Issued
01 Sep 1984

Income Tax Amendment Act (No 3) 1983

Archived legislative commentary on the Income Tax Amendment Act (No 3) 1983 from PIB vol 126 Sep 1984.

This commentary item was published in Public Information Bulletin Volume 126, September 1984

More information about Public Information Bulletins.

Section 1 - Short Title

This section provides that this Amendment Act is to be read with, and form part of, the Income Tax Act 1976.

Part I

General Provisions

Section 2 - Application

This section provides that the provisions in Part I of this Amendment Act are to apply to the tax on income derived during the income year which commenced on 1 April 1983, unless otherwise stated in the Amendment Act.

It is important to check the commencement date when applying any of the amending sections. Many of the provisions of this Part have their own commencing dates. These are pointed out in the commentary which follows.

Section 3 - "Superannuation Fund" Definition

In last year's Income Tax Amendment Act (No 2), the definition of the term "superannuation fund" was repealed and replaced by definitions of superannuation category 1, 2, and 3 schemes.

However, the principal Act still contained, in various sections, references to a superannuation fund, which in the absence of a specific definition, would have assumed its normal dictionary meaning.

Since the section 2 definition of a "superannuation fund", before last year's amendment, referred to only the Government Superannuation Fund and funds approved by the Government Actuary, the repeal of that definition left that term undefined in the Act and consequently capable of an expanded meaning.

This section simply reinstates the position as it was prior to the repeal of the former definition, by introducing a specific definition of "superannuation fund" to mean any superannuation category 1 scheme (includes the Government Superannuation Fund) or any superannuation category 2 scheme. That is, superannuation category 3 schemes are excluded from the definition of a superannuation fund, so that that term effectively refers only to approved schemes.

Section 4 - Bonus Issues

This section amends section 3(3) of the principal Act which excludes certain bonus share issues from the definition of "bonus issue" for income tax purposes.

The exclusion of certain bonus issues, made on or after 1 April 1982, from the meaning of the term for income tax purposes has two important results:

  1. The bonus issue is not one to which section 4(1)(ca) applies and therefore any return of capital within 10 years after the bonus issue is not treated as a dividend because of that bonus issue having been made, and
  2. The bonus issue is not excluded from company distributions which can be taxed as dividends under section 4(1).

This amendment makes two changes to the exclusions from the meaning of "bonus issue".

(a) Capital Profits to which Section 4(5A) Applies

Paragraph (a)(i) of section 3(3) excludes from the definition of bonus issue any bonus issue from a capital profit arising from the realisation of an asset of the company. Last year legislation was enacted (to insert a new section 4(5A) in the Income Tax Act 1976) to prevent the "tax free" distribution of capital profits arising from the sale of company assets to related parties. However it was still possible to effectively distribute these capital profits by converting them into share capital, making a bonus issue and then subsequently reducing the share capital to its original level and distributing the amount of the reduction. Such a bonus issue was under the provisions of section 3(3)(a)(i) of the principal Act, excluded from the meaning of "bonus issue" for income tax purposes and therefore the return of capital did not fall within the provisions of section 4(1)(ca).

Section 3(3)(a)(i) is now amended by section 4 of this Amendment Act so that bonus issues made out of profits to which section 4(5A) applies will now be bonus issues for income tax purposes. This means that such bonus issues will now fall within the provisions of section 4(1)(ca) if redeemed within 10 years.

(b) Bonus Issues from Revaluation Reserves

The intention of section 4(5A) as enacted last year could also be circumvented by revaluing the capital asset to market price prior to transferring it to the related party, converting the revaluation reserve into share capital by a bonus issue and subsequently redeeming the increase in share capital.

Accordingly section 3(3)(b) is repealed by section 4 of this Amendment Act which means that bonus issues made from revaluation reserves will now be bonus issues for income tax purposes. It follows that when such bonus issues are made they cannot be taxed as a dividend under section 4(1). However if there is a return of capital within 10 years, after the bonus issue, that return will fall within the provisions of section 4(1)(ca). Any bonus issues from revaluation reserves which occurred prior to this repeal coming into effect will continue to be exempt from Bonus Issue Tax and the Department will not seek to tax them as dividends,

Application Date

These amendments to section 3 of the principal Act apply from the 16th of December 1983, the date the Income Tax Amendment (No 3) Act 1983 received the Governor - General's assent.

Section 5 - Meaning of the Term "Dividends"

This section makes several changes to section 4 of the principal Act in relation to the meaning of dividends for income tax purposes.

Subsection (1) amends section 4(1)(ca) of the principal Act in relation to returns of capital made within 10 years after the making of a bonus issue by defining the term "return of capital". This amendment will now remove any uncertainty on the meaning of that term for income tax purposes.

A return of capital now means any amount:

  1. Distributed by a company from any reduction of the share capital of the company.
    • A "reduction of share capital" is the formal reduction of share capital contemplated under the provisions of the Companies Act 1955. It will include any reduction of preference share capital that is not "redeemable" and therefore cannot be repaid without the consent of the Courts. Note that formal approval of the Court, or lack of such formal approval, is not in this area a determinant for tax purposes and therefore an unauthorised reduction of share capital will fall within the scope of this paragraph.
  2. Distributed by a company on the redemption of preference shares where those preference shares:
    1. were issued by way of bonus issue made on or after 1 April 1982, or
    2. give the right to participate in any bonus issue made by the company on or after that date.
      • A redemption of preference shares only applies to preference shares that are redeemable without a formal reduction of share capital in the Court pursuant to the Companies Act.
      • Preference shares which are redeemable and which do not carry any rights to participate in bonus issues may be redeemed without falling within the scope of section 4(1)(ca) (provided the preference shares themselves were not issued by way of a bonus issue).
  3. Any return of paid up capital made on the winding up of the company to the extent that the return is in excess of share capital which is paid up in any way other than by making a bonus issue.
    • This paragraph brings within the meaning of "dividends" that part of the paid up capital of a company which exists because of a bonus issue made on or after 1 April 1982 if that part is returned on the winding up of the company within 10 years after that bonus issue.

None of the types of "return of capital" described in paragraphs (a), (b) or (c) is a "dividend" if it is an amount deemed to be a further bonus issue under section 263, ie, capital returned within 3 years of a bonus issue made prior to 1 April 1982, where the Commissioner is not satisfied that that return was not pursuant to an arrangement at the time the bonus issue was made.

It must be remembered that section 4(1)(ca) only provides for a dividend to arise when there has been a bonus issue made within 10 years before the return of capital. Bonus issue is a defined term for income tax purposes and it is common for companies to make bonus share issues from certain sources which are not considered to be bonus issues in terms of section 3 of the principal Act. Two common examples of bonus issues which are not bonus issues for income tax purposes are:

  • bonus issues from capital profits,
  • bonus issues from share premium reserves.

It is essential that section 4(1)(ca) is read in conjunction with section 3 of the principal Act when examining the taxation implications of any return of capital. Section 4 of this Amendment Act has a direct bearing on this issue.

Subsection (2) of section 5 of this Amendment Act extends section 4(1) of the principal Act to bring within the meaning of "dividend" any money advanced by a company to or for the benefit of any of its shareholders where, in the opinion of the Commissioner, the advance is not a bona fide investment by the company but virtually a distribution of an amount capitalised by way of a bonus issue where the bonus issue:

  • is made on or after 1 April 1982; and
  • is made within 10 years immediately preceding the making of the advance.

Essentially, this amendment allows the Commissioner to treat advances to shareholders that he considers are not bona fide investments by the company as returns of capital for the purposes of section 4(1)(ca). This is an extension of the same provisions that have existed for some time whereby the Commissioner can treat advances which he considers are not bona fide investments as being distributions of profits.

The first proviso to section 4(1) will also apply to advances where the Commissioner is of the opinion that they are a distribution of an amount capitalised by way of a bonus issue. In other words, if the total advance is subsequently repaid to the company the Commissioner may issue an amended assessment excluding the deemed dividend.

The Department will take the same stance on advances that it considers are a return of capital as it currently operates in respect of advances it considers are distributions of profit. This means that the current rulings in respect of what constitutes a "bona fide investment", and "to or for the benefit of any of its shareholders", etc, will apply to both types of advances.

The Department's policy is that advances to shareholders that are on terms which would not be commercially supportable are to be treated:

  1. Firstly, as a distribution of profits (whether from revenue or capital reserves). This means the advance is treated as a dividend which may, or may not, be taxable according to the source of the profit distributed.
  2. Secondly, and only after revenue and capital reserves have been exhausted , as a return of capital to which section 4(1)(ca) applies.

Subsection (3)

This subsection amends section 4(5) of the principal Act (which excludes certain capital profits from the meaning of the term "dividends") and qualifies the nature of the capital losses that must be taken into account in ascertaining the balance of any capital profit or gain that can be distributed "tax free". Where capital losses arise from the realisation of capital assets in transactions to which subsection 4(5A) would apply, ie, transactions between the company and related persons, this "intra - group" loss is excluded from those losses which must be taken into account pursuant to and for the purposes of section 4(5).

The effect of this amendment is to allow genuine capital profits, in excess of genuine capital losses, arising from the realisation of company assets to be distributed "tax free" without having to take into account "capital losses" arising from the realisation of assets in transactions with related persons.

Subsection (4) - Application date

This section has the same application date as the amendment made last year to section 4 in the Income Tax Amendment Act (No 2) 1982, ie, it applies to returns of capital, distributions or bonus issues made on or after 1 April 1982.

Section 6 - "Associated Persons" Definition

This section amends section 8 of the principal Act which contains a definition of the term "associated persons" which applies for the purposes of the various references to that term in the Act.

Prior to this amendment, the expression "associated persons" included the relationship between a company and a person (other than a company) who holds 25 percent or more of the paid - up capital of that company. The application of this associated persons "test", as between a company and a non - company, could be avoided where there was no paid - up capital in the company.

This amendment extends the definition of "associated persons" in section 8 to include the relationship between a company and a person (other than a company) who holds 25 percent or more in nominal value of the allotted shares of that company.

This amendment will apply from the income year commencing on 1 April 1984.

Section 7 - Returns by Partners, Co - Trustees, and Joint Venturers

At present, subsection (2) of section 10 provides that a husband and wife carrying on business together shall be deemed not to be carrying on business as partners unless they are carrying on business under a deed of partnership. This amendment removes that requirement with effect from the income year which commenced on 1 April 1983. For 1984 and future years, the determination of whether a husband and wife are carrying on a business as partners will be based on the facts of each case, with particular regard being given to the contributions made by each spouse by way of capital introduced and services performed in the carrying on of the partnership business.

In determining capital contributions, business assets owned by each partner following a transfer in accordance with a "matrimonial agreement" (as defined - please see comments on section 43 of this Amendment Act) will, following the transfer, be treated as having been introduced by each spouse in the proportions now owned.

Example

  • Assume that husband and wife had contributed capital to the extent of 90 percent by the husband and 10 percent by the wife towards the purchase of the farm in 1957 and had been farming in partnership since then. If they entered into a "matrimonial agreement" on 20 September 1984 for the ownership of the farm to be settled at 50 - 50, and transferred 40 percent of the property in accordance with that agreement, then the Department would accept that the capital contribution of each partner on that date was 50 - 50.

Where separate accounts are not available for each period, the Department will accept an apportionment of the profit or loss which relates to each period based on the following formula:

With regard to the contributions of each partner by way of services it should be noted that this contribution must be by way of services performed in the carrying on of the partnership business. The contributions either spouse makes to the marriage itself cannot be taken into account.

Section 8 - Back Pay Rebate

This section repeals the provisions in the principal Act which relate to the back pay rebate which, in accordance with the amendments made last year, can be claimed only in respect of payments of retrospective pay made on or before 30 September 1982.

The repeal is to be effective on 1 April 1984 in order to minimise any misunderstanding that the repeal of the provisions would mean that claims could no longer be made in tax returns furnished in the income year ending 31 March 1984. Furthermore, notwithstanding the repeal of the provisions, claims will still be accepted after 1 April 1984 so long as the payment of back pay was made on or before 30 September 1982.

A similar change has not yet been made in relation to the overtime and shiftwork rebates, which likewise do not apply to any time worked or shiftwork performed on or after 1 October 1982. This is because of the existence of the Overtime and Shiftwork Recognition Authority and the possibility of the need for that Authority to resolve disputes involving overtime or shifts worked before termination of eligibility for those rebates. The provisions which cover those rebates will be repealed in a later year when the Government is satisfied no further claims are likely to arise.

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

This section amends section 56A of the principal Act.

Section 56A allows a tax rebate of 31 cents per dollar - maximum rebate $200 - for cash gifts, each of $5 or more, made by individuals to certain organisations.

This amendment adds the following to the qualifying organisations so listed:

  • The New Zealand Society for the Intellectually Handicapped (Inc);
  • Amnesty International; and
  • The Evangelical Alliance Relief Fund (TEAR Fund).

Donations of $5 or more to those organisations, made by individuals on or after 1 April 1983, will be eligible for the section 56A rebate.

Section 10 - Exemption of Certain Income Derived by Disabled Persons

This section amends section 61(53) of the Income Tax Act which exempts from tax income of a "nominal" amount derived by a disabled person in respect of therapeutic activities undertaken in a sheltered workshop. The amendment increases the current "nominal" amount from $15 per week to $25 per week.

Section 10 amends section 61(53) also to clarify the basis upon which the determination of whether a taxpayer's income constitutes income of a "nominal amount" is to be made in practice. Currently, the position of a taxpayer whose income from a workshop may fluctuate on a weekly basis is unclear - in some weeks the income may exceed the stated limit, even though on average for the year it may be well below that limit.

The amendment ensures the determination of the "nominal" amount on the basis of average weekly income - calculated as the total income derived from therapeutic work divided by the number of weeks worked in the year. For example, a disabled person deriving $20 per week for 20 weeks of the year, and $30 per week for 15 weeks of the year (in the remaining 17 weeks no work is undertaken) would, under the amended section, qualify as deriving "nominal income" calculated as follows:

$20 x 20 = $400  
$30 x 15 = $450  
  850 Total income for year
+ 35 Number of weeks worked
  $24.28 Average weekly income

It should be noted that where the amount of income derived by a disabled person from therapeutic work exceeds the nominal weekly amount, the full amount is taxable , not just that amount received in excess of the limit.

The amendment to section 61(53) applies from and including the 1983/84 income year.

Section 11 - Taxation of Land Sales

This section makes a number of amendments to section 67 of the principal Act which deals with the taxation of profits on sale of land in certain circumstances.

Details of the amendments made by each subsection follow.

Subsection (1) of section 11 of this Amendment Act - "Associated Persons" Definition

Section 67(2) of the principal Act contains a definition of the term "associated persons", for the purposes of section 67, which differs from the general definition contained in section 8 of that Act.

As explained in relation to section 6 of this Amendment Act, the section 8 definition of "associated persons" has been amended this year by extending it to apply to the relationship between a company and a person (other than a company) who holds 25 percent or more in nominal value of the allotted shares in that company.

This subsection makes a similar extension to the "associated persons" test in section 67(2).

Application of this "associated persons" amendment

This amendment is to apply with respect to sales or other disposals of land made on or after the day on which the Amendment Act received the Governor - General's assent (16 December 1983).

Subsection (2) of section 11 of this Amendment Act - Persons Associated With Property Developers and Subdividers - New subsection 67(4)(ba)

Previously, subsection (4) of section 67 specified 6 categories of land sale the profits or gains from which could constitute assessable income.

This subsection adds a further category of land sales to which section 67 can be applied. It inserts a new paragraph, (ba), to cover the situation where the seller or an associated person of the seller was a property developer or subdivider at the time the land was acquired and :

  • that land was acquired for the purpose of that business of property developing or subdividing, or
  • that land was sold within 10 years of acquisition.

It is expected that there will not be many cases which fail within the new paragraph. This is because had the property been developed in accordance with an original intention to develop, it would then have been subject to the provisions of sections 67(4)(e) or 67(4)(f). The new paragraph (ba) therefore covers situations where property is acquired by a property developer or subdivider, or an associated person of a property developer or subdivider, but the property is not actually developed or subdivided.

This amendment is to apply to sales of land made on or after the day on which this Amendment Act received the Governor - General's assent (16 December 1983).

Subsection (3) of section 11 of this Amendment Act - Property Developments

This subsection amends section 67(4)(e) which treats land sale profits as assessable income where those profits arise from an undertaking or scheme carried on or carried out (whether or not an adventure in the nature of trade or business), involving the development or division into lots of that land where that development or division work (not being work of a minor nature) was commenced within 10 years after the date of acquisition of the land.

The intention was that that paragraph would apply only where land was developed as part of an undertaking or scheme for the purpose of deriving a profit from the subsequent sale of the land, in other words, to developments by way of subdivision for the purpose of resale. The High Court, in reaching its decision in the "ANZAMCO" case, by inference, considered that there was nothing in section 67(4)(e) which would require an undertaking or scheme to be sale/profit motivated before section 67(4)(e) could apply to it. The effect of the decision was that a profit on sale of land could be taxable where development work (including such work as farm or home development work) was carried out and the land was sold within ten years of the date of acquisition.

Subsection (3) of section 11 of this Amendment Act now restores the original intent. It adds a proviso to section 67(4)(e), to exclude from the types of development or division work to which that paragraph applies, developments, divisions or improvements that are, in the Commissioner's opinion, for use in and for the purposes of :

  • Any business carried on by the taxpayer (includes farming and other businesses carried on from the premises) except those businesses which are subject to the application of the paragraph, namely, land development businesses.
  • A private residence for the taxpayer and any member of his family living with him.
  • The deriving by the taxpayer of rents or similar revenues from that property.

Points to note

It should be noted that, for the proviso to apply, the Commissioner must be satisfied that the developments, divisions or improvements are "for use in" and"for the purposes of" the specified categories of land usage.

For example, the subdivision of a parcel of land into lots, one of which is retained by the taxpayer for, say, his own residential purposes, would not exclude subdivision sales from the effect of section 67(4)(e) since the development work could not meet the requirement of having been carried out for use in and for the purposes of that residence.

It should also be noted that the amendment excludes only three categories of land developments. Developments other than those specified, for example, development for hobby farming, could still come within section 67(4)(e). In most cases involving hobby farm development, however, the development work carried out is unlikely to be of more than a minor nature (the ascertainment of which depends essentially on the facts of the case).

A final point to note is that this amendment has been made only to section 67(4)(e) and not to section 67(4)(f) which also makes reference to the words "development or division into lots". This is because, as that paragraph comes into operation only in the case of development or division work involving "significant expenditure on earthworks, contouring, levelling, drainage, etc, being work customarily undertaken or provided in major projects involving the development of land for industrial, commercial or residential purposes", it is considered that this type of development work could not be undertaken in respect of the categories which the new proviso to section 67(4)(e) now excludes for purposes of paragraph (e). That is, any such developments would clearly be major subdivisions to which the provisions of section 67(4)(f) should be applied.

Application of this amendment to section 67(4)(e)

In order to give full effect to this amendment, its application has been backdated so that it applies to all land sales made on or after 10 August 1973, the date from which the original land sale provisions now embodied in section 67 first applied under the Land and Income Tax Act 1954.

This means that any cases where profits from land sales have in the past been assessed under section 67(4)(e), and the development or division work on that land was of a type to which the new proviso applies, would need reassessment to give effect to this retrospective amendment.

However, it is believed that there are few, if any, cases which could come within this category since, until the ANZAMCO case, it was not the Department's practice to take cases under section 67(4)(e) in circumstances that involved farm development expenditure.

Subsections (4) and (5) of section 11 of this Amendment Act - Consequential amendments to subsection (2)

These subsections make amendments to sections 67(4)(f) and 67(5) which are consequential to the introduction of the new paragraph (ba) in section 67(4), as introduced by subsection (2) of this amendment.

Subsection (4) makes it clear that paragraph 67(4)(f) (profits from major subdivisional developments) cannot be applied to profits on land sales which are covered by any of the preceding paragraphs of section 67(4), including the new paragraph (ba).

Subsection (5) extends the exemption given by section 67(5), from provisions of paragraphs (a), (b), and (c) of section 67(4), in respect of business premises and domestic dwellings so that it applies the new paragraph (ha) also.

These amendments are to apply with respect to sales of land made on or after the day on which this Amendment Act received the Governor - General's assent (16 December 1983).

Subsections (6) and (7) of section 11 of this Amendment Act - Farm Subdivisions

These subsections amend sections 67(6) and section 67(9) respectively, in relation to the exemptions which these sections provide in respect of subdivisions of land used in farming or agricultural businesses.

  • Section 67(6) - "rezoning betterment"

Section 67(6) provides an exemption from the provisions of section 67(4)(d) which deals with land sold within 10 years of acquisition when at least 20 percent of the gain on sale is due to a rezoning betterment factor. That exemption applies, in part, to land acquired and used, or intended to be used, by the taxpayer primarily and principally for the purposes of a farming or agricultural business carried on by him.

  • Section 67(9) - Division of farm land into economic farm units

Section 67(9) provided previously an exemption from the provisions of sections 67(4)(e) and 67(4)(f) applicable to profits from land sold pursuant to undertakings or schemes involving the development or division (of more than a minor nature) into lots of that land where that development or division work commenced within 10 years of the date of acquisition of that land.

The exemption under section 67(9) applies to a division of farm land into units, where:

  1. The land that, after division, is sold was, immediately before that division, occupied or used by the taxpayer primarily and principally for the purposes of a farming or agricultural business carried on by him; and
  2. Each lot resulting from the division is itself an economic farm unit; and
  3. Each lot was sold for use in a farming or agricultural business.
  • The amendments now made to section 67(6) and section 67(9)

The amendments made by subsections (6) and (7) of section 11 of this Amendment Act extend the exemption, in each case, so that it applies not only to land acquired and used by the taxpayer, but also to land acquired and used by the taxpayer's spouse or by both the taxpayer and his spouse primarily and principally for the purposes of a farming or agricultural business carried on by the taxpayer or by his spouse or by both the taxpayer and his spouse.

  • Application of the section 67(6) amendment made by subsection (6) of section 11 of this Amendment Act

The amendment made by subsection (6), to section 67(6), applies to sales or other disposals of land made on or after 23 October 1974, the date from which the provisions of what is now section 67(4)(d) first applied under the Land and Income Tax Act 1954.

  • Application of the section 67(9) amendment made by subsection (7) of section 11 of this Amendment Act

Similarly, the amendment made by subsection (7), to section 67(9), applies to sales or other disposals of land made on or after 10 August 1973, the date from which the provisions of what are now sections 67(4)(e) and 67(4)(f) first applied under the Land and Income Tax Act 1954.

As both amendments are retrospective, taxpayers should apply for reassessments to be made where profits from the sale of land have previously been regarded as assessable under section 67(4)(d), 67(4)(e) or 67(4)(f) and which are not assessable by reason of the amendments made by subsections (6) and (7) of section 11 of this Amendment Act.

Subsection (8) of section 11 of this Amendment Act -Mortgagee Sales

This subsection adds a new subsection (14) to section 67 of the principal Act.

At present, the provisions of sections 67(4)(b), 67(4)(c) and 67(4)(d) (and also the new section 67(4)(ba) as added by subsection (2) of this amendment) can only be applied in respect of land sold or disposed of by the taxpayer.

This amendment states that, for the purposes of those references to sales or disposals of land by the taxpayer, that phrase is deemed to include a sale or disposal of land by a mortgagee made on the default of the taxpayer under the mortgage to which that mortgagee is a party. That is, the mere fact that the land is actually sold by a mortgagee and not by the taxpayer himself will no longer exclude such sales from the application of sections 67(4)(b), 67(4)(c) and 67(4)(d) (and new subsection 67(4)(ba)).

It should be noted that a similar amendment has been made to section 129 of the principal Act in the new subsection (14) of that section (see section 20(3) of this Amendment Act).

  • Application of this "mortgagee sale" amendment

This amendment is to apply with respect to sales or other disposals of land made on or after 1 April 1983.

Subsections (9) to (14) of section 11 of this Amendment Act - Application Dates

These subsections all deal with the application dates of the amendments previously explained in the commentary on this section.

Section 12 - Retiring Allowances Payable to Employees

Section 68 of the Income Tax Act 1976 provides that where a qualifying retirement, redundancy, or loss of office payment has been made it attracts tax in the following manner:

  • Five percent of the "specified sum" is taxable plus the amount of the payment in excess of the specified sum.

The "specified sum" is, where the taxpayer has been employed for 10 or more years, the average remuneration received over the three years immediately preceding retirement, redundancy, etc. Where the period of employment is less than 10 years the average remuneration is multiplied by the total number of years employed and then divided by 10.

Section 12 makes amendments to section 68 designed to overcome problems associated with:

  • Early retirement;
  • Part - time employment;
  • Deemed retirement on death;
  • Payments to Directors;
  • Accrued Annual and Long Service Leave;
  • Mergers/Takeovers.

Subsection (1) - repeals the definition of the expression "appropriate retiring age".

With the provision for favourable tax treatment of payments made on redundancy and in respect of severance, the view that the concessional treatment of lump sum payments under section 68 was a reward for lengthy service is no longer relevant. An employee who retires at say 55 may have had a working life of 40 years and is no less deserving of the concessional treatment than an employee who retires at 60 and who may have worked for only 10 years. The Government considered that a "retiring age" criterion should no longer be a determinant of eligibility for the concessional tax treatment.

IT MUST BE NOTED THAT FOR THE CONCESSION TO APPLY THERE MUST STILL BE A "RETIREMENT" WITHIN THE NORMAL ACCEPTED MEANING OF THE WORD. PAYMENTS MADE ON RESIGNATION DO NOT APPLY.

Subsection (2) - removes the criterion that to qualify for the tax concession the retirement allowance must be in respect of "full time" employment or service.

The Government considered that retiring allowances paid to part - time workers should fall to be favourably considered under section 68. There was inequity in the fact that the tax concession was available to executive directors but not to non - executive directors of companies. The removal of the "full time" criterion restores equity between these two groups.

Subsection (3) - removes the "full time" and "appropriate retiring age" criteria from section 68(4) which deals with redundancy.

Subsection (4) - inserts a new subsection (4A) in section 68 to cover the situation of death in service.

In order to qualify for the tax concession in terms of section 68, lump sum payments by way of bonus, gratuity or retiring allowance must be made on the occasion of "retirement". Accordingly there has been no authority to grant the concessional tax treatment in respect of a payment made following the death of an employee. This amendment ensures that the legislation applies in those circumstances.

Subsection (5)

  1. Repeals section 68(5)(a) which excluded, from the concession, payments made by a company pursuant to its articles of association to any of its directors.
  2. Inserts a new subsection (5)(a) to exclude from the tax concession payments made to a director who receives the payment on behalf of his professional firm. This exclusion covers the situation where a director is a member of, say, a professional partnership where his directors' fees, etc, are paid into the partnership.

Subsection (6) - excludes from section 68(5) the "full time" criterion.

Subsection (7)

  1. Inserts in section 68(5) a new exclusion for payments in respect of rights which are not dependent on retirement.

In a recent case, in addition to receiving a retiring allowance an employee received a lump sum payment in lieu of long service leave to which he was entitled prior to retirement, but had not taken.

The Court of Appeal took the broad view that the payment was a "bonus" (being a payment in addition to the regular salary and allowances received over the years) and that as it was paid "on the occasion of retirement", it was a retiring allowance.

This amendment makes it clear that payments which do not arise directly from "retirement" do not qualify for the favourable tax treatment afforded by section 68.

  1. Inserts in section 68(5) a further exclusion, this time in respect of payments made as a consequence of a merger or takeover.

The Government considers that the application of the five percent of "retiring" allowances basis to employees who receive lump sums in a merger/takeover situation gives an unwarranted advantage. Such employees who continue in the same positions after the merger or takeover cannot logically be regarded as having retired. Lump sum payments made in such circumstances or where the employee is re - employed in the same overall organisation within six months (183 days) after the merger/takeover in substantially the same position as held previously are to be taxed in full.

Subsections (8) to (11) - make consequential amendments.

Subsection (12) - provides that the amendments are to apply in respect of payments made on or after 1 April 1984.

Section 13 - Power to Exempt Employees' Allowances

In last year's Income Tax Amendment Act (No 2), a new section 73 was substituted in the principal Act. As in the case of the previous section 73, the new section enables the Commissioner to make determinations as to the portion of an employer/employee allowance (if any) that can be regarded as reimbursing and thereby exempt from tax.

Amongst the changes incorporated in the new section were provisions dealing with the application date of such determinations. In particular, section 73(5) provides that determinations are to apply from a date one month after the date of the Commissioner's written determination. However, notwithstanding that subsection, section 73(6) permits a deferral of that application date in certain cases.

In last year's legislation, although the deferral was stated to apply to all allowances paid under the provisions of an award, collective agreement or other instrument (as defined in the Wage Adjustment Regulations 1974), the tests specified in paragraphs (e) and (f) of subsection (6) of section 75 to be applied in determining the deferred application date made references to only instruments registered with the Arbitration Court.

It has since been ascertained that many of the types of instrument in respect of which it was the intention to allow deferrals, were not specifically catered for in paragraph (e). In particular, some types of instrument were not registered but merely filed with the Arbitration Court while others were registered with the various industrial tribunals rather than the Arbitration Court.

Accordingly, this section substitutes a new paragraph (e) in section 75(6), which widens the types of industrial instruments to which deferrals can be applied to now include those instruments which are:

  • Made or approved or registered by the Arbitration Court, the Waterfront Industry Tribunal, the Agricultural Tribunal, the Aircrew Industrial Tribunal, any tribunal within the meaning of the State Services Conditions of Employment Act 1977 or any other tribunal.
  • Filed or required to be filed with the Arbitration Court pursuant to regulation 8 of the Wage Adjustment Regulations 1974. (In the main, these are the various "in - house" agreements negotiated between an employer and his employees. Note the use of the words "required to be filed", in recognition of the fact that despite the "filing" requirement many of these types of instrument are not actually filed with the Arbitration Court.)
  • Made pursuant to a decision of a compulsory conference or a committee of inquiry appointed under the Industrial Relations Act 1973.
  • Made as an Order in Council or regulation.

Section 14 - Amounts Remitted to be Taken into Account in Computing Income

This section repeals and substitutes section 78 of the principal Act. Section 78 provided formerly that where any expenditure or loss incurred by a taxpayer has been allowed as a deduction in calculating his assessable income for any income year and subsequently the taxpayer's liability in respect of that expenditure is (wholly or partly) remitted, his assessable income for that income year is to be increased by the amount remitted, and subject to tax accordingly.

For several years an equivalent provision has been contained in section 188 (carry - forward of losses). That provision was (and still is), however, more extensive than the former section 78. Accordingly, section 78 (as now substituted) has been brought into line with section 188 by being made applicable to both "remitted" liabilities and "cancelled" liabilities and by incorporating the provisions that a liability is deemed to have been "cancelled" to the extent that:

  1. The taxpayer has been released from that liability by the operation of the Bankruptcy Act 1908, the Insolvency Act 1967, the Companies Act 1955, or the deed of composition with his creditors.
  2. The liability has become irrecoverable or unenforceable because of lapse of time (statute - barred).

Section 15 - Spreading of Excess Income Derived on Sale of Livestock Where Unduly Low Standard Values or Nil Value Adopted

Section 93 of the principal Act in part applies where the Commissioner is satisfied that, upon the sale of a substantial part of the livestock of a farming business, the assessable income of the taxpayer is, by reason of the adoption of standard or nil values, increased to an amount that substantially exceeds his average assessable income.

The section provides for that excess to be spread over the year of sale and any previous income years (not exceeding 3) and assessed for income tax accordingly.

A recent review of the nature of bailments of livestock concluded that while leases or bailments of livestock constitute a business they do not constitute a "farming business". On a strict interpretation of section 93 there was accordingly no spreading relief available on the sale of bailed livestock.

The amendment to section 93 provides that the spreading relief (back) is to be made available where there has been a sale of leased or bailed livestock. The taxpayer must have disposed of a substantial part of all of the livestock he has bailed and that sale must have increased his assessable income to an amount substantially exceeding his average assessable income from bailing livestock. Average assessable income is determined having regard to the three years immediately preceding the disposal (or the period in which assessable income has been derived from bailing, if less than 3 years.)

Section 16 - Payments of Excessive Salary or Wages, or Allocation of Excessive Share of Profits or Losses, to Relative Employed by or in Partnership with Taxpayer

Section 97 enables the Commissioner, in certain circumstances, to allocate excessive salary or share of profits for tax purposes between the partners in a partnership in such manner as he considers reasonable. Section 16 of the Amendment Act extends the scope of the section to enable him to allocate shares of losses in similar circumstances.

Section 16 also makes two minor amendments to section 97 to bring the wording into line with the new section 167B (please refer to comment on section 28 of the Amendment Act). The word "salary" has been changed to "salary or wages" in subsections (1) and (4)(e) of section 97, and the words "contract of employment or engagement", in subsection (1) have been amended to read "contract of service, employment or engagement".

Section 17 - Limitation of Deduction for Expenditure to Amount at Risk

This section amends section 106A, which was inserted by section 15 of the Income Tax Amendment Act (No 2) 1982. That section applies to certain limited recourse loans made to taxpayers to assist in the financing of the acquisition, production or marketing of a film. The legislation enacted last year applied only to limited recourse loans made to the taxpayer and did not apply where that type of loan was made to an associated person of the taxpayer and then passed on to the taxpayer as a normal commercial loan.

Section 17 of this Amendment Act includes, within the definition of "limited recourse loan" in section 106A, all loans received by a taxpayer which have been funded by means of a limited recourse loan made to an associated person of the taxpayer. It applies to all such loans made on or after 1 April 1983.

It should be noted that section 106A applies only to films commenced on or after 6 August 1982. The tax treatment of loans used invest in "pre - Budget" films will not be affected by this amendment.

Section 18 - Additional Depreciation Allowance for Newly Constructed Private Rental Housing

Introduction

This section inserts a new section 114C in the principal Act and gives effect to the Budget announcement that in order to stimulate the supply of private rental accommodation an accelerated depreciation allowance would be given for the first five years on newly constructed houses used exclusively for rental. The allowance is equal to, and additional to, the ordinary depreciation allowed by the Commissioner under section 108 of the principal Act.

The section also provides that where any taxpayer acquires any rental dwellinghouse in accordance with a matrimonial agreement, as defined in section 43 of this Amendment Act, the allowance may continue to apply in relation to the transferee (see later).

Subsection (1) - Inserts the new section 114C.

Section 114C(1) - Definitions

"Rental dwellinghouse" - The main points in this definition are:

  • The dwellinghouse must be new (as defined).
  • The dwellinghouse must be owned for use as a residence .

Residence includes a house, flat, townhouse, home unit, unit of a multi - unit building or other similar dwelling.

  • The dwellinghouse which is let can be:
    1. part of a new building, eg, a Granny flat or a 2 - flat property where the owner lives in one and lets the other, or
    2. a new part of an existing building, eg, a self contained flat attached to the owner's own residence.

Where the dwellinghouse is a part of a building the determination of the cost price of the rental unit will depend on the facts of each case. Taxpayers should produce evidence to substantiate the cost attributed.

However if this is not available a pro - rata basis may be acceptable, eg, total cost $80,000 - rental unit is 1/4 area of total building - depreciation would be allowed on $20,000.

  • The dwellinghouse or the part, as referred to above, which qualifies for the allowance includes appurtenances, ie, garage, garden shed, etc, which belong to the dwellinghouse or the part of the building that comprises the dwellinghouse.

"New " - means "not having previously been occupied". For example, a house which was constructed in, say, 1979, yet has never been occupied will be regarded as new. On the other hand, the definition debars a dwellinghouse which has been renovated or a large home which has been reconstructed and divided into flats.

"Depreciation period"

1. This defines the period for which the additional depreciation is allowable. The period is the shorter of:

  • Sixty months commencing with the letting date (as defined).
  • The period commencing with the letting date and ending on the day immediately preceding the day on which the rental dwellinghouse (as defined) is occupied otherwise than for the deriving of rental income.

2. There is a maximum period for the allowance. This is five calendar years, or 60 months, from the date, after 28 July 1983, the dwellinghouse (having previously been unoccupied) is first used by the owner for the deriving of rents.

If at any time the dwellinghouse is occupied otherwise than for the deriving of rental income, the allowance ceases at that point and does not recommence even if the dwellinghouse is re - let at a later date.

This latter provision excludes the new holiday home which, having firstly been let is used by the owner at any time (however short the period) during the year. However, if the holiday home has not been previously occupied and is let for private rental purposes prior to the owner ever having resided in the home, for any period, then the period in which the home is first let will qualify for the allowance.

"Letting date" - This definition is divided into two parts, and prescribes the date which is the starting point for purposes of the "depreciation period".

Part (a) - specifies that where the taxpayer acquires a rental dwellinghouse (otherwise than by way of transfer under a "matrimonial agreement") or erects it, the "letting date" is the date on which the rental dwellinghouse, having never before been occupied, is first used for the deriving of rental income.

In this context a rental dwellinghouse will be first so used in the income year in which it is actually first let. Depending on the facts, that use might be considered as having started on the first day on which, in that income year, the rental dwellinghouse was first firmly offered for letting, even if it was not actually let until some time later in that income year.

The "letting date" cannot be a date earlier than 29 July 1983 (the day after Budget night), nor later than 31 March 1987.

It is not necessary that the rental property be constructed after 29 July 1983. If the new dwellinghouse has been constructed and completed prior to Budget night, but is first made available for private rental purposes after 29 July 1983, then the allowance will apply.

Example : If a newly constructed property is first available to be let, and is offered for letting, as a private residence on 20 November 1983 and, is first let on 1 January 1984 the owner will be allowed to claim the allowance for the period (maximum of 60 months) the property continues to be used for that purpose throughout the period up to 20 November 1988, ie, the owner can claim the accelerated rate for the:

Year ending 31 March 1984 for 5 months
Year ending 31 March 1985 for 12 months
Year ending 31 March 1986 for 12 months
Year ending 31 March 1987 for 12 months
Year ending 31 March 1988 for 12 months
Year ending 31 March 1989 for 7 months
  60 months

The "letting date" in this example is 20 November 1983, the date of first "use" of the rental dwellinghouse for the purpose of deriving rental income.

Part (b) - specifies that where a rental dwellinghouse is acquired by a person in accordance with a transfer under a "matrimonial agreement", the "letting date" applicable to the transferee is to be the same "letting date" as applied in the first instance to the transferor. This will enable the transferee to gain the benefit of the allowance for the remainder of the depreciation period.

"Rent" defines rent as being from any lease and includes any premium or other consideration for the lease."

Section 114C(2)

Provides that where the Commissioner is satisfied that a taxpayer has acquired or erected a rental dwellinghouse, the first occupant of which is a lessee, and that the taxpayer derives rental income from the rental dwellinghouse, he may allow a deduction of an amount equal to and additional to the amount of depreciation that would normally be allowable under section 108 of the principal Act, ie, double the existing depreciation rates. The new rates will therefore be:

Types of Building Existing Deprecuation Rates Under Section 108 of the Income Tax Act 1976 (on cost) Additional Depreciation Rate Under New Section 114C (on cost) Total
1. Reinforced concrete Throughout, steel or reinforced concrete framed with brick walls or other permanent materials. 1% 1% 2%
2. Brick, stone or concrete walled buildings without steel or reinforced concrete frames, stucco, steeltex or similar construction with wooden frame. 2% 2% 4%
3. Other wooden framed buildings 2 1/2% 2 1/2% 5%

The proviso to subsection (2) provides that where the first occupant of a rental dwellinghouse that is let, is acquired by a taxpayer (transferee) from a transferor by way of a transfer in accordance with a "matrimonial agreement", is a lessee, that first occupant of that rental dwellinghouse will be deemed to be a lessee in relation to the taxpayer (transferee) also.

This proviso, in conjunction with section 111A (as introduced by section 54 of this Amendment Act) ensures that, provided all the other tests are satisfied from time to time by the transferee, the additional allowance will continue to be allowed, to the transferee .

Note : Under section 111A a rental dwellinghouse transferred in accordance with a "matrimonial agreement" will retain, in the hands of the transferee, the same "new" building status that it had in the hands of the transferor.

Section 114C(3)

This subsection lists the types of buildings which are excluded from the additional allowance. They are:

  1. Any building or a part of any building which is used for the purpose of conducting any:
    1. boarding house;
    2. convalescent home;
    3. nursing home;
    4. rest home;
    5. guest home;
  • or any other similar type of establishment.
  1. Any building referred to in section 112(2)(e) of the principal Act, ie, employee accommodation provided by the employer.
  2. Any building or a part of any building used for the purpose of providing accommodation to the travelling public. This will exclude hotels, motels, cabins, holiday homes, or other similar types of establishment.
  3. Any building or a part of any building where that building or the part has been supplied by a company for use for the accommodation of a shareholder of the company or the use for the accommodation of the spouse or any child of any such shareholder.
  4. Any building that is an appurtenance, ie, garage, garden shed, etc, to any building or a in paragraphs (a) to (d) above.

Subsection (2) (of section 18 of the Amendment Act)

This is a consequential amendment to section 117(1) of the principal Act. It inserts in paragraph (i) of the second proviso a reference to section 114C.

This amendment ensures that where a rental dwellinghouse is disposed of, there will be no recovery of the additional depreciation allowance.

Section 19 - Deduction of Certain Expenditure incurred by Persons Engaged in Aquaculture

This section amends section 128 of the principal Act by:

  1. Extending the deductible kinds of development expenditure to include expenditure incurred in respect of sea cage - salmon farming.
  2. Making it clear that the various types of expenditure deductible in respect of freshwater fish farming are expressed in the alternative and not cumulatively.

Subsection (1) - Sea - Cage Salmon Farming

This inserts, into section 128 a new paragraph (bb). It provides that any taxpayer engaged in the business of sea - cage salmon farming in New Zealand will be able to deduct the following kinds of capital expenditure incurred in that business in any income year commencing on or after 1 April 1983 and ending on or before the terminating date, 31 March 1986. (Refer section 42.)

  1. The acquisition, preparation and mooring of pontoons, rafts or other floating structures for securing or protecting cages or other containment vessels; or
  2. The acquisition, preparation and placing of equipment or structures, including tanks, cages, nets, or other vessels, for the containment of live salmon; or
  3. The acquisition and placing of ropes and buoys used in the breeding or maturing of salmon.

Subsection (2) - Freshwater Fish Farming

A strict legal interpretation on the provisions of paragraph (c) of section 128(2) was that the use of the word "and" in the various subparagraphs meant that the taxpayer had to incur all of the types of expenditure mentioned in a particular subparagraph to qualify for the incentive. For example, a taxpayer could not qualify in respect of expenditure incurred in constructing access paths in terms of subparagraph (v) unless he also incurred expenditure on the construction of walls, embankments, walkways and service paths.

The incongruous requirements that resulted from these legal consequences necessitated changes in order to make the requirements of that paragraph reasonable. This subsection makes those changes, to give freshwater fish farmers the same "flexibility" of development expenditure combinations as is accorded to other forms of aquaculture under the other paragraphs of section 128(2).

Subsection 3

This subsection is consequential to the inclusion of sea - cage salmon farming in section 128. It amends section 188A (loss incurred in specified activities) of the principal Act by including sea - cage salmon farming in the definition of the expression "specified activity". This means that the loss containment provisions in section 188A will apply to the activity of sea - cage salmon farming in the same way that they apply to each of the separate specified activities of rock oyster, mussel, scallop, and freshwater fish farming.

The above amendments apply with effect from the income year that commenced on 1 April 1983.

Section 20 - Revised Assessments where Land or Fish Farms or Certain Assets Sold Within Ten Years of Acquisition

This section makes several changes to section 129 of the principal Act which provides for recovery of interest and development expenditure deducted for income tax purposes where land or certain assets are sold within 10 years of the date of acquisition. Under section 129 the amount of interest and development expenditure deductions that can be recovered is limited to the extent of any "profit" on sale of the land. The changes are discussed below under the relevant subsections.

Subsection (1) - Determination of Profit on Sale of Land

This subsection repeals paragraphs (c) and (d) of subsection (2) of section 129 and substitutes new paragraphs (c) and (d). Paragraph (c) relates to sales of land without the improvements thereon while paragraph (d) relates to sales of land together with the improvements.

The two new paragraphs provide that in calculating the "profit" on sale of the land, a taxpayer may take into account all expenditure incurred in purchasing, holding and selling the land that has not been allowed as a deduction against his assessable income .

The types of expenditure that can be taken into account are specified in the legislation and include:

  • "Any expenditure incurred in acquiring the land". This would include valuation fee, solicitors charges, stamp duty, etc.
  • "Any expenditure incurred in acquiring, installing or effecting improvements" - self - explanatory.
  • "Any expenditure by way of interest". This is interest (that has not been allowed as a deduction) which could arise, for instance, where the Department has apportioned or limited deductions against rental income.
  • "Any expenditure by way of rates, land tax, insurance premiums ..." - self - explanatory - see comments above in relation to "interest" not allowed as a deduction.
  • "Any expenditure in the selling or other disposing of the land". This would include legal fees, land agents fees, etc.

It must be remembered that this section relates only to land from which assessable income was derived. For example where land is used partly for business and partly for private purposes, when deducting expenditure to calculate the "profit" on disposal the expenditure must relate only to that part of the land from which assessable income was derived.

Subsection (2) - Income Year

This subsection merely replaces reference to the word "year" with the words "income year" so as to be consistent with the standard phraseology used elsewhere in the principal Act and to ensure uniformity within section 129 itself.

Subsection (3)

Adds six new subsections to section 129 which are outlined below. Although subsection (10) is initially repealed you will notice that it is reinstated, unchanged, as subsection (16).

1. Property Let While Owner Residing Elsewhere

The new subsection (10) gives effect to the Budget announcement that section 129 will not apply, to recover any previously - deducted interest, on the sale of a person's home which is rented while that person is residing elsewhere and has not purchased and occupied another residence while the first is being let. The intention of this amendment is to ensure that people are not penalised when, for a variety of reasons (usually employment related), they lease their home while temporarily residing elsewhere.

This subsection applies to any sale of land within 10 years of the date of acquisition where the land that is vacated by the taxpayer has:

  • been used, by the taxpayer solely as the site of his own residence and occupied, by him solely as his principal place of abode, and
  • been leased, subsequent to vacating, by the taxpayer to derive assessable income from rents at some time during that 10 year period.

Interest allowed as a deduction in calculating the taxpayer's assessable income from renting out this former residence will not be recoverable under section 129, provided that during that rental period the taxpayer has not acquired, otherwise than by lease , other land which he next occupies as his residence and principal place of abode. In other words, this concession (of non - recovery of interest) will not apply to interest incurred after the date the taxpayer buys his next residence and principal place of abode.

There is one exception to this rule. It is that, provided when he buys his next residence the taxpayer is taking and continues to take every reasonable step to secure as quick a sale as possible of his former residence, the concession will apply to interest incurred during the period from the vacating of the former residence until the date it is ultimately sold.

Example 1

Taxpayer posted to another city, in the course of his employment, and leases his home until he is able to purchase a suitable home in that other city.

First home purchased 10 June 1976
Home vacated 26 September 1983
Lease of first home commenced 1 October 1983
First home sold 20 September 1984
Next home purchased 27 September 1984

Any deductions for interest would normally be recovered as the former home has been sold within 10 years of purchase. However, the new subsection (10) exempts any interest allowed as a deduction from rental income for the period of time 1 October 1983 to 20 September 1984 (the full term of the lease) as the taxpayer had not purchased another residence to be used as his permanent place of abode during that time.

Example 2

Taxpayer on overseas leave for 12 months and leases his home. On return to New Zealand he purchases a new home, continuing to lease the original home, and making strenuous efforts to sell it.

First home purchased 10 June 1976
Home vacated 26 September 1983
Lease of first home commenced 1 October 1983
Next home purchased 27 September 1984
Lease of first home ceased 31 October 1984
First home sold 1 November 1984

As the original home has been sold within 10 years, the recovery provisions would normally apply to any interest deducted. However, the new subsection (10) will exempt any interest allowed as a deduction for the period 1 October 1983 to 31 October 1984 when the lease ceased, as the taxpayer is entitled to the "exceptional" concession already referred to.

Example 3

Taxpayer on overseas leave for 12 months and leases his home. On return to New Zealand he purchases a new home, continuing to lease the first home but not deciding until a year later to sell the first home.

First home purchased 10 June 1976
Home vacated 26 September 1983
Lease of first home commenced 1 October 1983
Next home purchased 27 September 1984
First home sold 10 September 1985.

As the first home has been sold within 10 years, the recovery provisions would normally apply to any interest deducted. However, the new subsection (10) will exempt any interest allowed as a deduction for the period 1 October 1983 (commencement of lease) to 27 September 1984 (next home purchased).

The subsection contains a proviso so that the concession will not apply where the Commissioner is of the opinion that, having regard to:

  • The date of acquisition of the land that is sold.
  • The date of vacating that land.
  • The length of time the taxpayer occupied the land.
  • Any other relevant circumstances.
  • The tenor of subsection (10),

the occupying of the land was of a temporary nature and was entered into to obtain an unfair advantage for tax purposes .

There are a number of points which need to be clarified. They are:

(1) What is considered a "residence" and "principal place of abode"?

A residence is a house, flat, townhouse, home unit or similar dwelling.

"Residence" also means the taxpayer must reside in the home - there is no time limit, however see (3) below.

"Principal place of abode" means it must be the taxpayers "principal " as opposed to secondary residence, (ie, a holiday home would not qualify as it is not a taxpayer's principal place of abode).

(2) What does the Commissioner consider are "such steps as are necessary to secure with expedition the sale ..."

Each case would have to be treated on its own merits; however, in general the property would have to be advertised for sale and at a realistic market price.

The "steps" taken would be the normal procedure taken when selling a house but the legislation includes the words "with expedition" which are important.

It would in many cases not be unreasonable to expect the property to be sold within a maximum of three months of being advertised. Depending on the general state of the property market, local conditions and the residence itself if a property remained unsold after that period consideration would have to be given to recovering any deductions for interest from the date the taxpayer purchased his new home.

(3) Under what circumstances would the proviso be applied to deny a concession?

The proviso has been included to ensure a taxpayer does not manipulate his circumstances to defeat the recovery provisions, for example by purchasing a property with the intention of leasing it but residing in it for a short period prior to leasing.

In determining whether the "occupying of that land was of a temporary nature and was entered into to obtain an unfair advantage for tax purposes", the following points are relevant:

  • For what length of time was the home resided in by the taxpayer as his principal place of abode?
  • Why did the taxpayer vacate the property, (eg, work related transfer?)
  • Why was another residence not purchased shortly after vacation of the first home?
  • Has the taxpayer owned and let other rental properties in the past?
  • What is his past history of home occupancy?
  • Do the circumstances of the taxpayer fit the "tenor of this subsection"? The subsection was introduced so as to not penalise a taxpayer who temporarily leases his own home. When deciding each case, the Department will have regard to this aspect.

2. Interest Allowed Against Home Study not Recoverable

As enacted last year, section 129 permitted the recovery of interest allowed as a deduction as an employment related expense under home study expenses.

The new subsection (11) amends section 129 to deem interest allowed as a deduction as employment related expenditure under clause 7 of the Fourth Schedule (home study expenses) to have been not so allowed as a deduction (for the purposes of section 129) and so not subject to recovery.

3. Compulsory Acquisition (new subsections (12) and (13))

Subsection 9(a) of section 129 exempts from the recovery provision land that has been compulsorily acquired (or which if had not been sold, would have been compulsorily acquired) by the Crown or any Public or Local Authority.

The new subsections (12) and (13) qualify this exemption by providing that where:

  • "replacement land" is purchased within 12 months of possession being given to the Crown, etc, of the "original land", and
  • the Commissioner is satisfied the replacement land will be used primarily and principally in:
    1. The carrying on of a business similar to the business carried on by the taxpayer on the original land, or
    2. the deriving of income of the same class of income derived on the original land,

the replacement land is deemed to have the same acquisition date as the original land that was compulsorily acquired.

What is a "similar business"?

When deciding what is a similar business a certain degree of flexibility will be allowed. Although retail premises should be replaced by other retail premises, a farm by a farm, rental property by rental property, etc, the nature of that business need not be exactly the same as previously, (ie, a hardware shop could be replaced by an electrical appliance shop or a horticultural farm by a pastoral farm).

If a taxpayer was originally in business on his own account and, following the compulsory acquisition of his business property, he subsequently goes into business in partnership on "replacement land", the provisions of the subsection will apply to any sale of his share of the partnership land provided the nature of his business being conducted in the partnership is primarily and principally the same as his original business. It should be noted that the exemption for replacement land will not be available to other partners unless they too had their previous business land compulsorily acquired and were previously carrying on a similar business activity.

4. Mortgagee Sale

Subsection (14) provides that a sale by a mortgagee of land in consequence of the default of the taxpayer under a mortgage shall be deemed to be a sale by the taxpayer.

5. Accounting Year

Subsection (15) is the normal provision for dealing with an accounting year that does not end on 31 March.

6. Arrangements

Subsection (16) re - enacts the former subsection (10) of section 129, relating to arrangements giving undue favourable advantage to the taxpayer.

Subsection (4) - Application Date

Subsection (4) provides that this section is to apply to any sale of land on or after 1 April 1983.

Section 21 - Farmers Expenditure on Tree Planting

This section amends section 134 of the principal Act which allows deduction, in the year incurred, of expenditure by farmers on non - commercial plantings of trees to provide shelter, prevent erosion, etc.

Under the Forestry Encouragement Grants Regulations 1981, farmers can be given by the Forest Service grants for the establishment and maintenance of farm - protection plantings that are designed to be, also, for eventual commercial utilisation. Section 134 was amended accordingly in 1981, to provide that the current - year deduction which it affords does not apply to expenditure for which a forestry encouragement grant is given.

The 1981 regulations have been superseded, from 1 April 1983, by the Forestry Encouragement Grants Regulations 1983. Section 21 of this Amendment Act accordingly amends section 134 to include also a reference to those latter Regulations.

Section 21 applies from and including the 1982/83 income year, in view of the fact that taxpayers with late balance dates may receive, under the 1983 Regulations, grants for expenditure that, although incurred after 31 March 1983, is incurred in their 1982/83 income year.

Section 22 - Expenditure in Respect of Forestry Encouragement Agreements under Forestry Encouragement Act 1962

This section amends section 135(1) of the principal Act which specifies the permissible deductions of forest establishment, and maintenance expenditure, interest payments, and loan repayments, in the case of taxpayers who planted commercial forests with the aid of loans from the Forest Service under the Forestry Encouragement Act 1962.

Over the past few years some taxpayers who originally established their forests under that loans scheme have converted to grants, in relation to those plantings, under the Forestry Encouragement Grants Regulations 1970 (which have since been amended in 1981 and again in 1983). Accordingly, in 1977 a proviso to section 135(1) was inserted to ensure that deduction is not allowed, under section 135(1), of expenditure for which a forestry encouragement grant has been given by the Forest Service.

Section 22 of this Amendment Act now adds, to that proviso, references to the Forestry Encouragement Grants Regulations 1981 (which superseded the 1970 Regulations) and the Forestry Encouragement Grants Regulations 1983 (which supersede the 1981 Regulations).

This section applies with respect to the tax on income derived in the 1981/82 income year and subsequent income years, in view of the inclusion, in the proviso, of the reference to the 1981 Regulations.

Section 23 - Donations by Public Companies

This section amends section 147 of the principal Act which provides a deduction for donations made by public companies (including private companies which are controlled by public companies, and public and local authorities) to qualifying charitable organisations (being those listed in section 56A(2) of the principal Act).

Section 147 contains two restrictions on the maximum amount of deduction claimable. These are:

(a) Donations to Any One Donee

Prior to this amendment, the maximum deduction allowable in respect of the total of all donations made by a public company in an income year to any one donee was $1,000.

This amendment increases this maximum from $1,000 to $4,000 with application to all donations made on or after 1 april 1983 .

(b) Donations to All Donees

The maximum deduction allowable in respect of the total of all donations made by a public company in an income year, (ie, to all donees) is limited to the greater of:

  1. 1,000,
  2. 5 percent of assessable income of the company (computed before allowing deductions under sections 146 or 147).

It is important to note that this "overall" maximum remains unchanged.

As amended, section 147 applies to public companies as follows:

  1. Public Companies with 31 March Balance Dates
    1. 1983 and prior income years:
      • In loss - maximum section 147 deduction $1,000.
      • Assessable income up to and including $20,000 - maximum deduction $1,000.
      • Assessable income of more than $20,000 - maximum deduction is 5 percent of assessable income but limited to $1,000 in respect of each donee.
    2. 1984 and future income years:
      • In loss - maximum section 147 deduction $1,000. (Note the new $4,000 "each donee" maximum has no effect.)
      • Assessable income up to and including $20,000 - maximum deduction $1,000. (Again the new maximum has no effect.)
      • Assessable income of more than $20,000 - maximum deduction is 5 percent of assessable income but limited to $4,000 in respect of each donee. (Note if assessable income is less than $80,000, the full effect of the new $4,000 maximum for any one donee cannot be gained.)
  2. Public Companies with Balance Dates other than 31 March
    1. 1982 and prior income years:
      • As for public companies with 31 March balance dates.
    2. 1983 income year:

      Early balance dates (1 October 1982 - 30 March 1983).

      • As for public companies with 31 March balance dates. (See A(i) above.)

      Late balance dates (1 April 1983 - 30 September 1983).

      • See "transitional provisions" below.
    3. 1984 income year:

      Early balance dates (1 October 1983 - 30 March 1984).

      • See "transitional provisions" below.

      Late balance dates (1 April 1984 - 30 September 1984).

      • As for public companies with 31 March balance dates. (See A(2) above.)
    4. 1985 and future income years:
      • As for public companies with 31 March balance dates.

Transitional Provisions

Since the increased maximum deduction for donations to any one donee applies to all donations made to any one donee on or after 1 April 1983, transitional provisions (contained in section 23(2) of this Amendment Act;) will apply to public companies with balance dates other than 31 March.

In particular, the 1983 (late balance dates) and 1984 (early balance dates) income years are affected. In respect of those years, the following provisions apply:

  1. In respect of all gifts made to any one donee on or before March 1983, the maximum deduction is $1,000.
  2. In respect of all gifts made to any one donee on or after 1 April 1983, the maximum deduction is $4,000.
  3. In respect of all gifts made to any one donee in the accounting year that transverses 31 March 1983 the maximum deduction is $4,000.
  4. In respect of all gifts made in the accounting year that transverses 31 March 1983 the maximum deduction in respect of all deductions to all donees is the greater of $1,000 or 5 percent of assessable income (before taking into account deductions under sections 146 or 147).

Example 1

ABC Limited made a donation of $5,000 to Charity A on 15 April 1983. The company has a 30 June balance date and has a loss in respect of the year ended 30 June l983.

Pursuant to (ii), the company is limited to a maximum (in respect of gifts to each donee) of $4,000.

This amount is not, however, allowable under section 147 since, pursuant to (iv), the company is subject to the overall maximum of 1,000 or 5 percent of assessable income whichever is the greater.

As the company is in loss, the section 147 claim in the 1983 income year is limited to $1,000.

Example 2

XYZ Limited, a public company, made donations as Follows:

  1. $800 to Charity A on 3 January 1983
  2. $700 to Charity A on 29 March 1983
  3. $6,000 to Charity B on 2 April 1983
  4. $500 to Charity A on 18 November 1983

The company has a 31 December balance date. In the year ended 31 December 1983, the company's assessable income was $90,000.

Donations (a) and (b) add to $1,500 but are limited to $1,000 (pursuant to (i)). Donation (c) is limited to $4,000 (pursuant to (ii)). Donation (d) is limited by neither (ii) nor (iii) since that donation is less than $4,000 and since all donations to Charity A total less than $4,000.

XYZ Limited is thus limited in the first place to a maximum (in respect of the total of gifts to both donees) of $5,500. ($1,000 + $4,000 + $500.)

This amount is not, however, allowable under section 147 since, pursuant to (iv) above, the company is subject to the overall maximum of $1,000 or 5 percent of assessable income whichever is the greater. In this case, 5 percent of $90,000 is $4,500

The section 147 claim for the above company in the 1984 income year is therefore limited to $4,500.

Example 3

Same facts as in Example 2 above except that donation (d) is $3,500 instead of $500.

Donations (a), (b) and (c) are limited as in Example 2. Donation (d) is not limited by (ii) as the gift is less than $4,000. Donation (d) is limited by (iii) since when it is added to donations (a) and (b) as limited in Example 2, the total is $4,500 which is now limited to $4,000.

XYZ Limited is limited in the first place to a maximum (in respect of gifts to both donees) of $8,000 ($4,000 in respect of Charity A and $4,000 in respect of Charity B).

However, as in Example 2, pursuant to (iv), the section 147 claim is again limited to $4,500, ie, 5 percent of assessable income of $90,000.

Section 24 - Contributions to Employees' Superannuation Schemes

This section amends section 150 of the principal Act which provides for the deduction by employers, for tax purposes, of contributions to employees' superannuation schemes.

Section 150(3), which specifies the maximum deduction allowable to the employer, was repealed and substituted last year; inadvertently, a reference was made at that time, in paragraph (b) of the substituted subsection (3), to "an amount equal to 10 percent of the amount of the earnings paid by him to all his employees in that income year", whereas the reference should have been to 10 percent of the earnings paid by the employer to such of his employees as are members of the subsidised superannuation scheme (or schemes) to which the employees and the employer contribute.

Section 24 of this Amendment Act inserts the correct reference in paragraph (b), effective from the 1st day of the 1983/84 income year.

Section 25 - Repeal of Spent Export Incentives

This section repeals the provisions in the principal Act that relate to those export incentives which can no longer be claimed. The three provisions repealed are those dealing with:

  • The increased exports taxation incentive (section 156).
  • The increased exports to new markets taxation incentive (section 157).
  • Tax credits in relation to export of goods (section 157A).

These incentives are the "old" export sales incentives which have now been superseded by the export performance taxation incentive contained in section 156A of the principal Act.

The repeal is to be effective on 1 April 1984. For this reason, reference is still made to the repealed provisions in the new Third Schedule to the principal Act (contained in the Schedule to this Act).

In addition, a number of other amendments (mostly repeals, and revocations of Orders in Council) are made in the section which are consequential to the provisions repealed above or are consequential to provisions which have been repealed in previous years.

Section 26 - Export Earnings from Qualifying Overseas Projects

Section 158A of the principal Act allows a deduction, in calculating assessable income derived from the carrying on of a business, of 10 percent of the net foreign currency earnings remitted to New Zealand in respect of "qualifying projects" as defined in that section. An exclusion from "net foreign currency earnings" (also defined) ensures that a taxpayer cannot obtain the benefit of a deduction under section 158A and a deduction under section 156 ("increased exports of goods") in respect of the same goods and materials that are embodied in the qualifying project.

However a similar exclusion was inadvertently not made in section 158A to cover the situation where an exporter of qualifying services who qualifies for an incentive deduction pursuant to section 158A might also claim the Export Performance Incentive (tax credit) in terms of section 156A ("export performance incentive for qualifying goods").

Section 26 of this Amendment Act now remedies this omission by way of a new paragraph (aa), to subsection (1) of section 158A, to exclude from the definition of "net foreign currency earnings" all amounts received by the taxpayer in respect of goods or materials exported in relation to a qualifying contract where a credit of tax is allowed in respect of those goods or materials under section 156A.

To ensure that taxpayers cannot obtain an unfair advantage from this situation which has existed since section 156A was enacted in 1979 (effective income year commencing 1 April 1980) this amendment first applies with respect to the tax on income derived in the income year that commenced on 1 April 1980 .

Section 27 - Notional Interest on Loans Made to Employees under Employee Share Purchase Schemes

This section amends section 166 of the principal Act which provides an incentive for company employers by allowing them to claim notional interest on loans made by them to their employees for the purpose of enabling those employees to purchase shares under an employee share purchase scheme.

That section has its own "associated persons" definition in subsection (2), which differs from the general definition contained in section 8 of the principal Act.

Section 27 of this Amendment Act makes to section 166 an identical amendment to that made to section 8, (by section 6 of this Amendment Act) to the general "associated persons" definition; it extends the "associated persons" definition in section 166 to include the relationship between a company and a person (other than a company) who holds 25 percent or more in nominal value or the allotted shares of that company.

This amendment will apply from the income year commencing on 1 April 1984.

Section 28 - Payments to Partners for Services Performed for the Partnership

Introduction

In terms of general law a person cannot employ himself and a partnership cannot employ any of its partners. Payments made for any such "employment" are treated as an allocation of profits where such profits exist but cannot be recognised where losses are involved. The tax effect has been that where a salary is paid to a working partner, and the partnership suffers a loss for the year, the salary is not allowable as a deduction and is not taxed in the shareholders hands. The amendment provided by section 28 partially overcomes this problem by deeming the "salary" payment to be salary or wages for the purposes of the Tax Act, and deeming it to be deductible, where certain conditions are met. It should be noted that where the conditions specified in the new legislation are not met, the previous conditions will continue to apply (eg, if the partnership is in loss the payment is not deductible).

Legislation

Section 28 of this Amendment Act inserts a new section 167B into the Act to enable payments akin to salary or 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. To qualify for this deduction, it will be necessary for the payment to be made on a similar basis to that which would apply where the partnership employed a person who was not a partner. To this end, the new section contains the following requirements:

  • The partner must be employed under a binding written contract of service which has been signed by all the partners in the partnership (definition of "contract of service").
  • The deduction will be available only in respect of amounts paid for services performed during the period commencing not earlier than the date on which the contract becomes binding and ending on the date on which it terminates (subsection (2)).
  • The contract must specify the amount payable to the working partner for services performed by him in carrying on the business of the partnership (definition of "contract of service"). (In the case of any end of year bonus, the amount of the proposed bonus and the basis on which it is payable must be set out in the contract of service. Provided these conditions are met, the bonus can qualify for a deduction under section 167B.) It should be noted that if any amount payable to the partner is not specified prior to the performance of the services the payment is not in the nature of salary or wages. It is an apportionment of profits and as such is not allowable as a deduction.
  • The deduction allowable cannot exceed the amount of the remuneration specified in the contract (subsection (2)). If the partners wish to increase the remuneration it will be necessary to renegotiate the contract. In this event, the increased deduction will be allowable in respect of increased payments made after the signing of the renegotiated contract.
  • The partner concerned must personally and actively perform services for the partnership as his principal occupation (definition of "working partner"). If the partner is also employed by employers other than the partnership then it is a question of fact as to whether the services which are performed for the partnership are performed as the principal occupation of the partner. It should also be noted that it is not possible for a person who performs services for two or more employers to perform those services as his principal occupation for more than one of them.
  • The services performed may be any of the duties required to be performed in the carrying on of the business of the partnership (definition of "working partner").

Where the requirements of the new section are met, the qualifying payments made to the working partner will be deemed to be an allowable deduction under section 104(b) of the Act in calculating the income (or losses) of the partnership.

It should be noted that:

  1. The section does not apply to payments made by an investment partnership, being a partnership which is engaged exclusively or principally in the investment of money or the holding of or dealing in shares, securities, investments or estates or interests in land.
  2. The payments made are subject to the provisions of section 97 where the working partner is a relative of any of the other partners in the partnership.
  3. Any payment made to a working partner which is, in terms of section 167B, deemed to be allowable as a deduction under section 104(b) is to be treated as salary or wages for the purposes of the Act. This is achieved by subsection (2) of the amendment which includes such payments within the definition of "salary or wages" in section 2. The effect of this amendment is two - fold.
  4. Firstly, it means that all payments of this type are to be treated in the same manner for income tax purposes as salary or wages paid to any other employee and PAYE deducted and accounted for in the normal way.

    Secondly, the partner in receipt of the payment will be entitled to the standard deduction of $52 or may claim employment - related expenses in the same manner as any other salary or wage earner when he furnishes his annual return of income.

  5. The payments are deemed to be salary or wages for the purposes of the Income Tax Act 1976 only. For example, they are not deemed be salary or wages for Accident Compensation Levy purposes. Therefore Employer Accident Compensation Levy is not payable on this type of payment. When employers are completing the Annual Reconciliation Statement, IR 68, the amount of the payment to the partner should be deducted from the Gross Wages figure before entering under total C. (Refer "Guide to Employers" Booklet.)

The partner in receipt of the payment will be required to pay self - employed Accident Compensation Levy on the total amount received by him from the partnership, including any amount paid to him under a contract of service to which section 167B applies.

In terms of the Accident Compensation Act 1982, the self employed levy is calculated on the partner's total assessable income (as determined under and for the purposes of the Income Tax Act 1976) derived by him from the carrying on of a business. As payments to which section 167B applies are not "salary or wages" for the purposes of the Accident Compensation Act, the amount of such payments which are included in the taxpayer's assessable income are "assessable income derived from a business" and must be added to the partner's share of partnership income to determine the total amount on which self - employed levy must be calculated.

The practical effect is that where no salary or other payment to which section 167B applies is paid, the levy would be calculated on the partner's share of partnership income. Where any payment to which section 167B applies is made to the partner, it will be necessary to add to the share of partnership income the salary or other qualifying payment made, less any employment related expenses or standard deduction which is allowable as a deduction against that salary income. Where the partner is also in receipt of salary or wages from another source, it will be necessary for any standard deduction allowance to be apportioned rateably.

For example , assume a partner in XYZ partnership derived assessable income as follows:

Share of partnership income - XYZ partnership           3,187
Add - Salary from XYZ partnership             17,000    
  Less standard deduction  
  17000   x 52             44   16,956
20000 1
Net assessable income for self - employed levy purposes     20,143

If any apportionment is necessary, a separate schedule should be included in the partner's return of income showing how the figure on which accident compensation levy has been calculated.

Section 29 - Forestry Encouragement Grants

This section amends section 168 of the principal Act to reflect changes to the forestry encouragement grants scheme announced by the Government last year. Where previously section 74 of the principal Act allowed companies engaged in forestry activities to claim a deduction, in the year incurred, of forest establishment and maintenance expenditure, from 1 April 1983 the deduction was terminated and effectively replaced by a new scheme of forestry encouragement grants (refer to page 46 of PIB 120 for further details).

The regulations administering the new grants, the Forestry Encouragement Grants Regulations 1983, were promulgated earlier this year, to apply from and including 1 April 1983. Section 168 is now amended to cater for the fact that grants by the New Zealand Forest Service can now be given in respect of depreciation on plant or machinery (including motor vehicles) used in establishing or planting, and maintaining forests.

The payment of grants in respect of depreciation is a new concept, as depreciation is not "expenditure". However, as the Government assistance for commercial forestry expenditure of all taxpayers (except those to whom section 135(1) - "Forestry Encouragement Act 1962" plantings - still applies) is now to be in the form of a grant rather than in the form of allowances or deductions in calculating assessable income, it was necessary to provide also a grant payment in lieu of a deduction for depreciation allowances for plant or machinery acquired on or after 1 April 1985. In order to prevent a "double deduction", section 168 is amended to prevent any deduction of depreciation allowances in respect of assets for which a depreciation component is included in the forestry encouragement grant.

Subsection (1) introduces a new definition to section 168 of the principal Act to define "depreciation portion". This "portion" is specified as being that part of the grant paid to any taxpayer that represents the amount of depreciation in respect of capital expenditure incurred on or after 1 April 1983 in respect of qualifying forestry plant or machinery.

Subsection (2) includes in section 168(2)(s) of the principal Act a reference to the Forestry Encouragement Grants Regulations 1983.

Subsection (3) repeals subsection (4) of section 168 of the principal Act and substitutes a new subsection (4).

  1. Any payment in any income year to a taxpayer under the Forestry Encouragement Grants Regulations for the expenditure portion (if any) or the depreciation portion (if any) is not to be included in the assessable income of the taxpayer.
  2. No deduction for depreciation is to be allowed in respect of any asset, acquired or constructed on or after 1 April 1983, in any income year where that asset is used in preparing or developing land for forestry operations or in the planting, tending or maintaining of a tree crop and where the depreciation portion (in whole or in part) of any grant payment to the taxpayer is related to and is based on the capital expenditure incurred in acquiring or constructing that asset.

Note: Depreciation allowances may still continue to be deducted, in calculating assessable income, in respect of forestry establishment and maintenance plant or machinery acquired or constructed before 1 April 1983 - see section 74(2)(b), third proviso.

Subsection (4) inserts new subsections (5A) and (5B) into section 168 to provide that any expenditure of the kinds for which a grant is given under regulation 5(1) or 5(2) of the Forestry Encouragement Grants Regulations 1983 will not be deductible for income tax purposes, to the following extent and on the following bases:

(Note: Commercial forestry establishment and maintenance expenditure incurred on or after 1 April 1983 will, subject to the following, be deductible only under the "cost of timber" basis, when income is derived eventually from disposal of the forest.)

  1. Regulation 5(1) grants
  2. These grants are the normal forestry encouragement grants. The grant is equal to 45 percent of the qualifying forestry expenditure and 45 percent of the annual depreciation (wdv basis) on the cost of the qualifying plant or machinery, respectively:

    1. In relation to the "expenditure portion" of the grant, the expenditure of the kinds to which that portion of the grant relates and on which it is based will constitute part of the cost of timber only to the extent that it exceeds 2 2/9th times the amount of that portion of the grant.
    2. In relation to the "depreciation portion" of the grant, the capital expenditure to which that portion relates and on which it is based will, to the extent that it equals 2 2/9ths times the amount of that portion of the grant, notconstitute part of the cost of timber.

    The point here is that the establishment and maintenance expenditure in respect of which the "expenditure portion" of the grant is given is, for purposes of quantifying that portion (by the Forest Service), taken into account once only .

    In the case of the "depreciation portion", however, the capital expenditure in respect of which that portion is given, is taken into account, by way of calculation of depreciation on the diminishing value , over a succession of years.

    Examples

    AND SO ON

  3. Regulation 5(2) grants
  4. These grants are what are known as "protection and production" grants. The grant is equal to 66 2/3 percent of the qualifying forestry expenditure and 66 2/3 percent of the depreciation on the cost of the qualifying plant or machinery, respectively.

    1. In relation to the "expenditure portion" of the grant, paragraph (a)(i) above will apply as if the reference to 2 2/9th times were a references to 1 1/2 times.
    2. In relation to the "depreciation portion" of the grant, paragraph (a)(ii), above will apply as if the reference to 2 2/9th times were likewise a reference to 1 1/2 times.

Subsection (5) provides that this section (Section 29 of the Amendment Act) will apply with respect to the tax on income derived in the 1982/83 income year and subsequent income years.

This recognises that while the forestry encouragement grants to which this section relates apply only to expenditure incurred on or after 1 April 1983, where a taxpayer has a late balance date such expenditure may in fact be incurred in that taxpayer's 1982/83 income year.

Section 30 - Grant Related Suspensory Loans

This amendment includes a new grant related suspensory loan entitled a "Fishing Vessel Construction Bounty" in section 173, with effect from 1 April 1981.

The bounty (loan) is 15 percent of the base price of certain commercial fishing vessels of between 10 metres and 18 metres, which are constructed in New Zealand for domestic use by New Zealand owners. The loan is to be written off provided the vessel operates for three of the first five years of its operations in the area for which it was approved.

Section 173 provides, via section 169, that for tax purposes the cost of the asset in respect of which the loan is made is to be reduced by the amount of the loan. The effect of this is to reduce the depreciation and investment allowance allowable on the asset.

Should any part of the loan subsequently be required to be repaid, section 173(3) permits the earlier reduction of claims for depreciation (and where appropriate, investment allowance) to be reviewed to allow, in the years of repayment, the deductions lost in earlier years because of the original reducing of the cost price of the asset by the amount of the loan.

Section 31 - Losses Incurred in Specified Activities

This section makes four amendments to section 188A as enacted last year; the amendments contained in subsections (1) and (2) correct anomalies which were present in the existing legislation, while subsections (3) and (4) merely make minor changes to ensure the application of section 188A as originally intended. All four amendments apply with effect from the commencement of section 188A, (ie, the 1983/84 income year).

Subsection (1) - Unrestricted Offset of Loss Against Interest and Farm Development Expenditure Recovery

This subsection inserts a new subsection (5A) in section 188A to enable a taxpayer to deem the assessable income arising from a section 129 interest and development expenditure recovery to be assessable income derived from the conduct of a specified activity (being an activity conducted on the land in respect of the sale of which the recovery is being made). Such deeming may enable the taxpayer to offset in excess of $10,000 of a specified activity loss against such income.

This amendment arises from an anomaly which became apparent during a review of the legislation enacted in 1982. Section 129 deems any deduction for interest and farm development expenditure allowed in respect of land sold within 10 years of purchase to be assessable income of the taxpayer to the extent of any profit arising on that sale. It does not, however, go as far as deeming that assessable income to be income derived from the activity (or activities) conducted on the land sold. Where that activity is a "specified activity" to which section 188A applies, the loss containment provisions of that section would apply in respect of the set off of a specified activity loss against the deemed assessable income as it would not constitute income from the specified activity. This would have been the case under the legislation as enacted in 1982, notwithstanding that the deemed assessable income represented recovered deductions of interest and development expenditure which might not yet have yielded tax benefits to the taxpayer due to the operation of section 188A. The result was that a taxpayer could be assessed for tax on the recovered interest and development expenditure deductions prior to the receipt of the tax benefits of those deductions (by way of loss offset).

That situation was considered to be inequitable and the legislation has been amended to provide that where any such "recoverable" deductions are allowed in respect of the conduct of a particular specified activity the assessable income deemed to arise on the recovery of those deductions should, for the purposes of the section 188A loss containment provisions, be treated as being derived from the conduct of that specified activity.

This amendment gives effect to that treatment where the following conditions apply:

  1. Land is sold by the taxpayer and, in respect of that sale, section 129 deems an amount of the gain on sale to be assessable income; and
  2. The taxpayer has, in any income year, conducted any specified activity on that land in the conduct of which (on that land ) the taxpayer has incurred a loss.

Where such circumstances exist, the new subsection (5A) permits the taxpayer to make an irrevocable election as to the extent to which the amount recoverable under section 129 shall be income deemed to be derived from the conduct of the specified activity - against which any losses (current or brought forward) from that activity on that land may be offset without limit.

While the taxpayer may, in any case, only make a maximum election equal to the amount of the "excess" determined in accordance with section 129, the proviso to the new subsection ensures that the amount elected cannot exceed the amount of loss or losses incurred in the conduct of the specified activity on that land that, at the time of sale, is available to be offset against other income.

As with the other election provisions in section 188A, (ie, subsections (4)(b)(i) and (7)(g)), the election in the new subsection, to be valid, must be made within the time within which the taxpayers' return of income for the year of sale is required to be furnished. Should no election be made for the purposes of subsection (5A), the assessable income deemed to arise from the section 129 recovery provisions is simply assessable income of the taxpayer ascribed to no particular activity and, as such, any offset of specified activity losses against that income will be subject to the section 188A provisions.

Where two or more specified activities have been conducted on the land sold, the taxpayer may make elections, in respect of each specified activity as described - provided that the amounts involved in those elections do not exceed, in total, the amount of assessable income arising from the section 129 recovery, and that each election does not exceed the amount of loss or losses, incurred in the conduct of the respective activity on that land, that have not, at the commencement of the year of sale, been offset against other income.

It is important to note that it is only the loss or losses incurred in the conduct of a specified activity on the land sold that can be offset without limit against the deemed assessable income arising from the section 129 recovery - losses incurred in the same kind of specified activity, but arising from conduct on land other than that subject to the section 129 recovery, are still "locked in" pursuant to section 188A.

Examples:

The following examples illustrate the application of the new section 188A(5A):

Example 1:

A taxpayer conducts two unrelated specified activities on separate blocks of land; horticulture and mussel farming. The mussel farm is sold (the lease constituting "land" for the purposes of sections 129 and 188A) within 10 years of acquisition and an "excess" arises that is deemed to be assessable income pursuant to section 129. The taxpayer's position prior to the subsection (5A) election in the year of sale of that farm is as follows:

Current year horticultural profit $30,000
Current year mussel farming loss $5,000
Prior years' mussel farming losses brought forward $20,000
Deemed assessable income (section 129 recovery) $12,000

Had the amendment not been made, the taxpayer's mussel farming losses would have been subject to the loss containment provisions (section 188A) and would therefore have been able to be offset only to the extent of $10,000 against the taxpayer's assessable income arising from horticulture and/or the section 129 recovery. This year's amendment allows the taxpayer, on election, to offset the mussel farming losses against the assessable income arising from the section 129 recovery provisions prior to the application of the section 188A provisions, ie,

Horticultural Profit   $30,000
"Section 129" assessable income (Election by taxpayer deems it to be from conduct of mussel farming) $12,000  
Less: Total mussel farming losses $25,000  
Net mussel farming loss $13,000  
Loss able to be offset (subject to section 188A limit) against assessable income from different specified activity   $10,000
Net assessable income   $20,000
Mussel farming loss to C/F $ 3,000  

Example 2:

A taxpayer conducts two unrelated specified activities (horticulture and viticulture) on the same block of land, both activities being in loss, and also derives investment income. As above, the taxpayer sells the land on which the specified activities are conducted within 10 years of acquisition and an "excess" arises that is deemed to be assessable income of the taxpayer (section 129).

In the year of sale, the taxpayers' position is as follows:

Net Investment Income $30,000
Accumulated Horticultural loss $20,000
Accumulated Viticultural loss $15,000
Deemed assessable income (section 129) $12,000

As in Example 1, the taxpayer would previously have been limited by section 188A in respect of the offset of the specified activity losses against investment and "section 129" income to a total of $10,000. The amendment made by this section allows the taxpayer to elect an offset of the specified activity losses against the assessable income arising from the section 129 recovery prior to the application of the section 188A provisions. The taxpayer may make an election pursuant to the new subsection (5A) in respect of either or both of the specified activities conducted on the land sold. However, in respect of each activity the election may not exceed the amount of the loss incurred in the conduct of that activity on the land sold, and further, the total amount of losses offset may not exceed the amount of the assessable income arising from the section 129 recovery. The taxpayer may make elections along the following lines:

Net Investment Income   $30,000
"Section 129" assessable income $12,000  
Less: Elected horticultural loss to be offset (section 188A(5A)) $ 7,000  
Less: Elected viticultural loss to be offset (section 188A(5A)) $ 5,000  
Net "section 129" assessable income NIL NIL
Net Horticultural loss ($20,000 - $7,000) $13,000  
Net Viticultural loss ($15,000 - $5,000) $10,000  
Loss available to be offset $23,000  
Loss able to be offset* (Pursuant to section 188A)   $10,000
Net assessable income   $20,000
Total specified activity losses to be c/f $13,000  

* An election may be made pursuant to section 188A(7)(g) in respect of how much of each specified activity loss will comprise the $10,000 loss actually offset.

Example 3:

A taxpayer conducts one kind of specified activity (horticulture) on two separate blocks of land (both activities in loss) and also derives investment income. The taxpayer sells one block of land (block A) within 10 years of acquisition and an "excess" arises which is deemed to be assessable income of the taxpayer (section 129). In the year of sale the taxpayer's position is as follows:

Net Investment Income $30,000
Accumulated Horticultural losses $22,000
Deemed assessable income $12,000

For the purposes of the subsection (5A) election, the loss attributable to the conduct of the horticultural activity on the land sold (block A) must be identified separately from losses arising from the conduct of that activity on other land (in this case block B). Accordingly, assume the loss attributable to block A is $5,000, and to block B, $14,000.

Under the new subsection (5A) the taxpayer may make an election only in respect of the loss incurred in the conduct of the specified activity on the land sold (block A, $8,000). That election gives rise to the following position:

Investment Income   $30,000
"Section 129" assessable income $12,000  
Less: "Block A" loss $ 8,000  
Net "section 129" income $ 4,000 $ 4,000
    $34,000
Balance of specified activity loss, (ie, block B) $14,000  
Amount able to be offset (section 188A)   $10,000
Net assessable income   $24,000

Subsection (2) - Inclusion of "Cash Cropping" as Specified Activity (When Appropriate)

The existing definition of the term "specified activity" in section 188A excludes from that term "the business of growing trees or plants ... for the production of ... crops (other than flowers) in respect of which the preparation of the land, and the planting and cultivation of the tree or plant, and the harvesting of the crop is accomplished within a period of 12 months". For simplicity we will refer to such an activity as cash - cropping. This amendment provides that cash - cropping will constitute a "specified activity" for the purposes of section 188A where that inclusion results in a more favourable treatment of the taxpayer under that section.

Cash - cropping activities were specifically excluded from the $10,000 loss provisions on the basis that the farming of such crops did not lend itself as an avenue for tax avoidance. Since the enactment of the loss containment legislation, however, critical evaluation of that legislation has highlighted certain anomalies that arise as a result of the exclusion of cash - cropping from the term "specified activity".

The following examples illustrate two such anomalies:

Example 1

An established sheep farmer (farming prior to 11 October 1982) who has been undertaking substantial cash - cropping in conjunction with his farming activity would, under current legislation, be subject to the loss containment provisions of section 188A. That is, any loss arising from the farming activity would be subject to a $10,000 limit if offset against any cash - cropping income. The reason for this is that, as cash - cropping does not constitute a specified activity, the taxpayer cannot satisfy the "existing farmer"/"established activity" criteria in order to be excluded from the provisions of section 188A - his livelihood and sole or principal source of income must be only from the conduct of specified activities in order to gain exclusion.

Example 2:

A very recently established (ie, post 11 October 1982) horticulturalist who, among other (horticultural) activities, undertakes cash - cropping. Even though cash - cropping could, in the normal course, be regarded as being of the same kind as the other horticultural activities, it could not previously be classed as such for the purposes of section 188A (specifically, "related activity" definition) as the former is not a specified activity as defined.

In order to correct the above situations it was necessary to provide a facility to enable cash - cropping to be given the status of a "specified activity" in section 188A where this would be advantageous to the taxpayer. This would enable:

  • the taxpayer in Example 1 to qualify as an "existing farmer" and both sheep farming and cash - cropping to qualify as "established activities"; and
  • the taxpayer in example 2 to class cash - cropping as a specified activity related to his other horticultural activities in terms of the definition of "related activity" -

thereby providing, to both taxpayers, exclusion from the loss containment provisions in respect of their respective farming activities.

It is important to note that cash - cropping will only be included in the definition of the term "specified activity" where that inclusion results in a "favourable " treatment for the taxpayer. This determination of favourability of treatment must be made on a year by year basis, ie, the fact that cash - cropping constituted a specified activity for a particular taxpayer in one year does not mean that it must constitute one in the following year - it will only do so if, in that later year, it is to the taxpayer's advantage.

Subsection (3) - Offset of Specified Activity Losses Carried Forward

This amendment alters paragraph (c) of section 188A(7) to ensure the correct application of the loss limitation provisions to any specified activity losses that are carried forward.

Paragraph (a) of section 188A(7) (as enacted last year) imposes the $10,000 limitation on the amount of specified activity loss that may be offset, in the year incurred, against a taxpayer's other income. Paragraphs (b) and (c) cover the situation where a loss, or the "contained" portion of a loss, brought forward from an earlier year is added to the current year loss (if any) from the relevant activity, which is then subject to the $10,000 limitation. However, paragraph (c), covering the offset of losses in "year 2", was deficient in that it did not specify a treatment (or limitation) in respect of any loss brought forward to a year in which a profit is derived in the conduct of the particular activity. The implication of this might have been that, under the legislation as originally enacted, a taxpayer sustaining a specified activity loss of $100,000 would, in the year incurred, be limited to the offset of only $10,000 of that loss against other income, whereas, in the year to which the remainder of the loss is carried forward, the offset of that amount carried forward would not be limited.

This amendment to paragraph (c) accordingly ensures the following treatment applies where any specified activity loss is incurred (in "year 1") and carried forward (to "year 2"):

  1. Where, in year 2, any loss is incurred in the conduct of the same specified activity as that in which the loss carried forward was incurred, those losses may only be offset, in total , to the extent of $10,000 against other income of the taxpayer (section 188A(7)(c)(ii) and (iv)).
  2. Where, in year 2, any profit is derived in the conduct of the same specified activity in which the loss carried forward was incurred, any remainder of that loss after (unlimited) offset against that profit, may only be offset to the extent of $10,000 against other income of the taxpayer (section 188A(7)(c)(iii) and (iv)).
  3. Where, in year 2, the taxpayer has neither derived a profit nor incurred a loss in the conduct of the specified activity in which the loss carried forward was incurred, (ie, has ceased to conduct activity, or revenues and expenses are equal), the loss carried forward may only be offset to the extent of $10,000 against other income of the taxpayer.

Note that in all cases, any specified activity loss carried forward is able to be offset without limit against income derived from the conduct of the same specified activity in the year to which it is carried forward.

Subsection (4) - Offset of Losses Among Group Companies

This section inserts a new subsection (7A) into section 188A to specifically restrict, to a maximum of $10,000, the amount of any specified activity loss incurred by a group company that may be offset (by election) against the income of another company in the same group.

The offset of losses among group companies can take two forms; subvention payments, and elections. In respect of the former, the general provisions of section 188A effectively restricted to $10,000 the amount of specified activity loss that may be "transferred" to another group company.

In respect of the latter (elections), however, doubt existed as to whether the legislation (as enacted) was specific enough to support the original intention with regard to "elected" loss offsets among "specified group" companies. Specific reference, therefore, is made to those losses in the new subsection (7A).

The new subsection provides that where a company included in a group of companies incurs a specified activity loss, the total amount that may be offset against both any other income of that company AND against the income of any other company in that group (by way of election made pursuant to section 191(5)) cannot exceed $10,000. The wording of the new subsection ensures that this will apply to an offset in "any income year", ie, it applies both to losses carried forward to, and losses incurred in, any particular year.

If the company undertakes only one of the above offset options, (ie, either offsets only against own income or only against another group company's income) the $10,000 maximum applies to that one offset.

Note that the $10,000 limit applies in respect of the company incurring the loss only; it is not a limit that applies to the group as a whole, ie, three loss companies in a group can each elect to offset up to $10,000 of loss - a total of up to $30,000 against the income of the other group companies.

Finally, to repeat, all the amendments detailed above apply from the commencement of section 188A, that is, the 1983/84 income year.

Determination of Application of Section 188A - Summary

In order to assist in understanding the application of section 188A a diagram was provided in PIB 120 issued last year. The following is a revised version of that diagram - containing the amendments outlined above and those matrimonial property changes contained in section 61 of this Amendment Act.

Larger version of image

Determination of Application of Section 188A

Section 32 - Transitional Provisions for Payment of Tax Arising from Application of Section 188A

This section amends section 188B of the Act to alter the rate of interest payable on the amount of tax deferred pursuant to the transitional measures introduced last year complementary to the $10,000 loss limitation legislation (section 188A). The monthly interest rate has been dropped from 1.25 percent to 1.0 percent - a change on an annual basis from 15 percent to 12 percent.

This amendment applies with effect from the commencement of the application of section 188B, ie, the 1983/84 income year.

Sections 33 and 37 - Group Investment Funds

Introduction

These two sections enact the new taxation regime for group investment funds which was announced in the 1983 Budget.

A group investment fund is a type of trust for investment purposes which can only be set up by a Trustee Company or the Public Trustee. There are five Trustee Companies in New Zealand and they operate under the ambit of the Trustee Companies Act 1967. The five companies are:

  • East Coast Permanent Trustees Limited;
  • New Zealand Guardian Trust Company Limited;
  • Perpetual Trustees, Estate and Agency Company of New Zealand Limited;
  • Pyne Gould Guinness Limited;
  • Trustees Executors and Agency Company of New Zealand Limited.

The Public Trustee may set up group investment funds under the Public Trust Office Act 1957.

The facility to form a group investment fund was designed to enable the Trustee Companies to gather the moneys of numerous small investors into an administratively efficient entity. Those investors can be estates and trusts or other persons who request the Trust Company to invest funds as agent for the investor (agency funds). Most Trustee Companies currently operate a number of group investment funds. Those group investment funds are all trusts and should have been furnishing returns and taxed in accordance with sections 226 to 231 of the Act (for all income years up to and including that beginning 1 April 1983).

Legislation

The legislation as now enacted by section 33 of this Amendment Act divides the income derived by a group investment fund into two categories: "category A income" and "category B income".

"Category B income" is essentially income generated by the "traditional" investment activities of group investment funds. They are:

  1. Investments in the group investment fund by:
    • estates, statutory and court ordered trusts;
    • superannuation category 1 schemes or superannuation category 2 schemes;
    • agency funds up to the value (in real terms) of the level of investment of that type of funds on 22 June 1983.
  2. Group investment funds with investments wholly in -
    • authorised trustee securities (except company equities);
    • a forestry business, but only in respect of land owned or held by the group investment fund for the purposes of that forestry business on 22 June 1983.

"Category B income" continues to be taxed as income derived by a trustee in accordance with sections 226 to 231 of the Income Tax Act 1976.

"Category A income" is that derived from all of the funds of a group investment fund other than the funds set out above. The distinguishing feature of these funds will be in relation to the source of the funds (eg agency funds invested above the level of those that are protected), or to the type of investment (eg real estate). This Category A income is taxed as if it were derived by a company (ie it is taxed in the hands of the trustee of the group investment fund at 45 cents for every dollar of income and in the hands of the investor when it is distributed as if it were a dividend).

Section 36 of this Amendment Act provides for the situation where investors in a group investment fund are absentees by adding a new section 285A to the principal Act. In that circumstance the trustee of the group investment fund is the agent of the investor and is therefore obliged to make returns and is assessable and liable for income tax on the investor's dividends from the group investment fund.

Comment

Because there are currently only 30 group investment funds operating in New Zealand and because of the relatively complex nature of this specialised taxation regime it has been decided that group investment fund tax returns will be handled by the Dunedin District Office.

Section 34 - Specified Leases

Section 34 amends section 222A(1) of the principal Act in respect of leases entered into on or after 28 October 1983 . There are two changes:

  1. Subsection (1) introduces a third proviso to the definition of "cost price". This proviso permits the Commissioner to accept the market price of a lease asset as the cost price for the purposes of specified leases in situations where the Commissioner is satisfied a cost price cannot be determined in accordance with the normal provisions of the definition.

    This amendment is required for the isolated cases where the lessee is unable to determine from the lessor the cost price of the lease asset. If there is no market price or more than one, the Commissioner will determine the cost price at an amount he considers equitable, having regard to the facts in any particular case and the tenor of the whole of the definition of "cost price", including the provisos.

    This new proviso can only be used where the "cost price" of a lease asset cannot be determined by the provisions of the definition and the first two provisos and is not an alternative to those provisions. If the Commissioner can determine the cost price in the normal way from the lessor, he will do so.

  2. Subsection (2) introduces the standard "associated persons" test to the definition of specified lease. The effect of this amendment is that where a lease asset is purchased at, or subsequent to, the end of the lease term by an associated person of the lessee the lease will be a specified lease for income tax purposes.

Section 35 - New Incentive for Cost of Producing Films - Section 224D of the Income Tax Act 1976

Introduction

Existing legislation (section 224A) requires the cost of producing or purchasing a film, or any right in a film, to be written off by the film owner as follows:

  • feature film - over 24 months,
  • non - feature films - over 2 income years.

This new section provides a tax incentive for the film industry by way of an accelerated write off for the costs of producing films, the principal features of which are:

  • Under the new provisions:
    • The cost of producing a film certified by the New Zealand Film Commission as a New Zealand film may be claimed as a deduction in the year in which the film is completed.
    • The cost of producing other films may be written off over 2 income years, commencing with the year of completion (on the same basis as currently applies to non - feature films under section 224A).
    • Costs of production which are incurred in any year following the year of completion will be deductible in the year incurred for both New Zealand films and other films.
    • Costs of producing advertising films or commercials may still be claimed in year incurred.
  • The new section makes no distinction between feature films and non - feature films. The distinction is simply between certified New Zealand films and other films.
  • The new section applies only to the costs of producing a film. The cost of acquiring any completed film or the rights in any completed film continues to be governed by section 224A. (Note, however, that expenditure incurred by a taxpayer in reimbursing any other person for costs incurred by that person in producing an uncompleted film is deemed to be expenditure incurred by the taxpayer in producing that film.)
  • The write - off of production costs in the year of completion of films certified as New Zealand films by the Film Commission will be allowable only on production of a copy of the "final certificate" issued by the Film Commission.
  • The Film Commission will also issue a "provisional certificate" to assist taxpayers in re - estimating provisional tax. Note, however, that the "provisional certificate" is not acceptable as evidence of eligibility for a 100 percent write - off in the year of completion of the film.
  • The new section is subject to section 106A (limited recourse loan provisions).
  • Section 224A is subject to the new section 224D. (Note however that taxpayers are not obliged to take advantage of section 224D if they do not wish to do so.)
  • The new section does not apply to "pre - Budget" films.
  • It applies to all other films completed on or after 16 December 1983.

Legislation

Full details of the new legislation are as follows:

Subsection (1) - Definitions

"Depreciation Loss " - This definition is essentially the same as that used in section 224A. The expression "depreciation loss" means the amount of depreciation which would have been allowable as a deduction in a particular year had section 108 of the principal Act applied in respect of the assets used in the production of the film. The amount of the depreciation loss to be included in the total film production expenditure figure is the sum of the amounts of depreciation which would have been allowable as a deduction in the years up to and including the year of completion had a current year deduction for depreciation been allowable in each of those years.

"Film Owner " is the person who owns a completed film.

"Film Production Expenditure " means -

  • expenditure which is normally allowable as a deduction; but does not include the cost of depreciable assets;
  • any loss which is deductible under section 104;
  • being expenditure or loss incurred by the taxpayer in producing film of which he is, or is expected to become, a "film owner". The definition also includes any depreciation loss;

    but does not include :

    expenditure incurred by the taxpayer:

    1. in the acquisition of a completed film from another person;
    2. in the acquisition of any right in a completed film from another person.
    3. directly in marketing or selling the film.

    In other words, the definition refers to all expenditure which is normally allowable as a deduction to the extent that it is incurred by a taxpayer in producing his film.

    It should be noted that the definition applies to both expenditure incurred prior to the completion of the film and that which is incurred after it has been completed. In addition, the provisions of subsection (3) should be noted in respect of the reimbursement of another person for film production expenditure where the reimbursement occurs prior to the completion of the film.

"Final Certificate " - This is the certificate which will be issued by the New Zealand Film Commission certifying that the film named therein has been approved by the Commission as a New Zealand Film. Production of a copy of this certificate is a prerequisite to eligibility for the 100 percent write - off of production costs in the year the film was completed in terms of subsection (6) of this section.

"New Zealand Film " - This is a film certified by the New Zealand Film Commission as being a film which the Commission is satisfied has a significant New Zealand content. The criteria to be used by the Commission in reaching its decision are those set out in section 18 of the New Zealand Film Commission Act 1978; viz,

"18. Content of films - (1) In carrying out its functions, the Commission shall not make financial assistance available to any person in respect of the making, promotion, distribution, or exhibition of a film unless it is satisfied that the film has or is to have a significant New Zealand content.

"(2) For the purposes of determining whether or not a film has or is to have a significant New Zealand content, the Commission shall have regard to the following matters:

  • "(a) The subject of a film:
  • "(b) The locations at which the film was or is to be made:
  • "(c) The nationalities and places of residence of -
    • "(i) The authors, scriptwriters, composers, producers, directors, actors, technicians, editors, and other persons who took part or are to take part in the making of the film; and
    • "(ii) The persons who own or are to own the shares or capital of any company, partnership, or joint venture that is concerned with the making of the film; and
    • "(iii)The persons who have or are to have the copyright in the film:
  • "(d) The sources from which the money that was used or is to be used to make the film was or is to be derived:
  • "(e) The ownership and whereabouts of the equipment and technical facilities that were or are to be used to make the film:
  • "(f) Any other matters that in the opinion of the Commission are relevant to the purposes of this Act.

"(3) In carrying out its functions, the Commission shall in relation to the content of any film have due regard to the observance of standards that are generally acceptable in the community."

Any enquiries concerning eligibility should be addressed to:

The New Zealand Film Commission,

PO Box 11546

WELLINGTON

"Provisional Certificate " - is a certificate issued by the Film Commission certifying that an uncompleted or proposed film will, in the opinion of the Commission, qualify for certification as a New Zealand film when completed. The purpose of this certificate is to provide an independent appraisal to assist taxpayers who have invested in the production of the film in any estimation of provisional tax they may wish to make for the year in which the film will be completed. However, it should be noted that this certificate will not be accepted in support of a claim for a 100 percent deduction in the taxpayer's return of income as a final certificate is required as evidence of eligibility for the actual deduction.

Subsection (2) - This subsection contains further definitions which are used in this section and which have the same meaning as that contained in section 224A. These are as follows:

"Completed " means that the film has been completed to the double head finecut stage of production (as defined) or equivalent production stage.

"Copyright " includes all rights and choses in action in, or in relation to:

  • the film,
  • the prints in the film;
  • publicity material in relation to the film;
  • all other tangible assets in relation to the film.

"Double Head Finecut Stage of Production " is the stage of production where the film has been completely edited, shot by shot, to its final length.

"Film " means a cinematograph film; and includes a videotape, and any other material record of visual moving images that is capable of being used for the subsequent projection of those images in a fixed sequence on to any screen; and also includes any copy of the whole or any part of that film; but does not include:

  1. an advertising film or a commercial (the cost of producing these films is therefore allowable in the year in which the expenditure is incurred under the general provisions of the Tax Act);
  2. a film which the Commissioner determines under section 224C to have commenced on or before the 5th of August 1982. (This means that "pre - Budget films" cannot take advantage of the new provisions. Note, however, that if that "pre - Budget" status is withdrawn in accordance with the provisions of subsection (3) of section 224C, the provisions of section 224D can apply in respect of the film - as can the provisions of section 106A and 224A).

The definition of film covers all films, including animated films, films of sporting events, documentaries, etc. It also includes videotapes, video cassettes and discs, audio - visual presentations and other similar property.

"Right " means any copyright (as defined) and any licence in respect thereof and any other right which subsists in or attaches to the film (including any right to income from the film) and includes any equitable right. The definition, in effect, covers all rights associated with a film.

Subsection (3) caters for the situation where a person who has incurred expenditure in producing a film sells his interest in the film to another person prior to the film's completion. To the extent that the payment made by that other person represents no more than a reimbursement of "film production expenditure", it is deemed by subsection (3) to be film production expenditure incurred by that purchaser in producing the film. To the extent that it does exceed the reimbursement level, that excess is required to be written off in accordance with the provisions of section 224A.

Subsection (4) provides that section 224D shall apply subject to section 106A. This means that adjustments required under section 106A must be made before the allowance of any deduction under this section.

Subsection (5) prevents a taxpayer from claiming a double deduction for expenditure to which this section applies. It provides that where a taxpayer incurs film production expenditure which is allowable as a deduction under this section (including any depreciation loss) no further deduction may be claimed under any of the other provisions of the Tax Act in respect of that expenditure.

Subsection (6) permits the total film production expenditure to be written off in the year the film is completed where the film has been certified by the New Zealand Film Commission as being a New Zealand Film. The subsection provides that where:

  1. the taxpayer has, in any year, incurred any "film production expenditure" in producing any film of which he is a "film owner"; and
  2. the film has, by means of a "final certificate", been certified by the New Zealand Film Commission, as being a "New Zealand film",

the taxpayer is entitled to claim a deduction for that expenditure in the later of:

  1. the income year in which the film is "completed";
  2. the year in which the expenditure is incurred.

This means that any costs of producing a New Zealand film which are incurred in, or prior to, the year in which the film is completed, are allowable as a deduction in the income year in which the film is completed. Expenditure incurred in any subsequent year is deductible in the year incurred.

Subsection (7) permits the cost of producing films which are not certified by the New Zealand Film Commission as New Zealand films to be spread equally over the year in which the film is completed and the subsequent year. It provides that costs of production incurred in the income year in which the film is completed or in any previous year must be accumulated and the total allowed over a two year period, 50 percent in the income year in which the film is completed and the balance in the subsequent year.

The proviso permits more than 50 percent of the costs to be written off in the year of completion where the income from the film (or from any right therein) which was derived in that year exceeds that 50 percent deduction which would otherwise be allowable under this subsection. Where such an excess occurs, this proviso increases the amount allowable as a deduction in that year to the lesser of:

  • the total film production expenditure which was incurred by the taxpayer prior to the end of that income year; or
  • the income from the sale, use, rental or other exploitation of that film (or that right) which was derived during that income year.

Any portion of the film production expenditure which is not allowed in the year of completion of the film is allowable in the following year. The maximum allowable for the two income years is, of course, the total film production expenditure incurred prior to the end of the income year following the year of completion of the film.

Note: It is important to note that the deductions permitted under subsection (6) or subsection (7) of this section apply to "film production expenditure" only. Any costs of acquiring any completed film or any rights in a completed film are required to be written off in accordance with the provisions of section 224A.

Subsection (8) provides that any film production expenditure incurred in any income year subsequent to the year in which the film is completed is allowable as a deduction in the year incurred.

Subsection (9) provides that where a taxpayer (who is a film owner) sells or, by any other means or because of any other circumstances, ceases to own a film and/or every right in a film, any film production expenditure which has not previously been allowed as a deduction may be claimed in the year in which the taxpayer ceases to own that film or those rights. This is the same provision as that contained in subsection (7) of section 224A.

Subsection (10) enables the Commissioner to determine the depreciation to be recovered where the asset on which the deduction was allowed is either sold or transferred to another activity. The normal rules for recovery of depreciation will be applied.

Subsection (11) gives the New Zealand Film Commission the power to issue final certificates and provisional certificates. It requires that:

  • the application for the issue of either of these certificates must be in writing;
  • the applicant must supply such information as the Film Commission requires;
  • the certificates issued by the Commission must be in writing.

Subsection (12) gives the Commission power to revoke any provisional certificate or final certificate which it has issued where, for any reason, it is satisfied that the certificate should not remain in force. Where a certificate is revoked by the Commission it is treated as void as from the time of its issue.

Subsection (13) provides that where a provisional or final certificate has been issued by the New Zealand Film commission -

  1. A copy of the certificate must be sent to the Commissioner of Inland Revenue;
  2. the Commissioner must be given written notice of the revocation of any certificate by the New Zealand Film Commission.

Subsection (14) sets out the basis on which a deduction is allowable for deferred fees and similar types of expenditure. It provides that where, in relation to a person who contributes towards the production of a film:

  • an amount (referred to as the "specified amount") is contributed by the taxpayer or is contingently liable to be contributed in payment towards the cost of producing that film; and
  • all or any of that specified amount relates to the provision of goods or the supply of services; and
  • the liability for payment of the cost of those goods or services has, in terms of an agreement entered into between the supplier and any other person, been deferred; and
  • the period between the time of the provision of those services or the supply of those goods and the time of the payment of the cost thereof is, in the opinion of the Commissioner, excessive, or the liability for payment of that cost is dependent on a contingency,

the expenditure in the acquiring of those services or those goods shall be deemed to be incurred at the time or times of the making of that payment or those payments.

This means that deferred fees, and other costs of producing a film for which payment is deferred beyond the period in which it would, in accordance with normal commercial practice, normally have been payable, are not allowable as a deduction until the year in which payment is made.

Subsection (15) provides that where, in relation to any taxpayer who produces a film, the Commissioner is satisfied, having regard to the relationship between the film owner and the person who supplies goods or services which are used in the production of the film (or to any other relevant circumstances) that:

  1. the film owner and the supplier were not dealing with each other at arm's length, and
  2. the expenditure incurred by the owner exceeds the amount which would have been incurred had the film owner and the supplier dealt with each other on an arm's length basis,

the amount allowable as a deduction will be limited to the amount which the Commissioner considers might have been expected to have been incurred if the film owner and the supplier had dealt with each other at arm's length.

Effectively, this subsection prevents arrangements from being entered into for the purposes of artificially inflating the cost of producing a film. It limits the amount allowable as a deduction to that which would be expected to have been paid in a normal commercial negotiation entered into between parties acting on an arm's length basis.

Subsection (16) is a general anti - avoidance provision which gives the Commissioner power to disallow any excess deduction where he is satisfied that arrangements have been made between the taxpayer claiming the deduction and another person to give an unfair advantage under the section.

Subsection (17) provides that every reference in this section to any income year shall be deemed to be a reference to the taxpayer's accounting year.

Consequential Amendments - Subsection (2) of section 35 of the Amendment Act consequentially amends section 224A by making it subject to section 224D.

Application Date - The new section applies to all films (as defined) completed on or after the 16th of December 1983 (the day on which the legislation received the Governor - General's assent).

Section 36 - Classes of Income Derived from New Zealand

This section amends section 243(2)(g) of the Act to provide that where income is derived from shares, etc, in a company resident in New Zealand , (ie, one that either is incorporated in, or has its Head Office in, New Zealand) that income is, in all cases, deemed to have a source in New Zealand.

The existing legislation, with its reference to a "New Zealand company", (ie, one that is incorporated in New Zealand) rather than to a "company resident in New Zealand" creates an anomalous situation whereby a company which has its Head Office in New Zealand but is incorporated elsewhere, (ie, resident in New Zealand but not a "New Zealand company") is assessable for New Zealand income tax on its world income but any dividends and/or interest it may pay are not deemed to have a New Zealand source. As a result, payments of such interest and dividends, when made to non - residents, were, before this amendment, not liable to either income tax or non - resident withholding tax in New Zealand.

In contrast, such payments made by "New Zealand companies" are subject to the deduction of non - resident withholding tax.

The above position conflicts with the treatment accorded by other countries to their resident companies - both Australia and the United States treat income derived from shares, etc, in their resident companies as having a domestic source.

This amendment corrects the above anomaly with effect from the date of the Governor - General's assent to this Act (16 December 1983).

Subsection (2) of this section amends section 243(2)(i) of the principal Act which gives a New Zealand source to pensions payable by the New Zealand Government or out of superannuation funds established in New Zealand. Because section 3 of this Amendment Act includes a definition of "superannuation fund" in section 2 of the principal Act and that definition only refers to superannuation category 1 schemes and superannuation category 2 schemes, it is necessary to omit the words "superannuation fund" in section 243(2)(i) and to refer to each type of superannuation scheme, viz, superannuation category 1 schemes, superannuation category 2 schemes and superannuation category 3 schemes. This amendment ensures that pension and annuity income from superannuation category 3 schemes is sourced in New Zealand.

Section 38 - Liability as Agent of Employer of Non - Resident Taxpayer

This section makes an amendment to section 287 of the principal Act, which deals with the liability of employers as agents for non - resident taxpayers. In that section, an employer is required, on the application of the Commissioner, to deduct any tax payable on any pension or annuity payable out of a superannuation fund established in New Zealand, from instalments of the pension or annuity payable to the non - resident taxpayer recipient.

In view of the inclusion this year (in section 2 of the principal Act) of a specific definition of "superannuation fund" by section 3 of that term being restricted to approved schemes only, section 287 could not be applied to payments made from a superannuation category 3 scheme.

Section 287(4) has accordingly been amended to specify that superannuation category 1, 2, and 3 schemes are all types of superannuation schemes to which section 287 can apply.

Section 39 - Credit for Tax Paid in Country or Territory Outside of New Zealand

This section amends section 293 of the principal Act in respect of the credit allowable for tax paid overseas against income tax payable in New Zealand. Any taxpayer who is resident in New Zealand is liable for New Zealand tax on all income derived (from New Zealand and overseas) while that New Zealand residence continues. Section 293 in its current form provides that credit is to be given against the amount of New Zealand tax payable for all tax paid in an overseas country on income derived in that country.

An amendment to section 293 has become necessary because some overseas countries impose a tax liability on the world income of their citizens and most countries impose a tax liability on the world income of persons who are resident or domiciled in the overseas country irrespective of the fact that they may reside elsewhere. Consequently when New Zealand residents are also citizens of, or resident or domiciled in those overseas countries they are taxed in both countries on their world income. When the overseas country imposes a higher tax liability than that imposed in New Zealand the credit for overseas tax allowed under section 293 extinguishes any New Zealand tax liability. As a result people in this situation do not pay any tax in New Zealand on the overseas income even though they are resident in this country.

These circumstances abrogated the internationally accepted principle that New Zealand has the prime right to tax persons resident in this country on their world income. The amendments to section 293 therefore limit the credit for tax paid overseas, on income subject to New Zealand assessment, to the same amount of tax that would be imposed in the overseas country on a New Zealand resident who was resident or domiciled in, or a citizen of that overseas country. While no person will be subject to any increased taxation liability, the tax paid will be more equitably divided between New Zealand and the overseas country.

In practice, this change only applies to income which is subject to non - resident withholding tax (or its equivalent) in the overseas country, ie, dividends, interest, royalties, etc. Where, as in most situations, an overseas country does not tax its nationals as such, a New Zealand resident who is a national of that country will not incur any further taxation liability in the overseas country. However, where the New Zealand resident is also a citizen of, or resident or domiciled in that overseas country and is taxed as such, the credit allowed in New Zealand will be limited to non resident withholding tax (or its equivalent) levied in that country as if that New Zealand resident had no connections with that country other than that source of income. The examples below outline the "before and after" situation in respect of a New Zealand resident who is also a citizen of a country that taxes the world income of its citizens.

(a) Previous Taxation Treatment of $100 Foreign (Dividend) Income Derived by New Zealand Resident/Foreign Citizen

Overseas Assessment   New Zealand Assessment  
Step l      
Overseas - source deduction income $100    
Less: Source Deduction $ 15 Step 2  
    NZ Income tax $25
    Less: Credit for tax paid overseas $15
    Net Payable $10
Step 3      
Overseas income tax $35    
Less: Credit for Source Deductions $15    
Less: Credit for tax paid in New Zealand $10    
Net Payable $10 Step 4  
    Reassessment:  
    NZ Income Tax $25
    Less: Credit for total tax paid overseas ($15 + $10) $25
    Net Payable Nil
Step 5   Refund to taxpayer of $10 previously paid  
Reassessment to disallow credit previously allowed but now refunded $10    
  $10    
Summary      
Total Income $100    
Less: Tax paid overseas ($15 + $10 + $10) 35    
Tax paid to NZ -    
Net Income $65    

(b) New Taxation Treatment of $100 Foreign Dividend Income Derived by New Zealand Resident/Foreign Citizen

Overseas Assessment   New Zealand Assessment  
Step 1      
Overseas source deduction income $100    
Less: Source Deduction $ 15 Step 2  
    NZ Income Tax $25
    Less: Credit for tax paid overseas $15
    Net Payable $10
Step 3      
Overseas Income tax $35    
Less: Credit for source deductions $15    
Credit for tax paid in New Zealand $10    
Net Payable $10    
    Step 4 - No New Zealand  
    reassessment  
Summary      
Total Income $100    
Less: Tax paid Overseas 25    
Tax paid to NZ 10    
Net Income $ 65    

The following countries are known to impose tax on a citizen basis:

  • United States
  • Philippines

When calculating the tax credit allowed in New Zealand for tax paid in these countries, the credit will not exceed the amount of tax which would be levied on a person who is not a citizen of the country. The terms of any Double Taxation Agreement between New Zealand and the country concerned will also be relevant.

Application Date

The amendment to section 293 of the principal Act will first apply the allowing of credits of income tax against New Zealand income tax for the income year commencing 1 April 1984.

Section 40 - Deductions of Tax from Payment Due to Defaulters

This section makes four minor amendments to the provisions of section 400.

Subsection (1) inserts a new definition of "amount payable" to make it quite clear that a notice issued under the section applies not only to amounts which are held or payable to the taxpayer at the time the notice is issued, but also to any moneys which become payable or are held at some future date while the notice remains in force. This has been achieved by expanding the definition to mean:

  1. Any amount payable to the taxpayer, on the date the notice is given, by the person to whom the notice is given.
  2. Any amount payable, or which becomes payable, to the taxpayer by that person on any day in the period following the day on which the notice is given and ending on the day on which the notice is revoked by the Commissioner.
  3. The expanded definition includes, in relation to any bank, any money (including interest thereon) that:
    1. Is on deposit or is deposited with the bank to the credit of the taxpayer on the day on which the notice is given; or
    2. Is on deposit or is deposited on any day in the period following the day on which the notice is given and ending on the day on which the notice is revoked.
  4. The definition includes (as was the case before this amendment) deposits with a bank irrespective of whether they are on current account, or so as to bear interest for a fixed term or without limitation of time, and whether the taxpayer has made any application to withdraw or uplift the money. However, it still does not include those accounts which were previously excluded, being:
  5. A Post Office Home Layby Account; or
  6. A Home Ownership Account; or
  7. A Farm Ownership Account;
  8. A Fishing Vessel Ownership Account.

Subsection (2) inserts a new subsection (2)(a) to make it quite clear that the amount specified in the notice is the maximum amount required to be deducted. This paragraph now provides that the amount to be deducted from an amount payable to the taxpayer specified in the notice is the lesser of:

  1. The amount specified in the notice, or
  2. The amount payable to the taxpayer at the time the deduction is required to be made.

Subsection (3) inserts a new subsection (4) into section 400. The effect of the new subsection (4) is to set a minimum amount which is required to be deducted from salary or wages in accordance with the notice. The minimum set is $10 per week, although of course where the final deduction required to be made to clear the amount specified in the notice is less than $10, only that lesser amount is to be deducted.

Subsection (4) inserts a new subsection (6) to make it clear that the copy of the original notice sent to the holder of the amount payable, which must be sent to the defaulting taxpayer, must be sent to him forthwith upon the issue of the original notice.

Section 41 - Keeping of Business and Other Records

This section amends section 428 of the principal Act.

Subsection (1) amends subsection (3) Of section 428 to make it clear that business records and other specified records are to be kept and retained in New Zealand, unless the Commissioner authorises them to be kept and retained outside New Zealand.

Subsection (2) states more positively the requirements relating to the retention of records that have been retained under the previous seven year retention period. One of the changes made to section 428 by section 41 or the Income Tax Amendment Act (No 2) 1982 was to increase from 7 years to 10 years the period for which business and certain other records are to be kept and retained. That section (41) was stated in that Amendment Act as applying to the keeping of records in the 1983/84 income year (or equivalent accounting year) and to future income (or accounting) years. This left doubt as to whether taxpayers who, on the first day of their 1983/84 year had in their possession earlier year records that they had retained for 7 years, were obliged to retain them for a further 3 years.

Section 40(2) of this Amendment Act now adds a new subsection (6) to section 428, to specify that where, on the day this Act received the Governor General's assent, a taxpayer had kept and retained records pursuant to the former 7 year rule and, notwithstanding that he may have already retained those records for 7, or, say, 8 years, he still has them in his possession, those records must be retained until the expiry of the period of 10 years after the end of the income year to which they relate.

Section 40 came into force on the day this Amendment Act received the Governor General's assent.

Section 42 - Terminating Dates Of Taxation Incentives

This section substitutes a new Third Schedule to the principal Act which sets out the terminating dates for the various tax incentives and allowances.

The terminating dates which have been extended are:

  Section of Tax Act Extended Terminating Date
Investment Allowance    
Farming and agriculture 122 31 March 1985
Development Expenditure    
Farming and agricultural land 127 31 March 1986
Aquaculture* 128 31 March 1986

*(which embraces rock oyster, mussel, scallop and freshwater fish farming and, by virtue of section 19 of this Amendment Act, sea - cage salmon farming.)

For incentives other than the above, the terminating dates remain the same as they were in the Third Schedule to the Income Tax Act, as amended last year.

This means that the regional, export and fishing investment allowances have now terminated, subject to transitional provisions introduced last year. Similarly, the high priority activity investment allowance has effectively been terminated.

The increased exports and increased exports to new markets incentives have also terminated and these will be repealed on 1 April 1984 (see section 25).

Part II

Provisions Relating to Matrimonial Property

Introduction

On Budget night (28 July 1985) Parliament passed legislation, introduced that night, to provide an exemption from gift duty and estate duty for certain transfers of property between spouses made in accordance with agreements entered into under section 21 of the Matrimonial Property Act 1976, or transfers made in compliance with Court orders made under section 25 of that Act.

Part II of the Income Tax Amendment Act (No 3) 1985 now gives extended revenue recognition to the social principles embodied in the Matrimonial Property Act by amending those provisions of the Income Tax Act 1976 which have taxation effects that discourage such transfers. These amendments will apply to all property transferred in accordance with agreements or Court orders made under the Matrimonial Property Act 1976 on or after 28 July this year.

The principal effect of the amendments is that in future such transfers of income producing property will, as far as is possible, not create a liability for income tax at the time the transfer is made, although of course any profit in excess of the transfer value on the subsequent realisation of the property by the transferee will be included in that person's income for tax purposes.

This facility is achieved by treating depreciable assets as having been disposed of at book value, enabling livestock to pass at standard value where such values are adopted, and permitting other trading stock to be transferred at the higher of the values adopted in the accounts of the transferor and transferee at the time of transfer. Other items of property, such as land, which are held in the taxpayer's accounts at cost price will be treated as having been disposed of at that value.

In other areas where special rules apply, the transferee will as far as possible, be placed in the position previously held by the transferor and subject to the same rules on the eventual sale of the property as would have applied to the transferor.

The effect of each of the amendments is discussed in detail below.

Section 43 - Interpretation

Section 43 inserts a definition of the expression "matrimonial agreement" in the principal Act.

"Matrimonial agreement" in relation to any two persons, means:

  1. An agreement made on or after the 28th day of July 1983 by those persons under section 21 of the Matrimonial Property Act 1976.
  2. An order of the Court made on or after the 28th day of July 1983 in relation to those persons under section 25 of the Matrimonial Property Act 1976."

It should be noted that in all but one case the legislation contained in Part II of the Amendment Act does not apply to transfers of matrimonial property where the agreement or Court order was made before the 28th day of July 1983. The exception is in respect of section 58 of this Amendment Act which deals with pensions payable to former employees. That section applies to any pension paid on or after the 28th day of July irrespective of when the agreement or Court order was made.

Section 44 - Items Included in Assessable Income

This section makes two amendments to section 65.

  1. Formerly, section 65(2)(k) provided that where a commercial bill was disposed of, other than by means of a redemption, the difference between the value of that bill on the day of disposal and its cost price was deemed to be assessable income. This meant that a transfer of a commercial bill between spouses in accordance with a "matrimonial agreement" would have created a tax liability in the hands of the transferor.
  2. This amendment takes such transfers outside the provisions of that section.

    Subsection (3)excludes transfers of commercial bills made in accordance with matrimonial agreements (please see section 43 of this Amendment Act for definition of "Matrimonial Agreement") from those provisions of subsection (2)(k) which deal with disposals other than redemptions. As such transfers are not redemptions, this means that section 65 cannot be applied to the transferor.

    When the transferee subsequently redeems or disposes of the bill, person will be deemed to have acquired it at the cost price the transferor, in accordance with the new section 65(1)(b)(ii) (which is inserted by subsection (1) of this amendment).

  3. Subsection (2) of this amendment amends section 65(2)(a) of the principal Act by inserting a proviso that where any business is transferred in accordance with a "matrimonial agreement" the value of the stock on hand shall be the amount that, under the new section 91A, the stock is deemed to have been sold at. (Essentially the greater of the values adopted in the accounts of the transferor and transferee.)

    Any excess of the amount at which the transferor is deemed to have sold the stock over the value of the stock recorded in the transferor's accounts will be included in the transferor's assessable income in the normal manner.

    For example, assume that a taxpayer who is in business transfers 40 percent of that business under a "matrimonial agreement". The value of the stock on hand to be transferred (determined from the transferor's accounts pursuant to section 85(3)) is $32,000. The amount that, under section 91A, the stock is deemed to have been sold for is $40,000 (the value to be adopted by the transferee because of that person's higher standard values). The amount to be included in the transferor's assessable income in the year of transfer is the difference between the amount at which the stock is valued in the transferor's accounts (pursuant to section 85(3)) and the amount the stock is deemed to have realised upon transfer (pursuant to section 91A), ie, $8,000 ($40,000 - $32,000).

Section 45 - Profits or Gains from Land Transactions

This section adds to section 67 of the principal Act provisions which enable land to which section 67 would otherwise apply to be transferred, under a "matrimonial agreement", at cost price and deems it to have been acquired by the transferor on the date on which it was aquired by the transferor.

  1. A new subsection (9B) has been inserted in section 67 to apply this provision for the purposes of paragraphs (a) to (e) of subsection (4). Where land has been transferred in accordance with a "matrimonial agreement" the position will be that:
    1. The transferror is deemed to have disposed of the land for an amount equal to the amount that would have been taken into account, as being the cost price of the land to him, for the purposes of calculating any profit or gain that the transferor would have made had he sold that land on the date of transfer.
      • This "cost" would include the original purchase price plus any expenses capitalised to the land.
      • The effect of the provision is that the transferor is not liable for income tax on the disposal of the land (in terms of section 67(4)(a) to (e)) as the deemed sale price equals the "cost" price and accordingly there is no "profit or gain" on which to assess income tax.
    2. The transferee is deemed to have acquired the land at the price at which the transferor is deemed to have disposed of it (ie, original cost price plus capitalised expenses).
      • As far as "cost" is concerned this measure effectively puts the transferee in the same position as the transferor would have been if the transfer had not occurred (see example).
    3. The transferee is deemed to have acquired the land on the day on which it was acquired by the transferor.
      • This provision is necessary to put the transferee in the same position as the transferor would have been had the transfer not been made. The date of acquisition is of importance in determining whether a taxable situation has occurred, eg, has there been a sale within 10 years of acquisition.

      Example

      Spouse X (Transferor) - acquires land 1977   $100,000
        - subdivides, etc, 1980   $20,000
        - transfers land to Spouse Y 1983    
        (Matrimonial Agreement) land valuation 1983: $200,000    
      Spouse Y (Transferee) - subdivides, etc(subsequent to transfer)   $20,000
        - sells 1983    
      Answer     $270,000
      Transfer to Y: disposed of by "X" at "cost"   $120,000
        acquired by "Y" at the same "price"   $120,000
      X - "Sale" price     $120,000
      Less Cost of land     $120,000
      Profit/Loss     NIL
      Y - Sale price     $270,000
      Less - Acquisition "price" $120,000  
        - Costs of subdivision by Y $ 20,000  
            $140,000
      Profit     $130,000
      Had X not transferred the land but carried out the subdivision and subsequently sold
      Sale Price   $270,000
      Less - Acquisition $100,000  
      Costs 1980 $ 20,000  
      Costs 1983 $ 20,000  
          $140,000
      Profit   $130,000
  2. A new subsection (9C) has been inserted in section 67 to apply to this provision for the purposes of paragraph (f) of subsection (4) . Where land has been transferred in accordance with a "matrimonial agreement" the position wall be that:
    1. The transferror is deemed to have disposed of the land for an amount equal to the sum of:
      1. The value of the land at the commencement of the scheme; and
      2. Expenditure incurred prior to the transfer in carrying out the scheme.
    2. The transferee is deemed to have:
      1. Incurred expenditure in the acquisition of the land of an amount equal to the value of the land at the commencement of the scheme (when undertaken by the transferor);
      2. Incurred expenditure in carrying out the scheme of an amount equal to the expenditure incurred by the transferor prior to the transfer in carrying out the scheme.
    3. Where the transferor had not commenced an undertaking or scheme (within the context of section 67(4)(f) the transferee is deemed to have acquired the land at the consideration for which the transfer is deemed (by section (9B(a)) to have disposed of it.

Section 46 - Benefit from Share Option or Purchase Scheme

Formerly, section 69 of the principal Act provided that an employee was deemed not to have derived a benefit from shares purchased under an employee share purchase scheme provided certain restrictive provisions existed under the scheme to prevent the employee from dealing with the shares so acquired. Those restrictions are specified in the first proviso to subsection (4) of section 69, paragraph (a) of which requires that those restrictive provisions apply for a period ending not earlier than eight years from the end of the income year in which the benefit is deemed to have been received by the taxpayer or not earlier than the date of death of the taxpayer.

Section 46 of this Amendment Act amends subsection (4) by adding a fourth proviso which for the purposes of paragraph (a) of the first proviso, provides that where the restrictive provisions relating to any of the shares referred to above do not restrict the taxpayer from transferring those shares in accordance with a "matrimonial agreement", but restrict the transferee spouse from disposing of those shares on the same basis as would otherwise have applied to the taxpayer, such a transfer is deemed not to be a breach of the restrictive provisions.

Section 47 - Income Derived from Use or Occupation of Land

Section 74(3) of the principal Act provides that where any land with standing timber is sold, the sale is deemed to be a sale of timber and the amount of consideration on the sale which is attributable to the timber is to be determined by the Commissioner and taken into account in calculating the assessable income of the vendor and effectively, the purchaser.

To harmonise with the social principles of the Matrimonial Property Act 1976 it was necessary to amend this section to provide that where land with standing timber is transferred in accordance with a "matrimonial agreement" the timber is deemed to have been transferred at cost price.

To achieve this, section 47 of this Amendment Act inserts a new subsection (3A) in section 74 to deem the transfer of any land with standing timber made in accordance with a "matrimonial agreement" to be a sale of timber for the purposes of section 74 and in every such case:

  1. The timber is deemed to have been sold at a price equal to the cost of the trees to the transferor, up to the date of transfer, and the consideration so attributable is deemed to be the consideration paid for the timber by the transferee; and
  2. The consideration which is so deemed to be paid for the timber is to be taken into account in calculating the assessable income of the transferor and in calculating the cost of the timber to the transferee.

This means that the transfer will not create a tax liability for the transferor as there will be no profit on the deemed sale of the timber, as the deemed consideration on "sale" will be exactly offset by the cost of the trees to date of transfer.

The proviso to the new subsection (3A) provides that subsection (3A) will not apply to trees used for the purposes of a farming or agricultural business to provide shelter or prevent erosion, or trees planted or maintained under a forestry encouragement agreement entered into under the Forestry Encouragement Act 1962. In other words this applies the same provision as that in section 74(3), that the transfer of such trees does not constitute a sale of timber.

Section 48 - Sums Received from Sale of Patent Rights

This section amends section 83 of the principal Act which governs the taxation of profits derived from the sale of patent rights and sets out the basis on which the costs of acquiring those rights may be deducted.

This amendment inserts a new subsection (4A) in section 83 to provide taxation rules for the disposition of patent rights under a "matrimonial agreement".

Paragraphs (a) and (c) of subsection (4A) state that:

"(a) The transferor shall be deemed to have sold those patent rights in that income year for a consideration equal to the amount (if any) of the expenditure of the kind referred to in subsection (3)(a) of this section or, as the case may be, of the total cost of the kind referred to in subsection (3)(b) of this section, that has not been allowed as a deduction from the assessable income derived by the transferor." (Subsections (3)(a) and (3)(b) relate respectively to expenditure incurred in devising the invention to which the patent relates, and to the cost of patent rights otherwise acquired by the taxpayer who later sells them.)

"(c) The transferee shall be deemed to have incurred expenditure, in the acquisition of those patent rights in that income year, of an amount equal to the value of the consideration for which, under paragraph (8) of this subsection, they are deemed to have been sold by the transferor."

Paragraph (a) enables the patent rights to be transferred under a "matrimonial agreement" without creating a tax liability at the time of transfer, while paragraph (c) provides effectively that the cost price of the patent right that will be allowable as a deduction to the transferee, should that person subsequently sell the patent, will be an amount equal to so much of the cost, to the transferor of the rights transferred, as has not been allowed as a deduction to the transferor in the income years preceding the year of transfer.

Paragraph (b) provides that no deduction of the amount first mentioned in paragraph (a) is to be allowed from the assessable income derived by the transferor in any income year.

It thus prohibits the transferor from deducting from his assessable income the amount of the cost price to the transferee, as determined under paragraph (a), which is deemed to have been incurred by the transferee in accordance with paragraph (c).

It should be noted, however, that this would not restrict the rights of the transferor to claim a deduction for that portion of the cost of the patent rights which have been retained by him.

For example , assume the transferor incurred expenditure of $100,000 in devising an invention, and the Commissioner had agreed pursuant to section 83(3)(a), that the cost should be spread evenly over a ten year period. If that person transferred 40 percent of the rights to his wife in accordance with a "matrimonial agreement" after three years, the portion of the cost which had not yet been written off would be $70,000. The effect of this amendment would be that:

  1. The portion of the cost price able to be written off by the husband over the balance of the life of the patent would be $42,000, which would be able to be written off at the rate of $6,000 per annum.
  2. The portion of the cost price able to be written off by the wife over the balance of the life of the patent would be $28,000, which would be able to be written off at the rate of $4,000 per annum.
  3. In the year of transfer, the husband would be entitled to write off costs of $6,000, and the wife $4,000, of the cost price in accordance with (a) and (b) above.

Section 49 - Standard Value and Nil Value of Livestock

Section 52 of this Amendment Act (discussed later in this PIB) specifies the value at which trading stock (including livestock) is deemed to have been transferred. Section 49 of this Amendment Act amends section 86 of the principal Act by providing rules for the valuation of livestock which has been transferred in accordance with a "matrimonial agreement" and should be read in conjunction with section 52.

Subsection (1) - repeals paragraph (d) of subsection (2A). Paragraph (d) provided that the value taken into account by the taxpayer in terms of the progressive 3 year write down to standard value pursuant to subsection (2A) was deemed to be the "standard value adopted or last adopted by the taxpayer ..." for the purposes of section 86 and the other "livestock sections" in the principal Act. This repealed provision is replaced in a new subsection (2C) of section 86.

Subsection (2) - adds a proviso to subsection (2A) to ensure that the acquisition of livestock by way of a transfer in accordance with a matrimonial agreement:

  1. Will not of itself constitute the commencing or recommencing to derive income from livestock by the transferee;
  2. may , depending on the facts, be regarded as a commencement by the transferee to derive income from livestock, for the purposes of determining whether any subsequent acquisition of livestock by the transferee should be regarded as constituting such a commencement or recommencement, ie, subsequent livestock acquisition may not be regarded as a commencement.

Subsection (3) inserts three new subsections in section 86 - A new subsection (2C) which, as mentioned above, replaces the previous paragraph (d) of subsection 2A; a new subsection (2B) which sets out rules for determining the value of livestock to be taken into account pursuant to section 85(2) of the principal Act; and a new subsection (2D) dealing with the acquisition date of land transferred in accordance with a matrimonial agreement.

(new)Subsection (2B)

Where a taxpayer acquires livestock by way of a transfer in accordance with a matrimonial agreement the value of that livestock to be taken into account by the taxpayer (transferee) shall be:

  1. Where the taxpayer (the transferee) was, before the transfer, deriving income from livestock, the value will be (at the end of the income year in which the transfer occurs):
    • A value determined by the taxpayer in accordance with section 86 (excluding subsection (2B)(b))
  2.  
    • ie the acquisition will be regarded as a normal purchase of livestock and where the taxpayer is, at the time of the transfer, already "locked into" the progressive write down to standard value, subsection (2A) of section 86 will apply.
  1. Where the taxpayer (the transferee) was not , before the transfer deriving income from livestock and the transferor was at the time of the transfer "locked into" the progressive writedown in relation to the livestock transferred and the taxpayer fixes a standard value in relation to the livestock transferred to him/her, the value will be:
    • Where the livestock transferred were purchased (by the transferor) during the income year -
      1. At the end of the first income year (the year the transfer is made) - a value not less than cost to the transferor reduced by one - third of the amount by which cost exceeds the standard value of the transferee.
      2. At the end of the second income year - a value not less than cost to the transferor reduced by two - thirds of the amount by which that cost exceeds the standard value of the transferee.
      3. At the end of the third income year - the standard value of the transferee.
    • Where the livestock were transferred in the income year immediately succeeding the income year in which they were purchased by the transferor -
      1. at the end of the income year of transfer - a value not less than cost to the transferor reduced by two - thirds of the amount by which that cost exceeds the standard value of the transferee.
      2. at the end of the income year after the income year of transfer - the standard value of the transferee.
    • Where the livestock were transferred in the second income year after the income year in which they were purchased by the transferor - the standard value of the transferee.

Examples

Spouse X has been farming for 1 year

Transfers 1,000 sheep to spouse Y

Spouse Y has:

  1. been farming for 5 years
  2. been farming for 1 year
  3. not farmed previously

and has in each case fixed a standard value of $6 per head.

Assume livestock transferred at $18 per head (pursuant to section 52 of this Amendment Act explained later in this PIB).

Example (a) Y has been deriving income from farming livestock prior to the income year of transfer, thus subsection (2B)(a) applies (see A above). As Y is not locked into subsection (2A) writedown, the livestock may be written down by Y to standard value $6, in the income year of transfer.

Example (b) Although Y has already commenced to derive income from farming livestock, and subsection (2B)(a) thus applies, Y is locked into subsection (2A) because the transfer occurs within the 3 year writedown (to standard value) applicable to Y.

As the livestock were acquired in the second income year (for the purposes of subsection (2A)) the value to be taken into account is cost ($18) reduced by two - thirds of the difference between cost ($18) and standard value ($6).

ie 18 - (2/3 x (18 - 6)) = $10

Example (c) As Y has not, prior to the transfer, derived income from farming livestock, subsection (2B)(b) applies (see B above).

Additional information: livestock transferred -

  1. Some in year in which purchased by X.
  2. Some in year following year in which purchased by X.
  1. Subsection (2B)(b)(i) applies ie - Cost, less one - third of the difference between cost and standard value.
  2. 18 - (l/3 x (18 - 6))

    = 18 - 4

    = $14.00

  3. Subsection (2B)(b)(ii) applies ie Cost, less two - thirds of the difference between cost and standard value
  4. 18 - (2/3 x (18 - 6))

    = 18 - 8

    = $10.00

    NB If the livestock had been transferred in the second or third income year following the income year of purchase by X, or X had been farming for more than 3 years and so was not locked into the progressive writedown, -

    Y would have been able to write the stock down standard value in the year of transfer.

(new) Subsection (2)(c)

As mentioned previously this new subsection replaces paragraph (d) of subsection (2A).

(new) Subsection (2D)

This subsection provides that land transferred in accordance with a matrimonial agreement is deemed to have been acquired by the transferee on the day it was acquired by the transferor. This is important in the context of determining whether the section 86(2A) progressive writedown is activated, ie, acquisition of additional land and purchase of livestock in next succeeding three income years.

Section 50 - Income Derived from Disposal of Trading Stock

Section 90(3) of the principal Act operates where trading stock:

  1. has been disposed of otherwise than by sale; or
  2. has been sold for a consideration other than cash,

and deems a sale to have taken place at market value or such value as the Commissioner determines.

Section 49 of this amendment Act makes it clear that section 90 is not to apply where there has been a disposal (transfer) of trading stock in accordance with a "matrimonial agreement". (Section 52 of this Act provides the code for determining the value of trading stock so transferred.)

Section 51 - Sale of Trading Stock for Inadequate Consideration

Section 91 of the principal Act applies where trading stock is sold or otherwise disposed of without consideration in money or money's worth for a consideration that is less than market price or its true value. It deems the disposal to have taken place at market value or at such value as the Commissioner determines.

Section 51 of this amendment Act makes it clear that section 91 is not to apply where there has been a disposal of trading stock in accordance with a matrimonial agreement.

Section 52 - Alternative Value for Trading Stock Transferred in Accordance with Matrimonial Agreement

This section inserts a new section 91A in the principal Act to govern the value at which trading stock can be transferred in accordance with a "matrimonial agreement". Trading stock in this context includes livestock.

  1. Where the trading stock transferred was:
    • used by the transferor in any business; and
    • held by the transferor at the commencement of the income year,
  2. it is deemed to have been sold by the transferor to the transferee on the date of transfer and the sale price is deemed to be the greater of:

    1. The value taken into account, under section 85(2) ("valuation of trading stock including livestock") by the transferor at the end of the preceding income year;
    2. The value to be taken into account by the transferee at the end of the income year.

    NB Where the trading stock is livestock the value under (ii) is the standard value fixed in accordance with section 86(2), and where the trading stock is other than livestock , the value under (ii) is fixed pursuant to section 85(4).

  1. Where the trading stock transferred was:
    • used by the transferor in any business; and
    • acquired by the transferor during the income year in which the transfer occurs:
  2. the deemed sale price is the price at which the trading stock was acquired by the transferor.
  3. Where the trading stock transferred was not used by the transferor in any business the deemed sale price is the cost price of the trading stock to him.
  4. These measures mean that the transferor disposes of the trading stock at a value which as far as possible equates the value in his accounts so that the transfer does not give rise to a tax liability in his hands. Where the value taken into account by the transferor and the transferee differ, thus giving rise to a tax liability, the liability is raised in respect of the transferor.
  1. Where the transferred trading stock was used by the transferor in the carrying on of a business but is not used by the transferee in any business and is subsequently sold by the transferee, the sale is deemed to be a sale of trading stock used by the transferee in the carrying on of a business. This provision is necessary to ensure that on ultimate sale of the livestock the realised profit is liable for income tax.
  2. Examples

    1. Spouse X has been farming for 10 years and the standard value of his sheep has been fixed at $4 per head. Under a matrimonial agreement 5,000 sheep are transferred to spouse Y.
    2. Spouse Y has an approved standard value for sheep of $6 per head.

      Answer

      The transfer is deemed to have taken place at the greater of the value taken into account by X, ($4) or the standard value Fixed by Y, ($6).

      Thus $6

      At this value X has generated income of $2 per head ($4 stock on hand: $6 sales), ie, $10,000 at the point of transfer.

    3. Spouse X has been farming for 10 years and has a standard value for sheep of $4.

      Under a matrimonial agreement 5,000 sheep are transferred to Spouse Y.

      Spouse Y has a standard value of $6 per head. The stock transferred by X were purchased during the income year in which the transfer occurs, for $18 per head.

      Answer

      The transfer is deemed to have taken place at cost to the transferor, ie, $18 per head.

      At this value

      - X has no tax liability, ie, purchases equal sales;

      - Y has purchased at 18 per head (eligible for write - down to standard values - see comment on section 49 of this Amendment Act).

    NB Although these examples are in relation to farmers, the principle is the same for trading stock of other businesses carried on by a transferor.

Section 53 - Revised Assessments where Assets Purchased and Resold after Deduction of Lease Payment

Previously section 107 of the principal Act provided that where a leased asset was sold or disposed of to an associated person, the Commissioner could recover lease payments previously allowed as a deduction (up to the profit on sale). Section 53 of this amendment Act amends section 107 to ensure that where an asset is transferred in accordance with a "matrimonial agreement", the transferor will not be subject to the recovery provisions.

The amendments made by section 53 are:

  • Subsection (1) deems a transfer of a leased asset, that is made in accordance with a "matrimonial agreement", not to be a disposition to which section 107 applies.
  • Subsection (3) deems transfers of assets in accordance with a "matrimonial agreement" not to be a disposition to which section 107(3) (which provides for the consideration or disposal of the asset to be determined by the Commissioner in certain circumstances) refers.
  • Subsections (2) and (4) cover the situation where the person to whom the asset is transferred under the "matrimonial agreement" subsequently disposes of the asset.
    • Subsection (2) inserts a new subsection (1A), to provide that where:
      1. Any person has leased, rented, or hired any asset, being any plant or machinery (including a motor vehicle) or other equipment or a temporary building, and the Commissioner has allowed a deduction, in calculating the assessable income of that person in any income year, for the consideration paid or given in respect of that lease, rental, or hire; and
      2. That person (or any other person where that person and that other person are associated persons) at any time purchases or otherwise acquires that asset; and
      3. That person (or that other person) who purchases or otherwise acquires that asset (referred to as the "transferor") at any time transfers that asset to any further person (referred to as the "transferee") in accordance with a matrimonial agreement; and
      4. The transferee sells or otherwise disposes of that asset for a consideration in excess of the amount at which, under the new paragraph (c) in subsection (3), that asset is deemed to have been sold by the transferor,
    • the Commissioner may recover the excess as being assessable income of the transferee . The recovery is limited to the lesser of the excess or the total amount of the deductions allowed to the transferor in calculating his assessable income.
    • Subsection (4) adds a further paragraph, paragraph (c), to section 107(3) which provides that where the asset is transferred in accordance with a "matrimonial agreement", it is deemed to have been transferred at book value or, if the transfer takes place in the same income year that the asset was acquired by the transferor, then at cost price. In effect, this deems the transferee to have incurred expenditure in the acquisition of the asset, which in turn enables the Commissioner to determine (in the event of the asset being sold by the transferee) any profit on sale for the purposes of the new subsection (1A).

Section 54 - Depreciation Allowance where Asset Acquired by Taxpayer as a Result of a Transfer Under a Matrimonial Agreement

This section inserts a new section 111A into the Act to govern the allowance of depreciation in respect of assets transferred in accordance with "matrimonial agreements". Effectively, it permits:

  • Assets to be transferred at book value;
  • The transferee to claim the same depreciation allowance as would have been available to the transferor if the transferor had retained the asset.

The legislation achieves these ends, for the purposes of all sections of the Act relating to the allowance of depreciation (sections 108 to 110 and 112 to 116), by providing that each of those sections shall apply as if:

  1. The transferee had incurred expenditure in the acquisition of the asset of an amount equal to the price at which the transferor is deemed to have disposed of it.
    1. The transferee had, where appropriate, met the same requirements (for depreciation to be allowable) as to purchase, acquisition, erection, etc, as were met by transferor. For example, if the asset was altered by transferor, that alteration will be deemed to have been carried out by the transferee for the purposes of post - transfer depreciation allowances (eg, for the purposes of section 112(2)(i) which relates to buildings that are obliged to meet hygiene requirements for export fish processing or storing).
    2. Where the asset was new when it was purchased, acquired or erected by the transferor, it was new when it was acquired by the transferee, (eg, for the purposes of section 112(2)(a) which relates to new plant and machinery purchased for business purposes).

The first proviso to the new section 111A ensures that the transferee cannot claim a greater depreciation deduction than that which would have been available to the transferor had he retained the asset, while the second proviso requires the Commissioner to allow depreciation, on any building transferred, on the basis of original cost price to the transferor, not the deemed transfer value.

It should be noted that these amendments simply place the transferee in the position of the transferor in regard to purchase, erection, alteration, etc, of the asset, and depreciation allowed in respect of it, in the period up to the point of transfer. They do not mean that the transferee is automatically entitled to the same deductions for depreciation, post - transfer, as could have been claimed by the transferor had the asset not been transferred. The transferee must still meet in his or her own right the other tests contained in the various sections dealing with depreciation (in particular, he or she must use the asset in the production of his or her assessable income before he or she can have any entitlement to depreciation allowances).

For example, assume a taxpayer engaged in a farming or agricultural business installed new plant and machinery to be used wholly for the purposes of that business, but transferred that plant or machinery, in the year of its purchase, under a "matrimonial agreement". (If the asset had not been transferred, the transferor would have been entitled to first year depreciation under section 112(2)(c).) Although, for the purposes of that section, the transferee will be deemed to have installed new farming or agricultural plant or machinery, that person must use that plant or machinery in a farming or agricultural business for paragraph (c) of section 112(2) to apply. If the transferee used that plant or machinery in any other business, then it would need to be considered under the provisions of section 112(2)(a).

Section 55 - Revised Assessment where Assets Sold after Deduction of Depreciation Allowances

Section 117 enables the Commissioner to recover depreciation previously allowed as a deduction, where an asset is disposed of at a profit. Section 117 is amended by section 55 of this Amendment Act to provide special rules where an asset is transferred in accordance with a "matrimonial agreement" (as defined - please see comments on section 43 of the amendment Act). Specifically, section 55 inserts a new subsection (6A) to section 117, which provides that:

  • The provisions of subsection (5) of section 117, which enable the Commissioner to determine the consideration for the sale in certain circumstances, will not apply in cases of such transfers. (The words "notwithstanding the provisions of subsection (5) of this section" in the first two lines of the new subsection (6A) are relevant).
  • The asset is deemed to have been disposed of by the transferor at the book value in the accounts at the commencement of the year of transfer. Where the asset was purchased by the transferor in the year of transfer, it is deemed to have been transferred at that purchase price (subsection (6A)(a)).
  • The transferee is deemed to have been allowed a deduction for depreciation of that asset of an amount equal to the aggregate of the amounts of depreciation allowed thereon to the transferor (subsection (6A)(b)).

The effect of these amendments is that where such a transfer of an asset takes place, no depreciation is recoverable to the transferor as the asset is treated as having been disposed of at the lesser of book value or cost price. If the transferee subsequently disposes of the asset for an amount in excess of the transfer value, depreciation is recoverable (to the transferee) up to the combined total of that allowed to the transferor and transferee.

For example, assume a taxpayer has owned an asset for five years. It cost $1,000 and as at 31 March 1984 it had a book value of $590. The asset is transferred on 28 April 1984 in accordance with a "matrimonial agreement" at the book value of $590 and over the next two years the transferee claims depreciation of $112. On 25 May 1986 the transferee sells the asset for $900. The transferee would be assessable under section 117 not only for the depreciation written off by him (or her), but also in respect of $310 of the depreciation allowed to the transferor but deemed, in accordance with the new subsection 6A(b), to have been allowed to the transferee.

Section 56 - General Provisions Relating to Investment Allowances

Section 118 of the principal Act sets out the general provisions applicable to all the investment allowances to which sections 119 to 123 apply. Subsection (3) of section 118 enables the commissioner to disallow any investment allowance, which would otherwise be allowable, in respect of an asset which is disposed of within 12 months of the date of its first use by the taxpayer.

Section 56(1) of this Amendment Act inserts a proviso in section 118(3) which provides that subsection (3) will not apply where the asset is transferred under a "matrimonial agreement". (But see note on new subsection (11) below.)

Subsection (2) of section 56 inserts two new subsections, (10) and (11) in section 118. These new subsections set out the provisions which are to apply to the transfer of assets made in accordance with a "matrimonial agreement" (as defined - see comments on section 43 of the Amendment Act).

The new subsection (10) provides that where the transfer takes place in the income year in which the asset was acquired, installed or extended by the transferor:

  1. The transferee shall be deemed to have acquired, (or installed or extended) that plant or machinery on the day on which it was acquired (or installed or extended) by the transferor.
  2. The transferee shall be deemed to have first used that plant or machinery:
    • in the production of his/her assessable income; and
    • in the same manner as it was first used by the transferor in the production of his assessable income,
    on the day it was first so used by the transferor;
  3. The transferee shall be deemed to have incurred (in the income year in which that transfer is made) capital expenditure in acquiring, installing, or extending that plant or machinery, of an amount equal to the amount of the expenditure of a capital nature incurred by the transferor in acquiring, installing, or extending that plant or machinery;
  4. That plant or machinery shall, where it was new when it was acquired, (or installed or extended) by the transferor, be deemed to be new on the date on which it was acquired by the transferee as a result of the said transfer;
  5. The transferor shall not be entitled to any deduction under any of sections 119 to 123 of this Act in respect of any of the capital expenditure incurred by him which is, under paragraph (c) of this subsection, deemed to have been incurred by the transferee.

For example , assume a taxpayer engaged in a farming or agricultural business, installed new plant or machinery, at a cost of $100,000, to be used wholly for the purposes of the business, but transferred a 40 percent interest in that plant or machinery in the year of installation under a "matrimonial agreement". If the asset had not been transferred, the transferor would have qualified for an investment allowance on that $100,000 pursuant to section 122.

The new subsection (10) enables the transferee to qualify for the section 122 allowance on $40,000 of the cost of the asset by deeming that person:

  1. To have installed that plant or machinery on the day it was installed by the transferor. (For the purposes of subsection (3) of section 122.)
  2. To have first used that plant or machinery primarily and principally and directly in and for the purposes of a farming or agricultural business on land in New Zealand. (For the purposes of subsections (1) and (3) of section 122.)
  3. To have installed NEW plant or machinery (where it was new when installed by the transferor), on the day it was installed by the transferor. (For the purposes of subsection (3) of section 122.)
  4. To have incurred expenditure of a capital nature of $40,000, in the installation of that plant or machinery. (For the purposes of subsection (3) of section 122.)

Finally, paragraph (e) of subsection (10) prevents the transferor from claiming any deduction under section 122 in respect of the 40 percent interest transferred.

The overall effect is that the transferor is entitled to investment allowance on $60,000 and the transferee to investment allowance on $40,000.

The new subsection (11) provides that where:

  1. As a result of any transfer made in accordance with a "matrimonial agreement", any plant or machinery is transferred in the income year next succeeding the income year in which that plant or machinery was acquired, installed, or extended by the transferor; and
  2. The transferee sells, disposes of, or otherwise ceases to use that plant or machinery (being plant or machinery in respect of which the transferor has been allowed a deduction by way of an investment allowance) in the production of assessable income in New Zealand within 12 months after the date on which the plant or machinery was first so used by the transferor;

the Commissioner may disallow the deduction allowed to the transferor.

Subsection (11) in effect treats the sale of the asset by the transferee within 12 months of the date on which the asset was first used by the transferor, as a disposition by the transferor to which section 118(3) would otherwise have applied. It enables the Commissioner to disallow the claim made by the transferor .

Section 57 - Certain Expenditure Relating to Energy Conservation

This section amends section 125 of the principal Act which allowed a 100 percent write - off of certain capital expenditure relating to energy conservation incurred on or before 31 March 1982. Although the deduction is no longer available (except in situations where a binding contract for the purchase of a qualifying asset was entered into on or before 31 March 1982), subsection (4) of section 125 still applies to ensure that where any asset for which a deduction has been allowed is disposed of within five years of the date of acquisition by the taxpayer, the sale price is treated as assessable income of the vendor, up to the original cost of the asset.

This amendment provides that where any asset, in respect of which a deduction for energy conservation expenditure has been allowed under section 125, is transferred in accordance with a "matrimonial agreement" subsection (4) will not apply to the transfer but the transferee will be assessable on the proceeds of any sae made within five years after the date of acquisition by the transferor . In addition, the section enables the deduction for energy conservation expenditure to be claimed by the transferee should any asset, in respect of which the transferor could have claimed the deduction through having entered into a binding contract for its purchase, be transferred in accordance with a "matrimonial agreement". These are achieved as follows:

  • Subsection (1) of section 57 inserts a proviso to subsection (4) of section 125 to provide that the subsection shall not apply to transfers of assets made in accordance with a "matrimonial agreement".
  • Subsection (2) inserts new subsections(4B) and (4C). Subsection (4B) provides that where an asset is transferred in accordance with a "matrimonial agreement" in the year it was acquired by the transferor:
    1. The transferee is deemed to have acquired it on the day it was acquired by the transferor.
    2. If the asset was new when it was acquired by the transferor, it is deemed to have been new on the date on which it is acquired by the transferee.
    3. The transferee is deemed to have incurred the same capital expenditure in the acquisition of the asset as was incurred by the transferor.
  • The effect of this new subsection is that where the transferor has satisfied the transitional binding contract provisions relating to the termination of the section 125 deduction, and the asset is transferred in accordance with a "matrimonial agreement" in the year of purchase, then the provisions of section 125 will apply as though the words "(not being qualifying expenditure incurred after the 31st day of March 1982)" in subsection (2) were omitted, and as though the transferee had incurred capital expenditure on the purchase of that new asset on the date on which it was acquired by the transferor. This means that if the transferee meets the other provisions of the section, the transferee will be eligible for the 100 percent write - off of the qualifying energy conservation expenditure.
  •  
  • The new subsection (4C) provides that where an asset, in respect of which the cost price has been allowed as a deduction to the transferor under section 125, is transferred in accordance with a "matrimonial agreement":
    1. The transferor is deemed to have disposed of it for nil value;
    2. The transferee is deemed to have acquired the asset for nil value;
    3. Where the asset is disposed of by the transferee within five years of its purchase by the transferor, the consideration received on that disposal is assessable income of the transferee in the year of disposal.
  • The proviso then limits the amount assessable under (c) above to an amount equal to the original cost price to the transferor.

Section 58 - Revised Assessments Where Land or Fish Farms or Certain Assets Sold Within 10 Years of Acquisition after Deductions in Respect of Certain Expenditure

Section 129 of the principal Act was substituted last year to give effect to the 1982 Budget proposals relating to sales of property (and certain assets) within 10 years of acquisition. It provides for the recovery of deductions allowed for:

  1. farm development expenditure, and
  2. certain development assets; and
  3. certain interest payments.

Section 58 of this Amendment Act varies the general rules under section 129, in cases of transfers of land and assets in accordance with a "matrimonial agreement".

The transfer of land in accordance with a "matrimonial agreement" constitutes a "disposal" for the purposes of section 129. Prior to this amendment the disposal would have been deemed to have taken place at market value and the transferor would have been subject to the recovery provisions of section 129 on what in essence would have been an unrealised profit. The transferee would have been deemed to have acquired the land on the day of the transfer and the 10 year ownership period in relation to the transferee would have run from that time.

The amendments made in section 57 overcome this situation in regard to "matrimonial agreement" transfers by providing rules for the valuation of land and other assets referred to in section 129 and deeming the land or asset to have been acquired by the transfers on the day it was acquired by the transferor.

Subsection (1) - inserts a new subsection (3A) to apply where assets (other than land) in respect of which a deduction has been allowed under section 127 or section 128 are transferred in accordance with a "matrimonial agreement" (eg irrigation plant installed by farmers; pontoons, rafts and buoys acquired by mussel farmers).

The transferee is deemed to have:

  1. acquired the asset on the day it was acquired by the transferor; and
  2. acquired the asset at a cost equal to the cost to the transferor; and
  3. been allowed a deduction under section 127 or section 128 equal to the deduction allowed to the transferor in respect of the asset.

These provisions ensure that:

  1. In the event of subsequent disposal by the transferee, the 10 year recovery period runs from the date the asset was acquired by the transferor and not from the date of transfer;
  2. At the point of transfer, the transferor disposes of the asset at its cost to him and therefore derives no profit which can activate recovery of development expenditure or interest under section 129;
  3. If the asset is sold by the transferee within 10 years after it was purchased by the transferor, the transferee will be subject to recovery of the development expenditure and/or interest allowed as a deduction to the transferor.

Subsection (2) - inserts a new subsection (7A) to apply where land , whether with or without any improvements, is transferred in accordance with a "matrimonial agreement".

The transferee is deemed to have:

  1. Acquired the land on the day on which it was acquired by the transferor; and
  2. Acquired it at a price equal to the aggregate of the amounts of expenditure referred to in section 129(2)(c) and (d)
  3. ie original cost plus capitalised expenditure;

    AND

  4. Been allowed a deduction for interest and a deduction for development expenditure equal to the deduction(s) so allowed, in respect of or in relation to that land, to:
    1. the transferor; or
    2. any other person (being an associated person of the transferor); or
    3. the transferor and that other person.

These measures have the same effect as that explained above in relation to the new subsection (3A) of section 129 (see comment on subsection (1) of this amending section).

Example

Spouse X - purchased farm property 18.1.77  
  Cost $115,000
  - Deducted farm development expenditure (s 127) $15,000

Property transferred in accordance with matrimonial agreement 6.8.83 to Spouse Y.

New subsection (7A) deems the property to have been acquired by Y on 18.1.77 ((7A)(a)(i)) at a price equal to $115,000 ((7A)(a)(ii)). Further, Y is deemed to have incurred, and to have been allowed a deduction of, $15,000 development expenditure ((7A)(b)).

If Y sells the farm before 18.1.87 at a profit, ie within 10 years of acquisition, the $15,000 development expenditure will be recoverable.

Subsection (3) amends section 129(9)(e)(i), by substituting for the former reference therein to section 25(2) of the Matrimonial Property Act 1976, a reference to section 25(l) of that Act.

General

In regard to orders made under the Matrimonial Property Act 1963: ie where a widow or widower obtains a Court order after the death of a spouse, there are already provisions in section 129 that give tax relief. Section 129(9)(b) would exclude the disposition of land or an asset by the trustees in terms of the Court order, while subsection (9)(c) or (9)(d) could apply to a disposition by the surviving partner where the requirements of those subsection 8 are satisfied.

Section 59 - Pensions Payable to Former Employees

Under the Matrimonial Property Act 1976 a pension right is matrimonial property and as such is capable of being divided between both spouses.

Section 151 of the principal Act enables employers to gain a deduction for pensions paid to former employees. It does not however permit a deduction for pensions paid to the spouses of living former employees. To harmonise with the Matrimonial Property concept it was necessary to amend this section to enable the employer to continue to be entitled to a deduction where he is required to divide a pension between spouses in terms of a "matrimonial agreement".

Section 59 of this Amendment Act accordingly adds to section 151(1) a provision that where a pension payment is divided between spouses in terms of a "matrimonial agreement" the provisions of subsection (1) are to apply in the same manner and to the same extent as if the payment had been made in full to the former employee.

This section applies to all such payments made on or after 28 July 1983 irrespective of the date on which the agreement or Court order was made.

Section 60 - Losses Incurred May be Set Off Against Future Profits

Section 188 of the principal Act provides that in order that losses of a company may be carried forward and set off against income derived in later years, a 40 percent common shareholding test must be met. This amendment ensures that a change of shareholding arising from a transfer of shares pursuant to a matrimonial agreement will not affect the continuity of shareholding required under section 188(7).

The amendment adds a new paragraph (c) to section 188(7) to provide that where the 40 percent test set out in paragraph (a) is not met (for reasons other than those set out in paragraph (b) of that subsection), the losses will still be able to be offset against profits of the relevant later year where the failure to meet that test was caused by the fact that the shares responsible had been transferred in accordance with a matrimonial agreement.

Section 61 - Loss Incurred in Specified Activity

This section amends section 188A of the principal Act in two respects, to cater for transfers of land in accordance with a "matrimonial agreement": the first relates to the transfer of land upon which the transferor conducted an "established activity"; the second to transferred land on which the transferee commences to conduct a specified activity.

Subsection (1) - Established Activity

The term "established activity" (as enacted in 1982) means any specified activity (or activities) currently conducted by an "existing farmer", where the conduct of that activity on 11 October 1982 constituted that taxpayer's livelihood and sole or principal source of income. That definition is now amended to include also the situation where land upon which an "existing farmer" conducts an "established activity" is transferred (by way of "matrimonial agreement") to another person who also is an existing farmer and who continues to conduct that specified activity on that land.

In order that a specified activity may, in any income year, constitute an "established activity" conducted by the transferee, the following conditions must be met:

  1. The land upon which that activity is conducted by the transferee must have been acquired by the transferee by way of a "matrimonial agreement" (made on or after 28 July 1983); and
  2. The transferee must, in relation to that income year, be an "existing farmer"; and
  3. The transferor must have conducted that activity on 11 October 1982 and it must have constituted his livelihood and sole or principal source of income on that date.

Note, in regard to paragraph (c), that where the transferor conducted, immediately before the transfer, 2 or more specified activities that together constituted an "established activity" in relation to him , the specified activity transferred to, and thereafter conducted by, the transferee need be only 1 of those specified activities. However, where, immediately before the transfer, the transferor conducts any combination of specified activities and non - specified activities, the requirements of paragraph (c) above will not be met - the transferred specified activity conducted thereafter by the transferee will not constitute therefore an "established activity" in relation to the transferee.

Where all of the requirements specified at paragraphs (a) to (c) above are met, the transferred specified activity conducted by the transferee will, in relation to him/her, constitute an established activity in any income year in relation to which the transferee qualifies as an "existing farmer". Accordingly, that "established activity" will not, in relation to that income year, be subject to the loss - containment provisions in section 188A(7) - see section 188A(6).

In no case will be above provisions apply where the specified activity conducted on the land transferred consists of the deriving of rents, etc - see paragraph (i) of the definition of "specified activity" - as that specified activity is specifically debarred for the purposes of both the "existing farmer" and "established activity" definitions.

Subsection (2) - Specified Activity. Commenced by Transferee on Transferred Land

This subsection inserts a new subsection (4A) into section 188A of the Tax Act. The new subsection provides that where a taxpayer has acquired land pursuant to a "matrimonial agreement" and subsequently commences to conduct a specified activity on that land, the taxpayer shall, for the purposes of section (4) of section 188A, be deemed to have acquired that land on the date on which it was originally acquired by the transferor.

Subsection (4) enables an "existing farmer" to diversify into a specified activity (that is different from every other specified activity carried on at time of diversification) that is conducted on land that has been held by him for five years preceding the date of commencing to diversify, without that new specified activity being subject to the $10,000 loss containment provision.

The new subsection (4A) enables the recipient of land that is transferred in accordance with a "matrimonial agreement" to receive the benefit of this "5 year holding period" treatment where that transferee diversifies into a specified activity (that is different from every other specified activity conducted by that person at the time of diversification or conducted by the transferor at the point of transfer under the "matrimonial agreement" - see comment below on proviso to subsection (4A) - and that diversification specified activity is conducted on land held by the transferor and subsequently by the transferee for an aggregate period of at least five years.

The proviso to subsection (4A) ensures that the transferee cannot gain, through this "5 year holding period" treatment, a greater advantage than would otherwise have been available to the transferor had he retained that land. The proviso restricts the application of this new subsection (4A) to new specified activities which the transferee commences to conduct on the transferred land AND which are different from every specified activity carried on by the transferor on that land immediately prior to the transfer.

Section 62 - Resident Mining Operators

Section 62 amends section 220 of the principal Act to stipulate the income tax consequences where assets are transferred from a resident mining operator in accordance with a "matrimonial agreement" and where assets are transferred to a resident mining operator in accordance with such an agreement.

The general effect of the amendments is briefly that:

  • The transferred asset is deemed to have been disposed of at the value (if any) at which it stands in the transferor's accounts immediately prior to the transfer.
  • The transferee is deemed to have acquired the asset at that value;
  • If the transferee subsequently disposes of that asset he/she is taxable on any profit on disposal, irrespective of whether, during the period of tenure of that asset, the transferee is a resident mining operator.

It should also be noted that where the asset transferred is one in respect of which depreciation has been written off by the transferor, the provisions of the new section IIIA and section 117(6A) apply in relation to the transferee in regard to the depreciation originally allowed as a deduction to the transferor.

A new subsection (7A), which is inserted in section 220 by section 62 of this Amendment Act, contains the following provisions in respect of any asset which is so transferred in accordance with a "matrimonial agreement":

  1. Where the transferor is a resident mining operator who, immediately before the transfer, has used the asset in deriving assessable income from mining, the asset is deemed to have been transferred for the lesser of:
    1. Cost price.
    2. Book value, where that asset is one in respect of which depreciation has been allowed as a deduction, eg, plant or machinery used in general office administration.
    3. Where the cost of the asset has been written off under section 220 as exploration or development expenditure, the amount (if any) of the cost that has not been allowed as a deduction to the transferor. In most instances this amount will be "Nil".
  2. Where paragraph (a) applies to the transferor, the transferee is deemed to have incurred the same amount of expenditure in acquiring the asset as the amount for which the transferor is deemed, under (a), to have disposed of it.
  3. Where the transferor is a resident mining operator who transferred a mining asset in respect of the cost of which he has claimed a deduction by way of exploration or development expenditure, and the asset is transferred to a transferee who is not a resident mining operator, then the following provisions apply when the transferee subsequently disposes of the asset:
    1. The transferee is deemed to be a resident mining operator in relation to that disposal;
    2. The disposal is deemed to be one to which, in relation to subsections 12, 13 and 14 of section 216, subsection 7 of section 220 applies. (In effect, the transferee is taxable on the full amount of the consideration for the disposal.)
    3. The consideration receivable for the purposes of section 216 is deemed to be the amount by which the disposal price exceeds the transfer value as determined under paragraph (a)(iii) above. (In effect the transferee is taxable on the excess of disposal price over the amount that was the value at point of transfer to him/her.)
  4. Where the transferee is, immediately prior to the transfer, a resident mining operator that person is deemed to have incurred expenditure in the acquisition of the asset of an amount equal to the lesser of:
    1. The original cost price to the transferor;
    2. The latest book value in the accounts of the transferor, where that asset is one in respect of which depreciation has been allowed as a deduction,
    3. Where the cost of the asset has been written off under section 220 as exploration or development expenditure, the amount (if any) of the cost that has not been allowed as a deduction to the transferor.
  5. Where paragraph (d)(iii) applies, the transferee is deemed to have acquired the asset as a result of exploration or development expenditure incurred by the transferee, for the purposes of subsections 11, 12, 13 and 14 of section 216. (In essence, this entitles the transferee to claim a deduction by way of exploration or development expenditure in respect of the amount of the deemed value (if any) at which the asset is transferred to him/her, and for the transferee to be taxable on any consideration received on any subsequent disposal of the asset.)