowed a claim in the absence of a reply, and the taxpayer then forwards the requested information upon receipt of the assessment.

3. That the determination of a credit of tax made under section 19(4) of the Act, is incorrect.

• This excludes from the definition, credits of tax claimed pursuant to sections 156A through to 156G of the Act relating to export incentives, and also sections 74A and 157A relating respectively to forestry and export losses.
• It means that taxpayers who have objected to a determination of a credit of tax, cannot obtain a refund of the one-half of the amount of the credit of tax in dispute which is, of course, money that the taxpayer has not in fact paid to the Commissioner, notwithstanding that in the ordinary course any excess credit of tax is refundable AS IF IT WERE tax paid in excess.

Subsection (2):

This is the operative subsection of this section. It ensures the right of the Commissioner to receive and recover the tax not able to be deferred, and suspends the obligation to pay and the right of the Commissioner to receive and recover deferrable tax until the day of determination of final liability.

Paragraph (a)

Relates to deferrable tax and provides that the right of the Commissioner to recover the amount of deferrable tax and the liability of the taxpayer to pay the amount of deferrable tax shall be suspended until the expiry of the day of determination of final liability (as defined).

This paragraph has the effect of suspending all action to recover the amount of deferrable tax until the day of determination of final liability, thus allowing a taxpayer to request in the interim a refund of the amount of deferrable tax if that amount has already been paid. The matter of additional tax on deferrable tax is discussed later in this Part of this Appendix, in the comments on section 40 of this Amendment Act.

Paragraph (b)

Relates to the amount of tax in dispute that is not able to be deferred and to the amount of tax not in dispute. It provides that the right of the Commissioner to receive and recover this tax shall not be suspended by any objection, case stated, or appeal.

This obliges the taxpayer to pay this tax by the due date for payment and gives the Commissioner the right to commence recovery proceedings on this tax if it is not paid by the last day for payment.

Subsection (3):

This provision allows the Commissioner to pursue legal proceedings in respect of the amount of deferrable tax and the amount of non-deferrable tax as if they were separate debts arising from separate causes of action.

This will allow the Commissioner to take proceedings to obtain judgment in respect of the amount of tax not in dispute and the amount of tax in dispute not able to be deferred, as separate causes of action. If and when it transpires that the deferrable tax is payable by the taxpayer, the Commissioner can then take proceedings to obtain judgment for the amount of deferrable tax, as another cause of action.

Subsection (4):

This subsection provides that where the taxpayer succeeds with his objection, case stated, or appeal, the Commissioner shall refund immediately any amount of tax received by the Commissioner, which according to the decision on the hearing of the objection, case stated, or appeal was paid in excess of the amount which was properly payable by the taxpayer.

The amount refunded in accordance with this subsection will not include any amount of the deferrable tax which has been refunded to the taxpayer prior to the making of the decision.

The proviso to subsection (4) provides that the amount to be refunded under this subsection will not be refunded until the final resolution of the case. The final resolution is defined as being the latest of:

1. The day on which the objection is determined by the Commissioner.
2. The day the decision of a Taxation Review Authority is given in relation to the objection.
3. The day judgment is given, in relation to an objection, by the High Court, Court of Appeal, or Privy Council, whichever judgment finally determines the objection.

Application

Section 7 of the No 2 Amendment Act applies with respect to any objection made to an assessment, the notice of which is given on or after the 1st day of April 1985. For further details refer to paragraph (2), of this Part of the Appendix.

Section 8: Interest On Certain Excess Tax

Section 8 introduces a new section 34A to the principal Act.

Section 34A provides for the Commissioner to pay interest on the amount of tax refunded pursuant to subsection (4) of section 34, as amended by section 7 of this Amendment Act.

The interest paid under this section will be taxable income in the taxpayer's hands in the year of receipt.

Subsection (1): Definitions

"Competent objection"

Has the same meaning as that given to it in section 34(1) of the Act.

"Instalment portion"

This defines the amount of "qualifying tax in dispute" (as defined) on which the interest is calculated. It is defined as meaning either:

1. the amount of qualifying tax in dispute paid to the Commissioner in one sum and required to be refunded to the taxpayer; or
2. the aggregate of the amounts of qualifying tax in dispute paid to the Commissioner in two or more instalments and required to be refunded to the taxpayer.

"Qualifying tax in dispute"

This definition defines the amount of tax which would qualify for an interest payment by the Commissioner if that amount were to be refunded to the taxpayer pursuant to subsection (4) of section 34.

Qualifying tax in dispute, in relation to a taxpayer and to an assessment, is:

1. The amount of tax, assessed in the assessment, in respect of which the taxpayer has lodged a competent objection.
2. The amount of a credit of tax determined pursuant to section 19(4) of the Act, to the extent that the taxpayer has objected validly to that determination. This paragraph, in addition, deems the amount of the credit of tax to be, for the purposes of section 34A, an amount of tax paid to the Commissioner by the taxpayer on the date of the determination of the credit of tax.

1. This deeming of payment is necessary in order to give a date from which to calculate the interest to which the taxpayer is entitled if he succeeds in his objection.

3. Qualifying tax in dispute also includes any amount of provisional tax payable in relation to the year next succeeding the year in respect of which the taxpayer has lodged an objection, to the extent that that provisional tax has been increased as a result of the assessment of tax or a determination of a credit of tax, made by the Commissioner, being less than the credit of tax claimed by the taxpayer.

This will not apply if the provisional tax has been subject to any adjustment by the taxpayer by way of estimation pursuant to section 387 of the Act.

If the taxpayer has paid the increased amount of provisional tax and he succeeds with his objection, the amount the provisional tax has been increased by, and which would not normally have been payable, will be refunded to the taxpayer and interest will be paid in respect of the amount refunded.

If it happens that the provisional tax has been credited against tax assessed to the taxpayer, pursuant to section 393(1) of the Act, interest will be paid by the Commissioner up to the date the amount of provisional tax is so credited.

"Specified rate of interest"

This definition defines the specified rate of interest for the purposes of the calculation in subsection (3). The rate of interest is that for a consecutive period of 12 months, commencing on any 1st day of April, determined and notified under subsections (7) and (8) of this section.

For the 12 months period commencing on 1 April 1985 the specified rate of interest has been set at 20 percent. The rate of interest will be re-determined for the 12 months period commencing on 1 April 1986.

Subsection (2):

This subsection provides for the Commissioner to pay interest on qualifying tax in dispute.

Points to note are:

• The qualifying tax in dispute was to have been paid to the Commissioner, either in whole or in part, before the making of the decision on the objection, to which the qualifying tax in dispute relates.
• The Commissioner shall pay interest on so much of the qualifying tax in dispute, that has been paid by the taxpayer, as is required to be refunded to the taxpayer pursuant to section 34(4) of the Act.

This will exclude any amount of deferrable tax which was already been refunded to the taxpayer at the taxpayer's request (being an amount of deferrable tax paid by the taxpayer before the determination by the Commissioner of the amount of the deferrable

• The proviso to this subsection provides that interest will not be paid by the Commissioner in relation to an objection to an assessment found in the taxpayer's favour if the interest amounts to less than $5.00.

Subsection (3):

This subsection provides the method of calculation of interest, on the amount of tax to be refunded, that is required to be paid to the taxpayer pursuant to subsection (2).

Subsection (3) provides that:

• Interest payable by the Commissioner shall be payable for any period of 12 months commencing on any 1st day of April, in relation to each instalment portion of the qualifying tax in dispute.
• If the period for which interest is payable spans any 31 March April date, two calculations will be required, one for the period up to 31 March and one for the period after 31 March.
• Where the instalment portion is paid in two or more instalments interest will be calculated in relation to each instalment.

• Interest will be calculated in relation to any amount of qualifying tax in dispute that is applied to, or standing to, the credit of the account of the taxpayer with the Commissioner.

This will allow the Commissioner to calculate and pay interest where the amount to be refunded pursuant to section 34 is, instead of being refunded, credited against the taxpayer's arrears of tax or is credited with his authority against another account.

• Interest will be calculated in accordance with the following formula:

(X x Y)	x Z
365

where "X" is the number of days in the period that commences on whichever of the following days is the latest:

1. The day on which the notice of assessment was given to the taxpayer, ie the date of the notice of assessment.
2. The day on which the instalment portion was paid to the Commissioner.
3. The first day of the relevant period of 12 consecutive months commencing on 1 April.
4. 1 April 1985.

and ends on whichever of the days as ascertained under (e) and (f) below is the earlier:

1. The day on which the instalment portion of the qualifying tax in dispute is refunded by the Commissioner or, where the instalment portion relates to an amount of provisional tax, the earlier of:
   1. that day (as just referred to); or
   2. the day on which the provisional tax is credited or refunded pursuant to section 393(1) of the Act.
2. The last day of the relevant period of 12 consecutive months that convinced on 1 April.

Y - is the amount of the instalment portion in relation to the qualifying tax in dispute.

Z - is the specified rate of interest.

Examples of the Effect of Subsection (3)

CREDIT ASSESSMENT

1. 1985 notice of assessment issued by Commissioner on 2.7.85. Assessment reduces taxpayer's claimed refund, from $1,000 to $500.

2. Taxpayer objects to assessment. Commissioner accepts objection as "competent".

3. After considering objection Commissioner concedes it and issues a notice of amended assessment allowing a further credit of $500 to the taxpayer.

4. Refund of $500 paid to taxpayer on 7 January 1986.

Interest Calculation

X = Number of days in period commencing 2.7.85 and ending 7.1.86

= 190 days

Y = $500

Z = 20%

(190 x $500)	x 20%	= $52.05
365

Taxpayer will receive an additional refund of $52.05, being interest payable pursuant to section 34A.

Debit assessment with provisional tax payable for next year

1. 1985 Assessment issued by Commissioner on 2.11.85. Assessment increases taxpayer's tax payable for 1985 year of assessment from $1,000 to $2,000. At the same time the 1986 provisional tax is also increased from $1,000 to $2,000.

2. Taxpayer objects to the assessment, as to $1,000 of the tax assessed. Objection is accepted by the Commissioner as "competent".

3. By 7 March 1986 taxpayer has paid the tax payable per the assessment, ie $2,000 income tax

Provisional tax aggregating to $2,000.

4. Objection is decided in the taxpayer's favour, by the High Court, on 4 April 1987.

5. Notice of amended assessment is issued, and $1,000 refunded to taxpayer on 30 April 1987. The $1,000 overpaid 1986 provisional tax has been credited against the 1986 income tax (which has been assessed in the interim) pursuant to section 393(1) of the Act, on 12 December 1986.

Interest Calculation (the interest rate for the purposes of this example, will remain the same for each consecutive period of 12 months commencing on 1 April)

(A) Income Tax

1. 1st calculation X = Number of days in period commencing 7.3.86 and ending 31.3.8 = 25 days Y = $1,000 Z = 20%

2. (25 x $1000)	x 20%	= $13.70
   365

3. 2nd calculation X=Number of days in period commencing 1.4.86 and ending 31.3.87 =365 days Y=$1,000 Z=20%

4. (365 x $1000)	x 20%	= $200.00
   365

5. 3rd calculation X=Number of days in period commencing 1.4.87 and ending 30.4.87 =30 days Z=20%

6. (30 x $1,000)	x 20%	= $16.44
   365

   Total interest payable on income tax = $230.14

(B) Provisional Tax

1. 1st calculation X=Number of days in period commencing 7.3.86 and ending 31.3.86 =25 days Y=$1,000 Z=20%

2. (25 x $1,000)	x 20%	= $13.70
   365

3. 2nd calculation X=Number of days in period commencing 1.4.86 and ending 12.12.86 =256 days Y=$1,000 Z=20%

   (256 x $1,000)	x 20%	= $140.27
   365

   Total interest payable on provisional tax = $153.97. In this example, total interest of $384.11 will be paid to the taxpayer by the Commissioner. It will be assessable income of the taxpayer for the income year in which the interest is received by the taxpayer.

Subsection (4):

This subsection provides that for the purposes of the calculation of interest under subsection (3), tax paid in 2 or more instalments is deemed to have been received by the Commissioner in the sequence that is the converse of the sequence in which those amounts were paid to the Commissioner, ie,

where qualifying tax in dispute has been paid by instalments and part only of the qualifying tax in dispute is refunded to the taxpayer, payment to the Commissioner of the tax that is to be refunded will, for the purposes of ascertaining the time of payment of the instalment(s) and/or part instalments that are equal in the aggregate to the amount of that refundable tax, be deemed to have been comprised in the most recent instalments received by the Commissioner.

Subsection (5):

This subsection provides that where the taxpayer is paid an excess amount of interest the Commissioner shall recover the excess as if that of excess were an amount of income tax payable.

If the taxpayer contends that the Commissioner has underpaid the interest, the Commissioner would be obliged to consider this question as a matter of administration and, if necessary, rectify to ensure Departmental compliance with the obligation in terms of section 34A.

Subsection (6):

This subsection provides that interest paid under section 34A is to be paid out of the Consolidated Account, without further appropriation than the Income Tax Act 1976.

Subsection (7):

This subsection provides for the Secretary to the Treasury to determine, prior to 31 March 1985, the interest rate at which interest shall be payable under this section, and to notify the rate in the Gazette.

The rate of interest for the period of 12 consecutive months commencing on 1 April 1985 was notified in the Gazette on 28 March 1985 (The Income Tax (Specified Rate of Interest) Notice 1965). The rate of interest was set at 20%.

Subsection (8):

This subsection provides that the specified rate of interest may determine from time to time, after 31 March 1985, by the Secretary to the Treasury. (This discretionary power of determination is distinct from the mandatory determination made pursuit to subsection (7)).

Subsection (8) provides also that the rate of interest will apply, for the purposes of this section, to any period or periods of 12 consecutive months commencing on any 1st day of April, and that the specified rate shall be notified in the Gazette.

Application

Section 8 of this No 2 Amendment Act applies with respect to any objection made to an assessment the notice of which was given on or after the 1st day of April 1985.

Section 40: Additional Tax To Be Charged if Default Made in Payment of Tax

The comment in this Part of this Appendix, relating to section 40, is limited to subsections (1), (3), and (4) which relate to additional tax payable in respect of deferrable tax.

Comment on the other provisions of section 40 is contained in Part 1 of this Appendix - Additional tax/penalty for late payment of tax.

1. INTRODUCTION

Section 34, as amended, of the principal Act provides for taxpayers who have lodged an objection to an assessment, that objection being a competent objection, to defer payment of one-half of the amount of tax in dispute.

Where the objection is found in the taxpayer's favour and the excess tax is refunded, the new section 34A of the Income Tax Act provides that interest is to be paid on the amount refunded.

Where the objection is not found in the taxpayer's favour, any amount of the deferrable tax that was not paid before the expiry of one month after the due date applicable to that tax will have incurred additional tax on the new 10 percent plus incremental basis.

As part of the new system for the collection and payment of tax in dispute, any additional tax incurred on deferrable tax calculated on the new 10 percent plus incremental basis during the period of deferral will be remitted and the additional tax will be recalculated at an interest rate on a daily basis.

The amendments to section 398 of the Act that are commented on in this Part of this Appendix are limited to this new, substitute, "interest-based" additional tax that applies to deferrable tax.

2. APPLICATION

It has already been mentioned in paragraph (2) of this Part of this Appendix that the application date for section 40 of the No 2 Amendment Act (section 398 of the principal Act) differs from the application date for sections 7 and 8 of this Amendment Act (sections 34 and 34A of the principal Act), and in so doing giving 3 different systems for the treatment of tax in dispute.

The comments on this section are presented in a manner which shows separately the effects of the provisions for;

1. Objections lodged for assessments, made on or after 1 April 1985, which relate to the 1985 or prior income years.
2. Objections lodged for assessments made on or after 1 April 1985 which relate to the 1986 or subsequent income years.

Application of section 398 in respect of competent objections lodged against assessments, the notices of which are given on or after 1 April 1985, relating to 1985 or prior income years

The additional tax provisions of section 398 as they apply to the 1985 and prior income years, will apply to tax in dispute in respect of objections lodged for assessments, made on or after 1 April 1985, relating to 1985 or prior income years; ie the additional tax is a 10 percent flat and final rate of additional tax.

Example 1

Debit Assessment - Taxpayer loses objection

1. 1985 income year. Notice of assessment issued 23 November 1985. Tax payable per assessment, due date 7 February 1986, last day for payment 7 March 1986, amounts to $20,000.
2. Taxpayer lodges an objection on 22 December 1985, which is accepted as a competent objection.
3. Commissioner disallows objection on 1 February 1986 and advises taxpayer that the amount of deferrable tax is $2,500.
4. Tax payable by due date is $17,500.
5. Tax payable paid late. Additional tax incurred on 8 March 1986 amounting to $1,750.
6. Objection determined by a Taxation Review Authority, in the Commissioner's favour, on 12 December 1986. Taxpayer does not appeal. The day of determination of final liability is thus, 12 December 1986.
7. Deferrable tax of $2,500 thus becomes payable from the last day for payment, being 7 March 1986. Additional tax of 10 percent, amounting to $250, added to deferrable tax as not paid by 7 March 1986.

Tax payable	$20,000
Additional tax incurred	$2,000
Total tax payable	$22,000

If in the above example the taxpayer had succeeded with his objection in full, so that the tax payable was reduced from $20,000 to $15,000:

1. The Commissioner would refund the amount of tax in dispute paid, ie, $2,500, with interest calculated in accordance with section 34A of the Act.
2. Additional tax incurred on the late payment of the tax payable would be recalculated and reduced to $1,500.

Example 2

Debit Assessment - Taxpayer obtains refund of deferrable tax and subsequently fails in his objection

1. 1985 Income year. Notice of assessment issued 23 November 1985. Tax payable per assessment, due date 7 February 1986, last day for payment 7 March 1986, amounts to $20,000.
2. Taxpayer lodges an objection on 22 December 1985, which is accepted as a competent objection.
3. Tax due and payable 7 February 1986 = $20,000
4. Taxpayer pays by 7.3.86 the full amount of tax payable, $20,000.
5. Commissioner formally disallows objection 27 March 1986 and, after calculating that the tax in dispute amounts to $5,000, advises taxpayer that the amount of deferrable tax is $2,500.
6. Taxpayer requests that the amount of deferrable tax be refunded. $2,500 refunded to taxpayer on 5 April 1986.
7. Objection determined by the High Court, in the Commissioner's favour on 12 December 1986. Taxpayer does not appeal. The day of determination of final liability is 12 December 1986.
8. Deferrable tax of $2,500 becomes payable therefore on 12 December 1986. Note, that deferrable tax was paid by the last day for payment, 7 March 1986, irrespective of the fact the the deferrable tax was refunded on 5 April 1986.
9. Deferrable tax not paid by 12 January 1987. 10 percent flat and final additional tax incurred on 13 January 1987, amounting to $250.

Tax payable	$20,000
Additional tax incurred	$250
Total tax payable	$20,250

Application of section 398 in respect of competent objections lodged against assessments the notices of which are given on or after 1 April 1985, relating to 1986 and subsequent income years

The provisions of section 398, as amended by section 40 of this Amendment Act, will apply in respect of tax payable for assessments the notices of which are given after 31 March 1985, and in respect of which competent objections have been lodged, relating to the 1986 and subsequent income years.

The essential difference in the area of additional tax for late payment, between assessments for 1985 and earlier income years, and assessments for 1986 and subsequent years is that in the case of the latter assessments -

• the additional tax for late payment will, in the normal course, be 10% flat additional tax plus an incremental compounding 10% additional tax for each 6 months on the balance outstanding.
• any additional tax that has been incurred in respect of tax that the Commissioner has notified is deferrable tax, is replaced from the commencement of the period of deferral, by an "interest-based" additional tax calculated on a daily basis.

IMPLEMENTATION

The following is an explanation of the implementation of section 40 of the No 2 Amendment Act, subsections (1), (3), (4).

Subsection (1): Definitions

"Competent objection"

has the same meaning as that given to it in section 34 of the Act.

"Day of determination of. final liability"

has the same meaning as that given to it in section 34 of the Act.

"Deferrable tax"

has the same meaning as that given to it in section 34 of the Act.

"Period of deferral"

This definition specifies the period the Commissioner shall calculate the interest based additional tax in respect of an amount of deferrable tax, determined by the Commissioner in accordance with section 34 of the Act. The period of deferral also determines the period the deferrable tax can be suspended from payment by the taxpayer and action to recover by the Commissioner.

It should be noted that this period of "suspension" does not have the effect of preventing the incurring of additional tax for late payment (where the taxpayer avails himself of this facility to defer payment), although the "penalty" for late-paid deferrable tax will, in relation to the period of deferral, be calculated at a rate of interest, on a daily basis.

The period of deferral in relation to an amount of deferrable tax is defined as being the period which commences on the later of -

1. The day on which the notice of the assessment in respect of which the taxpayer has made a competent objection is given to the taxpayer, (ie, the date of the notice of assessment); or
2. The day on which there expires the period of 1 month immediately following the due date for payment of that defer rable tax.
3. and ends at the expiry of the day that is the day of determination of final liability, (defined in section 34 of the Act) which briefly, is the day on which the objection is ultimately decided one way or the other.

Example One

1.	1986 income year. Notice of assessment given to taxpayer (due date 7 February 1987; last day for payment 7 March 1987)	22.11.86
2.	Taxpayer lodges competent objection	21.12.86
3.	Commissioner formally disallows objection Advises taxpayer of the amount of deferrable tax.	1.2.87
4.	Objection resolved in Commissioner's favour. Taxpayer does not appeal, the day of determination of final liability is thus 6 December 1987.	6.22.87.

Period of deferral = 7.3.87 to and including 6.12.87, ie, the period of deferral commences on the day on which there expires the period of 1 month immediately following the due date for payment and ends at the expiry of the day of determination of final liability.

Example Two

1.	1986 Income year. Notice of assessment given to taxpayer (due date 7 February 1987; last day for payment 7 March 1987; 10 percent additional tax incurred 8 March 1987.)	4.4.87
2.	Taxpayer lodges competent objection	28.4.87
3.	Commissioner formally disallows objection. Advises taxpayer of the amount of deferrable tax	16.6.87
4.	Objection resolved in the Commissioner's favour. Taxpayer does not appeal, the day of determination of final liability is thus 6 December 1987.	6.12.87

Period of deferral = 4.4.87 to and including 6.12.87, ie, the period of deferral commences on the day on which the notice of assessment is given to the taxpayer and ends at the expiry of the day of determination of final liability.

In this example the additional tax incurred for late payment on 8 March 1987 is not disturbed and remains payable as such. Any additional tax incurred during the period of deferral, will be calculated at the daily interest rate, refer subsection (4) of this section.

The proviso to this definition provides that where the amount of deferrable tax has been paid in time by the taxpayer prior to the determination of the amount of deferrable tax by the Commissioner, and is subsequently refunded to the taxpayer before the day of determination of final liability, the due date for payment of that deferrable tax that has been refunded shall, for the purposes of this definition, be the day that immediately precedes by 1 month the date of the making of the refund.

The effect of this proviso is that the date of the refund is deemed to be "the day on which there expires the period of 1 month immediately following the due date for payment of that deferrable tax".

Example of the effect of the proviso

1.	1986 income year. Notice of assessment given to taxpayer (due date 7 February 1987; last day for payment 7 March 1987).	22.11.86
2.	Taxpayer lodges competent objection	21.12.86
3.	Taxpayer pays the amount of the tax payable shown in the notice of assessment.	6.3.87
4.	Commissioner formally disallows objection. Advises taxpayer of the amount of deferrable tax	27.3.87
5.	Taxpayer requests a refund of the amount of deferrable tax. Deferrable tax refunded to him	20.4.87
6.	Objection resolved in the Commissioner's favour. Taxpayer does not appeal, the day of determination of final liability is thus 6 December 1987.	6.12.87

Period of deferral = 20.4.87 to 6.12.87,

ie the period of deferral commences on the date of the making of the refund and ends on the day of determination of final liability.

"Specified rate of additional tax"

This definition specifies effectively what rate of interest is to be applied in calculating the amount of additional tax payable in respect of deferrable tax, in accordance with the provisions of subsection (4) of this section.

The percent per annum for the purposes of this definition is the same as that applicable when the Commissioner pays interest to a taxpayer pursuant to section 34A of the Act on the amount of a refund of qualifying tax in dispute.

The rate of interest will apply in relation to any period of 12 consecutive months commencing on any 1st day of April, and has been set at 20 percent for the 12 months period commencing 1 April 1985. Refer to the Income Tax (Specified Rate of Interest) Notice 1985, notified in the Gazette dated 28 March 1985.

Subsection (2):

Refer to Part 1 of this Appendix - subsection 2 provides for the new system of additional tax for late payment, based on 10 percent flat plus 10 percent incremental.

Subsection (3):

This subsection requires the Commissioner to remit the additional tax, added under subsection (2) of this section, incurred on an amount of deferrable tax, where the additional tax so incurred was incurred on or after the day on which the period of deferral commenced.

The subsection provides also that subsection (2) - the new 10 percent flat plus 10 percent incremental additional tax - shall cease to apply to the amount of late-paid deferrable tax on the day the period of deferral, in relation to that deferrable tax, commences.

The effect of this subsection is to prevent additional tax being incurred in respect of deferrable tax under both subsections (2) and (4) of this section during the period of deferral, that is, only subsection (4) will apply in relation to the "period of deferral" additional tax.

Subsection (4):

This is the operative subsection. It provides for the calculation of the additional tax payable in respect of deferrable tax.

The subsection firstly deems the additional tax added to an amount of deferrable tax, to be deferrable tax, and to be payable accordingly. The additional tax incurred becomes automatically deferrable tax and is recovered accordingly as deferrable tax.

Paragraph (a) of Subsection 4:

This paragraph provides for the situation where a taxpayer pays an amount of the deferrable tax to the Commissioner during the period of deferral, the amount being referred to as the "specified payment" for the purposes of this subsection.

The additional tax will be calculated in such cases from the commencement of the period of deferral up to the date of payment in that period of deferral.

Formula to be used when calculating the additional tax is:

(X x Y x Z)

365

X is the number of days in the period which commences on whichever of the following days is the latest:

1. The day on which the period of deferral commenced.
2. The first day of the period of 12 consecutive months, commencing 1 April, during which the deferrable tax has remaine unpaid:
3. The 1st day of April 1985; and ends on whichever of the following days is the earlier:
4. The day on which the "specified payment" is received by the Commissioner:
5. The last day of the period of 12 consecutive months, commencing 1 April, during which the deferrable tax has remained unpaid.

Y is the amount of the specified payment.

Z is the specified rate of additional tax.

The additional tax will be calculated in relation to each period of 12 consecutive months, commencing 1 April, during which the deferrable tax has remained unpaid, ie if the period of deferral spans 31 March/1 April, two calculations will be required:

• 1st calculation from the commencement of the period of deferral to 31 March.
• 2nd calculation from 1 April to, in this instance, the date of payment of the deferrable tax in the period of deferral.

It could be, of course, that between these "1st" and "2nd" calculations, one or more further calculations would be required, each in respect of a full 12 months period (within the period of deferral) during which the deferrable tax has remained unpaid. This could well be the case where, for example, the objection is resolved ultimately by the Privy Council.

Example of the effect of paragraph (a)

Last day for payment of tax assessed: 4 April 1986.

1. Deferrable tax = $1,000
2. Taxpayer pays $400 of the deferrable tax, on 20 September 1986 received by Commissioner 21 September 1986.
3. Objection resolved 6 December 1986 - taxpayer does not appeal, period of deferral thus ends 6 December 1986.
4. Period of deferral = 4 April 1986 to 6 December 1986

Additional tax calculations are required to be made:

1. "Interest-based" additional tax on $400 deferrable tax paid during the period of deferral (a "specified payment").

2. (171 x $400 x 20%)	= $37.48
   365

• X=Number of days in period commencing 4.4.86 and ending on 21.9.86= 171 days
• Y= $400
• Z= 20%

The above calculation will be made upon receipt of the payment of $400. This amount of additional tax, being itself an amount of deferrable tax and payable accordingly, need not be paid until expiry of the period of deferral. If, in the above case, more than one specified payment had been paid to the Commissioner, in instalments, a separate calculation would be required in respect of each instalment.

2. "Interest-based" additional tax on $600 deferrable tax not paid during the period of deferral.

3. (247 x $600 x 20%)	= $81.20
   365

• X = Number of days in period commencing 4.4.86 and ending on 6.12.86 =247 days
• Y = $600
• Z = 20%

This latter calculation will be made on expiry of the period of deferral, in accordance with subsection 4(b) explained hereunder. The total interest-based additional tax incurred on deferrable tax, during the period of deferral, amounts therefore to $118.68 ($37.48 + $81.20). If this interest-based additional tax is not paid within one month following the day of expiry of the deferral period, it (together with any of the deferrable tax that is likewise not paid) will then become subject to also the 10 percent flat plus 10 percent incremental basis of penalty, as explained later.

Paragraph (b) of subsection (4)

This paragraph provides the formula to calculate the "interest-based" additional tax on any amount of deferrable tax the payment of which is not received by the Commissioner during the period of deferral. The additional tax will be calculated using the following formula: X x Y x Z 365 X is the number of days in the period that commences on whichever of the following days is the latest:

1. The day on which the period of deferral commenced:
2. The first day of the period of 12 consecutive months, commencing 1 April, in relation to which the interest-based additional tax is to be calculated:
3. The 1st day of April 1985; and ends on whichever of the following days is the earlier:
4. The day of expiry of the period of deferral:
5. The last day of the period of 12 consecutive months commencing 1 April, in relation to which the interest-based additional tax is to be calculated.

Y - is the amount of deferrable tax remaining unpaid at expiry of the period of deferral.

Z - the specified rate of additional tax.

Further example of the effect of paragraph (b) (See also example at paragraph (b) above)

1. Deferrable tax = $1,000 (No payment made during period of deferral.)
2. Period of deferral = 4.4.86 to 6.12.86 (Objection resolved 6 December 1986, wholly in Commissioner's favour.) "Interest-based" additional tax calculation made on expiry of the period of deferral, 6 December 1986:

• (247 x $1,000 x 20%)	= $135.34 "interest-based" additional tax
  365

• X = Number of days in period commencing 4.4.86 and ending on 6.12.86 =247 days.
• Y = $l, 000
• Z = 20%

As explained above this "interest-based" additional tax of $135.34 will, if it remains unpaid for more than one month after the day of expiry of the period of deferral, attract additional tax on the 10 percent flat plus 10 percent incremental basis, as provided in paragraphs (c) to (e) of this subsection.

Paragraph (c) of subsection (4)

This paragraph provides that additional tax of 10 percent will be added to any deferrable tax, and the amount of additional tax added thereto under paragraphs (a) and (b) of this subsection, that remains unpaid one month immediately following the day on which the period of deferral expires.

Paragraph (d) of subsection (4)

Provides that further additional tax of 10 percent will be added to so much of the deferrable tax, and the amount of additional tax added thereto under paragraphs (a), (b) and (c) of this subsection, as remains unpaid 6 months immediately following the "penalty day" specified in paragraph (c).

Paragraph (e) of subsection (4)

Provides that further additional tax of 10 percent will be added to so much of the deferrable tax, and the amount of additional tax added thereto under paragraphs (a), (b), (c) and (d) and additional tax added under this paragraph, as remains unpaid on the expiry of any of the periods of 6 months that, consecutively succeed the 6 months period referred to in paragraph (d).

Example of the effect of paragraphs (c) to (e) of subsection (4) of section 398

		Credit	Debit	Balance of Account
		$	$	$
Facts
	Deferrable tax $1,000
	Period of deferral expired 6.12.86
	Deferrable tax required to be paid within 1 month after 6.12.86			1,000.00
	Additional tax calculated in respect of the period of deferral required to be paid within 1 month after 6.12.86		138.08	1,138.08
Effect of paragraphs (c) to (e)
1.	10 percent additional tax added if unpaid before 7.1.87 (pursuant to paragraph (c) of subsection (4))		113.80	1,251.88
2.	10 percent additional tax added if unpaid before 7.7.87 (pursuant to paragraph (d) of subsection (4))		125.18	1,377.06
3.	10 percent additional tax added if unpaid before 7.1.88 (pursuant to paragraph (e) of subsection (4))		137.70	1,514.76

(and so on, at the expiry of each subsequent period of 6 months)

When a payment is made against tax in arrears the incremental additional tax is calculated on the balance of the arrears that remains unpaid at the date the incremental additional tax accrues pursuant to this subsection.

Application

Section 40 of the No 2 Amendment Act applies with respect to the tax on income derived in the income year commencing on the 1st day of April 1985 and in every subsequent year. For further details, refer to paragraph (2) of this Part of this Appendix.