Income Tax Amendment Act (No. 2) 1987
Archived legislative commentary on the Income Tax Amendment Act (No. 2) 1987 from PIB vol 165 Sep 1987.
This commentary item was published in Public Information Bulletin Volume 165, September 1987
More information about Public Information Bulletins.
Part II
A Farming And Forestry Taxation Amendments
Section 5 - Interpretation
This section amends the definition of "herd livestock" given in section 2 of the Principal Act.
The definition has been amended to allow bailors to value their bailed livestock under the herd scheme. This was always intended but was not reflected in the legislation. A bailor is an owner of livestock who has allowed another person (the bailee) the use of the livestock for an agreed period under a bailment agreement.
Section 19 - Treatment of Shortages of Bailed or Leased Livestock
In a normal bailment agreement the bailee, at the end of the bailment, has to replace or compensate the bailor for the livestock bailed. A shortage (or deficiency) of bailed livestock arises in any one income year when the bailee has less livestock, of the class bailed, on hand than the amount originally bailed. Such a shortage can occur if the bailee, for example, sells livestock of the class bailed.
Prior to the introduction of this Amendment Act there was no legislation specifically dealing with the treatment of shortages of bailed livestock by the bailee. The basis of accounting for bailed stock used by bailees was agreed to in discussions with the NZ Society of Accountants many years ago. An example of that basis is attached as Appendix 1.
The arrangement was that the bailee should adopt a value for bailed livestock at either the market value per head at the date of bailment, or an appropriate standard value; that value to be used in subsequent years during the term of the bailment. A deduction from income, for actual shortages in numbers of bailed livestock, at the value adopted, was allowed.
There are two methods that were prescribed for accounting for these shortages. Under method 1 the Livestock Account shows opening and closing bailed livestock at the adopted values. Under method 2 values of Bailed Livestock are not shown in the livestock account. In the latter case the livestock account has a provision for the replacement of deficient bailed livestock. Each year the existing provision is reversed and a new provision made. Both methods 1 and 2 arrive at the same figure for gross income.
On termination of the bailment the bailee returns the bailed livestock and compensates the bailor for any deficiencies. This compensation is usually set at the market price of the deficient stock numbers as at the date of termination of the bailment.
However, certain difficulties have arisen with this approach:
The method of determining adjustments to income following changes in the number of bailed livestock held by a bailee is not always equitable to the bailee.
- If the value of livestock increases over the term of the bailment then any adjustment made to income for deficiencies in the bailed stock numbers will become less in real terms. This means that where sales of livestock create deficiencies, the provision for replacement may not be a reasonable offset on the income from the sales.
- Example 1 - Bailee
- 1970 - 100 ewes bailed.
- Value to be used by the bailee set at market value of $8.
- 1974 - 80 bailed ewes on hand.
- 20 ewes were sold for $18 each.
- Sales are 20 x $18 = $360.
- Deduction for deficient bailed livestock (provision for replacement) is 20 x $8 = $160.
- There is, therefore, taxable income of $200 resulting from the sale.
- If the standard values given to bailed livestock are higher than the standard values of other similar livestock owned by a bailee, then any deduction for deficiencies may be excessive.
- Example 2
- 1980 - 100 ewe hoggets bailed.
- Value to be used by bailee is set at market value of $40.
- 1981 - No ewe hoggets on hand (have aged to two-tooth ewes)
- 100 two-tooth ewes with standard value of $3 on hand.
- Deduction for the replacement of the deficient bailed livestock is 100 x 40 = $4,000.
- Increase in income from value of two-tooth ewes is 100 x 3 = $300.
- Gain to bailee is therefore $3,700.
Aim of the Amendment
The aim is to produce a fairer system which accounts for bailees' deficiencies at annually adjusted market values which are equivalent to the values which owned livestock are valued at. It is also to ensure that in transition to the new livestock valuation regime, the effect of the revaluation of deficiencies is taken into account in the calculation of the write-off.
Under the amendment the bailee is required to value deficient bailed livestock under the same scheme as owned livestock. The bailed livestock are able to be broken down only into the authorised categories set out in the twelfth schedule to the principal Act.
Operation of the Amendment
Section 19 introduces a new section 85B to the principal Act. Section 85B provides that the specified livestock of a BAILEE is to be calculated in accordance with the following formula:
a - b
a is the actual number of specified livestock of a particular class on hand at the end of the income year, including both owned and bailed livestock; and
b is the original number of specified livestock of that class which were bailed, as specified in the bailment agreement(s) currently in force (provided that under the agreement these bailed livestock have to be returned or compensated for in full at a later date).
This means classes of specified livestock which are deficient are shown as negative livestock numbers and deducted from the number of owned specified livestock on hand.
The effect of the amendment is that the deduction for replacement of deficient specified livestock is made automatically and at the new standard or herd values. This is a change to the previous arrangement whereby adjustments for deficient livestock were made in the accounts at adopted (standard) values. Therefore methods 1 and 2 for accounting for bailed livestock as set out in the Departments rulings will no longer be needed (an example of how to reconcile these methods with the new treatment is given in Appendix 1)
Example
Taxpayer valuing livestock using the trading stock scheme.
| Livestock on hand 01.04.86 | ||
|---|---|---|
| Owned | 4000 | Mixed Age Ewes (Std Value = $8) |
| Bailed | 1950 | Ewe Hoggets (Adopted Std Value = $8) |
| Livestock on hand 31.03.87 | ||
| Owned | 4000 | Mixed Age Ewes (AMV = $13.20) |
| Bailed | 1900 | Ewe hoggets (AMV = $17.20) |
| (The terms of the bailment agreement relate to 2000 ewe hoggets) | ||
| Sales: | 3500 | Lambs and Ewe Hoggets at $18 |
| Purchases: | 800 | Ewe Hoggets at $17 |
| Natural increase: | 200 | Ewe Hoggets |
New values for specified livestock at 31.03.87
Trading stock scheme
Ewe Hogget Class = $17.20 x 0.7 = $12.04
Mixed Age Ewe Class = $13.20 x 0.7 = $ 9.24
| Specified livestock at 01.04.86 | Specified livestock at 31.03.87 |
|---|---|
| Ewe Hogget Class | Ewe Hogget Class |
| a - b | a - b |
| 1950 - 2000 = - 50 | 1900 - 2000 = - 100 |
| Mixed Age Ewe Class | Mixed Age Ewe Class |
| a - b | a - b |
| 4000 - 0 = 4000 | 4000 - 0 = 4000 |
LIVESTOCK ACCOUNT - Year Ended 31 March 1987
| Class | Opening Stock on Hand | No. Bailed | Surplus (Deficiency) | Value | Total Value |
|---|---|---|---|---|---|
| Ewe Hoggets | 1950 | 2000 | (50) | $8 | (400) |
| Mixed Age Ewes | 4000 | 0 | 4000 | $8 | 32,000 |
| Opening Value | 31,600 | ||||
| Class | Closing Stock on Hand | No. Bailed | Surplus (Deficiency) | Value | Total Value |
| Ewe Hoggets | 1900 | 2000 | (100) | $1,204 | (1,204) |
| Mixed Age Ewes | 4000 | 0 | 4000 | $9.24 | 36,960 |
| Opening Value | 35,756 | ||||
This way of accounting for bailed stock, which has already been adopted by some accountants, calculates the movement in bailed stock during the years in question and brings in deficient bailed livestock at negative values.
Calculation of Gross Profit
| Sales 3500 Lambs and Ewe Hoggets at $18 | $63,000 | |
| less: Cost of sales - Opening stock | $31,600 | |
| + Purchase | 13,600 | |
| $45,200 | ||
| less: Closing stock | 35,756 | |
| 9,444 | ||
| Gross Profit (ignoring any transitional concessions) | 53,556 | |
The amendment ensures that the net proceeds from any sale of specified livestock which increases the number of deficient bailed livestock will better reflect the actual return to the farmer, after allowing for the value of the deficient livestock.
Section 20 - Standard Value of Livestock
This section amends section 86 of the principal Act. Section 86 provides for the operation of standard values. Two drafting corrections were required.
Paragraph (a) of subsection (1) deletes the word "specified" that was wrongly inserted in the last line of the definition of "deductible excess".
Paragraph (b) of subsection (1) deletes a repeated phrase in 86(4)(b)(i)(B) (this error does not appear in CCH).
Section 21 - Valuation of Herd Livestock
This section amends section 86A of the principal Act by repealing subsection (3) and substituting a new subsection.
The former subsection (3) provided that where the value of any herd livestock of a taxpayer at the end of an income year is determined in accordance with section 86A then, regardless of section 85(3) of the Act, that value shall also be the value of the livestock at the beginning of the income year.
There is no change in substance to this. However, because the subsection required that a value be determined for livestock as at the end of the income year it did not appear to cover situations where the taxpayer ceased farming during the income year. The subsection has therefore been rewritten so that it will clearly apply whenever a taxpayer has elected to value livestock under the herd scheme.
Section 22 - Deduction in Respect of Livestock Revaluation
This section amends section 86E of the principal Act. Section 86E provides a "write-off" of livestock revaluation income (resulting from the increase in standard values which farmers are required to adopt as at 31 March 1987) in the transitional (1987) income year or the 1986 income year.
Subsection (1) makes a small change in the wording to 86E(2), which provides for the write-off in the case of a farmer ceasing farming after 12 December 1985 but in the 1986 income year. The referral to section 85(4C) has been replaced with a direct referral to the Estate and Gift Duties Act. The change in wording was necessary to make the section fully operative because section 85(4C) only comes into effect in the 1987 income year.
Calculation of the Livestock Revaluation Write-Off
The principal change to section 86E is made by subsection (2). Part of section 86E(3) has been rewritten to provide that the write-off is calculated by aggregating the amounts of revaluation income calculated for each class of livestock.
Base Number Calculation
In calculating the deduction given by section 86E(3) it should be noted that the section is affected by the new section 85B (introduced by section 19 of this Amendment Act) because deficient bailed livestock have to be taken into account in calculating base numbers.
Example 1
Taxpayer elects to calculate his base number as at 31 March 1985. Livestock on hand 31 March 1985:
Owned: 4000 mixed age ewes (standard value = $8)
Bailed: 1800 ewe hoggets (adopted standard value = $8)
(The terms of the bailment agreement relates to 2000 ewe hoggets).
Calculation, for base number, of the number of specified livestock on hand at 31 March 1985 (section 85B)
| a | - | b |
|
|
|
| (total livestock on hand) |
| (livestock specified in bailment agreement |
|
|
|
| 4000 | - | 0 | = | 4000 |
|
| Ewe hoggets: |
|
| |||
| a | - | b |
|
|
|
| (total livestock on hand) |
| (livestock specified in bailment agreement) |
|
|
|
| 1800 | - | 2000 | = | -200 |
|
| Calculation of write off (section 86E(3)) |
|
| |||
| Mixed age ewes: |
|
| |||
| a | x | (b | - | c) |
|
| (base number) |
| (new standard value) |
| (old standard value) |
|
| 4000 | x | (9.24 | - | $8.00) | = 4,960 |
| Ewe hoggets: |
|
| |||
| a | x | (b | - | c) |
|
| (base number) |
| (new standard value) |
| (old standard value) |
|
| -200 | x | ($12.04 | - | $8.00) | = -808 |
| Revaluation write off = |
| 4152 | |||
Dealing with Write-Downs
The amount of revaluation income for a positive class of specified livestock will be negative where the new standard value is lower than the standard value previously adopted. In these circumstances the amount of revaluation income for that class of livestock is deemed to be zero. This is done so taxpayers with high standard values will not be disadvantaged. The zeroing is given by a new subsection 86E(3A) which is inserted by subsection (3).
Example 2
Livestock on hand 31 March 1985:
Owned: 200 Mixed age ewes (standard value = $12)
200 Ewe hoggets (standard value = $12)
Calculation of write off (section 86E(3)).
| Mixed age ewes: | |||||
|---|---|---|---|---|---|
| a | x | (b | - | c) | |
| (base number) | (new standard value) | (old standard value) | |||
| 200 | x | ($9.24 | - | $12) | = - $552 but deemed to zero |
| Ewe hoggets: | |||||
| a | x | (b | - | c) | |
| 200 | x | ($12.04 | - | $12) | = - $ 8 |
| Revaluation write off = | 8 | ||||
Note that where the value of DEFICIENT bailed livestock is being written down the ZEROING DOES NOT APPLY because it is treated as negative livestock. The negative times negative in the write-off calculation for a deficient class will give a positive amount. This is justified because it compensates such bailees for their decreased deduction for deficiencies.
Treatment of Total Revaluation Write-Off
Where the total amount of the write-off calculated using section 86E is less than zero, the write-off is deemed to be nil. This is to ensure that no taxpayer has their assessable income increased by the write-off (a negative write-off means income).
Example 3
Base number: Mixed age ewes = 200
Ewe hoggets = -200
Calculation of write off (section 86E(3))
| Mixed age ewes: | |||||
|---|---|---|---|---|---|
| a | x | (b | - | c) | |
| (base number) | (new standard value) | (old standard value) | |||
| 200 | x | ($9.24 | - | $8.00) | = - $248.00 |
| Ewe hoggets: | |||||
| a | x | (b | - | c) | |
| (base number) | (new standard value) | (old standard value) | |||
| - 200 | x | ($12.04 | - | $8.00) | = -808.00 |
| -560.00 | |||||
| Revaluation write off = 0 | |||||
As a negative write off would result, the revaluation write off is deemed to be zero.
The application date for this section is the income year commenced on 1 April 1985.
Section 23 - Spreading of Income From Livestock Revaluation
This section amends section 86F of the principal Act. Section 86F provides for a spread of livestock revaluation income.
Subsection (1) amends the definition of "livestock revaluation income" in section 86F(1) to allow taxpayers, in calculating the spread, the option of comparing 1987 opening and closing numbers of livestock of the SAME class. The more complicated method of comparing the closing classes of livestock with opening classes of livestock one class younger, which was previously specified in the legislation, can also be used. For further explanation of how the spread is calculated refer to pages 69-71 of the explanatory document on the Income Tax Amendment Act (No 4) 1986.
Note that in calculating the spread, all negative amounts are taken into account. NO ZEROING APPLIES.
Subsection (2) inserts a new subsection (1A) in section 86F. The new subsection provides that only one of the options given in the definition of "livestock revaluation income" can be used for each type of livestock. Once the option is exercised for any class of livestock all classes of livestock within the particular type of livestock must be treated in the same way. This is to prevent taxpayers gaining a greater spread than was intended.
Subsection (3) inserts a new subsection (5A) which deals with matrimonial transfers in the 1987 income year. Both partners are deemed to own, at the beginning of the 1987 income year, for the purpose of calculating the spread, the amount of livestock owned by each of them after the matrimonial transfer.
Section 24 - Valuation of Bloodstock
This section amends section 86H of the principal Act. Section 86H provides the basis on which bloodstock is to be valued from the 1988 income year onward.
Subsection (1) amends paragraph (a) of 86H to make the meaning clearer. The change was required to ensure that subsection (2) of the transitional section 212C will work as intended, ie, a broodmare used by a taxpayer for breeding prior to the 1988 income year will be treated for the purposes of section 86H as first being used by the taxpayer for breeding in the 1988 income year.
Section 27 - Certain Expenditure on Land Used For Forestry Purposes
This section amends section 127A of the principal Act. Section 127A phases out existing deductions for forestry expenditure.
Subsection (1) corrects a wrong date in 127A(4). The 30th day of December should be the 31st.
The amendment applies from 1 April 1987.
Section 28 - Expenditure on Land Improvements Used For Forestry
This section amends section 128B of the principal Act. Section 128B allows a deduction by way of depreciation for forestry land improvements.
Subsection (1) deletes the incorrect exclusion of categories (a) to (d) of Part II of the thirteenth Schedule. A deduction is allowed on all types of expenditure listed in Part II of the Thirteenth Schedule to the principal Act.
The amendment takes effect from the date the section applies, ie, the 1988 income year.
Section 29 - Revised Assessments Where Land or Fish Farms or Certain Assets are Sold Within 10 Years of Acquisition After Deductions in Respect of Certain Expenditure
This section amends section 129 of the principal Act. Section 129 claws back deductions of interest and development expenditure when property is sold.
Subsection (1) amends section 129 so that ALL farm land sold after 12 December 1985, irrespective of ownership, is exempt from the clawback provisions. This means leasehold farm land will now no longer be subject to the clawback provisions.
The amendment takes effect from 12 December 1985.
Section 30 - Loss Incurred in Specified Activities
This section amends section 188A of the principal Act. Section 188A is a loss containment provision which applies to certain specified activities. The containment has been lifted for all activities, except renting, in relation to losses incurred in the 1986 income year and following years. This was achieved by adding a proviso to subsection 188A(7). However, group companies were left out because they are dealt with separately by subsection (7A).
This section inserts an appropriate proviso in section 188A(7A) to remedy the situation.
The amendment applies to any loss incurred in the income year that commenced on the 1st day of April 1986 or any following year. Losses incurred in previous years remain subject to the $10,000 per annum maximum offset.
Section 40 - Twelfth Schedule
This section amends the Twelfth Schedule of the principal Act. The Twelfth Schedule sets out all the types and classes of specified and herd livestock.
The new schedule gives the previously announced consolidation of angora goat categories. The new schedule will take effect from the 1988 income year (the 1987 goat values have been averaged to take account of the consolidation).
B Accrual Treatment Of Income And Expenditure
Sections 9 to 18, 25, 26 and 39.
These provisions implement all but two of the recommendations made by the Consultative Committee on Accrual Tax Treatment of Income and Expenditure in its supplementary report to the Minister of Finance.
A comprehensive explanation covering the whole of the accruals provisions is to be issued shortly. The amendments made in this Amendment Act to those provisions will also be explained in that document.
C. Family Support And GMFI
Section 34 - Family Support Credit of Tax
Section 374D of the principal Act sets out the formula for calculating a person's family support entitlement. Section 34 amends subsections 374D(1) and (2) to provide that the income level at which the tax credit entitlement commences to abate will be increased from $14,000 to $15,000.
This results in an increased tax credit entitlement of up to $180 a year for families who currently receive an abated amount of family support.
The amendment first applies for the income year that commenced on 1 April 1987 but any increase in entitlement for the 1987/88 income year can only be obtained in the end-of-year assessment (refer also to the commentary on section 36 below).
Subsection (1) - increases the income level, at which the family support entitlement commences to abate, from $14,000 to $15,000.
Subsection (2) - is the application section and provides for the increased abatement level to apply for the 1987/88 and all following income years.
Section 35 - Guaranteed Minimum Family Income Credit of Tax
This section increases the guaranteed minimum family income credit of tax (GMFI) provided by section 374E of the principal Act. The GMFI is increased from $208 a week ($10,816 per annum) to $228 a week ($11,856 per annum). Note that family support tax credits and family benefit payments are additional to the new weekly GMFI amount.
This means that a one-child family will now receive a guaranteed income of $270 a week after tax (including family support and family benefit). This amount is increased by $22 ($16 family support and $6 family benefit) for each additional child in the family.
The increase is backdated to 1 April 1987 although current recipients will need to reapply to the Department to have their entitlement increased. Similarly, any persons who have now become eligible for the GMFI will need to furnish an application. Any entitlement not received during the year (for example, for the period between 1 April 1987 and the date a new certificate of entitlement is issued based on the new annual net amount) will, of course, be paid at the end of the year when annual returns are furnished.
Subsection (1) - amends section 374E of the principal Act to increase the annual net amount of GMFI tax credit from $10,816 to $11,856.
Subsection (2) - provides for the increase to apply in respect of the 1987/88 and all subsequent income years.
Section 36 - Credit of Tax by Instalments
This section adds a proviso to section 374G(4) of the principal Act, which sets out the method of calculating the amount of the weekly tax credit entitlement to be included in a certificate of entitlement. This proviso prevents any increased family support entitlement resulting from the increase in the family support abatement threshold (from $14,000 to $15,000) from being claimed during the year.
All family support applications for the 1987/88 income year will therefore be treated as though the threshold is still $14,000. Any increased entitlement must be claimed at the end of the income year in the taxpayers return.
The proviso is necessary to avoid large scale recalculations of family support entitlements during this year and applies only for 1987/88.
Applications for 1988/89 will therefore be processed on the basis of the new $15,000 abatement threshold.
Subsection (1) - adds a new proviso to section 374G(4) of the principal Act to provide for interim instalments of family support tax credit for the 1987/88 income year to be determined on the basis of the "old" $14,000 abatement threshold.
Subsection (2) - provides for the proviso to apply only in respect of the income year which commenced on 1 April 1987.
Section 37 - Family Support Offences
This section amends section 374N which deals with the acts or omissions that constitute an offence in relation to the family support tax credit scheme.
Section 374N(d) and (f) as they currently stand, recognise only an attempt to commit an offence rather than the actual commission of an offence. The scope of the section is extended to include as an offence, the actual commission of the offence.
Subsection (1) declares that a person who obtains a refund of family support tax credit under false pretences commits an offence against the Income Tax Act 1976.
Subsection (2) states that a person who sells or otherwise transfers a certificate of entitlement to any other person commits an offence against the Income Tax Act 1976.
The amendment applies to offences committed on or after the date on which this Act received the Governor-General's assent (22 June 1987).
Section 38 - Penal Tax
An amendment is made to section 374O(1) which contains a separate penal tax provision dealing with false tax credits in connection with the Family Support Scheme.
Section 374O previously provided only for the imposition of penal tax where a person ATTEMPTED to obtain a refund from the Commissioner by falsely pretending to have made a payment to any person by way of a credit of tax.
The amendment ensures that any person who actually OBTAINS a refund of family support tax credit under false pretences will also be subject to penal tax.
The amendment applies with respect to tax on income derived in the income year that commenced on the 1st day of April 1987 and in every subsequent year.
D Double Dipping
Section 31 - Companies Included in a Group of Companies
Section 31 amends section 191 of the Act to prevent dual resident companies from offsetting their losses against the income of group companies. The effect is that a dual resident company will only be permitted to carry forward its losses for offset against its future income.
As announced in the 1987 Budget, the amendments to section 191 are an interim measure pending the introduction of legislation to combat international tax avoidance. The purpose of the measure is to counter the "double dipping" of tax losses by dual resident companies. The new legislation will apply to all dual resident companies in a tax loss situation, whether or not they are engaged in "double dipping" of losses.
Dual residence occurs when a company is resident in two countries under those countries' respective tax laws. An example of a dual resident company is one which is incorporated in New Zealand and managed and controlled in Australia. This company meets the tests of residence in each country.
Double dipping schemes rely on the establishment of a dual resident company and the company group loss transfer provisions in each country.
Example
Company DR is resident in both New Zealand and Australia under the tax laws of each country. It is wholly-owned by Company NZ, a company resident in New Zealand. Company DR borrows money to purchase the shares of Company OZ which is resident in Australia. At the end of the income year, Company DR returns a tax loss, mainly by virtue of the deduction claimed under section 106(1)(h)(ii) for interest incurred on money borrowed to acquire the shares in Company OZ. Prior to the amendment to section 191, the tax loss of Company DR could have been offset against the income of Company NZ under the grouping provisions of section 191. The loss could also be offset against the income of Company OZ under the Australian grouping provisions.
In this example, the amendments to section 191 will prevent Company NZ from obtaining the benefit of Company DR's tax losses. Company DR will be allowed to carry forward its losses under section 188 of the Act to be offset against its future income.
Subsection (1) of section 31 inserts a new paragraph (f) into section 191(1). The new subsection (1)(f) defines a "dual resident company" as a company that is resident in New Zealand during all or part of an income year, and that is resident in another territory during all or part of the same income year. Where a company is resident in either country for part of an income year it is still a dual resident company if, in another part of the same income year, it is resident in the other country.
The definition also applies where a company is subject to tax in another territory by virtue of registration, domicile, nationality, or incorporation.
Section 31(2) inserts a new subsection (7E) into section 191. The new subsection (7E) provides that -
- (a) the loss or part of a loss incurred by a dual resident company cannot be offset against the income of a group company under section 191(5);
- (b) any payment, that would be a subvention payment under section 191(7), made to a dual resident company in respect of a loss or part of a loss incurred in an income year -
- (i) is not allowable as a deduction to the paying company;
- (ii) is not assessable income of the dual resident company.
Section 31(3) makes consequential amendments to subsections (5) and (7) of section 191.
Section 31(4) provides that the amendments to section 191 apply to losses incurred by any company in accounting years that commenced after 17 December 1986. This is the date on which the Minister of Finance announced that legislation would be introduced to counter double-dipping.
E National Superannuitant Surcharge
Section 33 - Determination of "Specified Exemption"
Income derived by a superannuitant, other than National Superannuation, that is below the specified exemption is not subject to the surcharge.
Section 336BA of the principal Act sets out the procedure for calculating the specified exemptions for other income for the purposes of the surcharge.
Section 33 increases the specified exemption from $7,202 to $7,800 (single rate recipients) and from $6,006 to $6,500 (married rate recipients, giving a combined exemption of $13,000 instead of the present $12,012), as announced on Budget night.
The section does not come into force until 1 April 1988, but it will apply from 1 April 1987. Therefore superannuitants cannot take advantage of the new exemption levels on a pay period basis during the 1987/88 income year and will have to wait for the end of year assessment before getting the benefit of the increase. The retrospective application from 1 April 1987 will mean that benefits will be received when the 1988 tax assessment is issued.
Subsection (1) inserts the increased specified exemption levels into section 336BA of the principal Act.
Subsection (2) makes a consequential amendment to section 336L(1A) of the principal Act in order to specify the pay-period equivalents of the new $7,800 exemption for single rate recipients for the purposes of the "SAJ" code.
Subsection (3) makes a consequential amendment to section 336L(2) of the principal Act in order to specify the pay-period equivalents of the new $6,500 exemption for married rate recipients for the purposes of the "MAJ" code.
Subsection (4) - At present, National Superannuitants who receive more than $6,006 of taxable income in addition to their National Superannuation are excluded from being "pay-period taxpayers" as that term is defined in section 356(1) of the principal Act.
This subsection consequentially amends that definition as a result of the new specified exemption levels to ensure that only those National Superannuitants who receive more than $6,500 of taxable income in addition to their National Superannuation will be excluded from being "pay period taxpayers".
Subsection (5) - This is the application date subsection. It provides for this section of the amendment Act to come into force on 1 April 1988 but to apply with effect from the income year commencing on 1 April 1987.
F General
Section 2, 3, and 4 - Annual Taxing Act
These sections are deemed to be the annual taxing Act for the 1987-88 income year.
Section 2 confirms the rates of income tax for the 1987-88 income year. The rates are as set out in the First Schedule to the principal Act.
Section 3 confirms the rate of excess retention tax for the 1987-88 income year. This rate remains at 35 cents as set out in clause 11 of Part A of the First Schedule to the principal Act.
Section 4 repeals the Income Tax (Annual) Act 1986.
Section 6 - When Objections May Be Referred in the First Instance to the High Court
Section 6 amends subsection (11A) of section 33 of the Act to correct a drafting error made when section 33(11A) was inserted by the Income Tax Amendment Act 1987 (the legislation relating to the new accruals regime).
The amendment deletes the reference to section 64E(5) and substitutes a reference to section 64E(6).
Section 7 - Rebate From Tax Payable by Non-resident Companies in Respect of Income From Special Development Projects
Section 7 amends section 42 of the principal Act which provides for a special rebate for those non-resident companies which have been declared by Order in Council to be undertaking a special development project in New Zealand.
The rebate ensures that the non-resident company's New Zealand tax rate falls between a minimum of 42.5 percent and a maximum of 53 percent (the tax rate applicable to income derived in New Zealand by non-resident companies) during the "first specified period" and does not exceed 48 percent (the rate of tax applicable to New Zealand resident companies) during the "second specified period" on income derived from special development project activities. The first and second specified periods are as stipulated within the appropriate Order in Council.
The purpose of this amendment is to ensure that the rebate will also apply when an Order in Council provides for a second specified period only. Previously section 42 required that prior to the commencement of the second specified period there must also have been a first specified period. This amendment to section 42 simply allows for the rebate to apply during a second specified period without there being a first specified period.
Subsection (1) of section 7 merely adds the words "(if any)" into the definition of the term "first specified period". This has the effect of saying that there need not be a "first specified period" in an Order in Council.
Subsection (2) adds a proviso to the definition of the term "second specified period". This has been inserted so that where an Order in Council declaring a non-resident company to be carrying on a special development project does not provide for a first specified period, but does specify a second specified period, that period is to commence from the accounting year to which that Order first applies. In other words, the second specified period is to commence at the same time as the first specified period, had there been one.
Subsection (3) amends subsection (4) of section 42 in two ways:
First, paragraph (a) inserts some words into subsection (4) to provide that an Order in Council declaring an undertaking to be a special development project can apply to accounting years of the company carrying on the project that commences before, on, or after the Order is made. The entitlement to any rebate under section 42 will depend upon the periods actually specified in an Order.
Second, paragraph (b) merely adds the words "if any" into paragraph (a) of subsection (4). This subsection specifies the maximum length of time that the specified periods can run. By inserting "if any" into the legislation it implies that there need not be a "first specified period" before a "second specified period".
Section 8 - Incomes Wholly Exempt From Tax
This section amends section 61 of the principal Act to provide an exemption from income tax for income derived by the trustees of the New Zealand Agent Orange Trust from the settlement fund awarded to the Trust by the United States District Court Eastern District of New York and accretions of income to that fund. Note that the exemption applies only to that part of the Trust's income derived from the original settlement and accretions thereto. It does not apply to the income earned on any other funds held by the Trust.
Any income derived by beneficiaries of the Trust by way of distributions from the Trust, is also exempt. In this case, all distributions, including those from funds of the Trust other than the original settlement and accretions thereto, are exempt.
Subsection (1) inserts a new paragraph 56 into section 61 of the principal Act which exempts from income tax:
- income derived by any trustee of the New Zealand Agent Orange Trust from:
- the settlement fund awarded to it by the United States District Court Eastern District of New York, or
- from any accretions of income attributable to the settlement fund;
- any distribution made by the New Zealand Agent Orange Trust to any beneficiary of the trust.
Subsection (2) provides that this section shall apply from 1 April 1987.
Section 32 - Special Partnerships
This section makes an amendment to section 211B(12) which is concerned with the duration of a special partnership.
Section 211B(12) provides that where a special partnership, first registered prior to 1 August 1986, is renewed or continued in conformity with the appropriate provision in the Partnership Act, then for the purposes of section 211B(2) that renewed partnership is regarded as having been first registered prior to 1 August 1986.
The purpose of this amendment is to correct a minor grammatical error. The word "it" is inserted after the expression "duration of the partnership" and before the expression "shall be deemed" in subsection (12).
The amendment applies with respect to the tax on income derived in the income year that commenced on the 1st day of April 1986 and in every subsequent year.
Appendix 1
Accounting For Bailed Livestock
Example of old methods 1 and 2 for accounting for bailed livestock and adjustments needed if to be used in the 1987 income year.
Example
Livestock on hand 1.04.85
Owned 4000 Mixed Age Ewes (std value = $8)
Bailed 2000 Ewe Hoggets (adopted std value = $8)
(The terms of the bailment require 2000 ewe hoggets to be returned or compensated for in 1994).
Sales 3000 Lambs and Ewe Hoggets at $20.
Livestock on hand 31.03.86
Owned 4000 Mixed Age Ewes
Bailed 1950 Ewe Hoggets
Sales 3500 Lambs and Ewe Hoggets at $18
Purchases 800 Ewe Hoggets at $17.
Livestock on hand at 31.03.87
Owned 4000 Mixed Age Ewes (trading stock value = $9.24)
Bailed 1900 Ewe Hoggets (trading Stock value = $12.04)
| LIVESTOCK ACCOUNT (METHOD 1) YEAR ENDED 31 MARCH 1986 | |||||
|---|---|---|---|---|---|
| Nos | $ | Nos | $ | ||
| Opening Bailed Sheep | 2000 x $8 | 16,000 | Sales | 3000 | 60,000 |
| Opening Sheep | 4000 x $8 | 32,000 | Closing Bailed Sheep | 1950 x $8 | 15,600 |
| Closing Sheep | 4000 x $8 | 32,000 | |||
| Gross Profit | 59,600 | ||||
| 107,600 | 107,600 | ||||
| LIVESTOCK ACCOUNT (METHOD 2) YEAR ENDED 31 MARCH 1986 | |||||
| Nos | $ | Nos | $ | ||
| Opening Sheep | 4000 x $8 | 32,000 | Sales | 3000 | 60,000 |
| Closing Sheep | 4000 x $8 | 32,000 | |||
| Provision for Replacement | 400 | ||||
| Gross Profit | 59,600 | ||||
| 92,000 | 92,000 | ||||
| Deficiency in Bailed Stock | |||||
| Stock taken under bailment | Bailed Sheep on hand | Deficiency | |||
| 2,000 | 1950 | 50 at $8 = $400 | |||
| LIVESTOCK ACCOUNT (NEW METHOD) YEAR ENDED 31 MARCH 1986 | |||||
| Nos | $ | Nos | $ | ||
| Sales | 3000 | 60,000 | |||
| Opening Ewe Hoggets | - | - | Closing Ewe Hoggets - | 50 x $8 | (400) |
| Opening Mixed Age Ewes | 4000 x $8 | 32,000 | Closing Mixed Age Ewes | 4000 x $8 | 32,000 |
| Gross Profit | 59,600 | ||||
| 92,000 | 91,600 | ||||
| LIVESTOCK ACCOUNT (METHOD 1) YEAR ENDED 31 MARCH 1987 | |||||
| Nos | $ | Nos | $ | ||
| Purchases | 800 | 13,600 | Sales | 3500 | 63,000 |
| Opening Bailed Sheep | 1950 x $8 | 15,600 | Bailed* Sheep | 2000 x 8 | 16,000 |
| Opening Sheep | 4000 x $8 | 32,000 | Closing Sheep | 4000 x $9.24 | 36,960 |
| (Mixed Age Ewes) | |||||
| Negative Specified Livestock | |||||
| Gross Profit | 53,556 | (Ewe Hoggets) - | 100 x $12.04 | (1,204) | |
| 114,756 | 114,756 | ||||
| |||||
| LIVESTOCK ACCOUNT (METHOD 2) YEAR ENDED 31 MARCH 1987 | |||||
| Nos | $ | Nos | $ | ||
| Purchases | 800 | 13,600 | Sales | 3500 | 63,000 |
| Opening Sheep | 4000 x $8 | 32,000 | Closing Sheep | 4000 x $9.24 | 36,960 |
| (Mixed Age Ewes) | |||||
| Negative Specified Livestock | |||||
| Reversal of Prov for replacement* | (400) | (Ewe Hoggets) - | 100 x $12.04 | (1,204) | |
| Gross Profit | 53,556 | ||||
| 98,756 | 98,756 | ||||
- Provision for deficient bailed livestock at the end of the year is achieved by the negative livestock adjustment so a provision for replacement is not necessary. However, the provision made in the previous year needs to be reversed.
See main text for example of new method in 1987 income year.