Issued
01 Apr 1987

Income Tax Amendment Act (No. 4) 1986 (Apr 1987)

Archived legislative commentary on the Income Tax Amendment Act (No. 4) 1986 from PIB vol 162 Apr 1987.

This commentary item was published in Public Information Bulletin Volume 162, April 1987

More information about Public Information Bulletins.

This Act (which prior to being passed was part of the Taxation Reform Bill (No. 2) 1986) received the Governor-General's assent on 15 December 1986.

The Act gives effect to:

  • The changes to the income tax provisions dealing with primary sector taxation first announced in the Economic Statement of 12 December 1985 and set out in the Consultative Document on Primary Sector Taxation. Many of the original proposals were modified as a result of the Report of the Consultative Committee on Primary Sector Taxation.
  • The changes to the income tax treatment of Bloodstock Breeders, first announced in the 1986 Budget and outlined in the "Discussion Paper on the Taxation of Bloodstock Breeders". The Act reflects the changes made as a result of the subsequent consultation process.

Other important measures contained in the Amendment Act are:

  • New legislation which deals with information requisitions by the Commissioner in respect of offshore payments, as announced in the 1986 Budget.
  • New legislation which codifies the income tax treatment of GST.
  • The imposition of income tax on the new State-owned Enterprises, the Energy Trading Operators and Harbour Boards, as announced in the Statement on Government Expenditure Reform 1986.
  • The restriction on the offset of losses sustained by Special Partnerships, as announced in the 1986 Budget.
  • Amendments to provide for the payment of provisional tax in three equal instalments.
  • Amendments to provide for the payment of terminal tax by the 11th month of a taxpayer's accounting year and no later than the following 7 February for taxpayers with balance dates falling on or after 31 March.
  • The abolition of the one month's grace period after the due date for payment of both provisional tax and terminal tax before a late payment penalty is imposed.

Application

As many of the amendments apply from dates other than from the income year commencing 1 April 1986 particular attention should be given to the application dates of the various sections.

Part I - Introduction/Summary of Provisions

Part I of the Amendment Act gives effect to the income tax changes in respect of:

  1. Taxation of Livestock.
  2. Taxation of Bloodstock.
  3. Development Expenditure.
  4. Forestry.
  5. Other Primary Sector Provisions.

The changes in relation to "A", "C", "D" and "E" were first announced in the Economic Statement of 12 December 1985 and outlined in full in the Consultative Document on Primary Sector Taxation, with many of the original proposals being modified as a result of the Report of the Consultative Committee on Primary Sector Taxation. The changes in relation to "B" are a result of the proposals outlined in the "Discussion Paper on the Taxation of Bloodstock Breeders" issued on Budget night and the subsequent consulting process.

A. Taxation of Livestock

Section 3 inserts new definitions relating to livestock in section 2 of the Income Tax Act.

Section 5 outlines the different sections under which a taxpayer may elect to value livestock. The section also provides limitations for livestock valuation elections in respect of certain partnerships.

Section 6 outlines the method by which taxpayers can elect to adopt the various schemes for valuing livestock. The section provides that notification of a change in valuation methods must be given to the Commissioner at least 12 months prior to the income year in which the change is to take effect.

Section 7 outlines the new trading stock scheme for livestock valuation and outlines the circumstances in which a write-down to standard values must be spread over three income years.

Section 8 inserts new sections in the Income Tax Act which set out how livestock will be valued under the new schemes and how the income write-off and income spread is to be calculated:

Section 86A details the new herd scheme.
Section 86B details the cost option.
Section 86C details the high-priced livestock scheme
Section 86D provides for the determination of average market values for livestock.
Section 86E provides for the write-off of part of the livestock revaluation income.
Section 86F provides for the spread of the balance of revaluation income.
Section 86G provides for a number of transitional provisions.

Section 9 deals with minor consequential amendments.

The changes outlined below apply only to "specified livestock", namely:

  • Sheep
  • Cattle
  • Deer
  • Goats
  • Pigs

Any livestock other than of these livestock types will continue to be subject to the existing valuation provisions. That is, taxpayers can adopt cost price, market value, replacement price or an approved standard value in respect of such livestock.

Taxpayers owning "specified livestock" are required to revalue their livestock on hand at the end of the 1987 income year and all (in most cases) of the income resulting from the revaluation will be written-off for tax purposes.

Any revaluation income not written-off is eligible to be spread forward over 5 income years.

Taxpayers who cease farming after 12 December 1985 and prior to the end of the 1987 income year are also eligible for an income write-off.

For the 1988 and future income years taxpayers have the choice of 3 schemes for valuing livestock. They are -

  1. the trading stock scheme
  2. the herd scheme
  3. the cost option

A separate valuation scheme applies to high-priced purchased livestock.

Election

Taxpayers may elect which scheme they want each type of livestock to be valued under. That is, they may elect that their sheep be valued under the Trading Stock Scheme and that their cattle be valued under the Herd Scheme. Where a taxpayer makes no election in respect of a particular livestock type they will be valued under the Trading Stock Scheme.

Announcement of Standard Values

The Governor-General will, by Order in Council, declare an average market value each income year in respect of each class of specified livestock. Those values will be used for the purposes of valuing livestock under the trading stock scheme and herd scheme.

Trading Stock Scheme

Under the trading stock scheme livestock will be valued at 70 percent of an average of the market values declared for the previous three years. Under this scheme the value of livestock will fluctuate from year to year according to movements in the market value. Any increase from year to year will be taxable and any decreases tax deductible.

Herd Scheme

Under the herd scheme livestock will be valued at the declared market value for the income year. Under this scheme any increases in value from year to year will not be taxable at any stage (i.e. effectively an inflation-proofing of livestock). Conversely, any reductions in value between income years will not be tax deductible at any stage.

Immature livestock (e.g. ewe hoggets) or livestock kept only for meat production (e.g. steers) are not able to be valued under the herd scheme.

Cost Option

Under the cost option livestock will be valued, at the taxpayer's option, at either its cost, its market value or the price for which it can be replaced. Taxpayers electing to value livestock at cost will be required to keep detailed records of stock movements and returns so that an accurate cost can be determined.

Under all three schemes all income from sales of livestock will be taxable and the cost of all purchases deductible. The new schemes simply alter the method of determining the opening and closing values of livestock.

High Priced Livestock

High-priced purchased livestock will be subject to a separate valuation regime. "High-priced livestock" are defined as livestock that are purchased for not less than 3 times (or, for sheep, 4 times) the average market value declared for the income year prior to the year in which they were purchased.

The cost of high-priced livestock will be written-off at specified rates over the expected economic life of the animal. The specified rates are as follows:

% of cost price
Sheep 25
Cattle 20
Stags 20
Deer (other than stags) 15
Goats 20
Pigs 33 1/3

Immature high-priced livestock purchases must be valued at purchase price until they reach 2 years of age, or in relation to pigs, 1 year of age. After that time the annual write-down may commence.

B. Bloodstock

This Amendment Act introduces new provisions into the Tax Act to govern the tax treatment that is to apply to thoroughbred and standardbred horses for 1988 and future years. With effect from the income year commencing 1 April 1987 new rules will apply in relation to the valuation of bloodstock, the treatment of racing expenses and the treatment of horses raced by a stud. In addition, the legislation introduces a new provision to enable profits on sale of breeding stock or on insurance recoveries to be offset against the cost of the replacement animal. Briefly, the new treatment is as follows.

Valuation of Stock on Hand

For 1988 and future years, bloodstock must be valued at its cost price. The only exception to this rule will be in cases where an accident, birth deformity or infertility reduces the market value of a horse by more than 50 percent. In these cases market value may be used.

The cost of breeding stock may be written-down to $1 over a set period that commences in the year in which the animal is first used by the stud for breeding purposes. For stallions, the write-down takes place over a 5 year period at the rate of 20 percent of cost price per annum. For broodmares the write-down is spread evenly over a period that enables the cost to be reduced to $1 in the year in which the mare attains the age of 14 years. For a broodmare first used by a stud for breeding purposes in the year she attains an age of 12 or more years, the write-down must be spread over a three year period.

Transitional rules have been inserted in the legislation for horses owned by the stud at the end of the 1987 tax year. The value at which these horses are brought into account as stock in hand at the end of that year is deemed to be their cost price at the commencement of the 1988 tax year. For horses which commenced to be used for breeding before the end of the 1987 tax year, the legislation enables their 'cost' as at the commencement of the 1988 tax year to be written-off evenly over the remainder of the 5 year period (for stallions) or over the remainder of the period that would have applied had the broodmare been first used for breeding purposes in the 1988 year.

The new legislation applies equally to those thoroughbred horses that are used in the sport horse breeding industry. This industry will be required to value its thoroughbred horses under the new section 84H, with its other horses being required to be valued at cost price, market value or replacement value under section 86(1A).

Horses Raced by the Stud

For 1988 and future years expenses incurred by a stud in racing a horse will not be allowable as a deduction for tax purposes. An amendment has been made to section 106 to provide that the expenses incurred in preparing a horse for racing, the expenses of racing a horse, and all other racing expenses will not be deductible. The exemption from income tax for stake earnings will continue to apply.

The Amendment Act also introduces a new section 212A to deal with the situation where horses are raced by a breeder other than for business purposes. It treats horses that are incapable of being used for future breeding as being raced as a hobby and all other horses as being raced for business purposes. There is provision in the legislation for breeders who race a horse otherwise than for the reason provided in the legislation to apply to the Commissioner to have that reason recognised for tax purposes. For example, a breeder who races a colt could apply to the Commissioner to recognise that the horse is raced as a hobby rather than for business purposes. The application must be made in writing within the period of one month following the date on which the horse is first prepared for racing by the stud and good reasons will need to be supplied for approval to be granted. Wholesale treatment of stud horses as hobby interests will not be accepted.

Horses treated as being raced for business purposes will remain in the stud accounts at cost price and any sale while racing will be taxable income. Any horse treated as being raced as a hobby will be treated as having been sold by the stud at market value at the time that treatment commences to apply. Any income on the sale of the horse while it is being raced as a hobby will not be taxable. If the breeder decides that the horse should be used as a stud animal when it retires from racing it will be treated as a purchase by the stud at market value.

Transitional provisions contained in the legislation provide that horses held outside the stud accounts in a racing account at the end of the 1987 tax year will be required to remain there for the duration of their racing career. If the horse is subsequently used by the stud for breeding, it will be able to be treated as a purchase by the stud using the same basis of valuation as was previously used on its transfer out of the stud accounts.

Purchases of Replacement Breeding Stock - Sales and Insurance Recoveries

Section 117(2) and (3) enable depreciation recovered on the sale of fixed assets or on insurance recoveries to be offset against the cost of replacement assets. A new section, 212B, will enable similar treatment to apply to profits on sale of breeding stock and to insurance recoveries on the death of, or permanent injury to, such bloodstock. Breeding stock is defined as being:

  • in the case of any sales of bloodstock, stock that has previously been used for breeding purposes;
  • in the case of any insurance recoveries, bloodstock that has previously been used for breeding purposes or bloodstock that was purchased for breeding purposes.

Where the breeding stock is sold and replacement stock purchased within 6 months after the end of the income year of sale, the profit on sale is not assessable in the year of sale but is instead applied in reduction of the cost price of the replacement animal. Where an insurance recovery is involved, and the replacement animal is purchased within 2 years following the end of the income year in which the loss or damage to the breeding stock occurred, the assessment for the year of recovery will be re-opened to exclude the profit element, and that amount will be applied in reduction of the cost price of the replacement animal. The same conditions as apply for the purposes of section 117(2) and 93) have been incorporated into section 212B.

C. Development Expenditure

SECTIONS 11 and 12: Farming and Forestry Development Expenditure

These sections give effect to the announcement that the current year deduction in respect of farming, aquacultural and forestry development expenditure will be phased-out.

The present deduction for such expenditure is replaced with a depreciation regime which allows depreciation of land improvements to be written-off against assessable income.

The respective rates of depreciation are set out in the Thirteenth Schedule (Third Schedule of Amendment Act).

Forestry development expenditure that is incurred pursuant to a binding contract entered into on or before 12 December 1985 will continue to be fully deductible until the end of the 1997 income year. This ten-year extension applies also to forestry development expenditure in relation to forests planted by 31 December 1986, but only if the land on which the forest is planted was acquired on or before 12 December 1985.

Under the new depreciation regime, instead of claiming the total amount of such development expenditure as a deduction only the percentage of that expenditure specified in the Thirteenth Schedule can be claimed as a deduction. In the next year the same percentage of the diminished value of that expenditure can be claimed as a deduction, in the same manner as plant and machinery is depreciated at present.

When farm or forestry land is sold, the balance of any development expenditure that has not been deducted by the vendor (by way of depreciation) can be deducted by the purchaser on the same basis as the vendor would have deducted the expenditure had he retained the land. In other words, the purchaser takes over the asset at it's [sic] diminished value (the vendor's book value) and continues to claim depreciation each year, at the rate specified, in relation to that asset.

The new treatment outlined will generally apply to all the categories of farming and forestry expenditure deductible under the existing development expenditure provisions, but in addition will apply to the cost of planting horticultural trees and vines. Any plantings of such trees or vines prior to the commencement of the 1 April 1987 income year will not be eligible for depreciation.

D. Forestry

SECTION 4: Forestry Planting and Maintenance Expenditure

This section gives effect to the announcement that the current year deduction for most forestry planting and maintenance expenditure is to be phased-out so that in the 1992 income year the total amount of such expenditure must be capitalised to a "cost of forest" account and deductible only when income is derived from the forest.

Where such expenditure is incurred pursuant to a binding contract entered into on or before 12 December 1985, that expenditure will continue to be deductible until the end of the 1997 income year. This 10-year extension will apply also to forestry planting and maintenance expenditure in relation to forests planted by 31 December 1986, but only if the land on which the forest is planted was acquired on or before 12 December 1985.

The following categories of expenditure will continue to be deductible in the year in which they are incurred -

  1. rent, rates, land tax, insurance premiums, administrative overheads or other like expenses.
  2. weed control (excluding releasing) or pest control or disease control undertaken subsequent to the planting of the forest.
  3. interest.
  4. repairs and maintenance on plant and machinery.
  5. repairs and maintenance on land improvements e.g. roads, fences, dams, etc..

E. Other Primary Sector Provisions

SECTION 13: Interest and Development Expenditure Recovery Provisions (Section 129)

This section gives effect to the announcement that the section 129 "claw-back" provisions will not apply to sales of land used by the taxpayer for the business of farming, agriculture, horticulture, viticulture, aquaculture or forestry, made after 12 December 1985.

The section also amends the "stepping-stone farmer" provision of section 129. Any replacement property purchased will no longer be required to be retained for 10 years in order to exempt the previous sale, notwithstanding that the previous sale may have occurred prior to 12 December 1985.

SECTION 14: Farmers Expenditure on Tree Planting

This section phases-out the deduction in respect of all but the first $7,500 of expenditure incurred by farmers in relation to tree planting.

The present requirement that the trees must be planted for shelter or erosion control purposes has been abolished.

Where such expenditure is incurred pursuant to a binding contract (other than with a relative) entered into on or before 12 December 1985, that expenditure will continue to be deductible until the end of the 1997 income year.

SECTION 15: Losses Incurred In Specified Activities

This section gives effect to the announcement that the $10,000 loss limitation provisions of section 188A will no longer apply to losses incurred in the 1987 or future income years by taxpayers in relation to primary sector specified activities.

Specifically, the exemption will apply to:

  1. Livestock farming
  2. Poultry-keeping
  3. Bee-keeping
  4. The breeding of horses
  5. The growing of annual flowers
  6. Horticulture

Any losses in relation to such activities that were incurred prior to the 1987 income year will continue to be subject to the $10,000 per annum offset of such losses.

F. Other Provisions

Section 17

This section empowers the Commissioner to disallow a deduction claimed by a taxpayer for an offshore payment where:

  • the Commissioner gives an information requisition in respect of the offshore payment to the taxpayer (or some other person) and
  • the taxpayer (or other person) fails to respond to the requisition within 90 days of the mailing of the requisition.

Where the taxpayer responds to the requisition within the time period, the only evidence admissible in any proceedings under Part III of the Act in relation to questions asked in the requisition concerning the offshore payment is

  • evidence provided in the person's response to the requisition if such evidence can be verified by the Commissioner, or
  • evidence provided by the taxpayer where the requisition was given to a person other than the taxpayer.

Section 18 - Rates to be fixed by Annual Taxing Act

Section 18 amends section 39 of the Income Tax Act to provide that the rates of income tax need not be annually fixed in specific Acts passed by Parliament for that purpose, but can be fixed by Income Tax Amendment Acts.

Section 19 - Principal Income Earner Rebate

This section amends section 50B of the Income Tax Act by adding a new proviso to restrict the amount of rebate claimed by any taxpayer who received an income tested benefit or specified war pension to the difference between the tax assessed and the PAYE deductions made from the benefit or war pension payments.

Section 20 - Transitional Tax Allowance

Section 20 amends the provisions of the transitional tax allowance which under section 50C of the principal Act is claimable as a tax rebate.

The effect of the amendment is to reduce from 30 to 20 the number of hours a person must be engaged in remunerative work each week to qualify for the transitional tax allowance.

Section 21 - Family Rebate

This section amends section 53C of the Act by adding a new proviso to restrict the amount of family rebate claimed by any taxpayer who received an income-tested benefit or specified war pension to the difference between the tax assessed and the PAYE deductions made from the benefit or war pension payments.

Section 22 - Incomes Wholly Exempt From Income Tax

This section amends section 61 of the principal Act by -

  1. removing the reference to the "Cook Islands" from subsections (9) and (48) of that section. The reference to "Niue" remains.
  2. making exempt from income tax Jurors' and Witness' fees (other than expert witnesses fees) paid by the Crown.

Section 23 - Niue Development Projects

This section substitutes a new section 62 in the principal Act and continues the exemption from tax of New Zealand companies deriving income from development projects in Niue.

Section 24 - Items included in Assessable Income

This section amends section 65 of the principal Act by substituting and inserting a new subsection (1B). The purpose of this amendment is to correct a drafting point to make it clear that one-off gratuitous payments made to spouses or relatives of deceased employees are non-taxable.

Section 25 - Retiring Allowances Payable to Employees

This section amends section 68 of the principal Act to enable redundancy payments made to seasonal workers to come within the provisions of the section and therefore receive the concessional tax treatment.

Section 26 - Power to Exempt Expenditure on Account of an Employee

A new section has been introduced allowing the Commissioner to exempt from Income Tax certain amounts which are deemed under section 2 to be expenditure on account of an employee and assessable for income tax.

This exemption only applies where, had the expenditure been discharged by the employee, it would have been deemed to have been incurred in the gaining or producing of assessable income.

Section 27 - Supplementary Depreciation Allowance for Plant and Machinery used in Two and Three Shift Industries

This section amends section 113A of the principal Act to allow the supplementary allowance to be claimed in year one, in addition to years two to five, for qualifying plant and machinery in cases where the first year depreciation allowance cannot be claimed.

Section 28 - Recovery of Depreciation

This section amends section 117 of the principal Act to allow a deduction against depreciation recovered on the disposal of an asset for the costs attributable to the disposal.

Section 29 - Accounting for the Income Tax Implications of GST

Section 29 adds a new section 140B to the Income Tax Act which codifies the income tax treatment of GST. In general, GST is not taken into account in calculating assessable income except where a deduction of input tax cannot be made by the taxpayer, and except in respect of GST adjustments which arise from the operation of section 21(1), 21(3) and 21(5) of the GST Act.

Section 30 - Retiring Allowances Payable to Employees

This section amends section 152 of the principal Act and is consequential to the amendment made to section 68 - refer to section 25 of the Amendment Act. Section 152 governs the deductibility of retiring allowances and redundancy payments in calculating the assessable income of employers making such payments.

Section 31 - Export-Market Development and Tourist-promotion Incentive

Section 31 amends section 156F of the principal Act to exclude from the export-market development expenditure and tourist-promotion expenditure tax incentives credit, any expenditure incurred on or after 1 December 1986, in relation to the Republic of South Africa. Provision is made for any such expenditure incurred on or after 1 December 1986 under a binding contract entered into on or before 18 August 1986 to qualify under the section.

Section 32 - Export-Market Development Activities Incentive for Self-Employed Taxpayers

Section 32 amends section 156G of the principal Act to exclude export-market development activities (value of time) incurred by a self-employed taxpayer on or after 1 December 1986 in relation to the Republic of South Africa.

It will mean that a self-employed taxpayer cannot claim a tax credit for any export-market development activities performed on or after 1 December 1986, other than any performed pursuant to a binding contract entered into on or before 18 August 1986, where that expenditure is in respect of the promotion of export of goods or services to the Republic of South Africa.

Section 33 - State-owned Enterprises, Energy Trading Operators and Harbour Boards

Section 33 inserts 3 new sections into the Income Tax Act namely -

  • Section 197B - State-owned Enterprises
  • Section 197C - Energy Trading Operators
  • Section 197D - Harbour Boards

This gives effect to the Government's policy that the above organisations are to be subject to income tax as separate entities.

Section 34 - Insurance effected with persons not carrying on business in New Zealand

Section 34 amends section 209 of the principal Act to ensure that any insurance premium or any payment that is reimbursement of an insurance premium paid to any person not carrying on business in New Zealand by -

  1. any person resident in New Zealand, or
  2. any person not resident in New Zealand in respect of assets or risks situated in New Zealand,

is subject to tax in terms of section 209.

Section 35 - Special Partnerships

This section provides that where a special partnership sustains a partnership loss in any income year no partner shall be allowed a deduction for any outgoing of the partnership nor shall any partner derive any income of the partnership.

The section shall apply to those special partnerships registered

  1. on or after 1 August 1986 or
  2. prior 1 August 1986 where the partnership obtains additional capital from any source on or after 1 August 1986. (Subject to two exceptions explained in the detailed analysis contained in this circular).

Section 36 - Application of Excess Retention Tax

Section 36 amends section 248 of the principal Act to ensure that a New Zealand privately controlled investment company whose income is derived exclusively or principally from the Cook Islands or a company in respect of which an Order in Council has been made under section 62 of the principal Act, is no longer specifically exempt from the application of Part V (Excess Retention Tax) of the Act.

Section 37 - Value of Fringe Benefit

This section substitutes the method of valuing subsidised transport benefits provided to employees of transport operators. As from 1 April 1987 such benefits are to be valued at the greater of 25 percent of the highest priced fare for that class of travel provided or the price payable by the employee to the benefit provided.

Section 38 - Regulations - Prescribed Rate of Interest

This section provides that the prescribed rate of interest used to calculate the value of low interest loan fringe benefits can be set quarterly as opposed to annually. The amended section requires that if the rate is to be changed the regulations changing the rate must be made one month prior to the commencement at the next quarter.

Section 39 - Payment of Provisional Tax by Instalments

Section 39 amends section 385 of the principal Act to provide for the payment of provisional tax in three equal instalments due on the 7th day of the months set out in the new Eighth Schedule introduced by this section. Special transitional arrangements are included for the first year of the new instalment system.

Section 40 - Payment of Terminal Tax

This section provides for:

  1. the payment of terminal tax on the 11th month of a taxpayer's accounting year for taxpayers with balance dates on or before 31 March. Other taxpayers must pay terminal tax on 7 February each year.
  2. the abolition of the one month's grace after the due date for payment before a late payment penalty is imposed. This one month's grace is removed in respect of both provisional and terminal tax payments.

The provisions will apply equally in respect of individuals and companies.

Section 41 - Relief from Additional Tax

This section amends section 413(4) of the principal Act which provides for the Minister of Finance to approve cases for remission of tax where the amount exceeds a certain limit.

The amendment increased the limit, which was last reviewed in 1977, from $1,000 to $5,000 and applies from 15 December 1986, the date this Amendment Act received the Governor-General's assent.

Section 42 - Relief in Cases of Serious Hardship

This section amends section 414(5) of the principal Act and increases the limit under which cases have to be referred to the Minister of Finance for remission of tax in cases of serious hardship, from $1,000 to $5,000.

This section will apply from 15 December 1986, the date this Act received the Governor-General's assent.

Section 43 - Publication of Names of Tax Evaders

Section 43 amends section 427 of the principal Act which requires the Commissioner to publish from time to time, in the Gazette, particulars of offenders against the Act.

The section has been amended to ensure:

  1. the names of persons convicted of aiding, abetting, or inciting tax deduction offences are published in the Gazette; and
  2. the names of persons convicted of certain offences relating to the Family Support Tax Credit scheme are published in the Gazette; and
  3. the names of persons who have penal tax imposed under section 374O of the Act (Family Support Tax Credit) are published in the Gazette.

Section 44 - Dates for Payment of Income Tax and Provisional Tax

This section substitutes a new Eighth Schedule into the principal Act. This new Eighth Schedule contains, for each balance date, the months for payment of provisional tax instalments and the month for payment of terminal tax.

Part II - Livestock Valuation Provisions

1. Outline

  • 1.1
    • The Amendment Act contains a number of provisions which give effect to the new methods for valuing livestock. The relevant sections are:
      • Section 3 - Inserts definitions into section 2 of the principal Act.
      • Section 5 - Sets out the various sections under which livestock can now be valued.
      • Section 6 - Sets out the method by which taxpayers can elect to adopt the various valuation schemes.
      • Section 7 - "Trading Stock Scheme/Standard Values Scheme".
      • Section 8 - Inserts 8 new sections -
        • Section 86A - "Herd Scheme"
        • Section 86B - "Cost Option"
        • Section 86C - "High-Priced Livestock Scheme"
        • Section 86D - Determination of Average Market Values
        • Section 86E - Income Write-off
        • Section 86F - Income Spread
        • Section 86G - Transitional Provisions
        • Section 86H - Bloodstock
      • Section 9 - Consequential Amendments
        • First Schedule - Livestock Classes
        • Sixth Schedule - High-Priced Livestock Values
    • The provisions relating to bloodstock are covered in Part III of this publication.
  • 1.2
    • This Part:
      • summarises the old valuation scheme:
      • explains the new valuation schemes:
      • details the transitional provisions that apply in respect of the move from the old to the new schemes.

2. Old Valuation Schemes

  • 2.1 Prior to the enactment of the Amendment Act. farmers had two basic options for valuing livestock on hand at the end of any income year. They were:
    • either cost price, market selling value or replacement price (the methods by which all other taxpayers must value their trading stock) (Section 84(5)); or
    • a standard value (section 86).
  • By far the majority of farmers elected to adopt a standard value in respect of their livestock. The advantage for the farmer of the standard values scheme was that, once adopted, those values were fixed for the term of the farming business. For example, a farmer who adopted the $20 standard value for cattle in 1968 could still use that value in 1986 even though the market value for cattle may then be ten times that standard value.
  • 2.2 One of the effects of the disparity between the farmer's book value and the market value was that when a substantial number of the farmer's livestock were sold a large income tax liability arose. This led to a number of provisions being enacted which minimised the tax liability in such cases. They are:
  • Section 89 - Allows a farmer to transfer livestock to a child at standard value thereby avoiding any tax liability.
    Section 93 - Allows the income from the sale of a substantial number of livestock to be spread back over three income years (or forward over 3 income years in the case of retirement from farming).
    Section 94 - Deferment of income arising from livestock sold as the result of an adverse event (e.g. flood,drought).
    Section 95 - Deferment from income of livestock sold where a sharemilker or lessee farmer quits his farm and purchases another farm.
  • As well as the standard values scheme farmers could adopt a nil value for increases in livestock numbers (section 86).

3. New Valuation Scheme

  • 3.1
    • As part of the Government's moves to restructure the primary sector it was announced in the Economic Statement of 12 December 1985 that the old standard values and nil values scheme would be abolished. They would be replaced with new livestock valuation schemes which would value the trading stock of farmers more in line with the valuation of trading stock in other sectors. Transitional provisions were announced that would minimise the tax consequences of the movement from the old scheme to the new schemes.
    • A general overview of the new schemes and the transitional provisions is contained in Part I of this publication.
    • A detailed section by section analysis of the legislation relating to the new livestock valuation schemes follows.
  • 3.2
    • Section 1 - Short Title
    • This section provides the title of the Amendment Act and provides that the Amendment Act shall form part of the Income Tax Act 1976.
  • 3.3
    • Section 2 - Application
    • This section provides that, except where otherwise stated, Part I of the Act applies in respect of the income year that commenced on 1 April 1986 and every subsequent income year.
    • This means that the livestock provisions introduced in this Amendment Act first apply in the 1987 income year unless any of the relevant provisions have an alternate application date.
  • 3.4
    • Section 3 - Interpretation
    • This section inserts three new definitions into section 2 of the Principal Act.
    • "Bloodstock" (refer to Part III of this publication)
    • "Herd livestock" in relation to any taxpayer, means any animal (being specified livestock) that is, -
      • "(a) In relation to any of the classes of livestock set out in column (3) of the Twelfth Schedule to this Act, an animal of that class; and
      • "(b) Owned by that taxpayer primarily for the purposes of production of progeny or wool or milk or velvet or fibre or primarily for any combination of those purposes:
        • "'Specified livestock' means any animal that is, in relation to any of the types of livestock set out in the column (1) of the Twelfth Schedule to this Act, an animal of that type:"

Specified Livestock Definition

  • Looking at the definition of "specified livestock", it is important to note that the definition relates to "types of livestock".
  • Column (1) of the Twelfth Schedule (as inserted by the First Schedule to the Act) lists the following types of livestock:
    • Sheep
    • Cattle
    • Deer
    • Goats
    • Pigs
  • It will be seen from the ensuing analysis of the other relevant sections that the new valuation schemes apply only to the "specified" types of livestock as listed above, with separate rules applying to non-specified livestock types such as fitches and llamas.
  • Herd Livestock Definition
  • In relation to the definition of "herd livestock" the definition is limited to "specified livestock" with parts (a) and (b) of the definition further limiting the definition.
  • Paragraph (a) provides that the following classes of livestock (as set out in column (3) of the Twelfth Schedule) are herd livestock.
    Type Herd Livestock
    Sheep Two-tooth ewes
      Mixed-age ewes
      Five-year and six-year ewes
      Mixed-age wethers
      Breeding rams
    Cattle Rising two-year and older heifers (maiden/first calving)
      Mixed-age cows (second and subsequent calving)
      Breeding bulls
    Deer Rising two-year and older hinds (maiden/first fawning)
      Mixed-age hinds (second and subsequent fawning hinds)
      Rising two-year and older stags (non-breeding)
      Breeding stags
    Goats Rising two-year does *
      Mixed-age does *
      Bucks (non-breeding)/wethers over one year
      Breeding bucks
    Pigs Breeding sows over one year of age
      Breeding boars
    • It has been decided that these two classes should be combined and referred to as "rising two-year and mixed-aged does". It is intended that an amendment to the Twelfth Schedule will be made to incorporate this decision.
    • From the above list it can be seen that only "mature" livestock classes can be classified as herd livestock which means, for example, ewe hoggets are not herd livestock. It is not necessary that the livestock be breeding livestock (mixed-age wethers are herd livestock), but they must be of an age where, were they breeding stock, they would be capable of breeding.
  • Paragraph (b) of the definition provides that to be herd livestock they must be owned by the taxpayer primarily for the production of any of, or any combination of, the following products:
    • progeny (all types)
    • wool (sheep)
    • milk (dairy cattle/milking goats)
    • velvet (deer)
    • fibre (goats)
  • In effect, this means that only animals farmed principally for the production of meat are not herd livestock. The obvious example of non-herd livestock is steers. They are not capable of producing progeny and do not produce any by-product. Other examples are bulls which are purchased for fattening and resale rather than for the production of progeny, and sheep that are fattening stock only.
  • The purpose of the limitations imposed by paragraphs (a) and (b) is to ensure that only animals which are purchased other than primarily for the purposes of trading are eligible for the herd scheme. The rationale of this distinction is explained in detail in the Consultative Document on Primary Sector Taxation. Briefly, the herd scheme recognises that herd livestock are more in the nature of a "machine" than trading stock. They are held for the production of progeny (e.g. lambs) or a by-product (e.g. wool) rather than for the purposes of sale as trading stock. In recognition of this difference a different method of valuation applies to livestock included in the herd scheme. Details of the method of valuation are outlined in full later in this publication.

3.5 Section 5 - Livestock Valuations - Controlling Section

This section amends section 85 of the Principal Act by inserting new subsections (4A) to (4D).

Section 85 sets out the rules for valuing trading stock (including livestock). Before discussing the new subsections it is necessary to summarise the effect of the principal existing subsections.

  • Subsection (2) provides that a taxpayer in business must take into account the value of his trading stock at the beginning and end of every income year for the purposes of determining that taxpayer's assessable income. Hobby farmers (farmers who do not meet the "business test" requirements) are therefore not affected by any of the amendments discussed in this publication dealing with the valuation of livestock.
  • Subsection (3) provides that the value of opening stock shall be the value of the closing stock for the previous income year.
  • Subsection (4) provides that the value of closing stock shall be, at the taxpayer's option, its -
    • cost price;
    • market value;
    • or replacement price.

Additional subsections now inserted -

Subsection (4A) - Valuation of Livestock

  • This subsection overrides subsection (4) in relation to the valuation of closing livestock and is the controlling subsection for the various livestock valuation schemes available. Because of the lead-in words "Notwithstanding anything in subsection (4)" the new subsection (4A) is not simply an alternative to subsection 4, but it means that subsection (4) can no longer apply to livestock.
  • Note also in the lead-in that subsection (4A) applies to all livestock (not just specified livestock), but the subsection does not apply to "livestock used in dealing operations". Therefore taxpayers buying and selling livestock as a business, rather than farming the livestock, are limited to the valuation options outlined in subsection (4). Livestock dealers were excluded also from the old standard values scheme.
  • Each of paragraphs (a) to (e) of subsection (4A) deal with a separate valuation scheme and state how the closing value of livestock included in that scheme is to be determined. The various schemes are explained in detail later in this publication.
    • Paragraph (a) provides that all livestock other than specified livestock (e.g. fitches, llamas) are to be valued under the appropriate provisions of section 86 (the "standard values scheme").
    • Paragraph (b) provides that, unless the taxpayer elects otherwise, specified livestock are to be valued under the appropriate provisions of section 86 (the "trading stock scheme").
    • Paragraph (c) provides that, where the taxpayer so elects (explained later), specified livestock are to be valued under section 86A (the "herd scheme").
    • Paragraph (d) provides that, where the taxpayer so elects, specified livestock are to be valued in accordance with section 86B (the "cost option").
    • Paragraph (e) provides that "high-priced livestock", as defined in section 86C, are to be valued under that section (the "high-priced livestock scheme").
  • Note the effect of paragraph (b). Unless the taxpayer elects otherwise, the trading stock scheme will apply automatically.
  • Note also that paragraphs (b) to (d) state they do not apply to high-priced livestock, meaning that such livestock cannot be valued under any scheme other than the "high-priced livestock scheme".

Subsection (4B) - Partnership Restriction

  • This new subsection overrides subsection (4) and the new subsection (4A) of section 85 in relation to livestock owned by certain new partnerships. It provides that where a new partnership is formed in any income year and:
  • the new partnership owns a type of specified livestock (e.g. cattle): and
  • more than 50 percent of the property of the new partnership is owned by partners that own or owned, either in that income year or in the preceding income year, all the property of another partnership; and
  • the other partnership owned the same type of specified livestock (i.e. cattle), then the new partnership must value that type of livestock under the same valuation scheme as the other partnership.

The purpose of this provision is to ensure that taxpayers in partnerships cannot change valuation schemes (and thus circumvent the 2 years notice requirement - see commentary under section 6) simply by forming another partnership of principally the same partners.

Example

Husband/wife partnership own sheep which are in the trading stock scheme. They decide it would be more profitable to have their mature sheep in the herd scheme but do not want to give the required two years notice. They dissolve the partnership and form a new partnership with their son, each having a one-third interest. The new partnership owns sheep and cattle.

As more than 50 percent of the property of the new partnership is owned by taxpayers who owned all the property of another partnership, the new partnership must adopt the trading stock scheme in respect of its sheep. As the previous partnership did not own cattle the new partnership can adopt any scheme it wishes in respect of its cattle.

Note the following features of this provision:

  • The "other partnership" would need to be dissolved more than one income year prior to the income year in which the new partnership is formed in order for the new partnership to be exempted from this provision;
  • It will apply only where all of the partners of the other partnership form part of the new partnership;
  • It applies only to the type of specified livestock owned by the other partnership in the income year the new partnership is formed or in the preceding income year.
  • It applies regardless of whether the other partnership is dissolved, the only requirement being that the new partnership is formed after the other partnership.

Subsection (4C) - Valuation of Livestock at Date of Death

  • This new subsection overrides the other provisions of section 85 to provide that, where a taxpayer dies, the closing value of livestock in the tax return to date of death shall be the value determined for the purposes of the Estate and Gift Duties Act 1968. Generally this is a market value determined by a livestock valuer and is known as the probate value. If the livestock is then transferred to the trustee of the estate who continues the farming business, being a new taxpayer the estate will be subject to the other provisions of section 85 in relation to the valuation of livestock. The livestock would enter the books of the estate at probate value and would be valued at balance date according to the valuation scheme adopted by the estate.

Subsection (4D) - Death of a Partner

  • This new subsection provides that, where a partner of a farming partnership dies and the executor carries on the business in partnership with the surviving partner, the partnership livestock will be valued at probate value (market value at date of death) for the purposes of determining the assessable income of the deceased in the return to date of death. It should be noted that any increase or decrease in the value of livestock as a result of the application of this provision is treated as partnership income rather than the income of the deceased partner only. That is, the total partnership livestock is valued at probate value in the partnership accounts to date of death and the deceased's share of the partnership income reflected in those accounts is included in the deceased's return to date of death. However, this adjustment has no net effect on the income of the surviving partner who continues in partnership with the executor, as at the end of that income year the closing livestock will be valued according to the valuation scheme the partnership had previously adopted. The partnership income for that year would then be calculated on the basis of those values rather than probate values.

Subsection (2) - Valuation of Bloodstock

  • Subsection (2) of section 5 of the Amendment Act adds another valuation method to section 85(4A) of the principal Act, and applies to bloodstock (refer to Part III of this publication).

Schedule Inserted

Subsection (3) of section 5 of the Amendment Act inserts a Twelfth Schedule into the principal Act. The Twelfth Schedule (First Schedule to the Amendment Act) sets out the various -

  • types of livestock (column 1)
  • classes of livestock (column 2)
  • herd livestock classes (column 3)

As explained earlier in this publication, the types of livestock listed are the types that come within the definition of specified livestock, and the herd livestock classes are the classes eligible to be valued under the herd scheme.

Column (2) of the Twelfth Schedule lists the following various livestock classes for which values will be set each year:

Type of Livestock Classes of Livestock
Sheep Ewe hoggets
  Ram and wether hoggets
  Two-tooth ewes
  Mixed-age ewes (three-year and four-year old ewes)
  Five-year and six-year ewes
  Mixed-age wethers
  Breeding rams
Cattle Beef breeds and beef crosses:
  Rising one-year heifers heifers (maiden/first calving)
  Rising two-year and older
  Mixed-age cows (second and subsequent calving)
  Rising one-year steers and bulls
  Rising two-year and older steers and bulls
  Breeding bulls
  Friesian and related breeds:
  Rising one-year heifers
  Rising two-year and older heifers (maiden/first calving)
  Mixed-age cows (second and subsequent calving)
  Rising one-year steers and bulls
  Rising two-year and older steers and bulls
  Breeding bulls
  Jersey and other dairy breeds
  Rising one-year heifers
  Rising two-year and older heifers (maiden/first calving)
  Mixed-age cows (second and subsequent calving)
  Rising one-year steer and bulls
  Rising two-year and older steers and bulls
  Breeding bulls
Deer Red Deer
  Rising one-year hinds
  Rising two-year and older hinds (maiden/first fawning)
  Mixed-age hinds (second and subsequent fawning hinds)
  Rising one-year stags
  Rising two-year and older stags (non-breeding)
  Breeding stags
  Wapiti, Elk, and related crossbreeds:
  Rising one-year hinds
  Rising two-year and older hinds (maiden/first fawning)
  Mixed-age hinds (second and subsequent fawning hinds)
  Rising one-year stags
  Rising two-year and older stags (non-breeding)
  Breeding stags
  Other breeds:
  Rising one-year hinds
  Rising two-year and older hinds (maiden/first fawning)
  Mixed-age hinds (second and subsequent fawning hinds)
  Rising one-year stags
  Rising two-year and older stags (non-breeding)
  Breeding stags
Goats Angora and Angora Crosses - Purebred and G1 to G4:
  Rising one-year does
  Mixed-age does
  Rising one-year bucks (non-breeding) and wethers
  Bucks (non-breeding) and wethers over one year
  Breeding bucks
  Other fibre and meat-producing goats:
  Rising one-year does
  Mixed-age does
  Rising one-year bucks (non-breeding) and wethers
  Bucks (non-breeding) and wethers over one year
  Breeding bucks
  Milking (dairy) goats:
  Rising one-year does
  Does over one year
  Breeding bucks
  Other dairy goats
Pigs Breeding sows less than one year of age
  Breeding sows over one year of age
  Breeding boars
  Weaners less than 10 weeks of age (excluding sucklings)
  Growing pigs 10 to 17 weeks of age (porkers/baconers)
  Growing pigs over 17 weeks of age (baconers)

Classification in Tax Returns

  • For the 1987 income year and subsequent income years farmers will be required to classify their livestock (for income tax purposes) according to these classes. However, farmers may, if they wish, further break down their livestock schedules although this will not affect the values that will be placed on the livestock. For example, a sheep farmer may wish to show three-year and four-year old ewes as separate categories, but both categories will have the same value for income tax purposes (the value announced for mixed-age ewes).
  • Note that in the preceding list of livestock classes there is a lesser number of categories and classes for goats than shown in the Twelfth Schedule. This reduction results from a decision to consolidate the angora goat categories and include rising two-year does as mixed-age does. It is intended that the Twelfth Schedule will be amended in the next legislative round to give effect to this decision, although there will be no effect on the livestock values to be announced in respect of the 1987 income year. Each of the classes which are to be amalgamated will simply be given the same value which will be struck on the basis of the average of all those classes.

Application

  • Subsection (4) of section 5 of the Amendment Act provides that the section applies from the income year commencing on 1 April 1987 (i.e. the 1988 income year). This means that for the 1987 and prior years the new valuation schemes are not available. However, as discussed later, transitional provisions apply in respect of the 1987 income year.

3.6 Section 6 - Livestock Valuation Elections

  • Section 6 of the Amendment Act inserts a new section 85A into the Principal Act which allows a taxpayer to elect to adopt any of the various livestock valuation schemes, and sets out the procedure to be followed when doing so.
  • Right of Election
  • Subsection (1) is the operative subsection which gives taxpayers the right to elect to adopt a particular valuation scheme.
    • "Any taxpayer who is required to take into account the value of any specified livestock ... (exclusive of any high-priced livestock ...) on hand at the end of any income year ..."
  • The right of election applies only to taxpayers who are required to take into account the value of closing stock. As discussed earlier in this publication, only taxpayers in business are required to value opening and closing stock. This means that taxpayers not in business (e.g. hobby farmers) do not have the rights of election available under section 85A. Referring back to section 85(4A) (as inserted by section 5 of the Amendment Act), paragraph (b) provides that, where a taxpayer has not made an election in accordance with section 85A, the closing value of that taxpayer's specified livestock is to be determined under section 86 (trading stock scheme). Therefore one of the effects of subsection (1) of section 85A is that the herd scheme and the cost option are not available to taxpayers not in the business of livestock farming.

Election Irrevocable

  • "... (which election shall, after the end of the income year in which it is made, be irrevocable) ...."
  • The election can be revoked at any time during the income year in which it is made but after that time it cannot be revoked. Any revocation of an election should be given in writing and must be in the hands of the Inland Revenue Department prior to the end of the income year in which the election was received by the Department.

Effect of Election

  • Subsection (2) determines what livestock of a taxpayer the election applies to. Paragraph (a) provides that where the election requests that a type of livestock be valued under section 86 (trading stock scheme) or section 86B (cost option), that election shall apply to all livestock of that type owned by that taxpayer other than herd livestock in relation to which the taxpayer has separately elected to have valued under section 86A (herd scheme). For example, if a taxpayer elects to value his sheep under the trading stock scheme all the sheep owned by that taxpayer must be valued under that scheme. However if he has made a separate election to value his "herd livestock" (as defined) in relation to sheep under the herd scheme, then only the remaining classes of sheep would be valued under the trading stock scheme.
  • Paragraph (b) states the same requirement in respect of an election to value a type of livestock under the herd scheme. Any election must apply to all "herd livestock" of that type. For example, a taxpayer who owns both dairy and beef cattle cannot elect to adopt the herd scheme in respect of, for example, dairy cattle only. The election would apply to all "herd livestock" that are cattle.

Election Procedure

  • Subsection (3) sets out the procedure for the making of an election to adopt a particular livestock valuation scheme. It provides that the notice of election -
    1. shall be in writing:
    2. shall state the income year in relation to which it is to first apply:
    3. shall state the section of the Act (i.e. the scheme) in relation to which it applies.

Time Limits for Election

  • Paragraph (d) sets out the time by which the election must be given to the Department.
  • Subparagraph (i) relates to the situation where the election first applies in a year in which a taxpayer commences to derive income from a type of livestock which the taxpayer has not owned in either of the two preceding income years. In those situations the notice of election must be filed with the Department by the time in which the taxpayer is required to file the return of income for the year in respect of which the election applies, "or within such further time as the Commissioner, in his discretion, may allow". This means that new farmers or farmers commencing (or recommencing) to farm a particular type of livestock in any year can include their notice of election with the income tax return for that year and the election will apply from that year so long as the return is filed by the due date (which includes any extension of time). Any notice of election made after that time may still be accepted if the Commissioner exercises the discretion given to him to do so. Any decision to allow a late election can only be made on a case by case basis after consideration of the reasons given for the late notice.
  • Subparagraph (ii) relates to existing farmers who are not commencing to farm a new type of livestock (i.e., all taxpayers other than those covered by subparagraph (i)). It provides that, where subparagraph (i) does not apply, the notice of election must be given to the Department "prior to the end of the income year that precedes, by one income year and one day," the first day of the income year in which the election is to apply.

Example

  • If a taxpayer wishes to adopt the herd scheme for cattle in the 1990 income year, and the taxpayer has owned cattle in one of the two preceding income years, the notice of election must be given to the Department prior to the end of the 1988 income year. If the taxpayer operates a 30 June balance date the notice of election would have to be furnished on or before 30 June 1988. However, if the taxpayer had not previously owned cattle the notice of election could be forwarded with the 1990 income tax return.
  • Note that the notice of election can be furnished in any number of years prior to the year to which it first relates. However, as previously outlined, the notice cannot be revoked after the end of the income year in which it is made.

Application Life of Election

  • Subsection (4) provides that an election shall continue to apply (as stated by the taxpayer in the notice of election) up until, but not including, the income year in which a subsequent election first applies.

Election by Partnership

  • Subsection (5) provides rules for elections by partnerships. Paragraph (a) states that where any specified livestock are owned by two or more persons Jointly, the valuation of that livestock shall not be affected by an election made by one of those persons in relation to livestock owned in that person's own right.

Example

  • A farmer owns 200 deer in his own right and 100 in partnership, all of which are valued under the trading stock scheme. If the farmer elects to adopt the herd scheme in respect or the 200 deer the 100 deer owned in partnership are not affected by that election.
  • Paragraph (b) provides that partnerships, or any other taxpayers who jointly own livestock, are entitled to make a joint election in respect of that livestock.

Election Must Have Consent Of All Partners

Paragraph (c) provides that the Commissioner can disregard a joint election if he is not satisfied that at the time the election is made, "it is made by all the persons who, at that time, Jointly own the specified livestock". This means every partner of the partnership or every co-owner of livestock under any arrangement must agree to the election. Note that the unanimous agreement must be from the persons who are the owners of the livestock at the time the election is made. Therefore, if subsequent to the election one partner sells his share of the livestock to a new partner the consent of the new partner is not required in order for the election to continue to apply.

The purpose of paragraph (c) is to ensure that one partner of a partnership cannot make an election in respect of partnership livestock without the consent of the other partners. Although subsection (1) of section 85A provides that an election becomes irrevocable after the end of the income year in which it is made, that provision would have no effect if the Commissioner is not satisfied that all partners consented to the election. This unanimous consent requirement will be applied also in relation to a notice asking for a prior notice of election to be revoked. If the Commissioner is not satisfied that the notice of revocation is consented to by all the co-owners then the original election will stand.

Generally, any notice of election in respect of partnership livestock will be accepted by the Department as being made by all the partners unless information is presented to the contrary. This policy will ensure elections by partnerships are not subject to additional compliance requirements but at the same time allows any partner who was not party to the election to apply to the Commissioner to have it disregarded.

Subsection (6) is the normal accounting year provision which provides that references in the new section 85A to an income year will be deemed to refer to an accounting year where the taxpayer has other than a 31 March balance date.

Examples of the effect of Section 85A

From the preceding commentary it can be seen that the only scheme that requires no initial notice of election is the trading stock scheme. New farmers, or farmers who commence to farm a new type of livestock, are required to give notice of the scheme they wish to adopt and if they don't they will automatically be subject to the trading stock scheme. Once any scheme is adopted, including the automatic adoption of the trading stock scheme, an election must be made to adopt any alternative scheme. It is of no consequence what scheme was being applied, and what scheme is being adopted - the election requirements are the same in each case. The following are examples of the effects of section 85A:

Example 1

  • New farmer - first year 1990.
  • Owns sheep only.
  • Wishes to adopt trading stock scheme.
    • No election required - trading stock scheme applies automatically.

Example 2

  • New farmer - first year 1990.
  • Owns sheep and cattle
  • Wishes to adopt
    • trading stock scheme for sheep
    • herd scheme for "herd class" cattle
    • trading stock scheme for other cattle
  • No election required for sheep or 'non-herd class" cattle.
  • Election to adopt herd scheme for herd class cattle to be filed by the time within which the 1990 return of the taxpayer is required to be furnished (taking into account any extension of time given).
  • Herd scheme will apply from and including the 1990 income year and until the taxpayer makes a subsequent election to adopt an alternative scheme (i.e. cost option or trading stock scheme).

Example 3

  • Existing farmer
  • Sheep included in trading stock scheme
  • Commences to farm deer in 1991 income year
  • Wishes to adopt cost option for deer for 1991 and future years
  • Election to adopt cost option for deer to be filed by 1991 return filing date. Provided that, if farmer has owned deer in either of two preceding income years election to be filed by end of 1989 income year.

Example 4

  • Existing farmer
  • Owns deer which are valued under cost option
  • Wishes to adopt herd scheme for herd class deer and trading stock scheme for other
  • Election to first apply in 1992 income year.
  • Two notices of election required both of which must be filed by end of 1990 income year.

3.7 Section 7 - Standard Value of Livestock

This section repeals the whole of section 86 of the Principal Act, which provided for a standard values system of livestock valuation, and substitutes a new section which:

  • introduces a trading stock scheme in respect of specified livestock:
  • retains the old standard values scheme in respect of other types of livestock.

Under the trading stock scheme livestock will be valued at a "standard value" which (in effect) will be determined each year by Order in Council.

In relation to livestock that are not specified livestock they also can be valued using a standard value system. However the value will not be revised each year and will be determined by the Commissioner (i.e. the old standard values system continues to apply where appropriate).

Subsection (1) of the replacement section 86 contains two definitions.

  • "Deductible Excess" (see commentary under subsection (2) on page 35)
  • "Standard Value"

Definition of Standard Value

Paragraph (a) of the definition of "standard value" relates to specified livestock and provides that, in relation to any income year, the "standard value" is to be determined by the following formula.

VALUE x 100
70 3
  • Value =the sum of
    1. the average market value declared for that income year for that class of livestock.
    2. the average market value declared for the previous income year for that class of livestock.
    3. the average market value declared for the income year immediately preceding that previous income year for that class of livestock.

For example, say the following average market values have been declared in respect of two-tooth ewes:

1988 $20
1989 $23
1990 $23
Sum $66

The "standard value" of two-tooth ewes for 1990 is calculated as follows:

  • $66/3 x 70/100
  • = $22 x 70%
  • = $15.4

The effect of the formula is to determine a standard value based on 70 percent of a three-year average market value.

If in the above example the 1991 average market value declared for two-tooth ewes was $29 the standard value for that year would be calculated as follows:

1988 $23
1990 $23
1991 $29
  $75
75 x 70 =$25 x 70% = $17.50
30 10

Note that an average market value will be declared in respect of each of the livestock classes listed in the Twelfth Schedule, and therefore a separate calculation will be required for each of those classes. However, each year when the values are declared two sets of values will be announced in respect of each class of specified livestock:

  • the average market value (100%)
  • the standard value (70% of 3 year average)

Taxpayers operating the trading stock scheme will then only need to ensure their closing livestock are classified into the correct livestock classes and multiply the number of closing livestock in each class by the appropriate standard value.

Paragraph (b) of the definition of "standard value" provides that, in respect of livestock that are not specified livestock, the standard value is "such value as is agreed to by the Commissioner".

The effect of paragraph (b) is that taxpayers farming livestock other than sheep, cattle, deer, goats or pigs can apply to the Commissioner for a standard value for their livestock which, rather than being adjusted each year according to market changes, will, like the old standard values system, remain as a static standard value. Rather than set national minimal standard values for such types of livestock as fitches and llamas, until the farming of such livestock becomes more established, it is more appropriate that the standard value be set on a taxpayer by taxpayer basis. Such taxpayers who are not already operating a standard value for their "non-specified" livestock but wish to do so, should make application to the Department.

Standard Value for Non-Specified Livestock

Subsection (1A) is the operative subsection for the valuation of "non-specified" livestock. It gives taxpayers the option of valuing such livestock at either

  • cost price;
  • market value;
  • replacement price; or
  • standard value.

That is, such taxpayers have the same option available to all other traders with the addition of the option of using a standard value.

Standard Value for Specified Livestock

Subsection (2) is the operative section for the valuation of specified livestock on hand at the end of any income year and in respect of which the taxpayer has elected to value under the trading stock scheme (or has made no election at all and therefore is automatically subject to the trading stock scheme).

Paragraph (a) provides that specified livestock (other than pigs) which are less than 12 weeks of age at the end of the income year shall be valued at 50 percent of the standard value of such livestock for that income year. Paragraph (b) provides that pigs and other types specified livestock which are 12 weeks of age or more at balance date shall be valued at the standard value of such livestock for that income year.

The age distinction ensures that taxpayers who have very young stock on hand at balance date, are not required to value such livestock at values which are set for more mature livestock. Examples of farmers who may have livestock of less than 12 weeks of age on hand at balance date are farmers who have October to December balance dates and town milk supply dairy farmers who have autumn-born calves on hand at a 31 May balance date. The distinction is not required for pigs as there is a separate valuation class for weaners less than 10 weeks of age.

3-Year Write-Down

Subsections (2) and (3) provide for a 3-year write-down to standard value in certain circumstances. A similar provision applied under the old standard values scheme and the replacement subsections now modify that provision. Subsection (2) relates to non-specified livestock and subsection (3) to specified livestock with both subsections essentially having the same effect.

The intent of the 3-year write-down is to spread over 3 years the tax deduction that may arise from writing livestock down from the purchase price to standard value.

Example

If a herd of 20 deer is purchased for $1,000 per head and the standard value is $500 the taxpayer would receive a tax deduction of $10,000 calculated as follows:

Purchase price (deductible) 20 x $1,000 = $20,000
Closing value (taxable) 20 x $ 500 = $10,000
  Deduction $10,000

The effect of subsections (2) and (3) is to ensure that, in certain circumstances, the deduction is spread over 3 income years.

The following commentary explains subsection (3). which applies to specified livestock, however, paragraphs (a), (b) (e) and (f) apply equally to non-specified livestock (subsection (2)). The provision outlines four situations (paragraph (a) to (d)) where the 3-year write-down will be applied.

  • (a)
    • Where a taxpayer "commences or recommences during an income year to derive income from specified livestock"
    • The word "commences" relates to taxpayers who commence farming for the first time.
    • The word "recommences" contemplates a situation where a farmer, having derived income from livestock, takes up some other occupation and then at a later date decides to return to farming. Each situation will be considered separately taking into account the facts of the case. However, it is not intended that the 3-year write-down apply where a taxpayer may not derive income from livestock in any one year but the taxpayer's principal occupation does not change from that of a farmer. For example, a farmer decides to reduce the size of his farming operations, sells his farm, takes a 1-year overseas holiday and purchases a small farm unit on his return. The 3-year write-down would not be applied in such situations.
  • (b)
    • Where a taxpayer -
      • "(i) Brings into production or substantially increased production any land for the purpose of deriving income from specified livestock; or
      • "(ii) Acquires any additional land for that purpose."
    • The term "brings into production" means that the existing farmer develops, and thereby facilitates the farming of, land that he already owns but has not, for some reason such as the existence of native bush or lupin, farmed previously.
    • The term "brings into substantially increased production" means that the existing farmer develops, and thereby facilitates substantially more intensive farming of, land that he already owns but has previously farmed only to minimal capacity.
      • For Example: -
        • Swampland that previously was virtually waste land is drained, ploughed, and sown in grass.
        • Land that over a period of years has reverted to scrub is cleared and resown.
      • In either of the situations covered in paragraphs (a) and (b) the 3-year write-down applies to purchases of livestock in the year that situation occurs, and purchases in the 3 succeeding income years. However the provision excludes replacement livestock meaning that it applies only to increased livestock numbers in those years.
  • (c)
    • Where a taxpayer purchases any type of specified livestock which that taxpayer did not own in either of the two preceding income years.
    • For example, a sheep farmer who diversifies into deer will be subject to the 3-year write-down in respect of the deer unless the taxpayer owned deer in either of the two preceding income years.
  • (d)
    • Where a taxpayer values specified livestock under the trading stock scheme and in the previous year that livestock was valued under a different scheme (i.e. herd scheme or cost option).
    • For example, where a taxpayer operated the herd scheme for herd class sheep and then elects to have them valued under the trading stock scheme, the 3-year write-down will apply.
  • Paragraphs (e) and (f) determine how the 3-year write-down applies in respect of the livestock it applies to as outlined in paragraphs (a) to (d).
  • Paragraph (e) provides that the value of such specified livestock to be taken into account at the end of the year of purchase (or where paragraph (d) applies, at the end of the year in which the change of valuation scheme occurs) shall be the value that would otherwise be determined under the section (i.e. the standard value) "increased by an amount equal to the deductible excess in relation to that specified livestock".
  • Paragraph (f) provides that the value of that specified livestock to be taken into account at the following income year shall be the standard value for that income year increased by one-half of the deductible excess in relation to that specified livestock.

Definition of "Deductible Excess"

Deductible excess is defined in subsection (1) as,

  • (a)(i) In relation to specified livestock purchases:
    • (purchase price - standard value) x 2/3
  • (a)(ii) In relation to specified livestock that were, in the preceding income year, valued otherwise than under the trading stock scheme:
    • (opening value - standard value) x 2/3
    • Note that this calculation does not apply to opening livestock that is not on hand at the end of the year (the provision does not apply to replacement stock purchased during that year).
  • (b) In relation to livestock other than specified livestock:
    • (purchase price - standard value) x 2/3

Examples of 3-year write-down

Example 1

Sheep farmer commences deer farming in 1989 by purchasing 50 deer at $1,000 per head. The "standard value" for that class of deer is -

1989 - $400
1990 - $450
1991 - $420

3-year write-down applies section 86(3)(c)).

1989 Closing value = standard value + deductible excess (section 86(3)(e))
= $400 + (purchase price - standard value) x 2/3
= $400 + ($l,000 - $400) x 2/3
= $400 + $400
= $800
1990 Closing Value = standard value + [deductible excess / 2] (section 86(3)(f))
= $450 + 400 / 2
 
= $450 + 200
= $650

Note that the amount of deductible excess does not alter.

1991 closing value = standard value
= $420
(The closing value for year 3 is not affected).

Note that in this example, any additional purchases in the 1990, 1991 and 1992 income years would similarly be subject to the provision.

Note also that the same procedure would apply if the 50 deer were purchased as a result of the purchase or the bringing into production of additional land, or the taxpayer had not previously derived income from livestock.

Example 2

Taxpayer is operating the herd scheme for his herd class goats and elects to adopt the trading stock scheme with effect from the 1993 income year. Values set for that class of goats were -

1992 herd value $400
1993 standard value $250
1994 standard value $255
1995 standard value $260

3 year write-down applies (section 86(3)(d))

1993 Closing value = standard value + [deductible excess / 2](section 86(3)(e))
= $250 + (opening value - standard value) x [2 / 3]
= $250 + ($400 - $250) x 2 / 3
= $250 + 100
= $350
1994 Closing value = standard value + [deductible excess / 2] (Section 86(3) (f))
= $255 + [100 / 2]
= $255 + 50
= $305
1995 Closing value = standard value
= $260

Matrimonial Transfers

Subsection (4) of the replacement section 86 deals with transfers of livestock by way of a matrimonial agreement and although the wording is lengthy and complex, the effect is reasonably simple.

  • Paragraph (a) provides that where a taxpayer acquires livestock under a matrimonial agreement which is to be valued under section 86 and that taxpayer was, immediately before that transfer, deriving income from livestock then the other provisions of the other subsections of section 86 apply.
  • This means that if the taxpayer (the transferee) is operating the trading stock scheme in respect of the type of livestock transferred then the closing value of that livestock will be valued at standard value regardless of the valuation scheme being operated by the transferor in that year.
  • Paragraph (b) provides for the situation where a taxpayer acquires livestock under a matrimonial agreement which are to be valued under section 86, and that the taxpayer was not, immediately before the transfer, deriving income from livestock. In such cases, if the transferor would have been subject to the 3-year write-down in respect of those livestock then the transferee is also subject to that provision to the same extent as the transferor would have been affected had the transfer not taken place.
  • This means that where the transferee elects to adopt the trading stock scheme (or makes no election and is therefore automatically subject to section 86) in respect of the livestock transferred, the transferee obtains with those livestock the requirement to continue any 3-year write-down imposed on the transferor in respect of those livestock.
  • Note that subsection (4) applies only where the livestock transferred is to be valued in the hands of the transferee under the trading stock scheme (or the standard values scheme in respect of non-specified livestock).

Subsection (5) relates also to matrimonial property transfers.

  • Paragraph (a) provides that where a taxpayer acquires livestock under a matrimonial agreement and by virtue of that transfer the taxpayer commences or recommences to derive income from livestock, the 3-year write-down will not be applied for that reason (the 3 year write-down may still apply by reason of subsection (4)(b)). This is achieved by deeming the taxpayer not to so have commenced or recommenced for the purposes of the 3-year write-down provision in relation to that transfer.
  • Paragraph (b) provides that a taxpayer who acquires land under a matrimonial agreement shall, for the purposes of the section, be deemed to have acquired the land on the day the transferor acquired that land. This ensures that the land transfer does not in itself result in the application of the 3-year write-down provision.
  • The following flow-chart summarises the application of subsection (4).

Matrimonial Transfer of Livestock

A flowchart showing the process of matrimonial trasnfer of livestock

Larger version of image

The replacement section 86 is inserted by subsections (1)-(3) of section 7 of the Amendment Act. The remaining subsections of section 7 are:

  • Subsections (5) and (6)
    • Repeal spent provisions of previous Amendment Acts.
  • Subsection (7)
    • Provides that the 3-year write-down provision in respect of non-specified livestock (section 86(2A)) and the repeal of the old 3-year write-down provision, apply in respect of livestock purchased in the 1987 income year and every subsequent income year.
  • Subsections (4) and (8)
    • See commentary on bloodstock

Application Date - Specified Livestock

As subsection (3) has no separate application date the general application date (commencement of 1987 income year) applies. This means that, where the taxpayer is subject to the 3 year write-down, purchases made in the 1987 income year must be valued at closing balance date announced to subsection (3). Where a taxpayer was, prior to the 1987 year, already in the process of writing-down livestock over three years that write-down will cease in the 1987 income year and those livestock will be valued at the trading stock value announced for 1987. Only further purchases made in the 1987 income year would be subject to the write-down provision in that year.

3.8 Section 8 - New Livestock Valuation Sections

Section 8 of the Amendment Act inserts 8 new sections (sections 86A - 86H) into the Principal Act all of which relate to the valuation of livestock. Parts 3.9 - 3.16 of this publication discuss the effect of those sections.

3.9 Section 86A - Herd Scheme

This section introduces the new herd scheme which is an alternative livestock valuation scheme and applies in respect of mature livestock which are farmed principally for production rather than held for sale as trading stock.

Subsection (1) provides that the expression "herd value" means, in relation to herd livestock, "the average market value of that herd livestock declared for that income year ..."

Closing Herd Value

Subsection (2) provides that the closing value of any herd livestock which a taxpayer has elected to value under section 86A (the herd scheme) shall be the herd value of that herd livestock for that income year. (The matter of elections and the definition of herd livestock were discussed earlier in this publication.)

The effect of subsections (1) and (2) is that, where a taxpayer makes the appropriate election to adopt the herd scheme in respect of any type of livestock, the herd livestock of that type of livestock will be taken into account at the end of each year at the average market value declared in respect of each of those classes. That valuation procedure will continue to apply to that taxpayer until a further election (if any) is made to adopt an alternative scheme (i.e. trading stock scheme or cost option).

Note that the "herd value" is the average market value declared for that income year - this differs from the standard values set for the trading stock scheme which are based on an average taken over three income years.

Opening Herd Value

Subsection (3) overrides section 85(3) of the principal Act in relation to the value of livestock to be taken into account at the beginning of an income year (i.e. the opening value). Section 85(3) states that the opening value of trading stock (including livestock) shall be the closing value of that trading stock for the previous income year. Example 1 demonstrates the effect of section 85(3) and Example 2 the effect of section 86A(3).

Example 1 (static livestock numbers but increasing values)

Income Year Opening Value (Section 85(3)) Closing Value (Section 85 (4A))
1989 $18,000 (1988 closing value) 1,000 sheep at $20 = $20,000
1990 $20,000 (1989 closing value) 1,000 sheep at $23 = $23,000
1992 $23,000 (1990 closing value) 1,000 sheep at $24 = $24,000
Taxable (closing less opening)
$2,000 - 1989
$3,000 - 1990
$1,000 - 1991

Subsection (3) overrides section 85(3) by providing that the opening value of herd livestock shall be the closing value (i.e. the herd value) for that income year.

Example 2 (static livestock numbers but increasing values)

Income Year Opening Value (Section 86A(3)) Closing Value (Section 86A (2))
1989 $20,000 (1989 closing value) 1,000 sheep at $20 = $20,000
1990 $23,000 (1990 closing value) 1,000 sheep at $23 = $23,000
1992 $24,000 (1991 closing value) 1,000 sheep at $24 = $24,000
Taxable (closing less opening)
Nil - 1989
Nil - 1990
Nil - 1991

The effect of subsection (3) is that any increase in the value of livestock over an income year is not taxable. In the above examples it can be seen that the provision effectively exempts $6,000 of income tax that would otherwise accrue. This is in contrast to the trading stock scheme where such increases are taxable. However, under the trading stock scheme the closing values are set at 70 percent of a 3-year average market value rather than at 100 percent of the market value as required under the herd scheme.

Opening Herd Value in Year of Election

There is one exception to the above treatment of opening stock and that is in relation to the income year the election to join the herd scheme first applies. In that income year the provisions of section 85(3) are not overriden and thus the opening value for that year must equal the closing value for the previous income year.

Matrimonial Transfers

Subsection (4) deals with transfers of livestock under a matrimonial agreement where that livestock was valued under the herd scheme by the transferor in the year prior to the transfer, and the transferee is to value the livestock under the herd scheme in the year of transfer.

In such cases subsection (4) overrides section 91A to provide that the transferee will be deemed to have acquired the livestock at the herd value (i.e. average market value declared) for the income year in which the transfer takes place. Without this provision the transferee would be deemed, pursuant to section 91A, to have acquired the livestock at the transferor's closing value for the income year prior to the year of transfer. This would have given rise to a tax liability in the hands of the transferee if the herd value for the year of transfer exceeded the deemed purchase price.

Subsection (5) contains the normal accounting year provision.

Effect of Herd Scheme

The overall effect of section 86A is to provide different rules for the valuation of opening and closing stock. It does not override the provisions of section 85 which treat closing stock as income (section 85(4)) and opening stock as a deduction (section 85(7)), nor does it affect the treatment of sales (taxable) and purchases (deductible).

What the herd scheme achieves is an effective inflation proofing of herd class livestock by ensuring that the increase in value of livestock over an income year does not attract tax. However, the herd scheme also has the effect of not allowing any deduction for any decrease in value of livestock over an income year.

Note that the herd scheme only exempts the increase in value of livestock over an income year and does not exempt increases in numbers. The following example demonstrates this point.

Example 3 (increasing sheep numbers/increasing values)

Income Year Opening Value Closing Value
1989 1,000 at $20 = $20,000 1,200 at $20 = $24,000
1990 1,200 at $22 = $26,400 1,400 at $22 = $30,800
1991 1,400 at $24 = $33,600 1,600 at $24 = $38,400
Taxable (Closing less Opening)
$4,000 - 1989
$4,400 - 1990
$4,800 - 1991

3.10 Section 86B - Cost Option

This section contains what has been termed as the "cost option" for valuing livestock. In fact it provides for the valuation of closing livestock at either -

  • cost price;
  • market value; or
  • replacement price.

It has been termed the cost option as it is anticipated that most taxpayers adopting this option will use cost price as the basis of valuation.

These options have always been available in respect of the valuation of livestock under section 85(4). Section 86B now provides a separate section for those three valuation options in respect of specified livestock but at the same time introduces several related provisions.

Subsection (1) provides that where a taxpayer elects that the value of specified livestock is to be determined under section 86B, the closing value of that livestock shall be "at the option of the taxpayer, its cost price, its market value, or the price at which it can be replaced".

Cost Price

Cost price can be difficult to determine in relation to livestock. In the past, because the standard values set were generally below cost, the option of valuing livestock at cost was seldom used. However, now that standard values will be set at 70 percent of average market values (average of 3 income years) the cost option may be a more attractive proposition for some taxpayers who farm livestock which have a cost price of less than the new standard values.

The adoption of cost price as a valuation method will require the maintaining of detailed records of farm costs and livestock identification. The New Zealand Society of Accountants together with officials from Inland Revenue and the Ministry of Agriculture and Fisheries have formulated guidelines as to what farm costs must form part of the "cost price" of livestock. Details of the procedure to be followed in determining "cost price" and the record keeping requirements are contained in Appendix B of this publication.

Market Value

The market value of livestock can be used as an alternative to cost price. Market value is the value at which the livestock would be worth on the open market if they were available for sale in the normal course of business to an arms-length party at balance date.

Market value should not be reduced by any selling costs such as the cost of transport from farm to saleyards or slaughterhouse.

The use of market value as opposed to the trading stock scheme would be advantageous to taxpayers who farm livestock which are worth less than 70 percent of the declared average market value.

Replacement Price

The replacement price of livestock is the price the taxpayer would pay at balance date for livestock of the same class and quality as the livestock on hand at that balance date which are to be valued at replacement price.

Replacement price would be advantageous to taxpayers who can acquire replacement stock at a price less than 70 percent of the declared average market value.

Movement Between Valuation Methods

Note that the restriction of movement between livestock valuation schemes imposed under the election requirements, as outlined earlier in this publication, applies to the "cost option" as a collective option incorporating cost price, market value or replacement price. It does not apply to these individual valuation alternatives which form the "cost option". That is, a taxpayer, having adopted the cost option, is free to value closing livestock at cost, market or replacement price and may alternate between those three alternatives at will from year to year on the same basis as applies for trading stock other than livestock.

Bailors

Subsection (2) qualifies subsection (1) by providing that the alternative of valuing livestock at cost price within the "cost option" is not available to livestock that have been bailed or leased by the taxpayer during the income year. That is, bailors of livestock who elect to value their bailed livestock under section 86B are restricted to the alternatives of market value or replacement price.

Record Keeping

Subsection (3) also qualifies subsection (1) to provide that the cost price alternative will not be available 'where the Commissioner is not satisfied that the taxpayer has sufficient records to accurately determine the cost price of that specified livestock'. As already noted, details of the record keeping requirements when using cost price are outlined in Appendix B.

Opening Value

Subsection (3A) provides that where a taxpayer elects to change to the cost option from another scheme (i.e. trading stock scheme or herd scheme), the opening value in the year the cost option first applies is deemed to be the cost price of that livestock at the commencement of that income year.

The effect of this provision is that, if the taxpayer adopts the cost price alternative within the cost option the "cost" is fixed and the taxpayer does not need to examine past records to try and determine the historical cost of the livestock.

Subsection (4) is the normal accounting year provision.

3.11 Section 86C - High-priced Livestock Scheme

Definition of High-priced Livestock Section 86C introduces the new high-priced livestock valuation scheme.

Subsection (1) defines "high-priced livestock" as specified livestock purchased for equal to or more than 3 times (or, for sheep, 4 times) the average market value determined in relation to that class of livestock for the income year preceding the income year of purchase.

  • Note that the definition, and therefore the high-priced livestock scheme, applies only to livestock purchases and not high-valued livestock such as stud stock which are bred by the taxpayer.

In determining whether an animal purchased in any income year is "high priced livestock" the purchase price must be compared to the declared value for the class of livestock "in which that specified livestock is able to be classified at the end of that income year, ..."

Example

A rising one-year bull purchased at the commencement of an income year will be a rising two-year bull at the end of the income year. The purchase price should be compared with the value determined for the income year preceding the year of purchase in respect of rising two-year bulls not rising one-year bulls.

A comparison is made with the previous year's value so that the taxpayer knows at the time of the purchase whether the livestock will be classed as "high-priced livestock".

Closing Value

Subsection (2) is the operative subsection which determines how the closing value of high-priced livestock is to be determined. It provides that the closing value should be:

  1. In the year of purchase, its cost price reduced by the "assigned percentage" of that cost price;
  2. In relation to any succeeding income year, the opening value for that income year, reduced by the "assigned percentage" of the cost price.

"Assigned percentage" is defined in subsection (1) as being:

Sheep - 25 percent
Cattle - 20 percent
Stags - 20 percent
Deer (other than stags) - 15 percent
Goats - 20 percent
Pigs - 33 1/3 percent

The combined effect of subsections (1) and (2) is shown in the following example.

Example

A taxpayer makes the following purchases in the 1991 income year. He has elected that the trading stock scheme is to apply to all livestock types.

  • 10 pedigree mixed-age ewes at $100 per head
  • 1 breeding boar at $600 per head
  • 1 Wapiti breeding stag at $12,000

Average market values declared as follows:

  1990 1991 1992
mixed-age ewes $ 15 $ 20 $ 22
breeding boars $ 120 $ 130 $ 135
Wapiti breeding      
stags $5,000 $5,000 $5,000

The livestock accounts of the taxpayer should record the following values:

Income Year Opening Value   Purchases Closing Value  
1991 Nil Ewes $ 1,000 Ewes $ 750
    Boar $ 600 Boar $ 400
    Stag $12,000 Stags $3,500
1992 Ewes $ 750 Nil Ewes $ 500
  Boar $ 400   Boar $ 200
  Stag $3,500   Stag $3,500

The amount of write-down is a fixed amount regardless of the market fluctuations subsequent to the income year which determines that amount (i.e. the income year preceding the year of purchase).

In this example the stag is not "high-priced livestock" (the purchase price does not exceed three times the average market value) and therefore is valued according to the valuation scheme the taxpayer has elected for that livestock type, which in this example is the trading stock scheme. (The example assumes the declared value for Wapiti breeding stags in 1989 and 1988 was $5,000 and therefore the 3-year rolling average produces a constant value ).

Matrimonial Transfers

Subsection (3) relates to high-priced livestock which are transferred under a matrimonial agreement. It deems such livestock to have been acquired by the transferee on the same day and at the same cost to the transferor. It provides also that the closing value (transferee's accounts) of that high-priced livestock in the year of transfer shall be -

  • the value at which the livestock is deemed to be transferred under section 91A (the opening value (transferor's accounts) in the year of transfer)

REDUCED BY

  • the assigned percentage of the original cost to the transferor

The effect of subsection (3) is that the transferee continues the same write-down in respect of the livestock that the transferor would have been entitled to had the transfer not taken place.

Restrictions to Write-Down

Subsection (4) qualifies subsections (2) and (3) to provide that no write-down of high-priced livestock will be allowed in any year where the livestock -

  1. Was purchased within 6 months of the end of that income year; or
  2. In relation to pigs, was less than one year of age at the end of that income year; or
  3. In relation to livestock other than pigs, was less than 2 years of age at the end of that income year.

In such cases the high-priced livestock must be valued at its cost price until the first income year in which the above provisions are no longer relevant. In relation to (a) and (b) above obviously the provision can apply only to the year of purchase. However, in relation to (c) any livestock which are less than 1 year of age at the closing balance date in the year of purchase will be required to be valued at cost price in the subsequent year also.

Minimum Closing Value

Subsection (5) provides that the closing value of high-priced livestock shall not be less than $1.

Example

A stud ram is purchased in the first half of an income year for $400. The write-off for each year the animal is owned would be calculated as follows:

Year of purchase - purchase price $400.00
    less write-off  
    (400 x 25%) $100.00
    Closing value $300.00
Year 2 - opening value $300.00
    less write-off $100.00
    Closing Value $200.00
Year 3 - opening value $200.00
    less write-off $100.00
    Closing value $100.00
Year 4 - open value $100.00
    less write-off (Ss(5)) $ 99.00
    Closing value $ 1.00
Year 5 - Opening value $ 1.00
    Closing Value $ 1.00

Determination of Cost Price

The high-priced scheme is based on the "cost price" which is:

Purchase Price + Cost of transporting the stock to the farm

Under the cost option "cost", in relation to immature livestock, includes costs incurred in holding an animal to maturity. For the high-priced scheme only the purchase price plus transport costs will be included. This means that where subsection (4) applies to restrict the write-down to mature animals, costs incurred in holding animals to maturity will not be required to be included as part of the cost price.

3.12 Section 86D - Declaration of Annual Values by Order in Council

This section provides that the Governor-General shall, by Order in Council, declare an average market value in relation to each of the classes of specified livestock set out in column (2) of the Twelfth Schedule (First Schedule of the Amendment Act) in respect of the 1987 and future income years.

Although 1988 is the first full year of operation of the new valuation schemes, the values announced for the 1987 income year are necessary for the purposes of the transitional provisions.

As discussed earlier, the value of herd livestock is based on the valuation announced under this section and the value of livestock under the trading stock scheme is based on 70 percent of a 3 year average of the values so announced.

It is intended that the values will be announced in late March of each year except for cattle based on the auction system for which the values will be announced in May of each year.

The values announced will be in respect of an income year and will apply to the value of closing livestock in that income year only regardless of the taxpayer's balance date.

The Department will publish the values in a Public Information Bulletin after the values are announced. For simplicity the trading stock value (70 percent of 3-year average) will be shown as well as the herd value.

The announced values will be based on one of two types of data. For livestock classes which are predominantly sold through the auction system rather than as prime stock ultimately destined for slaughter, average auction prices will be used. For all other classes, the values will be based on meat schedule prices for prime stock.

All values used for deriving the standard values will be exclusive of goods and services tax.

3.13 Example of New Valuation Schemes

The following is an example of the new valuation schemes in operation by a sheep and cattle farmer. For simplicity, only three classes have been used for each livestock type.The example assumes the following values have been announced:

Year Livestock Class Standard Value Herd Value
    $ $
1990 Ewe hoggets 14.00 20.00
  Mixed-age ewes 10.00 15.00
  Breeding rams 98.00 140.00
  Rising one-year heifers 154.00 220.00
  Mixed-age cows 266.00 380.00
  Breeding bulls 1,260.00 1,800.00
1991 Ewe hoggets 15.00 22.00
  Mixed-age ewes 11.00 16.00
  Breeding rams 101.00 150.00
  Rising one-year heifers 150.00 210.00
  Mixed-age cows 266.00 380.00
  Breeding bulls 1,295.00 1,900.00
1992 Ewe hoggets 16.00 24.00
  Mixed-age ewes 12.00 20.00
  Breeding rams 105.00 160.00
  Rising one-year heifers 156.00 240.00
  Mixed-age cows 270.00 400.00
  Breeding bulls 1,330.00 2,000.00

The farmer is operating the trading stock scheme but decides that for the 1990 income year and future income years the breeding cattle are to be valued under the herd scheme. In the 1991 income year two stud rams are purchased at the commencement of the income year - one for $400 and one for $600. At the commencement of that income year the farmer also purchases 10 rising one-year red deer hinds at $1,000.00 per head and decides they will be valued at cost. Other livestock numbers remain static by way of the sale of cull stock and the purchase of the same number of replacements. The 1990 opening stock is shown as follows:

100 ewe hoggets x $12.00
100 mixed-aged ewes x $10.00
9 breeding rams x $90.00
10 rising one year heifers x $150.00
10 mixed-age cows x $250.00
1 breeding bull x $1,200.00

The farmer operates a 30 June balance date.

Election Requirements (Section 85A)

In relation to the cattle, the farmer must -

  • Advise the Department in writing of the intention to change to valuation schemes
  • State in the notice the election first applies for the 1990 income year:
  • State in the notice the election applies in respect of section 86A (herd scheme);
  • Give the notice to the Department by 30 June 1988 at the latest.

In relation to the deer purchased in the 1991 income year the farmer must -

  • Advise the Department in writing of the intention to adopt the cost option in respect of deer;
  • State in the notice the election first applies for the 1991 income year;
  • State in the notice the election applies in respect of section 86B (cost option);
  • Give the notice to the Department by the time in which the 1991 return of income is required to be filed.

The farmer's livestock schedules should reflect the following valuations.

1990 Return Closing Stock
Trading Stock Scheme
ewe hoggets 100 x $14
mixed-aged ewes 100 x $10
breeding rams 9 x $98
rising one-year heifers 10 x $154
Herd Scheme
mixed-age cows 10 x $380
breeding bulls 1 x $1,800

1991 Return

Class Opening Stock Closing Stock
Trading Stock Scheme
ewe hoggets 100 x $14 100 x $15
mixed-age ewes 100 x $10 100 x $11
breeding rams 9 x $98 10 x $101
rising one-year heifers 10 x $154 10 x $150
  Herd Scheme  
mixed-age cows 10 x $380 10 x $380
breeding bulls 1 x $1,900 1 x 1,900
High-priced Scheme
breeding rams 1 x $450 (note 1)  
Cost Option
red deer - rising    
two-year hinds NIL 10 x $1,100 (note 2)

Note 1 - only one of the stud rams purchased was high-priced livestock.

Note 2 - $100 holding costs included.

1992

Class Opening Stock Closing Stock
Trading Stock Scheme
ewe hoggets 100 x $15 100 x $16
mixed-age ewes 100 x $11 100 x $12
breeding rams 10 x $101 10 x $105
rising one-year heifers 10 x $150 10 x $150
Herd Scheme
mixed-age cows 10 x $400 10 x $400
breeding bulls 1 x $2,000 1 x $2,000
High-priced Scheme
breeding ram 1 x $300  
Cost Option
red deer - rising one-year hinds 10 x $1,100 10 x $1,100

3.14 Section 86G - Transitional Provisions

This section provides for a number of transitional provisions in relation to the move to the new livestock valuation schemes.

APPLICATION DATE

Subsection (1) provides that no election made under section 85A to join a particular livestock valuation scheme can be made in respect of the 1987 income year or any preceding income year.

The effect of this provision is to override the general application date of the Amendment Act (commencement of 1987 income year) by not allowing taxpayers to make an election to join a particular scheme in respect of the 1987 income year. This means that taxpayers cannot adopt the herd scheme or the cost option for 1987 thus leaving the trading stock scheme as the only available option for that income year. (However see commentary on subsection (3) below).

Time for Filing 1988 Election

Subsection (2) provides that any notice of election to adopt a particular livestock valuation scheme for the 1988 income year shall be furnished to the Department within the time in which the taxpayer's 1987 return is required to be filed. The provision overrides the two year notice requirement of section 85A.

1987 Closing Value - Herd Scheme Adopted

Subsection (3) provides that taxpayers who elect to adopt the herd scheme for the 1988 income year must value their 1987 closing herd class livestock (in respect of which the election applies) at the average market value to be declared for the 1987 income year.

This means that taxpayers who make such an election will have a greater amount of income (difference between herd value and standard value) than taxpayers who do not so elect. As discussed earlier, the additional income arising from the revaluation of livestock which exceeds the income write-off can be spread over five income years.

1988 Opening Value - Cost Option Adopted

Subsection (4) provides that where taxpayers elect to adopt the cost option for the 1988 income year the opening value for that income year (i.e. the standard value for the 1987 income year) shall be deemed to be the cost price.

The effect of this provision is that, if a taxpayer adopts the cost price alternative for the 1988 income year the "cost" is fixed and the historical cost does not need to be determined.

Stud and Pedigree Stock

Subsection (5) deals with the closing value of stud and pedigree specified livestock for the 1987 and future income years. It provides that where -

  1. The livestock was owned by the taxpayer at the end of the 1986 income year: and
  2. Was used for the purposes of stud or pedigree farming; and
  3. The taxpayer's 1986 closing value is greater than the average market value for that class of livestock declared for the 1987 income year, -

the taxpayer must continue to use the 1986 closing value until (but not including) the income year in which the declared value equals or exceeds the 1986 closing value.

The effect of this provision is that taxpayers who were using market-related closing values for such livestock cannot write those values down to the declared national average value for that class of livestock - the declared values would be substantially lower than the market value of stud or pedigree stock.

Instead, such taxpayers must continue to use the 1986 closing value for the 1986 closing livestock until those livestock are sold or until the income year in which the declared value meets that closing value.

Note that the provision applies only to the actual livestock that were on hand at the end of the 1986 income year. Any replacement animals purchased or bred after that date are subject to the normal valuation rules. Although this requires the separate identification of such 1986 closing livestock until they are subsequently disposed of this should not be a problem with this type of livestock.

High-priced Livestock

Subsection (6) deems any closing 1986 livestock which is valued at equal to or greater than three times (or, for sheep, four times) the average market value for the 1986 income year (as specified in the Sixth Schedule) to be "high-priced" livestock.

The effect of the subsection is to require such high-priced livestock to be written down at the rate specified in section 86C and thus they cannot be written down to the declared value for 1987 to create a large tax deduction in that income year.

Note that this subsection applies to any specified livestock including stud or pedigree stock and therefore it has a correlation with subsection (5). The following flow chart demonstrates the application of these two subsections.

1986 Closing Livestock

A flowchart showing the 1986 closing livestock process

Larger version of image

High-priced Purchases in 1987

Subsection (7) provides that livestock purchased in the 1987 income year for an amount equal to or greater than 3 times (4 times for sheep) the value listed in the Sixth Schedule shall be deemed to be "high-priced" livestock.

Note that the purchase price must be compared with the value listed in the Sixth Schedule for the class in which the livestock will be classified at the end of the income year.

The effect of this provision is that high-priced purchases in the 1987 income year cannot be written down to the declared value in that year but instead must be valued (closing 1987 value) at the purchase price reduced by the appropriate "assigned percentage" as specified in section 86C.

Standard Value for 1987 and 1988

Subsection (8) provides the formulae for determining the 1987 and 1988 "standard value".

As outlined earlier in this publication, the "standard value" for a particular year is determined at 70 percent of the average of the declared value for that income year and the two preceding years. However, as there will be no declared value for the 1986 or the 1985 income years it is not possible to apply the calculation for the purposes of determining the 1987 and 1988 standard values.

This subsection provides for the following transitional formulae for determining the standard value for a particular class of livestock.

1987 Standard value
1987 declared value x [70 / 100]
1988 Standard value
Sum of 1987 &1988 [declared value /70] x [2 / 100]

Subsection (9) is the normal accounting year provision.

3.15 Section 9 - Consequential Provisions

This section contains a number of amendments to various sections of the principal Act which arise as a result of the enactment of new livestock valuation provisions.

Section 88 - Bailed Livestock

Section 88(3) allowed bailors (lessors) of livestock to value the bailed livestock at either market value, the taxpayer's standard value in force at the date of the bailment, or any other higher standard value that was less than the market value.

Section 9(1) of the Amendment Act adds a subsection (6) to section 88 which provides that nothing in subsection (3) of that section shall apply to the value of closing stock to be used in the 1987 income year or any subsequent year.

The effect of this provision is that for the 1987 and subsequent income years no special valuation rules will apply to bailed livestock (except the exclusion from the cost option).

Note that the provision in section 88(2), which deems bailed livestock to continue to be livestock which is used by the bailor in a business, has not been amended. This means that bailors will continue to include livestock which they have bailed as closing livestock in their annual accounts and will value them according to the valuation scheme adopted for that type of livestock.

Section 91A - Matrimonial Transfers

Section 91A(2) determined a deemed sale price for trading stock which is transferred pursuant to a matrimonial agreement. In relation to livestock it provided that the deemed transfer price would be the greater of:

  • "the transferor's closing value for the income year preceding the transfer; or
  • the transferee's standard value.

As taxpayers will no longer have individual standard values the provision has been amended to remove reference to the transferee's standard value. Specified livestock that are transferred under a matrimonial agreement will now be deemed to have been transferred at the transferor's closing value for the income year preceding the year of transfer.

The amendment is achieved by substituting a new section 91A(2) and applies with respect to the 1987 income year and future years.

Section 93 - Spreading of Income on Sale of Livestock

Section 93 of the principal Act allows for the spreading of income arising from a sale of substantial number of livestock where that income arises by reason of the adoption of low standard values.

Section 9(4) of the Amendment Act amends section 93 to provide that the section shall apply only to sales of livestock that occur in the 1987 income year or in any preceding year.

Section 9(5) of the Amendment Act further amends section 93 to provide that the section shall not apply to any assessable income that is written-off under section 86E or spread under section 86F.

The effect of the amendments to section 93 is that, in respect of substantial sales of livestock in the 1987 income year, there will be very little (if any) balance of income remaining to spread under section 93. However, where the substantial sale takes place in the 1986 income year, initially there will be an amount of income to spread back under section 93 as the income write-off and section 86F income spread and will not be determined until the end of the 1987 income year. Once that deduction and spread are determined the amount initially spread back under section 93 must then be reduced by the amount of income write-off and income spread which is attributable to the numbers of livestock sold (the back-year returns affected would be reassessed accordingly). The following formula should be applied in respect of each class of livestock sold to calculate the portion of income write-off attributable to that livestock.

Number of that class sold x Income write-off for that class
Number of that class that class included in "base number"

Although the amendments to section 93 require any section 86F income spread attributable to the livestock sold to be deducted also, in relation to section 93, sales made in the 1986 income year there will never be an amount to be so deducted. This is because the section 86F spread calculation is based on 1987 opening and closing numbers and of course any livestock sold in the 1986 income year will not be included in the 1987 opening or closing livestock.

Section 94 - Adverse Event

Section 94 of the principal Act allows for the spreading of income arising from the sale of livestock due to an adverse event (drought, flood etc.). The income arising from the forced sale can be deferred until the income year in which replacement livestock are purchased. The income that can be deferred is termed the "assessable excess" and is the difference between the sale proceeds and the taxpayer's standard value in relation to those livestock.

Section 9(6)-9(8) of the Amendment Act make amendments to section 94 with the principal amendment contained in section 9(7).

Subsection 9(7) provides that section 94 shall apply only to sales of livestock made in the 1987 income year or any preceding income year. The effect of the amendment is that section 94 will not apply to adverse events which occur in the 1988 income year or future years and therefore the past procedure of "declaring" adverse events will no longer be necessary.

Section 9(6) of the Amendment Act amends the definition of "Assessable excess" in section 94 to provide that only the balance of assessable income, after deducting any income write-off allowed under section 86E and any income spread allowable under section 86F, can be deferred until the income year replacement livestock are purchased.

The provision applies from and including the 1987 income year (as provided by section 9(14)) but only has application in the 1987 income year for the reason that the section 94 provision applies only to sales of livestock made up to and including the 1987 income year.

The provision requires the allocation of a portion of the income write-off to the livestock disposed of, and this can be achieved by using the following formula in respect of each class of livestock sold.

Number of that class sold x Income write-off for that class
Number of that class included in "base number"

The resultant figure is deducted from the assessable income arising from the sale and the balance is the "assessable excess" which can be deducted from 1987 income and returned in the year the livestock are replaced.

EXAMPLE

2-Tooth Ewes

Base Number - 1,000  
Write-off - $11,000  
Number sold - 300  
Sale proceeds - $ 6,000 (300 x $20)
Opening value - $ 900 (300 x $3)


Assessable Income From Sale $6,000 - $900 = $5,100
Write-off To Be Deducted (see formula above) [$3,00 / $1000] x 11,000 = $3,300
Assessable Excess $5,100 - $3,300 = $1,800

Situations may arise where the total livestock numbers have increased subsequent to the base number determination and prior to the forced sale. This means a number of the livestock sold may not have an associated income write-off. In order to determine the amount of income write-off that is to be deducted in such cases a "Last in first out (LIFO)" method can be used. The earlier example assumes that all the livestock sold came from the base number (i.e. assesses the 1987 opening number for 2-tooth ewes was 1,000 or less). If however the 1987 opening number was 1,200, using the LIFO method, of the 300 sold 200 of them are deemed to be additions since the base number determination. The amount of income write-off to be deducted would therefore be -

[$100 / $1000] x 11,000 = $1,100


Assessable Excess = $5,100 - $1,100 = $4,000

Note that section 9(6) requires that as well as deducting a proportion of the income write-off, any assessable income in relation to the livestock sold which is spread forward under section 86F should also be deducted. However, section 86F requires that the lesser of 1987 opening numbers or 1987 closing numbers be used for the purposes of determining the income spread. Any forced sale of livestock in the 1987 income year will mean that the closing number will be reduced accordingly; the net effect being that no income spread is attributable to the livestock sold.

Section 9(8) of the Amendment Act further amends section 94 to provide that any taxpayer with an "assessable excess" still to be brought to account may, instead of being required to return the amount as assessable income in the year replacement livestock are purchased, apply to have that amount returned as assessable income in the 1987 income year.

The effect of this provision is that taxpayers with an "assessable excess" arising from a forced sale made prior to the 198V income year can now return the assessable excess in the 1987 income year instead of being required to return the income in the year replacement livestock are subsequently purchased. This gives such taxpayers the opportunity to take advantage of the reduced income (or loss) that is likely to arise in the 1987 income year as a result of the income write-off available.

Section 95 - Sales of Livestock by Sharemilkers and Lessee Farmers

Subsections (9) and (10) of section 9 amend section 95 of the principal Act which is a provision similar to section 94 except that it relates to the assessable income arising from the sale of livestock by a sharemilker or a lessee farmer.

Subsection (9) provides that the assessable income arising from the sale shall be reduced by any income write-off and income spread attributable to the livestock sold. The same procedure for calculation of the "assessable excess" under section 94 should be applied in calculating the "assessable excess" under section 95.

Subsection (10) provides that section 95 will not apply to sales which occur subsequent to the 1987 income year.

Family Support

Subsections (11)-(13) of section 9 make amendments to the Family Support legislation. They are generally of a consequential nature and simply make reference to a number of new sections which should be taken into account when determining a taxpayer's income for family support purposes.

There is however one significant amendment and that is the repealing of the legislation which required livestock to be valued at "net realisable value" for the purposes of determining a taxpayer's income for family support purposes. This amendment applies with effect from the commencement of the 1987 income year so that the determination of family support income for the 1987 and future income years will be based on the taxpayer's opening and closing livestock values as reflected in the tax accounts for that income year. In respect of the 1987 income year the income write-off allowed will offset the additional income arising from the livestock revaluation and no adjustment should be made in respect of the income write-off for the purposes of calculating income from family support.

The following is a summary of the effect of subsections (11) - (13) on sections 374A and 374B of the principal Act.

  • Subsection (11) - Repeals definition of "net realisable value".
  • Subsection (12)
    • (a) Repeals a provision relating to the use of net realisable value.
    • (b) and (d) Provide that income spread under section 86F will not be recognised for the purposes of determining family support income.
    • (c) Repeals a provision relating to the use of net realisable value.
  • Subsection (13) adds references to three new sections to the provision which disregards deductions allowed for farm/forestry development expenditure for the purposes of determining family support income.

4. Transition

4.1 As discussed in Part II of this publication, the new livestock valuation provisions first take effect in the 1988 income year. The transition from the old to the new schemes takes place in the 1987 income year and the relevant provisions are contained in sections 86E-G as inserted by section 8 of the Amendment Act.

The transition is achieved by requiring taxpayers to revalue their closing 1987 livestock to the new standard value (70 percent) to be set for the 1987 income year. There are only two exceptions to this rule. Where the taxpayer elects to adopt the herd scheme for the 1988 income year the classes of livestock to be included in the herd scheme will be revalued to the average market value (100 percent) to be declared for the 1987 income year. The other exception is where the taxpayer is subject to the 3-year write-down in respect of purchases of livestock in the 1987 income year. In such cases the 1987 closing value will be the new standard value increased by the "deductible excess" (two-thirds of difference between purchase price and standard value).

The income arising from the revaluation (or a substantial part of that income) will be written-off with any balance of income being available to be spread over the 1987 income year and the four succeeding income years.

4.2 Section 86E - Income Write-Off

This section provides for the writing off of an amount of income that arises from the transition.

Definition of Base Number

Subsection (1) provides a definition of "base number" which is the number of specified livestock that will qualify for the income write-off. The "base number" is, at the taxpayer's option, either -

  1. The number of specified livestock owned by the taxpayer at the end of the 1985 income year:
  2. The lesser of -
    • The number of specified livestock owned by the taxpayer on 12 December 1985 (excluding livestock aged 12 months or less on that date).
    • The number owned at the end of the 1986 income year.

The effect of part (ii) of the definition is that taxpayers who commence farming after 12 December 1985 (the date the income write-off was announced), or who increase livestock numbers after that date, will not receive an income write-off in respect of the livestock purchased after that date.

Example

  30 June 1985 12 December 1985 30 June1986
Sheep 1,200 1,200 1,000
Cattle 200 210 220
Deer NIL NIL 20
  1,400 1,410 1,240

In this example the taxpayer's "base number" of livestock is, at the taxpayer's option, either 1,400 or 1,240.

Taxpayers cannot select different income years for the purposes of calculating the base number for each type of livestock. That is, the base number is the total number of all types of specified livestock owned at a particular date. The base number, once selected, then determines the numbers of each type of livestock owned that will qualify for the income write-off. If in the preceding example the taxpayer chose the total closing 1986 number (1,240) as the base number the income write-off would apply in relation to:

sheep 1,000
cattle 220
deer 20

Base Number - Adverse Event

Paragraph (c) of the definition of "base number" provides a further option for taxpayers who have sold livestock as the result of an adverse event. Where the sale was made in the 1985 income year or in either of the two preceding income years the number of livestock on hand at the commencement of the income year in which the sale took place will be that taxpayer's base number. Where more than one such sale took place in those three income years (e.g., two summers of drought) the taxpayer can choose the opening number of livestock in any one of those three income years as the base number.

Income Write-Off - Farmers Who Cease in 1986

Subsection (2) provides an income write-off for taxpayers who cease to derive income from specified livestock after 12 December 1985 and during the 1986 income year.

Taxpayers who ceased farming prior 12 December 1985 do not qualify for any income write-off. Taxpayers who cease farming after the end of the 1986 income year are dealt with under subsection (3).

To qualify for the income write-off under subsection (2) taxpayers must completely cease to derive income from specified livestock and not just substantially reduce the size of the farming operations. Generally the provision will apply to taxpayers who cease farming and sell their land but will apply also to farmers who sell their livestock but retain their farm land (e.g., convert to horticulture or employ a 50 percent sharemilker).

The formula for calculating the income write-off under subsection (2) is

(a x b) - (c)
Where
a = the sale proceeds of the 1986 opening livestock numbers
b = 70 percent
c = the 1986 opening livestock values

Example

1986 Opening Values   Sale Proceeds
$ $  
Sheep 2000 x $3 = $6,000 2,000 x $15 = $30,000
Cattle 200 x $60 = $12,000 200 x $300 = $60,000
Deer 20 x $150 = $3,000 20 x $500 = $10,000
  a = Sheep $30,000
  Cattle 60,000
  Deer 10,000
    $100,000
  b = 70 percent  
  c = Sheep $6,000
  Cattle 12,000
  Deer 3,000
    $21,000
  • ($100,000 x 70%) - $21,000
  • = $70,000 - $21,000
  • = $49,000

In this example the income write-off available is $49,000.

Note that the additional livestock purchased during the 1986 income year (2 deer) do not qualify for the income write-off (the calculation is based on 1986 opening numbers).

Where the cessation of farming is due to the death of the taxpayer the probate value (market value) and not the sale proceeds is used in calculating the income write-off.

In determining the amount realised on the sale of livestock where the sale is for less than market value (e.g. sale to a related party) it is the amount actually received that is to be used for the purposes of the calculation and not the amount that other provisions of the Income Tax Act may deem the taxpayer to have received.

Note also that the base number provision has no application to taxpayers who qualify for the income write-off under subsection (2).

Income Write-Off - Farmers who Continue After 1986

Subsection (3) provides an income write-off for taxpayers who derive income from specified livestock at any time during the 1987 income year. The formula for calculating the income write-off under subsection (3) is applied to each relevant class of livestock.

The formula is

a x (b - c)
Where
a = the number of that class of livestock included in the taxpayer's base number
b = the 1987 standard value for that class of specified livestock (i.e. 70 percent of the annual market value to be declared for the 1987 income year)
c = the 1987 opening value for that class of specified livestock. (Where the taxpayer had no livestock of that class on hand at the commencement of the 1987 income year,the value that the taxpayer would have used will be used for the purposes of the calculation).

EXAMPLE

Base Number (a) 1987 Standard Value (b) 1987 Opening Value (c)
Sheep 2,000 $ 10.50 $ 6.00
Cattle 200 $280.00 $60.00

Income Write-Off

Sheep =2,000 x (10.50 - $6.00)
  =2,000 x $4.50
  = $9,000
Cattle = 200 x ($280 - $60)
  = 200 x $220
  = $44,000

Total Write-Off = $53,000

The income write-off applies to all taxpayers who derive income from livestock in the 1987 income year regardless of whether they cease farming during that year. Also, the write-off is calculated on the classes and numbers of livestock included in the taxpayer's base number regardless of any subsequent change in numbers, classes or types of livestock. For instance, in the preceding example the same write-off would be given even though in the 1987 income year the taxpayer may have sold all his sheep and cattle and purchased deer and goats.

Write-Off Calculated by Class

The preceding example, for simplicity , shows the write-off calculated by type of livestock, however, the legislation requires the calculation to be made in relation to each class of livestock included in the base number. There may be situations where the taxpayer has no breakdown of the respective classes of livestock owned at the date the base number is determined (e.g., the taxpayer's 1985 closing livestock may simply show - sheep 2,000). In such cases the base number may be broken down into the classes shown in the 1987 closing livestock and on the same proportional basis.

EXAMPLE

Base Number 1987 Closing Numbers  
Sheep 2,000 ewe hoggets 1,000 (40%)
  2-tooth ewes 1,000 (40%)
  mixed-age ewes 500 (20%)
Base Number by Class
ewe hoggets 2,000 x 40% = 800  
2-tooth ewes 2,000 x 40% = 800  
ewe hoggets 2,000 x 20% = 400  

Where a taxpayer has more than one 1987 opening value applying to any class of stock (for example. a standard value and a nil value). the 1987 opening value for the purposes of calculating the income write-off will be the weighted average of the 1987 opening values.

EXAMPLE

Taxpayer's 1987 opening livestock consists of 1,000 ewe hoggets at a standard value of $6 and 200 at nil value. The weighted average value of the ewe hoggets is:

total value
number
= (1,000 x $6) + (200 x $0)
1,200
  = $6,000
1,200
  = $5

The 1987 opening value of ewe hoggets which the taxpayer will use for the purposes of calculating the income write-off is therefore $5 per head.

The proviso to subsection (3) ensures that a taxpayer who receives a deduction under subsection (2) (ceases farming in the 1986 income year) cannot also receive an income write-off under subsection (3).

Base Number - Matrimonial Transfers

Subsection (4) provides additional rules for determining the base number in relation to taxpayers involved in a matrimonial transfer in the 1986 or 1987 income years. Put simply, it provides that in such situations the transferee is deemed to have owned a share of the livestock owned by the transferor on each of the relevant dates for determining the base number (i.e., closing 1985, 12 December 1985, closing 1986). The transferor's base number is then reduced accordingly. In determining the share of livestock deemed to have been owned by the transferee the Commissioner can have regard to:

  • the tenor of the matrimonial agreement.
  • any wishes of the parties expressed therein
  • the marital status of the transferor and transferee at all material times
  • such other information as in his possession ..."

Generally matrimonial agreements recognise a 50/50 ownership of matrimonial property and therefore in most cases it can be expected the transferee will be deemed to have owned one-half of the livestock owned by the transferor at the those relevant dates. However, if for example, the transferor owned closing 1985 livestock and married subsequent to that date (but prior to 12 December 1985) then it would not be appropriate to deem the transferee to have owned a share of the transferor's livestock as at the transferor's 1985 balance date.

Note that the provision does not require both parties to a matrimonial agreement to adopt the same date for the purposes of calculating their base number.

Arrangements

Subsection (5) is an anti-avoidance provision which allows the Commissioner to disregard any amount of income write-off that may arise due to arrangements entered into by a taxpayer which gave rise to a greater income write-off than the taxpayer would otherwise be entitled to.

Subsection (6) is the normal accounting year provision.

4.3 Section 86F - Income Spread

This section provides for the spreading of any balance of additional income arising from the revaluation of livestock which has not been written-off under section 86E.

Determination of Amount of Spread

Subsection (1) contains two definitions which determine the amount of income available to be spread.

The definition of "assessable excess" determines the income spread available under subsection (2) to persons who cease farming after 12 December 1985 and prior to the end of the 1987 income year.

The formula for determining the "assessable excess" is:

(a - b) - income write-off
a = the actual amount realised by the taxpayer from the sale or other disposal of the opening livestock
b = the opening value, in the year the taxpayer ceases farming, of the livestock disposed of.

EXAMPLE

Taxpayer ceases farming during the 1987 income year.

1987 Opening Livestock Sale Proceeds
  $   $  
Sheep 2000 @ $6 = $12,000 2,000 @ $15 = $30,000
Cattle 200 @ $60 = $12,000 200 @ $300 = $60,000
    $24,000   $90,000
  • a = $90,000
  • b = 24,000
  • Income write-off = $53,000 (say)
  • ($90,000 - $24,000) - 53,000
  • = $66,000 - $53,000
  • = $13,000
  • The income spread available in this example is $13,000.

The definition of "livestock revaluation income" determines the income spread available under subsection (3) to continuing farmers.

The formula for determining the "livestock revaluation income" is calculated in relation to each class of livestock owned by the taxpayer at the end of the 1987 income year. The formula is -

[a x (b - c) ] - income write-off
a is the lesser of:
  1. 1987 closing numbers of that class of livestock.
  2. 1987 opening numbers of that class of livestock (Note 1)
b is 1987 closing value used for that class of livestock (i.e., 1987 standard value or, where the herd scheme is to be adopted in 1988, the 1987 herd value).
c is 1987 opening value used for that class of livestock.

EXAMPLE

Classes of Livestock 1987 Opening Livestock 1987 Closing Livestock
  (Standard Value) (Standard Value)
two-tooth ewes 600 x $6 = $3,600 500 @ $15 = 7,500
mixed-age ewes 900 x $6 = $5,400 1,000 @ $10 = 10,000

 

Two-tooth Ewes Mixed age Ewes
a Lesser of
  1. 500 or
  2. 600
=500
a Lesser of
  1. 1,000 or
  2. 900
=900
b =$15 b =$10
c =$6 c =$6
500 x ($15 - $6) 900 x ($10 - $6)
=$4,500 =$3,600

Similar calculations would be made for each class of 1987 closing livestock so that a total is obtained. The total income write-off allowed to the taxpayer is then deducted from that total to give the income eligible to be spread (the "livestock revaluation income ").

NOTE 1

The actual wording of the legislation provides that "a" of the livestock revaluation income shall be the lesser of:

  1. 1987 closing numbers of one class of livestock (e.g., two-tooth ewes); or
  2. 1987 opening numbers of the class of livestock into which the closing livestock in (i) above would have been classified at the commencement of the 1987 income year (i.e., ewe hoggets ).

The strict application of that provision would, however, result in the situation of no income spread being given in respect of 1 year old stock on hand at the end of the 1987 income year (e.g., ewe hoggets). As there is no younger class of livestock such cases "a" will always be nil.

In practice therefore it is acceptable that the calculation "a" be based on a comparison with 1987 closing numbers of one class with 1987 opening number of that class (e.g., closing number of ewe hoggets should be compared with opening number of ewe hoggets). It is expected that most taxpayers will adopt this approach. However, where the taxpayer wishes, the calculation of the income write-off can of course be made in strict accordance with the legislation. Situations where this approach may be more appropriate with farmers who are building up a breeding herd by purchasing and retaining immediate livestock.

Farmers Who Cease In 1986 or 1987

Subsection (2) provides that taxpayers who cease to derive income from livestock after 12 December 1985 and before the end of the 1987 income year may apply to apportion the taxpayer's "assessable excess" between the year of cessation (1986 or 1987, as appropriate) and all or any of the 4 succeeding income years. Any such application must be in writing and must be forwarded to the Department within the time in which the relevant return (the return for the income year in which the taxpayer ceases farming) is required to be filed (the date depends on what balance date is used and whether any extension of time for filing of the return has been granted).

Continuing Farmers

Subsection (3) provides that taxpayers who continue farming (i.e. have closing 1987 livestock) may apply to apportion the taxpayer's "livestock revaluation income" between the 1987 income year and the 4 succeeding income years.

The same application procedure as outlined for subsection (2) must be followed.

Minimum Amount to Spread

Subsection (4) provides that any amount of income apportioned under subsection (2) or subsection (3) shall not be less than 20 percent of the total income available to be spread (i.e. the total "assessable excess" or the total livestock revaluation income").

Where in any income year the remaining balance of income to be spread is less than 20 percent of the total that balance must be brought to account in that income year.

Subsection (5) gives the Commissioner power to cancel any such apportionment of income to any income year and requires the income instead to be returned in the income year prior to the income year to which it was to be apportioned.

This provision will be applied where a taxpayer dies before the full amount of the income spread is brought to account, with the balance being included as income derived in the return to date of death.

Subsection (6) is the normal accounting year provision.

Part III - Bloodstock

Outline

The legislation contained in this Act introduces new rules for the treatment of certain aspects of the taxation of bloodstock. It introduces legislation governing the valuation of stock on hand, the writing down of the cost of breeding animals, the racing of stud stock and the treatment of profits on sale or insurance recovery. In all other respects, the treatment that has applied in the past remains unchanged.

The new legislation applies with effect from the income year commencing 1 April 1987. The effect of each of the new provisions is as follows.

Section 3 Definition of "Bloodstock"

Section 3 inserts a definition of "bloodstock" into section 2 of the Act. The expression is defined as meaning any standardbred or thoroughbred horse and as including any share or interest in any such horse. The definition covers not only standardbred or thoroughbred horses used in the bloodstock breeding industry but extends to these horses where they are used in the conduct of any business. In general, however. the provisions of the legislation affecting bloodstock apply only to bloodstock used in a breeding business. However the provisions relating to the valuation of bloodstock can apply not only to thoroughbred and standardbred horses used in the business of bloodstock breeding, but also to bloodstock used in any other business.

The extension of the definition to include any interest or share in any bloodstock means that any such interest or share is treated in the same way for tax purposes as full ownership of the horse. The principal effect of this inclusion will mean that the cost of the share in any breeding stock will be able to be written down over the appropriate term, depending on whether the horse is a stallion or broodmare, at the same rate as applies for outright owners of breeding stock.

Valuation of Bloodstock

A. Year Ending 31 March 1987

The new legislation affecting bloodstock valuation does not apply until the year commencing 1 April 1987 and for the year ended 31 March 1987 the old rules continue to apply. However, as the general rules for valuation of livestock have been amended in this Amendment Act it is necessary to explain the way in which the legislation achieves that effect for the 1987 year.

Section 85(4) of the Income Tax Act has required, in previous years. that all trading stock (including bloodstock and other livestock) be valued at cost price, market value or replacement value. The valuation rules for bloodstock in those years have been developed from that base. From the income year commencing 1 April 1986, section 85(4) has a series of different options in relation to livestock to cater for the new basis on which "specified livestock" is to be valued. The new subsection provides, at paragraph (a), that all livestock other than specified livestock is to be valued under section 86 of the Act. The new section 86(1A) provides that these livestock are to be valued at cost price, market value, replacement value or standard value. No standard value has been approved for bloodstock and accordingly the same three valuation options as have applied in previous years will continue to apply for the year ending 31 March 1987. There will be no practical effect resulting from the change to the legislation, the only difference being the position in which the authority for the treatment is contained in the legislation.

Valuation of Bloodstock

B. Year Ending 31 March 1988 and Future Years

The legislation that applies for the year ending 31 March 1987 and previous years will not apply for 1988 and future years. Section 7(4) of the Amendment Act amends the new section 86(1A) by excluding bloodstock from its coverage for the year commencing 1 April 1987, meaning that bloodstock cannot be valued under section 86 for 1988 and future years. Instead, section 5(2) of the Amendment Act inserts a new paragraph (f) into section 85(4A) to require that the valuation of bloodstock is to be determined under section 86H, the new section 86H being inserted into the Act by section 8 of the Amendment Act with effect from the income year commencing 1 April 1987.

The new section 86H(2) provides the basis on which bloodstock is to be valued. Paragraphs (a) and (b) deal with bloodstock used for breeding by the taxpayer as part of the taxpayer's business, while paragraph (c) deals with bloodstock not yet used for breeding or not used in the conduct of a business. Subsections (3) and (4) then qualify this treatment in certain limited circumstances.

Subsection (2)(a) applies in the first year in which bloodstock is used by a taxpayer for breeding purposes in the course of the conduct of the taxpayer's business. It provides that the value at which that bloodstock is to be brought into account at the end of the year is to be its cost price reduced by the "specified write-down" This expression is defined in subsection (1) as meaning:

  • for stallions, 20 percent of cost price;
  • for broodmares, an annual amount that will reduce the cost to $1 in the year the mare attains the age of 14, with a maximum rate of 33 1/3 percent of cost price. It is achieved by application of the formula -
  • Y
    15 - Z
  • Y being the cost of the horse; and
  • Z being 12, or the age of the horse (in whole years) in the year the horse is first used by the taxpayer for breeding if that age is 11 or less.

For example, a broodmare purchased at a cost of $40,000 is first serviced by a stallion during the year ending 30 June 1988. She was aged 5 years 11 months at that date. The value of which the mare is to be brought into account at 30 June 1988 is its cost price reduced by the following amount:

$40,000 = $40,000 = $4,000
15 - 5 10

ie, she is brought to account at $36,000.

Paragraph (b) of subsection (2) then provides that the value of that breeding stock may be written down by that "specified write-down" in every subsequent year until the year in which the write-down reduces the cost of the horse to Nil. In that year, subsection (4) provides that the horse is to be valued at $1. This means that in the example shown previously, the broodmare would continue to be written down by $4,000 per annum until the year ending 30 June 1997, in which year the write-down would be $3,999 to reduce her cost to $1. In every subsequent year, she must be valued at that $1 level.

Paragraph (c) provides that all other bloodstock must be valued at its cost price. This means that:

  • Bloodstock purchased specifically for use as breeding stock but not used for breeding in the year of purchase (say, because it was purchased after the end of the breeding season) will not be able to be written down in the year of purchase. It must be valued at its cost price.
  • Bloodstock bred for future use as breeding stock cannot commence to be written down until it is first used for stud duties. It must be valued at the amount it has cost the breeder to breed and rear it.
  • All bloodstock that is used by the owner for breeding, or that is used for breeding but not as part of any business activity of the owner, must be valued at cost price.

Additional points to note in relation to the interpretation of subsections (2) and (4) of this section are:

  • The requirement that bloodstock be used for breeding purposes means that the stud must actually put the mare to the stallion during the year in a normal businesslike manner. It is not necessary for the mating to be successful but it is essential that a serious attempt be made and be able to be substantiated by reference to the stallions' service records.
  • Mares purchased in foal may commence to be written down in the year of purchase. They will be regarded as having been used by the new owner for breeding purposes in that year. However, a mare which is not in foal and is purchased with a foal at foot would not be treated as having been used by the new owner for breeding purposes and the new owner will need to commence to use her for breeding purposes to be entitled to any write-down.
  • The commencement of the write-down is dependent upon the horse having been used by the current owner for breeding purposes. The fact that a horse has previously been used for breeding by a previous owner does not entitle a new owner to commence to write-down its cost. The new owner must use the horse for breeding before the write-down can commence and, in the case of a stallion, the period of 5 years commences at that point.
  • Paragraph (b) envisages the situation where a stud has used a horse for breeding, then used it for hobby racing, and subsequently recommenced to use it for breeding. In these cases, the write-down recommences immediately, but is a write-down of the new cost price over the same period as would have applied had the horse been purchased and first used for breeding in that subsequent year of recommencement.
  • Once a horse has been used for breeding by any taxpayer that taxpayer may continue to write-down its cost every year, provided the horse is still being held for breeding purposes notwithstanding that it may not be used for breeding purposes in any of those subsequent years. However, if the horse has ceased to be used for breeding purposes, it raises the question of whether it has commenced to be used for private purposes. This question is reliant on the facts of each case but where the animal has commenced to be held for private reasons it must be treated as having been disposed of by the business at its market value.

Exception

Subsection (3) of section 86H provides the only exception to the cost price valuation method for bloodstock. This subsection enables market value to be adopted where the market value of any horse reduces, as a direct result of accident, birth deformity or infertility, to less than 50 percent of the market value that would have applied had that accident, birth deformity or infertility not occurred. The taxpayer is not required to adopt market value, but once market value has been adopted it must be used in every subsequent year. The provisions of subsection (2), including the write-down provisions, cease to be available when the taxpayer has elected to use market value in accordance with this subsection.

Horses Raced By a Stud

Section 10 of the Amendment Act introduces a new paragraph (n) to section 106 of the Act to debar a deduction for expenditure incurred in racing a horse. In accordance with the new paragraph, the following expenses will not be allowable as a deduction, even where they are incurred by a breeder in carrying on the business of breeding bloodstock:

  • the cost of preparing a horse for racing, e.g., training fees
    • Note: The Department regards the cost of breaking in a horse as not being a cost associated with preparing the horse for racing. However, other expenses related to, for example, preparing a horse for racing preparatory to a ready to run sale would be treated as a cost of preparing the horse for racing, notwithstanding that the owner had no intention of racing the horse on his or her own account:
  • the cost of racing a horse:
  • any other costs incurred in relation to the racing of a horse.

The amendment first applies to expenditure incurred during the year ending 31 March 1988. Expenditure not directly related to racing (for example, the cost of feeding or maintaining a horse)will continue to be deductible to the stud owner. Income derived by any person from racing stakes continues to be exempt from tax in accordance with the provisions of section 61(31).

Section 16 of the Amendment Act inserts a new section 212A into the Act to deal with horses raced by a stud. In the past it has been the practice of some studs to treat horses raced by the stud as a transfer to a non-taxable racing account at cost price or market value. The Government has decided that this treatment is not appropriate in cases where the horse is not being raced as a hobby and has inserted the new section 212A to ensure that it ceases for 1988 and future years. The intention of the legislation is that horses raced by a stud to enhance their value, the value of their progeny, or otherwise in furtherance of the interests of the stud, should remain in the stud accounts and that only horses raced as a hobby should be permitted to be transferred to a non-taxable racing account. Because, in general, the majority of fillies raced by studs are raced for business purposes the legislation deems all horses capable of future breeding to be raced as part of the stud business, while all horses known to be incapable of use for future breeding are regarded as being raced as a hobby. There is provision in the legislation for the stud to convince the Commissioner that the treatment provided in the legislation does not reflect the reality of a given situation. If the Commissioner is convinced, there is provision for the legislation to reflect the true position.

The legislation applies to taxpayers engaged in the business of breeding or rearing bloodstock for sale. It does not apply to persons who are not in business nor to persons engaged in a different business (e.g., leasing of bloodstock). It also does not apply to persons who are not yet in the business of breeding bloodstock but who are racing a horse or horses they intend to use in a breeding business at some future date.

Horses Incapable of Breeding

Subsection (1) of section 212A provides that any bloodstock of any taxpayer that is expected to be unable to be used for future breeding is to be regarded as no longer being used in the stud business if it is raced by the stud. Subsection (6) then provides that it is treated as having been sold by the stud at market value on the day in which it commenced to be used as a racehorse.

Horses that are Capable of Future Breeding

Subsection (2) provides that where any bloodstock that is capable of future breeding is raced by the taxpayer, it is deemed to be raced as part of the stud business. This means that the horse is not able to be treated as being involved in a non-taxable activity and is therefore to be retained in the stud accounts and not transferred to a non-taxable racing account. It also means that if the horse is sold while racing, the consideration received on the sale is taxable income.

Non-Breeders Raced for Business Purposes

Subsection (3) enables the taxpayer to convince the Commissioner, in an application made under subsection (5), that a horse that is unable to be used for future breeding is being raced as part of the stud business activities. Where the Commissioner is convinced of this, whether as a result of the application or otherwise, the horse will be treated in the same manner as one to which subsection (2) applies. It is difficult to envisage the type of circumstances in which subsection (3) could apply and each case will therefore be treated on its own merits.

Hobby Racing

Subsection (4) enables the taxpayer to convince the Commissioner that a horse that is capable of future breeding is being raced as a hobby and not as part of the business. Where the Commissioner is convinced of this, the horse will be treated in the same manner as one to which subsection (1) applies. The subsection can also be applied where the taxpayer does not make an application but the Commissioner is nevertheless satisfied that the horse is being raced for private enjoyment. The purpose of this provision is to ensure that where a horse is genuinely raced as a hobby it is not treated as being owned by the business. It is not intended as a provision that will enable studs to continue their past practice of transferring horses in and out of the stud accounts. For this reason strong argument will need to be provided to convince the Commissioner that a horse is being raced for private purposes. It is difficult to envisage circumstances where major studs would race any horses as a hobby and well-bred fillies could not generally be regarded as being hobby propositions. Once again, each case will fall to be considered on its own merits.

Rules for Applications Made Under Subsection (3) or (4)

Subsection (5) sets out the conditions with which applications made to the Commissioner under subsection (3) or (4) must comply. Each such application must:

  1. be in writing:
  2. be given to the Commissioner within one month following the earlier of the day on which the horse is first prepared for racing and the day on which it is first raced by the taxpayer,
  3. be supported by any information the Commissioner may require.

Horses no Longer Used for Business Purposes

em>Subsection (6) provides that any racehorse that is treated as no longer being used in the business of bloodstock is deemed to have been disposed of by the taxpayer, on the day it ceased to be used in the business, at its market value on that day. The day on which it ceased to be used for business purposes is the earlier of the day on which it was first prepared for racing or the day on which it was first raced by the taxpayer. The market value of the horse on that day must be included in the stud's assessable income for the year in which that day falls.

Horses Transferred from Private Account to the Stud Business

Subsection (7) caters for the situation where a horse that has previously been regarded as not being part of the business activities of the taxpayer subsequently commences to be used as part of the stud business. In general, it would cater for horses which have previously been treated as a deemed sale by the stud business at market value as a result of the application of subsection (1) or subsection (4) of this section. It applies where the horse commences to be used as a stud stallion or broodmare and deems the horse to have been acquired by the stud, at market value, on the day it commenced to be so used. The amount of the market value on that day will be treated as the purchase price and will be depreciable in the same manner as if the horse had been acquired by the stud on that day for that amount.

Subsection (8) is the normal accounting year provision.

This new section applies for the income year commencing 1 April 1987. Please see the commentary on the transitional provisions for the treatment that is to apply from that date for horses that are raced by a stud prior to the commencement of that year.

Transitional Provisions

Section 16 of the Amendment Act introduces a new section 212C to provide transitional provisions for the charges in the method of valuing livestock and the treatment of horses raced by the stud.

Deemed Cost Price for 1988

Subsection (1) of the new section sets a cost price for all bloodstock on hand at the end of the income year ending 31 March 1987. It deems those horses to have had a cost price, at the commencement of the taxpayer's 1988 accounting year, of the amount at which they were valued in the taxpayer's accounts at the end of the previous accounting year. For example, a broodmare purchased for $300,000 in 1986 and written down to $200,000 at the end of the year ended 31 March 1987 is deemed to have a cost price of $200,000 as at the commencement of the taxpayer's 1988 accounting year.

The subsection is required because bloodstock will in future be required to be valued at cost price and it is necessary to establish an opening cost value. For stallions and broodmares, it is this opening cost value that will be able to be written-off in 1988 and future years in accordance with section 86H. For other bloodstock, this deemed cost is the amount the horse is regarded as having cost the taxpayer to breed and rear, or purchase and rear, as at that date.

Transitional Cost Write-down Provisions

Subsection (2) sets out the basis on which this deemed cost may be written-off in respect of horses first used for breeding prior to the commencement of the 1988 year. Section 86H permits stallions and broodmares to be written down to $1 on a straight line basis, the write-down to commence in the year in which the horse is first used for breeding purposes by the taxpayer. However, that section applies only to horses that commence to be so used on or after the commencement of the 1988 accounting year so transitional measures are needed to provide a write-down, of the deemed cost as determined under subsection (1) of section 212A, for horses that commenced to be used by the taxpayer for breeding prior to the start of the 1988 year.

The legislation provides a formula for stallions that enables the deemed cost to be written down evenly over the remainder of the 5 year period that commenced in the year the horse was first used by the taxpayer for breeding. For example, if a horse was first used by the taxpayer for breeding during the year ended 31 March 1985 and had a deemed cost of $200,000 as at the end of the 1987 year, it has 2 years remaining in the 5 year period that commenced in the year it was first used for breeding. The deemed cost of $200,000 may be written down to $1 in the years 1988 and 1989, $100,000 being written-off in 1988 and $99,999 in 1989. If the horse was first used by the taxpayer for breeding during the year ending 31 March 1987, the five year period commencing with that year expires with the 1991 tax year and the write-down of the deemed cost as at the commencement of the 1988 tax year would be spread evenly over the four years 1988, 1989, 1990 and 1991.

The formula specified in the legislation to achieve these results is as follows:

Y
15 - Z

where

  • Y is the deemed cost price of the horse determined under subsection (1) of the new section 212A; and
  • Z is -
    1. The number 1 where the horse was first used by the taxpayer for breeding during the year ending 31 March 1987.
    2. The number 2 where the horse was first used by the taxpayer for breeding during the year ended 31 March 1986.
    3. The number 3 where the horse was first used by the taxpayer for breeding during the year ended 31 March 1985.
    4. The number 4 where the horse was first used by the taxpayer for breeding during the year ended 31 March 1984 or in any previous year.

The formula for broodmares is different. Paragraph (b) of subsection (2) provides that where a broodmare commenced to be used by the taxpayer for breeding purposes prior to the start of the 1988 accounting year, the horse is deemed to have been first used by the taxpayer for breeding during the 1988 year. This means that it's deemed cost at the start of the 1988 year is written down evenly to $1 over the period that commences with the 1988 year and ends with the year in which the horse attains the age of 14 years.

It is important to note that the legislation, both in section 212A and section 86H, deals with the year in which the horse was first used by the taxpayer for breeding in the course of the conduct of a business. For example, if a horse was used by the taxpayer for hobby breeding in 1984 and 1985 but commenced to be used in a business of breeding when the taxpayer expanded his activities into a business in 1986, that horse is treated as having commenced to be used by the taxpayer for breeding in 1986, not 1984. Similarly, it is important to note that the legislation refers to first use by the taxpayer for breeding. Thus a broodmare that had been used for breeding by a breeder since 1984, was purchased by the taxpayer in 1986 and first used by the taxpayer for breeding during the year ending 31 March 1987 is, as far as the current owner is concerned, treated as being first used for breeding in 1987, not in 1984.

Horses Held in Racing Account at the End of 1987 Income Year

Subsection (3) deals with situation where a horse owned by the stud has been transferred to a non-taxable racing account and is still recorded in that account at the end of the 1987 year. The horse has effectively been treated as not owned by the business at the end of the 1987 year. Subsection (3) provides that it will continue to be treated as not comprising part of the business activities of the taxpayer until such time as the Commissioner is satisfied that it has ceased to be used as a racehorse. If it is sold as a racehorse the rules governing sales from racing, that applied prior to the passing of this legislation, will continue to apply.

Subsection (4) deals with the situation where any horse to which subsection (3) applies ceases to be used as a racehorse and commences to be used for stud duties. Where this occurs, the horse must be transferred back into the business accounts using the same valuation method as applied when it was transferred into the non-taxable racing account. This is the same as the treatment that would have applied had section 212A not been introduced.

Subsection (5) is the normal accounting year provision.

Profit Offset Against Replacement Breeding Stock

Section 16 of the Amendment Act introduces a new section 212B to enable profits on sale of, or insurance recovery on death or permanent injury to, bloodstock held for breeding to be offset against the cost price of the replacement animal. The amount so offset is not taxable to the stud and the cost of the replacement is treated as being reduced by the amount offset. The provision is similar in its effect to the provisions in section 117 in relation to the recovery of depreciation.

Definitions

Subsection (1) is the definition section.

The expression "assessable gain" defines the amount that is available for offset against replacement stock. It is defined as meaning -

  • in the case of sale of breeding stock, the amount by which the consideration on sale exceeds the value at which the horse was valued in the taxpayer's accounts at the end of the previous year;
  • in the case of an insurance recovery, the amount by which that recovery exceeds the value at which the horse was valued in the taxpayer's accounts at the end of the previous year.

Note that one of the implications of this definition is that the section cannot apply in respect of any bloodstock purchased during the year in which the sale or insurance recovery takes place. The "assessable excess" calculation requires the animal to have been valued in the taxpayer's business accounts at the end of the preceding income year.

"Breeding stock" is defined to make it quite clear as to which animals the legislation applies. It is defined as meaning -

  • (a) In relation to bloodstock that is sold, an animal that had been actually used for breeding prior to the sale. If the animal that is sold has never been used by the taxpayer for breeding as part of the stud's business activity, the legislation does not apply.
  • (b) In relation to bloodstock that is subject to an insurance recovery, an animal that has either been used by the taxpayer for breeding as part of the stud's business or an animal that the Commissioner is satisfied was purchased for breeding. It does not, however, apply to stock bred by the taxpayer that the taxpayer intended to use as breeding stock unless that animal has in fact been used for breeding purposes.

Only profits on sale, or insurance recoveries on loss, death or permanent injury, involving "breeding stock" are eligible for offset against replacement stock.

Sales of Breeding Stock

Subsection (2) deals with sales of "breeding stock". It enables the taxpayer to apply to the Commissioner for any "assessable excess" on sale of any "breeding stock" to be offset against the cost of any bloodstock which the taxpayer has acquired to replace the stock that was sold. The application must be made in writing by the taxpayer within 6 months following the end of the income year in which the breeding stock was sold (or within such further period as the Commissioner considers reasonable) and the replacement animal must be purchased prior to the making of the application. Thus to be eligible the replacement animal must be purchased within 6 months following the end of the year of sale unless exceptional circumstances require a longer period. The legislation permits the whole of the profit on sale to be offset against the cost of the replacement animal. If for any reason the profit exceeds the cost of the replacement, the legislation permits part only of the profit to be offset. Similarly, if the taxpayer wishes to offset only part of the profit, this can be permitted under the legislation.

The effect of the provision is that the profit offset under this section is no longer taxable and the cost of the animal against which it is offset is treated as being reduced by the amount offset.

If the profit on sale has been included in an assessment issued to the taxpayer prior to the receipt of the application for it to be offset, the assessment will be amended to exclude the profit to be offset when the application is approved by the Commissioner.

Insurance Recoveries

Subsection (3) deals with insurance recoveries and other payments made by way of indemnity, compensation or other damages in respect of the loss or death of, or permanent injury to, any breeding stock. It enables the taxpayer to apply to the Commissioner for the whole or any part of any "assessable excess" to be offset against the cost of the replacement animal. The provision is in two parts. Paragraph (a) requires the election to be made in writing within 6 months after the end of the income year in which the loss, death or permanent injury occurred or within such further time as the Commissioner considers reasonable. In addition, the replacement animal must be purchased prior to the making of the application. Essentially, this provision is the same as that which applies under subsection (2) on the sale of breeding stock.

The second part of this provision is set out in paragraph (b). It caters for the position where paragraph (a) does not apply and the Commissioner is satisfied that:

  1. there are valid commercial reasons for the delay in the replacement of the breeding stock: and
  2. the replacement animal was acquired within two income years following the end of the income year in which the loss, death or permanent injury occurred.

Where these conditions are met, and the taxpayer makes written application prior to the end of that second income year, the Commissioner may exclude all or part of the profit on insurance recovery from the taxpayer's income and reduce the cost of the replacement animal by that amount. It should be noted that:

  • under paragraph (b), the Commissioner has no discretion to accept a late application:
  • the taxpayer has two income years in which to replace the animal, not two years. Although in general it will be two years in practice, it could be a lesser or greater period if the taxpayer has a change of balance date within that two year period.

Subsection (4) is the normal accounting year provision.

Application Date

The new legislation first applies to the income year commencing on 1 April 1986 (or equivalent accounting year). It will therefore first apply in respect of sales, losses, deaths or permanent injuries that occur in 1988 and future tax years. It does not apply where these events occurred in earlier years notwithstanding that the replacement animal may be acquired in 1988 and future years.

Sport Horses

The legislation applies not only to studs which breed throughbred [sic] and standardbred horses for sale as racehorses. It also applies to other industries which use bloodstock for breeding purposes, such as the sport horse breeding industry which uses thoroughbred horses in the breeding of, among others, show Jumpers. The effect of the new legislation on this industry is set out below and is indicative of the treatment that will in future apply to any industry that uses bloodstock in the carrying on of a business.

Valuation of Stock on Hand, - Section 86H

The new legislation dealing with the valuation of bloodstock applies to all thoroughbred and standardbred horses used in any business. The basic valuation method provided in section 86H for these horses is cost price, with market value being available only where the market value drops significantly as the result of infertility, birth deformity or accident. In the income year in which the horse commences to be used for breeding as part of the stud's business operations, its cost can commence to be written down to $l over a five year period for stallions or at age 14 for broodmares. This applies irrespective of whether the horse with which it is mated is a thoroughbred or standardbred horse.

In short, the rules set out in the detailed explanation of the provisions of section 86H apply equally to all thoroughbred or standardbred horses notwithstanding that the business may not be that of thoroughbred or standardbred breeding.

The provisions of section 86H apply only to those sport horses that are thoroughbreds (or standardbreds). The valuation of all other sport horses is governed by the provisions of section 86(1A), in terms of that section, they must be valued at (at the taxpayer's option) cost price, market value or the value at which the horse can be replaced. There is no provision in the legislation for the cost price of breeding stock that is not a thoroughbred or standardbred horse to be written down to $1.

The stock must be valued at cost price, market value or replacement value, although of course if the market value is declining the adoption of market value will effectively enable the stud to progressively reduce the value of the animal.

Profit Offset Against Replacement Breeding Stock

Profits on sale or insurance recovery in bloodstock used for the breeding of sport horses will be able to be offset against the cost of replacement bloodstock under the new section 212B. Where these circumstances apply, the legislation applies to the sport horse breeding industry in the same manner as it applies to the thoroughbred and standardbred breeding industries.

It should be noted that for the legislation to apply the breeding animal in which the profit is made must be a thoroughbred or standardbred horse and the replacement animal must also be a thoroughbred or standardbred horse. It does not apply where the profit was made on a horse other than a thoroughbred or standardbred nor does it apply where the replacement animal is a horse other than a thoroughbred or standardbred.

Part IV - Farm Development Expenditure

1. Outline

Sections 11 and 12 of the Amendment Act give effect to the announcement that the current year deduction in respect of farming. aquacultural and forestry development expenditure is to be replaced with a depreciation regime which allows depreciation of land improvements to be written-off against assessable income.

Section 11 repeals the old sections 126, 127, 127A and 128A, and inserts new sections 127, 127A and 128. The effect of section 11 is to phase-out the deduction allowed under those sections over the income years 1988-1991.

Section 12 inserts new sections 128A, 128B and 128C which provide for the new depreciation regime for land development assets. The following commentary explains the detail of these provisions as they relate to farming. The changes relating to forestry are detailed In Part V of this publication.

2. Section 11: Phase-Out of Farm Development Expenditure

2.1 Repeal of Section 126

Subsection (1) repeals section 126 of the principal Act. That section allowed a deduction for certain types of farm development expenditure but only to the extent that the expenditure is not deductible under section 127. As all the types of expenditure listed in section 126 are deductible under section 127 the former section is redundant and has therefore been repealed.

2.2 Replacement Section 127

The old section 127 allowed a current-year deduction to taxpayers engaged in any farming or agricultural business in respect of farm development expenditure.

Deductible Expenditure

Subsection (1) of the replacement section provides the same conditions that were contained in the old section 127(2) and lists the same types of expenditure that can be deducted.

The only additional condition imposed by subsection (1) is the requirement that to be deductible the expenditure must be incurred in or before the 1991 income year.

Phase-out

Subsection (2) provides that a reducing percentage of the expenditure allowed as a deduction under subsection (1) will be deductible in the 1988 income year and future years.

The effect of subsection (2) is as follows:

Income Year Percentage of Expenditure
  Deductible
1987 100
1988 90
1989 75
1990 55
1991 30
1992 0

Binding Contracts

Subsection (3) qualifies subsection (2) by providing that a taxpayer who enters into a binding contract on or before 12 December 1985 (i.e. a contract that becomes unconditional on or before that date) to incur expenditure of any of the kinds listed in subsection (1), may deduct the total amount of any of that expenditure which is incurred in the 1988 income year.

Note that it is only the expenditure that is incurred in that income year pursuant to the binding contract which can be deducted in full. Any expenditure not directly related to the contract is only deductible to the extent of 90 percent of that expenditure.

Deferral of Deduction

Subsection (4) to (6) simply restate the provisions that were contained in the old section 127 which allowed taxpayers to spread the deduction for development expenditure over any or all of the nine income years succeeding the income year in which the expenditure is incurred. For example, the amount of deduction allowed in respect of expenditure incurred in the 1991 income year (i.e., 30 percent of expenditure incurred) can be deferred and claimed in full (or in part) In any of (or all of) the expenditure income years 1992-2000.

Subsection (7) is the normal accounting year provisions.

2.3 Replacement Section 127A - Forestry Development Expenditure

See commentary on forestry in Part V.

2.4 Replacement Section 128 - Aquacultural Development Expenditure

The old section 128 allowed a deduction to taxpayers engaged in the business of aquaculture in respect of specified types of development expenditure.

The replacement section 128 simply restates the old provisions but inserts the same additional provisions as inserted in the replacement section 127. That is -

  • The deduction will apply only to expenditure incurred in or prior to the 1991 income year (subsection 2).
  • The following phase-out applies -
  • Income Year Percentage of Expenditure
      Deductible
    1987 100
    1988 90
    1989 75
    1990 55
    1991 30
    1992 0
  • Any expenditure incurred in the 1988 income year pursuant to a binding contract entered into on or before 12 December 1985 may be deducted in full.

3. Section 12 - Depreciation of Development Expenditure

3.1 New Section 128A

The new section 128A gives effect: to the new treatment of farm development expenditure.

Deduction - Farmer Owns Land

Subsection (2) provides that taxpayers who carry on a farming or agricultural business are entitled to a deduction in respect of any of the types of expenditure specified in Part I of the Thirteenth Schedule (Third Schedule of the Amendment Act). The types of expenditure listed are the same as the types of expenditure in respect of which a deduction is allowed under section 127. There' are, however, two additional categories of expenditure listed in the Thirteenth Schedule. They are - expenditure incurred in:

  • "(1) The planting of vines or trees on the land other than trees planted primarily and principally for the purposes of timber production.
  • "(2) The construction on the land of structures for shelter purposes."

The subsection contains a number of qualifying conditions:

  1. The taxpayer who carries on the farming or agricultural business must also own the land,
  2. No deduction is allowed in the income year the taxpayer disposes of the land
  3. The expenditure must be of benefit to the business in the income year the deduction is claimed.

The effect of condition (iii) is that no deduction is allowed in respect of any land improvements which are not of benefit to the business in the year concerned. For example, deductions would not continue to be allowed in respect of a water bore that dries up or a sheep dip that becomes obsolete.

An additional feature of subsection (2) is that a deduction is allowed in respect of expenditure incurred by the taxpayer concerned or by any other taxpayer. This means that the land owner may claim a deduction in respect of the unexpired portion land improvements effected by previous owners of the land. The effect of this provision is shown in the example that follows.

Deduction - Lessee Farmer

Subsection (3) is a similar provision to subsection (2) but applies to taxpayers who do not own the land on which they undertake their farming or agricultural business. However, such taxpayers are allowed a deduction only in respect of expenditure incurred by that taxpayer.

The effect of the subsection is that farmers who lease their land cannot claim deductions in respect of land improvements effected by the owner or past owners of the land.

Amount of Deduction

Subsection (4) provides that the amount of any deduction allowed under subsection (2) or (3) shall be an amount equal to the percentage specified in the Thirteenth Schedule (5 percent or 10 percent depending on the type of expenditure) of the "diminished value" of the expenditure.

Subsection (1) defines "diminished value" as being in relation to any income year, an amount of expenditure reduced by:

  • (a) every deduction allowed to any taxpayer in any preceding income year in relation to that expenditure:
  • (b) every deduction allowed in that income year (other than any deduction allowed under section 128A) to any taxpayer.

The effect of section 128A is demonstrated by the following example

Example

  • Farmer A spends, in the 1989 income year, $40,000 on constructing an access road and $5,000 on clearing scrub from a previously undeveloped block.
  • In the 1991 income year farmer B buys the land.
  • In the 1993 income year the road is washed away in a flood.

The income tax accounts of farmer A and farmer B could be expected to show the following details:

FARMER A
Expenditure Opening Section 127 Deductible Section 128A Closing
  Balance Deduction Excess Deduction Balance
1989 Return       (5%)  
Access Road - (cost)        
B Block 10,000 7,500 2,500 125 2,375
Scrub Clearance - (cost)        
B Block 5,000 3,750 1,250 63 1,187
1990 Return          
Access Road -          
B Block 2,375 - 2,375 118 2,257
Scrub Clearance -          
B Block 1,187 - 1,187 59 1,128
1991 Return          
Access Road -          
B block 2,257        
  (sold 10.10.92) Nil Nil Nil  
Scrub Clearance -          
B Block 1,128        
  (Sold 10.10.92) Nil Nil Nil  
FARMER B
Expenditure Opening Section 127 Deductible Section 128A Closing
  Balance Deduction Excess Deduction Balance
1991 Return       (5%)  
Access Road          
-B Block 2,257 (purchased 10.10.92) 2,257 112 2,145
Scrub Clearance -          
B Block 1,128 (purchased 10.10.92) 1,128 56 1,072
1992 Return          
Access Road -          
B Block 2,145 - 2,145 107 2,038
Scrub Clearance -          
B Block 1,072 - 1,072 53 1,019
1993 Return          
Access Road -          
B block 2,038 - 2,038 101 Nil
          (written off)
Scrub Clearance -          
B Block 1,019 - 1,019 50 969

It can be seen from the preceding example that the new treatment of farm development expenditure is in the nature of a depreciation regime on a diminishing value basis. Additional features of the new basis of treatment are:

  • Any deductions allowed under any other provision must be deducted from the expenditure before calculating the "depreciation".
  • When the land improvement is sold the purchaser continues to claim "depreciation" (on the unexpired portion of the vendor's opening book value of land improvements) at the same rate that would have applied to the vendor had the sale not been made.
  • No deduction is allowed to the vendor in the year of the sale.
  • The purchaser is entitled to a full deduction in the year of purchase (no apportionment regardless of when in the income year the purchase took place).
  • There is no additional deduction in respect of the loss incurred when an improvement is written-off.
  • A full deduction is allowed in the year an improvement is written-off (i.e. the deduction is not apportioned regardless of when in the income year the asset is written-off).
  • The improvement must be of benefit to the business in the income year (one day is sufficient).
  • The taxpayer must be carrying on the business of farming to receive any deduction under this section, i.e., land owning companies and trusts leasing farm land do not qualify.

Farmers who own land but have bailed all their livestock also do not qualify. However, 50/50 sharemilkers do qualify for a deduction under this section because they are considered to be carrying on the business of farming.

Purpose of Farm Tree Plantings

Subsection (5) relates to expenditure of the type specified in category (1) in Part I of the Thirteenth Schedule, which allows a deduction under section 128A in respect of expenditure incurred in:

  • "The planting of vines or trees on the land other than trees planted primarily and principally for the purposes of timber production."

Subsection (5) provides that where there is dispute as to the purpose of any farm plantings a certificate from the Ministry of Agriculture and Fisheries, or the appropriate Catchment Commission or any other person the Commissioner considers suitably qualified, shall be final evidence as to the purpose of the trees.

Such situations may arise where it is questionable whether a farm planting is a shelter belt or a small commercial woodlot. The purpose for which the trees were planted is the test and it is of no consequence whether the trees ultimately are sold as timber.

Subsection (6) is the normal accounting year provision for balance dates which correspond to the 31st day of March.

3.2 New Section 128B

See commentary on forestry in Part V.

3.3 New Section 128C

The new section 128C relates to aquaculture and enacts a provision the same as section 128A but with the necessary changes to section references. The rates of "depreciation" that apply to aquacultural land improvements are listed in Parts III - VII of the Thirteenth Schedule.

All the features of section 128A as outlined in the preceding paragraphs apply also to section 128C.

3.4 Applications

The new section 128A, 128B and 128C apply with respect to the income year ending on the 31st day of March 1988 and subsequent income years.

Horticultural Trees and Vines

The enactment of section 128A introduces a significant change to the taxation treatment of orchard trees and horticultural vines. Previously the initial cost of purchasing and planting the trees and vines was a capital expense and not deductible with the cost of the replacement trees and vines being deductible. Under the new treatment the cost of both the initial plantings and replacement plantings will be capitalised and "depreciable" under section 128A.

Part V - Forestry Provisions

1. Introduction

The Forestry provisions are covered in three sections of the Amendment Act.

  • Section 4 - Repeals old section 74 and inserts a replacement section 74 to phase out the deduction of certain planting and maintenance expenditure.
  • Section 11 - repeals old section 127A and inserts a replacement section 127A which phases out the deduction of forestry development expenditure.
  • Section 12 - inserts new section 128B which provides for the "depreciation" of forestry development expenditure.

2. Forestry Planting and Maintenance Expenditure

The old section 74 taxed profits from the sale of timber and allowed for a current year deduction of all forestry planting and maintenance expenditure. The new section 74 restates most of the old section 74 but adds a number of new provisions. The following commentary explains the effect of the new provisions.

Section 74(1) - Definitions

The definition of "standing timber" has been amended to provide that the definition includes immature trees. The amendment clarifies that the sale of land on which seedlings or saplings are planted will be deemed to be a sale of standing timber, and therefore any profits in relation to that timber will be taxable.

Section 74(2) - Profits Taxable

Restates provision which taxes the profits derived from the sale of timber (and minerals and flax).

Section 74(3) - Certain Deductions Continue

Provides that taxpayers carrying on a forestry business can continue to deduct the following types of expenditure in the year incurred:

  1. Rent, rates, land tax, insurance premiums, administrative overheads, other like expenses;
  2. Weed control (excluding releasing), pest control, disease control, fertiliser applied to the forest;
  3. Interest;
  4. Repair and maintenance of plant and machinery;
  5. Repair and maintenance of land improvements (e.g., fences, roads, dams).

Section 74(4) - Depreciation

Continues to allow a deduction in respect of the depreciation of plant and machinery used in the forestry business.

Section 74(5) - Sale of Standing Timber

Restates the provision which deems a sale of land with standing timber to be a sale of timber. and thereby requiring the profit on the sale of the timber to be returned as assessable income in the year of sale.

Section 74(6) - Matrimonial Transfers

Restates the provision which allows the matrimonial transfer of standing timber to take place at cost so that no taxable income arises as a result of the transfer.

Section 74(7) - Ornamental or Incidental Trees

Restates the provision regarding certification as to whether trees are ornamented or incidental in nature and therefore not taxable when sold as standing timber.

Section 74(8)-74(10) - Existing Provisions

Restates existing provisions to ensure expenditure deductible in the year incurred cannot subsequently be claimed as a "cost of forest" deduction against the income from the sale of the timber.

Section 74(11) - Land Contouring

Inserts a new provision who deems the cost of land contouring not to form part of the "cost of timber". The effect of this provision is that at no stage can such costs be deductible for income tax purposes.

Section 74(12)-74(13) - Determination of Cost of Timber

Inserts new provisions which provide that any forestry expenditure incurred in the 1988 income year or future years must form part of a "determination" by the Commissioner if it is to be allowed as a deduction against the income from eventual sale of the timber.

The effect of these two subsections is that the deductibility of "cost of forest" expenditure (i.e., expenditure which must be carried forward and offset against the eventual income from the sale of the timber) is determined in the year the expenditure is incurred rather than up to 30 years later. The provision means also that taxpayers can object to the disallowance of a claim for expenditure nearer the time the expenditure is incurred rather than have to wait until the year the corresponding income is received.

The provision requires the taxpayer to include in each year's tax return a record of the "cost of forest" expenditure incurred in that income year. The Department will then issue a notice of determination which certifies the amount of expenditure that eventually will be deductible against the income from the forest.

Section 74(14) - Loss of Forest

Inserts a new provision which allows for a deduction of the "cost of forest" expenditure where the forest is destroyed (e.g., by fire). It provides for a deduction of the balance of the cost of forest account, after subtracting any insurance or compensation proceeds, in the year the forest is lost.

Section 74(15)-74(16) - Phase-out of General Deduction

These two subsections restate the deduction for forestry planting and maintenance expenditure, but provide for a phasing-out of the general deduction so that in the 1992 income year and future years only the types of planting and maintenance expenditure listed in section 74(3) will be allowed as a current year deduction.

The phase-out will be on the following basis:

Income Year Percentage of Expenditure
Ending 31 March Deductible in the Year Incurred
1987 100
1988 90
1989 75
1990 55
1991 30
1992 NIL

Section 74(17) - Committed Expenditure

Inserts a transitional provision which allows taxpayers a deduction in full in respect of forestry planting and maintenance expenditure which is subject to a binding contract entered into on or before 12 December 1985 (i.e., a contract that became unconditional on or before that date). However, it provides that the provision extends only to expenditure incurred in the 1997 income year or any previous year. Also there is a further limitation that the binding contract cannot be between associated persons.

Section 74(18) - Existing Forests

Inserts a further transitional provision which allows taxpayers a deduction in full in respect of forestry maintenance expenditure Incurred on land purchased or leased, or subject to a binding contract of purchase or lease, on or before 12 December 1985. The provision contains the limitation that it will apply only in respect of trees planted on or before 31 December 1986. Also, it further provides that the deduction extends only to and including tree maintenance expenditure incurred up to and including the 1997 income year. Maintenance expenditure includes the pruning and tending of existing trees.

3. Forestry Development Expenditure

Section 11 of the Amendment Act inserts a replacement section 127A which phases out the existing deduction for forestry development expenditure.

Expenditure Deductible

Subsection (1) restates the types of forestry expenditure deductible in the year incurred but adds that to be deductible the expenditure must be incurred in the 1991 income year or in any preceding year.

Phase-out

Subsection (2) provides for the following phase-out of the deduction allowed under subsection (1).

Income Year Percentage of Expenditure
Ending 31 March Deductible in the Year Incurred
1987 100
1988 90
1989 75
1990 55
1991 30
1992 NIL

Committed Expenditure

Subsection (3) provides that taxpayers who enter into a binding contract (other than between associated persons) on or before 12 December 1985 to incur forestry development expenditure, receive a deduction in respect of 100 percent of any amount of that expenditure incurred in the 1988 income year.

The effect of this provision is to override the phase-out in respect of expenditure unconditionally committed to prior to 12 December 1985 and incurred in the 1988 income year. Any expenditure incurred in a subsequent income year is subject to the phase-out regardless of any prior binding commitment.

Existing Forest

Subsection (4) inserts a further transitional provision which allows taxpayers a deduction in full in respect of forestry development expenditure incurred on land purchased or leased, or subject to a binding contract of purchase or lease, on or before 12 December 1985. The provision contains a limitation that it will apply only in respect of land on which trees are planted on or before 31 December 1986. Also, it further provides that the deduction extends only to and including development expenditure incurred up to and including the 1997 income year.

As the provision is limited to forests in which the trees are already planted most forestry "development" expenditure would have already have incurred. The provision therefore will apply in practice only to expenditure such as the erection of fences, the sinking of bores and wells, construction of dams, etc.. It will not apply to expenditure undertaken to enable trees to be planted (e.g., the clearing of land).

Deferral of Deduction

Subsections (4)-(7) restate the provisions which relate to the deferral of the development expenditure deduction over a period of up to nine income years. The only change from the old provisions is the insertion of the restriction that the deduction for any expenditure allowed under the section cannot be deferred beyond the year 2000.

Subsection (8) is the normal accounting year provision.

4. Depreciation of Forestry Land Improvements

Section 12 of the Amendment Act inserts a new section 128B which allows for a deduction in the nature of depreciation in respect of forestry land improvements.

Subsection (1) defines the term "diminished value" (see commentary under subsection (4)).

Deductions - Forester Owns Land

Subsection (2) provides that any taxpayer who carries on a forestry business on land owned by the taxpayer is entitled to a deduction (other than in the year the land is sold) in respect of any of the types of forestry development expenditure listed in Part II of the Thirteenth Schedule.

The subsection provides that the deduction relates to expenditure incurred by the taxpayer claiming the deduction or by any other taxpayer. This means the taxpayer is entitled to a deduction in respect of forestry land improvements effected by that taxpayer or by any previous owner of the land. The effect of this provision is shown in the example that follows.

The subsection further provides that the expenditure must be of benefit to the business in the income year a deduction is being claimed, meaning that land improvements that have subsequently been written-off or become redundant (e.g., subsided road or dry bore) will not be eligible for the deduction. Note that the land improvement does not have to actually be used in a particular income year to be of benefit to the business, an example being a fire protection water reservoir from which water is not actually drawn. The benefit of the reservoir is its potential use.

Deduction - Lessee Forester

Subsection (3) is a similar provision to subsection (2) but applies to taxpayers who do not own the land on which they undertake their forestry business. However, such taxpayers are allowed a deduction only in respect of expendiyure incurred by that taxpayer.

The effect of the subsection is that foresters who lease their land cannot claim deductions in respect of land improvements effected by the owner or past owners of the land.

Amount of Deduction

Subsection (4) provides that the amount of any deduction allowed under subsection (2) or (3) shall be an amount equal to the percentage specified in the Thirteenth Schedule (5 percent or 10 percent depending on the type of expenditure) of the "diminished value" of the expenditure.

Subsection (1) defines "diminished value" as being in relation to any income year, an amount of expenditure reduced by:

  1. every deduction allowed to any taxpayer in any preceding income year in relation to that expenditure;
  2. every deduction allowed in that income year (other than any deduction allowed under section 128B) to any taxpayer.

The effect of section 128B is demonstrated by the following example

Example

  • Forester A spends, in the 1989 income year, $10,000 on constructing an access road and $5,000 on clearing scrub from a previously undeveloped block.
  • In the 1991 income year forester B buys the land.
  • In the 1993 income year the road is washed away in a flood.

The income tax accounts of forester A and forester B could be expected to show the following details:

FORESTER A
Expenditure Opening Balance Section 127 Deduction Deductible Excess Section 128A Deduction Closing Balance
1989 Return       (5%)  
Access Road -          
B Block 10,000 7,500 2,500 125 2,375
Scrub Clearance -          
B Block 5,000 3,750 1,250 63 1,187
1990 Return          
Access Road -          
B Block 2,375 - 2,375 118 2,257
Scrub Clearance -          
B Block 1,187 - 1,187 59 1,128
1991 Return          
Access Road -          
B block 2,257 (sold 10.10.92) Nil Nil Nil  
Scrub Clearance -          
B Block 1,128 (Sold 10.10.92) Nil Nil Nil  
FORESTER B
Expenditure Opening Balance Section 127 Deduction Deductible Excess Section 128A Deduction Closing Balance
1991 Return       (5%)  
Access Road          
-B Block 2,257 (purchased 10.10.92)   2,257 112 2,145
Scrub Clearance -          
B Block 1,128 (purchased 10.10.92)   1,128 56 1,072
1992 Return          
Access Road -          
B Block 2,145 - 2,145 107 2,038
Scrub Clearance -          
B Block 1,072 - 1,072 53 1,019
1993 Return          
Access Road -          
B block 2,038 - 2,038 101 Nil
          (written off)
Scrub Clearance -          
B Block 1,019 - 1,019 50 969

It can be seen from the preceding example that the new treatment of forestry development expenditure is in the nature of a depreciation regime on a diminishing value basis. Additional features of the new basis of treatment are:

  • Any deductions allowed under any other provision must be deducted from the expenditure before calculating the "depreciation".
  • When the land improvement is sold the purchaser continues to claim "depreciation" (on the unexpired portion of the vendor's book value of the land improvements) at the same rate that would have applied to the vendor had the sale not been made.
  • The purchaser is entitled to a full deduction in the year of purchase (i.e. no apportionment is made regardless of when in the income year the purchase takes place).
  • There is no recovery of excess deductions on sale (i.e., it is of no consequence what the improvements were sold for).
  • There is no additional deduction in respect of the loss incurred when an improvement is written-off.
  • A full deduction is allowed in the year an improvement is written-off (i.e., the deduction is not apportioned in that year).
  • The improvement must be of benefit to the business in the income year (one day is sufficient).

5. Summary of Forestry Changes

The following charts summarises the effects of the phasing out of the old forestry provisions and the enactment of the replacement provisions.

A: EXISTING FOREST
Income Year Development Expenditure Planting and Tree Maintenance Expenditure Administrative and Other Similar Expenditure
1987-1997 Deductible - 100% Deductible - 100% Deductible - 100%
  Depreciable - Nil Capitalised - Nil  
1998 Deductible - Nil Deductible - Nil Deductible - 100%
  Depreciable - 100% Capitalised - 100%  

Applies to expenditure incurred in forests planted on or before 31 December 1986 where land was owned or leased on or before 12 December 1985.

B: NEW FOREST
Income Year Development Expenditure Planting and Tree Maintenance Expenditure Administrative and Other Similar Expenditure
1987 Deductible - 100% Deductible - 100% Deductible - 100%
  Depreciable - Nil Capitalised - Nil  
1998 Deductible - 90% * Deductible - 90% * Deductible - 100%
  Depreciable - 10% Capitalised - 10%  
1989 Deductible - 75% Deductible - 75% * Deductible - 100%
  Depreciable - 25% Capitalised - 25%  
1990 Deductible - 55% Deductible - 55% * Deductible - 100%
  Depreciable - 45% Capitalised - 45%  
1991 Deductible - 30% Deductible - 30% * Deductible - 100%
  Depreciable - 70% Capitalised - 70%  
1992-7 Deductible - Nil Deductible - Nil Deductible - 100%
  Depreciable - 100% Depreciable - 100%  
  • 100 percent if subject to binding contract entered onto on or before 12 December 1985.
  • Applies to expenditure incurred in forest planted after 31 December 1986 or purchased after 12 December 1985.

In both examples:

"Depreciable" means deductible at the rate specified in the Thirteenth Schedule, e.g., 1991 income year - $10,000 spent on access track (new forest)

Deductible - $ 3,000
Depreciable - $ 7,000 x 5 percent = $3,500

"Capitalised" means the deduction must be capitalised to a "cost of forest" account and deducted in the year income is derived from the forest.

6. Administrative Amendments

A number of decisions made as a result of the Consultative Committee proposals are not reflected in the legislative amendments but are more administrative policy divisions. The following is a Summary of those divisions.

Operation of Cost of Forest Accounts

Cost of forest accounts may be operated in the following ways:

  1. Stand by stand basis (each stand of trees has its own cost of forest account).
  2. Annual planting basis (each year's total plantings has its own cost of forest account).
  3. Total forest basis (a single cost of forest account - available only where the taxpayer has 40 hectares or less of total forest plantings).

Revenue from Thinnings

The total balance in the appropriate cost of forest account may be deducted in full from any revenue from thinnings for up to the twelfth year after planting. After that time the costs must be apportioned according to the amount of forest thinned and the extent of the thinning operation.

For example, if after the twelfth income year of planting one-quarter of an annual planting is thinned to the extent of one tree in three being removed, the following formula should be applied to determine the costs that can be deducted from the thinnings revenue:

cost of bush balance x one third
4

Debris Clearance Following Harvest

The cost of clearing the land of debris remaining after a forest is felled can be offset against the income from the forest concerned, with any excess capitalised to the cost of forest account for the subsequent forest (if any).

7. Farm Forestry

Section 14 of the Amendment Act inserts a replacement section 134 of the principal Act which allows a current year deduction for forestry planting and maintenance expenditure incurred by farmers.

Under the old section 134 the deduction was limited to expenditure in relation to trees planted for shelter or erosion control purposes. The deduction is now extended to all trees planted on land on which the taxpayer undertakes a farming or agricultural business. The deduction is however limited to $7,500 in any one income year with the balance being:

  1. depreciable under section 128A in respect of trees planted for other than timber production (i.e., shelter or erosion control plantings)
  2. capitalised to a cost of forest account in respect of forest plantings.

Subsection (1) of the replacement section 134 permits the deduction in respect of planting and maintenance expenditure on farm plantings but provides that the farming or agricultural business must be the principal business undertaken on the land for the section to apply.

Subsection (2) phases-out the complete deduction allowed under the old section 134 so that for the 1991 income year and subsequent income years only the first $7,500 of planting and maintenance expenditure will be deductible in the year incurred.

The following phase-out is provided:

Income Year Ending 31 March Percentage of Expenditure Deductible
1987 100
1988 90
1989 75
1990 55
1991 30
1992 up to $7,500

Subsection (3) provides that -

During the period of phase-out the greater of $7,500 or the specified percentage of expenditure incurred can be deducted. For example if in both the 1988 and 1990 income years a farmer incurs $10,000 of qualifying expenditure, the following deduction would be allowed:

  • 1988 income year - $9,000
  • 1990 income year - $7,500

Subsection (4) is a further transitional provision which allows for an additional ten years (up to and including the 1997 income year) of complete deductibility where the expenditure is incurred pursuant to a binding contract entered into on or before 12 December 1985.

Subsection (5) is the normal accounting year provision.

Part VI - Other Primary Sector Provisions

1. Introduction

Part I of the Amendment Act contains two provisions affecting the primary sector which are an addition to the livestock, farm development expenditure and forestry provisions.

They are:

  • Section 13 - Amendments to Section 129
  • Section 15 - Amendments to Section 188A

2. Amendments to Section 129

Section 13 of the Amendment Act gives effect to the announcement on the 12 December 1985 that farmers and foresters would be exempted from the interest and development expenditure recovery provisions of sections 129 of the principal Act.

An additional exemption is inserted in subsection (9) of section 129 to provide that land (or assets) used by the taxpayer primarily and principally in the carrying on of a farming, agricultural, horticultural, viticultural, aquacultural, or forestry business will be exempted from the recovery provision if the land is sold after 12 December 1985.

It should be noted that the legislation exempts sales of land or other assets that have been used by the owner, or by the owner and any other person, primarily and principally in the carrying on of a farming, agricultural, horticultural, viticultural, aquacultural or forestry business. It does not require the taxpayer to be engaged in any such business within any set period prior to the sale. However, it is necessary for the owner to have been engaged in one or more of these businesses on that land at some previous time.

The means that an owner who leases land for use by some other person in the carrying on of, for example, a farming business will not be eligible for the exemption unless that owner has at some time actually carried on one of the specified businesses on that land. The leasing of land does not itself constitute the carrying on of any of those businesses.

For example, if a private company that has always leased land to the principal shareholder and that shareholder has always farmed that land, the private company will not be eligible for the exemption on the sale of that land.

The "stepping stone farmer" provision (section 129(5)) is also amended. That provision exempts the sale of a farm where a replacement farm is purchased within twelve months of that sale and retained for ten years. The provision has now been amended so that the original sale will not be subject to the recovery provisions if the replacement farm is sold after 12 December 1985 but within ten years of purchase.

Subsection (1) of section 13 contains the amendment to the "stepping stone farmer" provisions.

Subsection (2) of section 13 contains the exemption for farmers and foresters.

3. Amendments to Section 188A

Section 15 of the Amendment Act gives effect to the announcement that the $10,000 loss containment provisions of section 188A of the principal Act will no longer apply to farming, horticultural, viticultural and aquacultural activities.

The exemption is achieved by adding a proviso to subsection (7) of section 188A stating that the subsection will not apply to losses incurred in the 1987 or subsequent income years in the conduct of any of specified activities (a) to (h) listed in section 188A(1).

The effect of this amendment is that losses incurred in such activities in the 1987 and subsequent income years can be offset without limit against income from other sources. However, losses incurred in previous income years are still subject to the $10,000 per annum maximum offset.

Part VII - Other Provisions

Section 17 - Information Requisitions - New Section 21A

Section 17 of the Amendment Act inserts a new section 21A in the principal Act. This provision is intended to enhance the Commissioner's information gathering powers in relation to expenditure incurred to persons outside New Zealand. This purpose is achieved by making the deduction for the expenditure dependent on the supply of information to the Commissioner.

It was apparent from investigations into film partnerships that non-recourse finance was used to make large payments to entities offshore, usually in tax haven countries. In some instances the offshore entity was associated with the lender and the lender may actually have received the loan back. Payment for intangible benefits, such as advertising, marketing, management fees, royalties, and licence fees, were of particular concern to the Department. It is very difficult for the Department to examine the nature, timing and amount of these payments because of the taxpayer's efforts to keep the details secret. If the Department can obtain details of the payment made it can challenge the deductibility of such expenditure on one or more grounds, including transfer pricing. This provision is intended to assist the Commissioner to obtain information necessary to assess the merits of a claim to deduct payments to an offshore entity.

Basic Scheme of Section

Where a taxpayer makes a payment offshore and the Commissioner issues an information requisition under section IV of the Inland Revenue Department Act 1974 concerning that payment then:

  1. if the taxpayer fails to respond to the requisition within 90 days of the mailing of the requisition the Commissioner may disallow the deduction claimed by the taxpayer in respect of the offshore payment, or
  2. if the taxpayer does respond within 90 days of the mailing of the requisition then the only evidence that is admissible in any proceedings under Part III of the principal Act is evidence that is provided in the person's response to the requisition or that is in the possession of the Commissioner when the requisition was given to the taxpayer.

This provision is intended to encourage taxpayers to be more forthcoming in their responses to requisitions from the Commissioner. Also it has the effect of placing a manageable time frame on any investigation in this area because of the 90 day maximum. This will counter the potential to delay an investigation which might otherwise be exploited by taxpayers.

It is envisaged that following a series of questions the Department will finally get to the essential point at issue and will be able to make a more informed decision as to the deductibility of the expenditure incurred.

Detailed Explanation of Section

Subsection (1)

Subsection (1) is the interpretation subsection.

"Assessment" is given an extended meaning and includes:

  • a determination of loss:
  • a determination of loss carried forward:
  • a determination of a tax credit.

"Information requisition" means a written notice from the Commissioner to a person, informing the person that the Commissioner is acting pursuant to the powers conferred on him by section 17 of the Inland Revenue Department Act 1974 and requiring the person to furnish in writing any information or produce for inspection any books or documents or verify by statutory declaration any information or particulars specified in the notice.

A request under section 17 is not required to be in writing but, for the purposes of section 21A, an information requisition must be in writing.

"Offshore Payment" means an amount of expenditure or loss incurred or purportedly incurred by a taxpayer on or after 1 August 1986 to:

  • a person outside New Zealand, or
  • a person associated with or acting in a fiduciary capacity in relation to a person outside New Zealand, or
  • a person in New Zealand who, in the opinion of the Commissioner, may in consequence of the expenditure or loss incurred by the taxpayer make a payment to a person outside New Zealand (or to another person who may make a payment to a person outside New Zealand and so on until a payment to a person outside New Zealand is eventually made).

Subsection (2) - 90 Day Rule

Subsection (2) provides that where the Commissioner gives an information requisition to any person and the requisition concerns a deduction claimed by a taxpayer in respect of an offshore payment then the Commissioner may disallow, in the course of making any assessment, the deduction claimed if the person fails to respond to the requisition (as far as it relates to the offshore payment) within 90 days of the date of the mailing of the requisition.

It is important to note that where the requisition was given to a person other than the taxpayer then the Commissioner may only disallow where the person fails to respond to the requisition within 90 days of the date of the mailing of the requisition and the taxpayer also fails to respond to the copy of the requisition (required to be given to the taxpayer under subsection (7) of this section), i.e., there are two conditions that must occur before the Commissioner can disallow under this subsection.

The subsection also provides that where the Commissioner, in the course of making an assessment, disallows a deduction for an offshore payment the assessment (to the extent of the deduction claimed) shall not be disputed in any proceedings under Part III of the principal Act. The disallowance of a deduction cannot be litigated, notwithstanding the inclusion in any notice of objection of any ground to the disallowance of the deduction unless the taxpayer first establishes, in proceedings on an objection, that

  1. the taxpayer responded to the requisition within 90 days of the date of the mailing of the requisition, or
  2. Where the requisition was given to a person other than the taxpayer, that the person responded to the requisition within 90 days of the date of the mailing of the requisition or the taxpayer responded to the copy of the requisition required to be given to the taxpayer under subsection (7) of section 21A within 90 days of the date of the mailing of the requisition.

What this subsection contemplates is that where there is a dispute about whether a person responded to a requisition that dispute can be dealt with as a preliminary point on objection.

Subsection (3) - Evidence in Proceedings Limited to Taxpayers Response

This subsection provides that where a person responds to an information requisition concerning a deduction claimed by a taxpayer in respect of an offshore payment the only evidence admissible in any proceedings under Part III of the Act in which the deduction is in issue, is evidence:

  • provided in the person's response to the requisition, if such evidence can be verified by the Commissioner, or
  • provided to the Commissioner by the taxpayer, if the requisition was given to a person other than the taxpayer, within 90 days of the date of the mailing of the copy of the requisition (required to be given to the taxpayer), if such evidence can be verified by the Commissioner, or
  • which relates to information or material not mentioned in the requisition.

This subsection limits the evidence that may be admissible in any proceedings under Part III of the principal Act concerning a deduction claimed in respect of an offshore payment. The limitation ensures that, in any proceedings in which a deduction concerning an offshore payment is in issue, the taxpayer is estopped from producing further evidence which for some reason he was not prepared to disclose when responding to an information requisition. Therefore, in any proceedings in which the deduction will be decided upon the evidence is limited to that provided by the taxpayer to the Commissioner and any other evidence in the possession of the Commissioner. This subsection encourages a taxpayer to give a full and frank response to a requisition given by the Commissioner. Failure to do so would limit the evidence available to the taxpayer in any Part III proceedings.

Subsection (4) - Admissibility of further evidence gained by Commissioner

This subsection ensures that where the Commissioner discovers evidence which may refute the evidence supplied in response to an information requisition, that evidence may be adduced in the proceedings and is not made inadmissible by subsection (3). This subsection recognises that the Commissioner is not in the same position as the taxpayer. The taxpayer who claims the deduction for the offshore payment has all the necessary information to justify the claim. The Commissioner must rely on his investigating ability in order to verify the deductibility of the claim. In certain cases the Commissioner may obtain evidence from a taxpayer which the taxpayer failed to disclose or from a source other than the taxpayer. It is this kind of evidence which this subsection will permit the commissioner to adduce notwithstanding the limitations in subsection (3).

Subsection (5) - Notice to Taxpayer

This subsection was designed to give the taxpayer advance notice that the Commissioner is going to invoke subsection (3) in litigation.

The subsection provides that subsection (3) does not apply unless the Commissioner informs the taxpayer that he considers that the taxpayer (or person to whom the requisition was given) has not furnished sufficient information or material to sustain the deduction claimed by the taxpayer in respect of an offshore payment referred to in the information requisition.

If the Commissioner considers that insufficient information or material has been supplied and therefore intends to invoke subsection (3) then he must:

  • by a separate written notice;
  • issued prior to or contemporaneously with a notice of assessment:
    • inform the taxpayer that he (the Commissioner) considers that the taxpayer (or person to whom the information requisition was given) has not furnished sufficient information or material to sustain the deduction claimed in respect of an offshore payment referred to in the information requisition.

This is a statutory duty placed on the Commissioner. Failure to comply with the duty will nullify the provisions in subsection (3) of the section. Care must be taken by the Commissioner to ensure that the exact requirements set out in the subsection are followed.

Subsection (3) limits the evidence that may be admissible in any proceedings under Part III of the Act. It does not disallow the deduction claimed by the taxpayer for an offshore payment as subsection (2) does. This subsection is primarily concerned with increasing the Commissioner's information gathering function and is complementary to, rather than a substitute for, section 104 of the Act or any other deductions provision.

Under section 104 a taxpayer must establish that the amount claimed is deductible and if the Commissioner, after considering the information and material supplied by a taxpayer, decides that any amount claimed as a deduction by a taxpayer is not deductible, he may disallow the deduction under section 104. In such a case a notice under subsection (5) of section 21A is not required.

Subsection (6) - Agents and Partners

This subsection is self explanatory. For the purposes of the section, any information requisition and any notice given pursuant to subsection (7) of the section by the Commissioner to:

  • an agent for a partnership: or
  • a partner in a partnership,

shall be deemed to be given by the Commissioner to every partner in the partnership.

This provision recognises the reality for the Commissioner when dealing with partnerships. Usually the Commissioner corresponds with either an agent for the partnership or the managing partner. This subsection will save both time and unnecessary expense for the Commissioner in dealing with partnerships.

Subsection (7) - Copy of Requisition to Taxpayer

This subsection provides that a copy of any information requisition given under subsection (2) or (3) of the section, if the requisition was given to a person other than the taxpayer, shall be given to the taxpayer.

This ensures that the taxpayer 15 aware that an information requisition has been sent to another person. The taxpayer can then supply to the Commissioner any information sought in the requisition and so avoid the consequences attendant on an insufficient response by the recipient of the requisition.

The subsection also provides that, for the purposes of section 21C of the Inland Revenue Department Act 1974, every copy of a requisition shall be deemed to be a notice required to be given by the Commissioner to the taxpayer. Section 21C provides that any notice required to be given by the Commissioner to any person may be -

  1. Given to him personally; or
  2. Sent to him by post addressed to him at his usual or last known place of abode or business; or
  3. Given personally to any other person authorised to act on behalf of that person; or
  4. Sent to that other person by post addressed to him at his usual or last known place of abode or business.

Note that the information requisition itself, which is a separate notice from the copy, is a notice in terms of the definition of "notice" in section 2 of the Income Tax Act.

Subsection (8) - Inadequate Response

This subsection ensures that inadequate responses to information requisitions will not suffice as a response for the purposes of section 21A. A response which is inadequate is deemed not to be a response for the purposes of the section. An inadequate response may well result in the Commissioner invoking subsection (2) and the deduction claimed will be disallowed.

Application Date

This section shall apply with respect to the tax on income derived in the income year commencing on the 1st day of April 1985 and in every subsequent year. Note, however, that an offshore payment means, inter alia, an amount of expenditure incurred on or after 1 August 1986. Therefore, in relation to the 1986 income year, this section effectively applies only to those taxpayers with balance dates between 1 August 1986 and 30 September 1986 who happened to incur an offshore payment between those dates. In relation to the 1987 income year offshore payments made after 1 August 1986 are subject to section 21A.

Section 18 - Rates to be fixed by Annual Taxing Act

Subsection (1) amends section 39(1) of the Act to provide that the rates of income tax need not be fixed in specific Acts passed by Parliament for that purpose, but can be fixed annually by Income Tax Amendment Acts. (Note that urgent refunds are to be determined using the income tax rates that exist at the time.)

Subsection (2) amends the definition of annual taxing Act in section 2 of the Act so that the sections of an Income Tax Amendment Act which change the rates of income tax are deemed to be the annual taxing Act.

Section 19 - Principal Income Earner Rebate

Subsection (1)

This section amends the Principal Income Earner Rebate (PIER) provisions contained in section 50B of the principal Act.

The amendment is necessary to prevent persons who receive an income-tested benefit or specified war pension from claiming an amount of PIER or family rebate over and above the amount that would have been their entitlement but for the taxation of benefits from 1 October 1986.

The phase-out provisions of the PIER and family rebate prevent any person who was not a taxpayer in the period 1 April 1986 to 30 September 1986 from claiming a rebate for the 1986/87 income year. This means that a person who received an income-tested benefit or specified war pension and derived no other taxable income during the first six months of that income year commenced to be a taxpayer from 1 October and therefore had no rebate entitlement.

However, where such a person derived a small amount of income during the first six months, the qualification criteria for the PIER and family rebate are satisfied. Furthermore, because of the PAYE deductions attributed to the benefit income, large rebate entitlements result. Such entitlements are inflated through the income tax deductions relating to the post-1 October period and would be in addition to the family support entitlement for that period.

In order to allow a rebate only to the extent to which it relates to tax attributable to the pre-1 October 1986 period, a new proviso is added to restrict the amount of the rebate claimed by any taxpayer who received an income-tested benefit or specified war pension, to the difference between the tax assessed and the PAYE deductions made from the benefit or war pension payments.

Example: Income returned for year ended 31 March 1987

Income   PAYE
Benefit (after 1.10.86) $5,458.18 $814.58
Employment (before 1.10.86) $200 $25.10
  $5,658.18 $839.68

Tax Calculated

Tax on $5,658.18 equals $981.05

Rebate Limit

The rebate is limited to the difference between tax assessed ($981.05) and PAYE deductions from benefit income ($814.58) equals ($981.05 $814.58 =) $166.47.

Even though the rebate calculated under normal rules is $240.47 (= $5,658.18 x 0.0425), only $166.47 should be allowed.

This results in a refund of $25.70 being the PAYE deductions on the employment income.

Subsection (2)

This is the application subsection and provides for the rebate limitation contained in subsection (1) of this section to apply in respect of the 1986/87 income year only.

Section 20 - Transitional Tax Allowance

This section amends the provisions of the transitional tax allowance which under section 50C of the principal Act is claimable as a tax rebate.

Subsection (1) expands the qualifying criteria for the transitional tax allowance by amending the definition of "full time earner" contained in section 50C(1) of the principal Act, to include persons who are engaged in remunerative work for at least 20 hours a week. Previously only persons engaged in remunerative work for at least 30 hours a week were deemed to be full time workers, and therefore eligible for the transitional tax allowance.

Subsection (2) determines when a taxpayer who qualifies for the transitional tax allowance, because of the new definition of "full time earner" (i.e., they work between 30 and 20 hours a week), will be able to receive the transitional tax allowance on a pay-period basis. These persons will first be able to have the tax code "T" apply against their income:

  1. after they have delivered a tax code certificate, or tax code declaration to their employer, or
  2. after the 15th of December 1986,

- whichever is the later.

Tax code "T" will continue to apply against the income of the qualifying taxpayer until:

  1. the date on which that tax code ceases to apply to the taxpayer (i.e., the qualifying criteria are no longer met), or
  2. before the 31st of March 1987, (when they are required to furnish a new tax code certificate or tax code declaration)

- whichever is the earlier.

Subsection (3) provides that subsection (1) of this section shall apply from 1 April 1986. Those taxpayers who qualify for the transitional tax allowance because of the expanded criteria can therefore claim, in their end of year tax return (1987). the rebate as if they had been eligible from 1 October 1986.

Subsection (4) provides that subsection (2) of this section shall come into force on 15 December 1986, which is the first day from which newly qualifying taxpayers are able to receive the transitional tax allowance through reduced PAYE deductions.

Section 21 - Family Rebate

This section limits the amount of the Family Rebate which can be claimed by any taxpayer who received an income-tested benefit or specified war pension to the difference between the tax assessed and the PAYE deductions made from the benefit or war pension payments.

This provision restricts the amount of Family Rebate which may be claimed in the same way as section 19 restricts the Principal Income Earner Rebate entitlement. (Refer to the commentary on that section for an example ).

The restrictions apply only for the 1986/87 income year after which the Family Rebate and PIER cease to exist.

Section 22 - Incomes Wholly Exempt From Income Tax

This section amends section 61 of the principal Act by:

  1. removing the reference to the "Cook Islands" from subsections (9) and (48) of that section. The reference to "Niue" remains.
  2. making exempt from income tax Jurors' and Witnesses' fees (other than expert witnesses fees) paid by the Crown on or after the 13 October 1986.

Subsections (1) and (2)

The effect of this amendment is to repeal certain New Zealand income tax concessions relating to companies registered in New Zealand and deriving income from the Cook Islands. These concessions were introduced at the time when there were no facilities in the Cook Islands for company registration and Cook Islands companies were required to incorporate in New Zealand. The concessions are no longer required as the Cook Islands Companies Act 1970 now renders it unnecessary to register Cook Islands companies in New Zealand.

These subsections will apply with effect from the income year which commences 1 April 1987.

Subsection (3) - Juror's and Witnesses' Fees

This subsection inserts a new subsection (55) to section 61 of the principal Act. The new subsection exempts from income tax income derived by any person from:

  1. Juror's fees paid by the Crown, and
  2. Fees paid by the Crown to witnesses, other than expert witnesses.

The exemption will apply only to fees paid on or after 13 October 1986. Fees paid by the Crown to expert witnesses will still remain taxable. To coincide with this amendment, amendments have been made to:

  1. Income Tax (Withholding Payments) Regulations 1979 (Amendment No. 5). The amendment (1986/298) removes jurors' and witnesses' fees from liability for deduction of withholding tax effective from 13 October 1986.
  2. The Witnesses and Interpreters Fees Regulations 1974, (Amendment No. 3). This amendment (1986/296) reduces fees payable to witnesses from 13 October 1986 to the net of withholding tax payable prior to that date. Fees payable to expert witnesses will remain at the same level as these will remain taxable.
  3. The Jury Rules 1982, (Amendment No. 3). This amendment (1986/297) reduces the fees payable to jurors from 13 October 1986 to the net of withholding tax levels payable prior to that date.

This subsection will apply with respect to the tax on income derived on or after 1 October 1986.

Section 23: Niue Development Projects

Section 23 substitutes a new section 62 in the principal Act and continues the exemption from tax of New Zealand companies deriving income from development projects in Niue.

This section authorises the Governor-General to declare, by Order in Council, to be a development project any business or enterprise which is entered wholly or principally for the purpose of developing Niue or will be of importance in such development.

Section 24 - Items Included in Assessable Income

This section amends section 65 of the principal Act by substituting and inserting a new subsection (1B). The purpose of this amendment is to correct a drafting point to make it clear that one-off gratuitous payments made to spouses or relatives of deceased employees are non-taxable.

Section 65(1B) was inserted by the Income Tax Amendment Act (No. 2) 1985. Its purpose was to treat as taxable income ex-gratia payments made voluntarily to ex-employees or relatives of ex-employees to make good any loss in the real value of pension payments.

However, an inadvertent effect of the amendment was to make taxable ex-gratia payments made to spouses or relatives of an employee upon the death of that employee. These payments have never been taxable in the past because they are not income of the surviving spouse or of the deceased employee.

As it was not the intention of the 1985 amendment to bring within the taxation net such payments, an amendment was necessary to restore the previous position.

This section will apply to payments received on or after 23 March 1985, the application date of the 1985 amendment.

Section 25 - Retiring Allowances Payable to Employees

This section amends section 68 of the principal Act to enable redundancy payments made to seasonal workers to come within the provisions of the section and therefore receive the concessional tax treatment.

Subsection (1) inserts two new definitions to section 68.

"Season" defines for the purposes of any employment or service what shall be regarded as a season or seasonal for the purposes of the section. It means any continuous period of employment or service of less than 12 months, where the Commissioner having regard to the circumstances and nature of the type of business, is of the opinion that the employment or service is a normal period of employment or service for that business.

An example of the type of employment which comes within the definition is that of freezing workers where the normal employment or service is for a period of less than 12 months.

"Year of Service" defines for the purposes of seasonal employment any 12 month period where a taxpayer has been employed for a period of not less than one season.

This definition has the effect of allowing the "specified sum" formula to apply to seasonal employment by counting each full season to be a year of service in the same manner as normal employment.

Subsection (2) repeals and substitutes a new subsection (4) to section 68. This subsection provides, for the purpose of section 68, where -

  1. Any taxpayer has ceased to be employed by reason of redundancy or loss of office or employment, or other similar circumstances or
  2. Any taxpayer is unable to be re-employed in any seasonal employment by reason of circumstances, that had they resulted in a cessation of the seasonal employment would have been circumstances where the taxpayer would have ceased to be employed by reason of redundancy or loss of office or employment or other similar circumstances:

that any lump sum payment made by way of redundancy by reason of the above is deemed to be a retiring allowance and therefore qualify for the concessional treatment as long as the other provisions of the section are met.

The new subsection removes the requirement that only redundancy payments made "on the occasion of" the termination of employment qualify for the concession. It will enable redundancy payments made subsequent to the termination of a seasonal worker's employment to qualify for the concession. It will also ensure that employees who ceased in a previous season and who have not been re-employed in the current season because their Jobs have been made redundant will be eligible for the concession.

Subsection (3) is a consequential amendment.

Subsection (4) is the application section. The amendment shall apply with respect to the tax on income derived in the income year that commenced on the first day of April 1986 and every subsequent year.

EXAMPLE

Joe Smith is employed by a freezing works company. For the past 8 years when killing season has re-commenced Joe has been re-employed and has worked for the season. Joe Smith has worked approximately six months of each year and is made redundant after five months of his ninth season at the works.

As the normal period of employment for Joe Smith is the complete season of approximately six months each period employed is deemed to be a "season" for the purposes of section 68. The "years of service" are then calculated on the number of "seasons" that have been worked. In Joe's case 8 years of service have been worked.

Calculation of taxable income

Total redundancy pay $20,000
Specified sum  
(Average remuneration for the last three years of service) 8/10 x $30,000
$24,000
Taxable:  
5% of redundancy payment $1,000

Section 26 - Power to Exempt Expenditure on Account of an Employee

Section 26 introduces a new section 73A into the principal Act giving the Commissioner the power to determine the extent to which certain amounts of expenditure on account of an employee may be exempted from income tax.

Under the section 2 definition of "expenditure on account of an employee" where an employee incurs expenditure but the actual payment of that expenditure is discharged by the employer that amount is deemed to be assessable to the employee as monetary remuneration. The purpose of introducing the new section is to allow the Commissioner to exempt from income tax that expenditure on account of an employee that relates to the income earning process.

For example:

  1. Where an employee travels on business and books into a hotel in his own name and the account is paid by the employer.
  2. Where an employee orders equipment, say of $300, that she will use whilst working, and the employer pays the amount charged.

Under the definition of "expenditure on account of an employee" such amounts would be assessable to the employee as monetary remuneration. Section 73A eliminates this problem by introducing a test, which if satisfied, enables the Commissioner to exempt such amounts from being assessable to the employee.

Section 73A provides that if the employee had paid the amounts owing, rather than the employer, and would have been deemed incurred in gaining or producing of assessable income then such amounts would be exempt from income tax in the hands of the employee.

Included within section 73A are the words "the Commissioner may from time to time determine". This does not mean that the commissioner will be required to make an individual determination every time an employer discharges a debt incurred by an employee. Provided that the expenditure was incurred by the employee in the gaining or producing of his/her assessable income then that amount will be exempted under section 73A. It is a general determination rather than specific to any one case. However, where the Commissioner is not satisfied that the expenditure was incurred in respect of the employment or service of the employee such amounts will remain taxable to the employee as monetary remuneration.

The new section refers to expenditure which if paid by the employee would have been deemed to have been incurred in the gaining or producing of the employees assessable income. This does not limit the exemption to amount which would have been deductible if the employee had discharged the debt. To illustrate this point refer back to example (ii) above. If the employee had paid for the equipment $300 would have been incurred in the gaining or producing of assessable income but only $250 would have been deductible because of the restrictions of section 105 and the Fourth Schedule.

This new section has application as from 1 April 1985, being the date from which the definition of the term "expenditure on account of an employee" had application.

Section 27 - Supplementary Depreciation Allowance for Plant and Machinery Used in Two and Three Shift Industries

This section amends section 113A of the principal Act and is simply a machinery amendment to make it clear that the supplementary allowance can be claimed in year one, in addition to years two to five, for qualifying plant and machinery in cases where the first year depreciation allowance cannot now be claimed because of the latter's repeal.

The supplementary allowance is an additional rate of 3 percent d.v. or 6 percent d.v. for plant and machinery used for 2 shift or 3 shift operations respectively and is allowable in the 2nd to 5th years of the plant's use. In the first year the higher rates of first year depreciation allowance substitute for all other depreciation allowances.

The first year depreciation allowance for new or second hand plant and machinery (section 112(2)(a) or (b) of the Act) was terminated with effect from Budget night, 31 July 1986 - for further information refer to the publication on the Income Tax Amendment Act (No. 3) 1986. As a result of the removal of the first year depreciation allowance multi-shift businesses were put at a disadvantage as the supplementary allowance could not be claimed in year one.

This amendment rectifies the position.

Subsection (1) inserts the word "first" into paragraph (a) of subsection (4) of section 113A. The effect is to allow the supplementary allowance for the first income year in which the plant and machinery is used in the production of assessable income. This is subject to the proviso inserted by subsection 2.

Subsection (2) adds a proviso to subsection (4) of section 113A. This provides that no deduction of the supplementary allowance shall be allowed in the first income year in any case where the first year depreciation allowance is allowable under section 112(2)(a) or (b) of the Act.

Subsection (3) is the application section.

In order to coincide with the removal of the first year depreciation allowance effective from 31 July 1986 the amendment applies from the income year which commenced 1 April 1985 (1986 income year). This will enable taxpayers with late 1986 balance dates, falling after 31 July, repeal date, and who purchase any qualifying plant and machinery after that date, to claim the supplementary depreciation allowance.

Section 28 - Revised Assessments Where Assets Sold After Deduction of Depreciation Allowances

This section amends section 117 of the principal Act to allow a deduction against depreciation recovered on the disposal of an asset for the costs attributable to the disposal.

Section 117 of the Act provides that where the Commissioner has allowed a deduction for depreciation in respect of any asset and the asset is sold or disposed of for a price or consideration in excess of its written down value, the assessable income of the taxpayer is increased by the amount of the depreciation recovered on the sale.

The section does not provide for the costs of sale of the asset (for example, commission on sale, auctioneer's fees) to be deducted from the sale price in calculating the amount of the profit on sale. Under the present legislation the costs of sale are incurred in the sale of a capital asset and are not deductible in determining any profit or loss on sale.

The amendment to section 117 effectively enables the amount of depreciation recovered to be reduced by the costs incurred in selling the asset. This follows normal commercial and accounting practice.

Subsection (1) removes the words "at a price or" from subsection (1) of section 117. This removes any reference to the term "price" in favour of the term "consideration".

Subsection (2) amends subsection (5) of section 117 by adding a new sub paragraph (a) which defines the term "consideration" as being the consideration received on the disposal or sale of an asset reduced by any amount paid or payable by the person in respect of selling or disposing of the asset.

Note This amendment allows costs of sale of an asset to be deducted against the sale price only in cases involving depreciation recovered. Such costs are capital losses and remain non-deductible against assessable income. Where the costs of sale exceed the difference between cost and book value the depreciation recovered is nil and no further deduction for the costs of sale are allowed. Where the asset is sold for less than book value the loss on sale may be deducted in accordance with the provisions of section 108, but the costs of sale are non-deductible.

Example(i) - Profit on sale

    $
Cost price ofs aset   $9,000
Written down value   5,760
Sale Price 6,500  
less costs of sale 600 5,900
Depreciation recovered   $140

Example (ii) - Loss on Sale

Cost price of asset $9,000
Written down value 5,760
Sale Price 5,500
Loss on Sale $260

Subsection (3)

This amendment applies in respect of any asset sold or disposed of in the income year commencing 1 April 1986 (1987 tax returns) and every subsequent year.

Section 29 - Accounting for the Income Tax Implications of GST - New Section 140B

1.1

This section introduces a new section (section 140B) which comes into effect from the income year commencing 1 April 1986.

Basic Principles

The basic principles which need to be understood in relation to the income tax treatment of GST are:

  • Where GST incurred is not allowable as a deduction for GST purposes then the GST which has been paid is a real cost in the incurring of the expenditure of the business. For income tax purposes the legislation recognises a deduction for the cost of GST.
  • Conversely, where GST incurred is allowable as a deduction for GST purposes then that GST is not a real cost for income tax purposes and therefore no deduction is allowable against the business expenditure.

Note that the above principles apply irrespective of whether the expenditure is on account of revenue or capital.

GST charged on taxable supplies made is not business income of the taxpayer as the GST is collected by the taxpayer effectively as agent for the Crown.

Presentation of Accounts

Having regard to the above basic principles, taxpayers may furnish accounts based on either a GST-inclusive basis or a GST-exclusive basis, either approach is acceptable - as the same result is achieved, by making certain adjustments at the end of the year. This is discussed in 1.8. For persons registered for GST purposes, GST is generally neither assessable nor deductible for income tax purposes. Specifically:

  1. "Output tax" charged on supplies (including sales of assets), made by the taxpayer is not assessable (refer section 140B(2)(a)).
    • "Output tax" is defined in the Goods and Services Tax Act 1985 as the tax chargeable on supplies of goods and services made by a registered person in the course of a taxable activity.
    • Output tax charged in relation to the sale or other disposition of a capital asset is not included in the "consideration" for the sale, etc., for the purposes of section 117 of the Income Tax Act (refer section 140B(7)(a)).
  2. Any refunds of GST from the Commissioner to the taxpayer are not assessable (refer section 140B(2)(b)).
  3. "Input tax" charged on purchases made by the taxpayer is not deductible for income tax purposes; either as expenditure incurred or by way-of depreciation (refer section 140B(3)(a) and (6)(a)).
    • "Input tax" is defined in the Goods and Services Tax Act 1985 as being GST charged on goods and services acquired by a registered person for the principal purpose of making taxable supplies. Section 140B(1)(b) extends the meaning of this term for income tax purposes to include imported goods acquired for the principal purpose of making taxable supplies.
    • "Taxable supplies" can only be made in the course of a taxable activity by a taxpayer who is registered for GST purposes. Therefore, any taxpayer conducting a GST-exempt activity can use GST-inclusive costs when determining deductions for income tax purposes. This is because the GST they have incurred is not defined as "input tax". This applies also to a small-scale business activity which is not registered for GST purposes (because their turnover is below the threshold of $24,000 per annum).
  4. Any payments of GST to the Commissioner are not deductible (refer section 140B(3)(b)).

Exceptions to the General Rule

1.2

Notwithstanding the above, there are three situations where GST is deductible or assessable for taxpayers who are registered for GST purposes:

(i) Section 21(1) Adjustments for Private/Exempt Use

Section 21(1) of the GST Act applies where goods and services were purchased for the principal purpose of making taxable supplies (and a full input tax deduction thereby allowed), are subsequently applied partially for private or GST-exempt purposes. Upon this subsequent application a GST taxable supply is deemed to occur.

Exempt Use Adjustment

Where the section 21(1) adjustment arises as a result of the partial use of a business purchase for generating GST-exempt supplies, the output tax arising from that use will generally be fully deductible for income tax purposes (refer section 140B(4)(a)).

Where both the taxable activity and the activity that generates the GST-exempt supplies are assessable for income tax purposes, a full deduction is allowed for income tax purposes of the output tax arising from the section 21(1) adjustment. This is because a full income tax. deduction (either for expenditure incurred or by way of depreciation) is allowed in respect of the expenditure incurred in acquiring or producing the goods and services so applied.

To illustrate, where a car acquired by a bank is mainly used by its travel agency (i.e., for the principal purpose of making taxable supplies) and is also used to a minor extent for providing financial services (exempt supplies), there is an ongoing adjustment under section 21(1) to recognise that partial GST-exempt use. As the provision of financial services is assessable for income tax purposes, the output tax payable under section 21(1) is deductible for income tax purposes. This deduction is made in the income year in which the output tax is charged.

Example:

Car acquired for the principal purpose of making taxable supplies:

Cost (GST-inclusive) $22,000
Input Tax deduction  
claimed $ 2,000
Net cost for depreciation  
purposes $20,000

Car used 25 percent for the purpose of making GST-exempt supplies:

$20,000 (GST-exclusive value) x 13.33% (straight line depn) x 25% (exempt use)
6 (number return periods per annum)

= $111.08 deemed supply x 10% = $11.11

Section 21(1) output tax adjustment per GST return $11.11
Total output tax in income year (6 GST returns) $66.66
Deductible for income tax purposes $66.66

NB Where the GST-exempt activity is not assessable for income tax purposes, no deduction is allowed in respect of the output tax liability arising under section 21(1) (refer section 140B(4)(c) and (d)).

Private Use Adjustment

Where the section 21(1) adjustment has arisen as a result of the private use of a business purchase, the output tax arising from that private use will not be deductible for income tax purposes (refer section 140B(4)(c) and (g)). This is because the expenditure incurred in the acquisition of those goods and services would not have been deductible to the extent of that private use for income tax purposes.

(ii) Section 21(3) Fringe Benefit Tax Adjustment

Output tax is payable under section 21(3) of the Goods and Services Tax Act on supplies to employees subject to fringe benefit tax. However, output tax is not charged on fringe benefits that are exempt or zero-rated supplies for GST and on fringe benefits provided in the course of a GST-exempt activity.

The output tax payable under section 21(3) is generally deductible for income tax purposes (refer section 140B(4)(a)). A full deduction is allowed provided the expenditure incurred in providing those fringe benefits is itself taken into account in calculating the assessable income of the taxpayer (refer section 140B(4)(c) and (d)).

Example:

Details from a trading bank's FBT return (the bank's business includes a travel agency):

Details from FBT return Fringe Benefits* s. 21(3) Value Output tax Payable
Motor Vehicles (25% relates to travel agency, 75% to exempt) $4,400 $l,100 $100
Other Benefits:      
Overseas trip (zero-rated) $3,600 - -
Low interest loan (exempt supply) $20,000 - -
Subscription for travel agency employee $ 110 $ 110 $ 10
  $28,110 $1,210 $110
  • Amount to be claimed in income tax return $110
  • FBT is based upon GST inclusive amounts
  • *Note that the values of fringe benefits upon which the FBT is calculated are always based upon GST-inclusive amounts. This applies irrespective of whether an input tax deduction is allowed.

(iii) Section 21(5) Adjustment for Taxable Use of Principally Private/Exempt Asset

For GST purposes, where goods and services are acquired other than for the principal purpose of making taxable supplies no deduction of the GST incurred is allowed, as it is not defined as "input tax". Where such goods and services are also partially used for the of making taxable supplies section 21(5) of the GST Act allows a deduction to recognise taxable activity content of the GST incurred on the purchase of those goods and services for which no GST deduction was originally been allowed.

Where such a deduction (21(5)) for GST purposes is allowed, that amount is generally assessable for income tax purposes (refer section 140B(4)(b)). Where income from the taxable activity of the taxpayer is assessable for income tax purposes the GST deduction is fully assessable. The GST deduction is included in the assessable income of the taxpayer in the year in which it is allowed.

Example:

Car used by bank 25% of time for travel agency, balance of time used for banking operations, i.e., acquired for the principal purpose of making exempt supplies:

Cost (GST-inclusive) $22,000
GST incurred but not claimed (not "input tax") $ 2,000
Cost for depreciation purposes $22,000

Car used 25% for the purpose of making GST-taxable supplies:

Section 21(5) GST adjustment per GST return $11.11
Total GST adjustments; in income year (6 GST returns) $66.66
Assessable for income tax purposes $66.66

Where income from the taxable activity is not assessable for income tax purposes (e.g., non-commercial sales by a charity). the section 21(5) adjustment for GST purposes is not assessable to the taxpayer.

1.3 Capital Assets and Depreciation

For income tax purposes, assets are depreciated on the cost price less any input tax deduction claimed (refer section 140B(6)(a)). Thus an asset acquired principally for making taxable supplies is depreciated on the cost price exclusive of GST. In contrast, an asset acquired by a taxpayer other than for the principal purpose of making taxable supplies (but nevertheless for the purpose of producing assessable income) is depreciated on the cost price including GST; as no deduction of GST will have been allowed. This is because the GST incurred would not be defined as input tax.

When an asset is sold or otherwise disposed of, section 117 of the Income Tax Act requires the total capital cost of an asset at purchase to be determined. This expenditure is to be exclusive of any input tax incurred (refer section 140B(7)(b)). Remember that if the GST incurred on the capital expenditure is not "input tax" then the total capital cost will include that GST.

(i) Section 21(1) Adjustment: Permanent Change in Principal Use

Generally, any adjustment which arises from the operation of section 21(1) of the Goods and Services Tax Act is deductible and requires no change to be made to the cost price or book value of a depreciable asset for income tax purposes.

However, where a section 21(1) adjustment arises from a permanent change in the principal use of an asset, the opening book value is increased in the year of adjustment by the amount of output tax charged (refer section 140B(6)(b)). This is instead of the income tax deduction of the output tax that would otherwise be allowed (refer section 140B(4)(f)).

To illustrate, a car is acquired by a bank mainly for the use of its travel agency (i.e., for the principal purpose of making taxable supplies), and is subsequently used principally for providing financial services (i.e., for the principal purpose of making exempt supplies). At the time of this change in the principal use of the asset a one-off adjustment is made under section 21(1). The resulting output tax liability will be added to the opening book value of the asset in the income year the liability arises. Where the liability arises in the first year that depreciation is allowed, the output tax is added to the cost price of the asset.

Example:

Car acquired for the principal purpose of making taxable supplies:

Any ongoing output tax adjustments made under section 21(1) for the exempt use of this car until the time of the principal use changeover, are deducted for income tax purposes in those years (refer 1.2(i)). Any ongoing GST deductions made under section 21(5) to recognise any taxable use after the changeover will generally be assessable for income tax purposes in the year the GST deduction is made (refer 1.2(iii)).

Section 21(5) Adjustment: Permanent Change in Principal Use

Generally, any ongoing adjustment which arises from the operation of section 21(5) of the GST Act is assessable and requires no change to be made to the cost price or book value of a depreciable asset.

However, where a section 21(5) adjustment arises from a permanent change in the principal use of an asset, the book value is decreased in the year of adjustment by the amount of the GST deduction claimed and depreciated accordingly (refer section 140B(6)(a) and section 140B(4)(e)). This is instead of the assessment of the GST deduction that would otherwise be required.

To illustrate, a car is acquired by a bank mainly for use in generating financial services (i.e., for the principal purpose of making exempt supplies), and is subsequently used principally by the bank's travel agency (i.e., for the principal purpose of making taxable supplies). At the time of this change in the principal use of the asset, a one-off adjustment is made under section 21(5). The resulting GST deduction will be deducted from the opening book value of the asset in the income year the GST deduction is given. Where the GST deduction is made in the first year that depreciation is allowed, the cost price of the asset is reduced by the amount of that deduction.

Example:

Car acquired for the principal purpose of making exempt supplies:

Cost (GST-inclusive) $22,000  
Input Tax deduction $ 2,000  
Net cost for depreciation purposes $20,000  
Year Book Value Depreciation
1 $20,000 $4,000
2 $16,000 $3,200
3 (Principal Use Changeover) $12,800  

In year three, the principal use of the car changes to that of making GST-exempt supplies:

Consideration set at lesser of cost of car or open market value of a similar supply at time of changeover $16,500
Section 21(1) output tax adjustment $ l,500
Opening book value in the year of transfer $12,800
add one-off section 21(1) adjustment $ 1,500
New opening book value $14,300

Any ongoing GST deductions made under section 21(5) for the taxable use of this car until the time of the principal use changeover are assessable for income tax purposes in those years (refer 1.2(iii)). Any ongoing output tax adjustments made under section 21(1) to recognise any exempt use after the changeover may be deductible for income tax purposes in the year the output tax is charged (refer 1.2(i)).

1.4 Insurance Receipts

In most cases, fire and general insurance payments received by a registered person are subject to GST. In such cases, that GST component (i.e., one-eleventh of the insurance receipt) is ignored for the purposes of subsections 117(7) and (8) of the Income Tax Act (refer section 140B(7)(d)).

1.5 Valuation of Trading Stock

Registered Persons

Section 140B(5)(a) deems "cost price" and "price" in relation to trading stock (including livestock and replacement trading stock) to exclude any input tax deduction claimed. Further, determination to the "average market value", "market selling value", and "market value" will not include GST where GST would have been charged if the taxpayer had made the supply (refer section 140B(5)(b)).

The above applies for the purposes of sections 85(4), 86, 86A, 86B, 86C, 86D, 86H and 88 of the Income Tax Act.

Non Registered Persons

Non-registered persons and those conducting exempt activities will, of course, not be in a position to claim an input tax deduction in respect of the GST incurred on the purchase of trading stock, etc., and therefore will value trading stock inclusive of GST charged.

1.6 Calculation of Export Market Development and Tourist Promotion Expenditure Incentive (section 156F)

This incentive is claimed on the basis of "prescribed outgoings" exclusive of any "input tax" which is claimed for GST purposes (refer section 140B(8)). Note that the majority of the "prescribed outgoings" will in any case not have GST charged on them as they will relate to costs incurred overseas.

1.7 Dividends

Dividends deemed to be made pursuant to sections 4(1) or 4(2) of the Income Tax Act are to be valued on GST inclusive amounts where appropriate. This is not covered by the new section 140B but is necessary in determining the income tax liability of a registered person.

For example, where a company asset is given to a shareholder, the value of that asset for the purposes of calculating the dividend distribution would include any GST charged on the supply of that asset.

A further example is where a proprietary company pays one of its shareholder's rates bill of $1,100 (including GST). The deemed dividend made to the shareholder pursuant to section 4(2) is $1,100.

1.8 Preparing Accounts for Taxation Purposes - Registered Persons

There are two methods of preparing accounts for income tax purposes for a person who is registered for GST purposes. Both are equally acceptable as they will achieve the same assessable income figure.

The first method is to prepare accounts completely excluding GST, except for the deductible/assessable adjustments which arise from the operation of section 21 of the GST Act. This method complies with the NZ Society of Accountant's SSAP 18.

The second method is to record revenue and expenditure on a GST-inclusive basis and adjust in the accounts by including refunds of GST from the Department as revenue and GST payable to the Department as expenditure in the profit and loss account. The adjustment made must exclude GST in respect of capital and non-assessable or non-deductible items. Where a GST return period spans the balance date a calculation will have to be made of GST payable to/refundable from the Department in respect of the period from the previously furnished GST return to the balance date.

Example:

A company has sales (including GST) of $110,000 inputs (including GST) of $33,000 and wages of $40,000. In that income year fringe benefits with a value of $11,000 are provided, and plant costing $22,000 (including GST) is purchased. Some of the company's assets are applied to a minor degree for making GST-exempt supplies and ongoing output tax adjustments totalling $1,200 are made in that year pursuant to section 21(1) of the GST Act.

(i) GST-Exclusive Accounts

Sales   $100,000
Expenditure:    
Inputs $30,000  
Wages $40,000  
     
Depreciation of plant (10% of $20,000) $2,000  
Deductible output tax (relating to GST-exempt use)- Section 21(3) $1,000  
- Section 21(1) $1,200  
  $74,200  
Net Profit   $25,800

(ii) GST-Inclusive Accounts

Sales   $110,000
Expenditure:    
Inputs $33,000  
Wages $40,000  
Depreciation of plant (10% of $20,000) $ 2,000  
GST payable* $ 9,200  
  $84,200  
Net Profit   $25,800

*GST payable is calculated as follows:

Output tax: 1/11 x $110,000 $10,000  
Section 21(1) $1,200  
Section 21(3) $ 1,000  
  $12,200  
Input Tax:
1/11 x $33,000
$3,000  
1/11 x $22,000 $2,000  
  $5,000  
    $7,200
GST payable to the IRD Amount to be included in accounts needs to be adjusted for capital and non-assessable items: add input credit in respect of plant   $2,000
Amount to put in accounts   $9,200

Section 30 - Retiring Allowances Payable to Employees

This section amends section 152 of the principal Act and is an amendment consequential to that made to section 68 - refer to section 25 of this Amendment Act. Section 152 governs the deductibility of retiring allowances and redundancy payments in calculating the assessable income of employers making such payments.

Subsection (1) inserts a new subsection (2) to section 152. This subsection is virtually a repeat of the new subsection (4) to section 68 of the Act (as repealed and substituted by section 25 of this Amendment Act - refer to that section for commentary). The amendment ensures that the employer is allowed a deduction for the lump sum payment made to any employee or in the case of seasonal workers, former employees.

Subsection (2) is a necessary drafting amendment.

Subsection (3) is the application section and states that the amendment will apply with respect to the tax on income derived in the income year that commenced on the 1st day of April 1986 and every subsequent year.

Section 31 - Export-Market Development and Tourist-Promotion Incentive

Section 31 amends section 156F of the principal Act to exclude from the export-market development expenditure and tourist-promotion expenditure tax incentives credit, any expenditure incurred on or after 1 December 1986, in relation to the Republic of South Africa. Provision is made for any such expenditure incurred on or after 1 December 1986 under a binding contract entered into on or before 18 August 1986 to qualify under the section.

The amendment is a result of the October 1985 Commonwealth Heads of Government Meeting which agreed to implement certain measures against the Republic of South Africa, and the Review meeting held in London from 3-5 August 1986 which recommended certain economic measures.

The effect of the amendment is to exclude a taxpayer from claiming a tax credit for any export-market development expenditure, where that expenditure is incurred on or after l December 1986 in respect of the promotion of exports of goods or services to South Africa. Similarly, a taxpayer will not be able to claim a tax credit for any tourist-promotion expenditure, where that expenditure is incurred on or after 1 December 1986 relating to New Zealand tourist promotion in relation to the South African market.

Where either expenditure is incurred pursuant to a binding contract entered into on or before 18 August 1986 that expenditure will still qualify for the tax credit.

Subsection (1) is a necessary drafting measure.

Subsection (2) amends the definition of the term "export-market development expenditure" by adding a new paragraph (g). This paragraph excludes from the definition any outgoings incurred on or after 1 December 1986 in relation to the Republic of South Africa.

The proviso provides that where the Commissioner is satisfied that outgoings are incurred in relation to South Africa on or after 1 December 1986 pursuant to a binding contract entered into on or before 18 August 1986, those outgoings are deemed to have been incurred prior to 1 December 1986 and therefore will qualify for the tax credit.

Subsection (3) is a necessary drafting measure.

Subsection (4) amends the definition of the term "tourist-promotion expenditure" by adding a new paragraph (c). This paragraph excludes from the definition outgoings incurred on or after 1 December 1986 for the purpose of attracting tourists to New Zealand from the Republic of South Africa.

The proviso contains the transitional provisions for outgoings subject to a binding contract entered into on or before 18 August 1986.

Section 32 - Export-Market Development Activities Incentive for Self-Employed Taxpayers

Section 32 amends section 156G of the principal Act to exclude export-market development activities (value of time) incurred by a self-employed taxpayer on or after 1 December 1986 in relation to the Republic of South Africa.

As with section 26 this amendment results from the decisions made by the Commonwealth Heads of Government. It will mean that a self-employed taxpayer cannot claim a tax credit for any export-market development activities performed on or after 1 December 1986, other than any performed pursuant to a binding contract entered into on or before 18 August 1986, where that expenditure is in respect of the promotion of export of goods or services to the Republic of South Africa.

Section 33 - State-owned enterprises, energy trading operators and harbour boards

Subsection (1) of this section inserts 3 new sections into the Income Tax Act:

  • Section 197B - State-owned enterprises
  • Section 197C - Energy trading operators
  • Section 197D - Harbour boards

This gives effect to the Government's policy that the above organisations are to be subject to income tax as separate entities.

A. State Owned Enterprises - Section 197

Section 197B deals with companies and corporations owned or controlled by the Crown or any person acting for the Crown. The section excludes a state-owned enterprise, or any subsidiary of a state-owned enterprise, as an associated person with, or as a member of a group of companies that includes, -

  1. Any other state-owned enterprise,
  2. Any subsidiary of another state-owned enterprise.

The effect of this provision is illustrated in the following example:

A flowchart showing the effect of the s.197 provision on State Owned Enterprises

Larger version of image

In this example SOE 1 with its chain of subsidiaries and SOE 2 with its chain of subsidiaries would, in the absence of s. 197B, be a group of companies under s. 191 by virtue of their common shareholder, the Minister of Finance. Section 197B prevents SOE. 1 and SOE. 2 being considered a group of companies or associated persons. The treatment of a single SOE and its chain of subsidiaries is not affected by this provision. They remain a group of companies and associated persons.

Note that for the purposes of section 191 of the Income Tax Act section 197B took effect from the commencement of section 191 (i.e., 1 April 1977). This prevents any possibility, however academic, of two or more SOEs claiming to be a group of companies in relation to any income year prior to 1 April 1987.

B. Energy Trading Operators - Section 197C

Section 197C deals with local authorities that supply energy to other persons.

Subsection (1) provides that section 197C shall apply notwithstanding any other provision in the Income Tax Act.

Subsection (2) defines certain terms used in section 197C. A "consumer contribution" (an expression used in section 197C(9)) is any contribution made by a consumer, or a prospective consumer or any other person, toward costs incurred by a local authority in respect of any asset installed by the local authority for use in connection with the supply of energy.

"Energy" is electricity, gas, liquid, geothermal activity, or coal for use as energy or a source of energy (but not for other uses).

The two classes of local authorities subject to this legislation are "energy supply authorities" and "specified local authorities"

An "energy supply authority" is a local authority, the principal purpose of which is the supply of energy (for example an electric power board or an electric power and gas board).

A "specified local authority" is any local authority (except an "energy supply authority" or a harbour board) that supplies "energy" to any other person, but does not include a local authority that derives less than $100,000 per annum gross income from the supply of energy. The $100,000 limit is intended to exclude local authorities that derive a small amount of income from energy produced, for example, in a cogeneration plant.

Section 197C refers generally to "energy trading operators". An "energy trading operator" is -

  • An "energy supply authority"; or
  • A "specified local authority" in its capacity as a supplier of energy (for example a city council, with a municipal electricity department, in its capacity as a supplier of energy).

Section 197C(3) states which local authorities the legislation applies to; i.e., "energy supply authorities" and "specified local authorities".

Section 197C(4) contains a series of deeming provisions.

Section 197C(4)(a) deems an "energy trading operator" to be a company. It also deems shares in the deemed company to be held by the elected members of the local authority in their collective capacity as such. That is, the elected power board or the elected city council holds the shares in the deemed company. An energy trading operator will therefore be able to carry forward losses under section 188 regardless of any change in the Councillors comprising a Council.

Section 197C(4)(b) deems any activity or undertaking carried on by an "energy trading operator" to be a business activity. This is intended to ensure that an "energy trading operator" will be subject to income tax on its financial surplus in the same way a private sector taxpayer is taxable on its profits, and that the "energy trading operator's" assessable income is calculated in the same way as taxable business profits.

Section 197C(4)(c) deems an "energy trading operator" that is not an "energy supply authority" to be a person separate from every local authority. That is, a city council in its capacity as a supplier of energy is not, for income tax purposes, the same person as that same city council in its capacity as a transport operator. Thus, if a city council's municipal electricity department supplies energy to the city council's transport department it is, for income tax purposes, supplying the energy to a shareholder in the deemed company that is the energy trading operator.

Section 197C(4)(d) deems an energy trading operator not to be a local authority. The chief effect of this is that the energy trading operator will not get the benefit of the income tax exemption provided in section 61(2) of the principal Act for local authorities.

Section 197C(5) provides that any activity or undertaking that is carried on by a "specified local authority", if it is an activity of a type carried on by an "energy supply operator", is deemed to be carried on by the specified local authority in its capacity as a supplier of energy (that is, the activity is subject to income tax). The proviso to section 197C(5), however, provides an exception: if the activity is not carried on in connection with the supply of energy it is not subject to income tax.

Thus, if a city council contracts out the use of excess computer capacity from its municipal electricity department, that activity is a taxable part of its activities as a supplier of energy. However, if the same city council contracts out the use of excess computer capacity from its treasury department, that will not be a taxable activity.

Section 197C(6) provides that, notwithstanding the proviso to section 197C(5) (discussed above), the following activities are deemed to be carried on by a local authority in its capacity as a supplier of energy (if it is a supplier of energy):

  • Sales, installation and servicing of appliances etc.
  • Energy generation, extraction etc.

Section 197C(7) contains a series of deeming provisions relating to the income of "energy trading operators". Section 197C(7)(a) provides that any income derived from the investment of funds that have arisen -

  1. From the "energy trading operator's" activities and whether before or after the commencement of taxation, or
  2. Otherwise as assessable income of the "energy trading operator" (e.g. investment income)

is to be included in the assessable income of the "energy trading operator". This section effectively applies to "specified local authorities" - if the surplus funds of a "specified local authority's" MED are invested and managed by the "specified local authority's" treasury department the income relating to those surplus funds is included in the "specified local authority's" assessable income from the supply of energy.

Section 197C(7)(b) provides an exception to section 197C(7)(a). To the extent that a "specified local authority" derives income from the investment of funds that have been passed by the deemed "energy trading operator" company to the "specified local authority" as a virtual distribution of profits, that income is not taxable. This would require some documentation of the passing of funds from the deemed company to the local authority.

Section 197C(7)(c) includes in an "energy trading operator's" assessable income any income from any sinking fund in relation to the debt or assets of the energy trading operator.

Section 197C(7)(d) provides that rates levied by an "energy trading operator" are exempt from income tax except to the extent that the rate is levied to meet any tax-deductible expenditure of the "energy trading operator".

Section 197C(8) prevents the Commissioner from treating any company, the shares in which are held by an "energy trading operator", as a member of a group of companies with the "energy trading operator" if the activities of the company are not integral to the activities of the energy trading operator. This will prevent the provisions of section 191 of the principal Act, which relate to loss offsets among companies in a group, from applying in such cases.

Section 197C(9) deals with "consumer contributions" and Rural Electrical Reticulation Council (RERC) subsidies under section 45(1) or Section 45(5)(a) of the Electricity Act 1968. Any "consumer contribution" or RERC subsidy received in relation to an uneconomic supply, and the related expenditure, is to be dealt with in terms of section 169 of the principal Act. This means that the "capital contribution" and the RERC subsidy will be deducted from the expenditure and only the balance will be allowed as a tax deduction or as a basis for depreciation.

Section 197C(10) and (11) deal with mergers of "energy trading operators" where the merger is not effected by way of a sale and purchase or similar agreement. For the purposes of the principal Act the new "energy trading operator" is deemed to have done all things that were done, and to have suffered all things that were suffered, by its predecessors. This will ensure that the assets (including depreciable assets and trading stock) and liabilities of the predecessor "energy trading operators" are brought to account by the new "energy trading operator" at book value, that the new "energy trading operator" must meet any liability of the predecessor "energy trading operators" under the principal Act and that it will have the rights of objection that its predecessors would have had. This legislation is necessary because in some cases a merger of "energy supply authorities" in the accepted commercial sense is not possible (there may be no owner to buy an "energy supply authority" from).

A merger of "energy trading operators" effected by way of a sale and purchase or similar agreement will be subject to the same treatment as any similar merger of private sector companies.

Section 197C(12) deals with assets of a "specified local authority". It provides that transfers of assets from energy supply use to other uses, and vice versa, shall be brought to account by the specified local authority for income tax purposes at market value. This accords with the generally accepted view of the income tax treatment of transfers of assets from one business of a taxpayer to another business of the same taxpayer.

Section 197C(13) provides that, subject to subsection (14), any asset owned by an "energy trading operator" at the commencement of section 197C is to be brought to account for income tax depreciation purposes at tax written-down book value based on the historical cost of the asset.

Section 197C(14) allows the Commissioner to determine an appropriate book value in cases where the cost price of an energy trading operator's asset cannot be ascertained.

Section 197C(15) provides that section 197C shall apply from the commencement of the 1987/88 income tax year. For all known "energy trading operators" this is the year commencing on 1 April 1987.

C. Harbour Boards - Section 197D

Section 197D deals with the taxation of harbour boards.

For the purposes of section 197D a "harbour board" means a harbour board constituted in the manner prescribed in section 15(2) of the Harbours Act 1950. These are the separately constituted harbour boards, and they currently do not include the Crown in its capacity as a harbour board or any territorial local authority in its capacity as a harbour board.

Section 197D(3) contains two deeming provisions. Section 197D(3)(a) deems a harbour board to be a company. It also deems shares in the deemed company to be held by the elected members of the local authority in their collective capacity as such. That is, the elected harbour board holds the shares in the deemed company. This provision ensures that a harbour board can carry forward losses under section 188, notwithstanding changes in the members comprising the harbour board.

Section 197D(3)(b) deems any activity or undertaking carried on by a harbour board to be a business activity. This is intended to ensure that a harbour board will be subject to income tax on its financial surplus in the same way a private sector taxpayer is taxable on its profits, and that the harbour board's assessable income is calculated in the same way as taxable business profits. It will also ensure that all receipts and all expenditure and losses of a harbour board will be included in the calculation of its assessable income, subject to any specific provisions of the Income Tax Act.

Section 197D(4) contains a series of deeming provisions relating to the income of harbour boards.

Section 197D(4)(a) includes in a harbour board's assessable income any income from any sinking fund in relation to its debt or assets.

Section 197D(4)(b) provides that rates levied by a harbour board are exempt from income tax except to the extent that the rate is levied to meet any tax-deductible expenditure of the harbour board.

Section 197D(5) provides that any asset owned by a harbour board at the commencement of taxation is to be brought to account for income tax depreciation purposes at tax written-down book value based on the historical cost of the asset.

Section 197D(6) allows the Commissioner to determine on appropriate book value in cases where the cost price of a harbour board's assets cannot be ascertained.

Section 197D(7) provides that section 197D shall apply from the beginning of the harbour boards' 1987/88 income tax year. For all known harbour boards this is the year commencing 1 October 1987.

Subsections (2) and (3) of section 33 of the Amendment Act amend section 67(2) of the Income Tax Act by adding two new paragraphs which exclude state-owned enterprises and harbour boards from the income tax exemption for local and public authorities.

Subsection (2), which applies to state-owned enterprises, has effect from 1 April 1987. Subsection (3) is consequential upon the new section 197D (harbour boards) and has effect from the same date as section 197D.

Subsection (4) adds a new Fourteenth Schedule to the Income Tax Act.

The Fourteenth Schedule is referred to in section 197B(2) and lists the "state-owned enterprises" for the purposes of the Income Tax Act. Other state-owned enterprises may be added to the list from time to time.

Files

The income tax files of all state-owned enterprises, energy trading operators, and harbour boards will be held on the Special Companies Section in Wellington District Office. All income tax returns and related correspondence should be referred to that Section.

Section 34 - Insurance effected with persons not carrying on business in New Zealand

Section 34 amends section 209 of the Income Tax Act to ensure that any insurance premium or any other payment that is a reimbursement of an insurance premium paid to any person not carrying on business in New Zealand by -

  1. any person resident in New Zealand, or
  2. any person not resident in New Zealand in respect of assets or risks situated in New Zealand,

is subject to tax in terms of section 209.

The purpose of the amendment is primarily to ensure that section 209 applies to insurance premiums or reimbursements of insurance premiums paid to non-residents in respect of assets or risks situated in New Zealand. However, the amendment also clarifies the application of section 209 in relation to insurance premiums paid offshore by persons resident in New Zealand.

Examples of some situations which would be covered by section 209 are:

  1. A branch of a non-resident company makes reimbursing payments to its head office. Included in the payments is a reimbursement of a charge for premiums paid to a non-resident insurer in respect of the branch's assets in New Zealand. The reimbursement of the insurance premium is subject to tax under section 209.
  2. Insurance premiums or reimbursements of insurance premiums paid to non-resident insurers in respect of assets used in New Zealand by non-resident contractors operating here.
  3. Insurance premiums paid to non-resident insurers by a New Zealand resident company in respect of assets situated overseas owned by that company.
  4. Insurance premiums paid on goods exported from New Zealand on a c.i.f. quotation or imported into New Zealand f.o.b.

Section 35

Special Partnerships

A special partnership is formed under Part II of the Partnership Act 1908 and consists of two types of partners, special and general partners.

  • Special partners are not permitted to take an active part in the business operation and are only liable for partnership debts to the extent of the capital they are required to contribute.
  • General partners are treated in the same way as partners in ordinary partnerships in that they are jointly and severally responsible for any debt of the partnership.

The general partner carries on the business activity of the partnership while the special partners contribute, to the common stock, specific sums in money as capital.

The main differences between a special partnership and an ordinary partnership are as follows:

  • a general partner is the only partner that is liable for the partnership debts and is also the only one that can contract on behalf of the partnership.
  • the special partnership can have more than 25 members.
  • it may only operate for a maximum period of 7 years (however the partnership can continue to operate by re-registering in the High Court, on the expiration of the 7 year period or any shorter period).

Advantages of a Special Partnership

Special partners essentially enjoy a limited liability status and when combined with a general partner which may be a limited liability company this gives the special partnership the same protection as to liability that a limited liability company enjoys. The limited liability enables the investors to invest their money in high risk ventures, e.g., film making, mussel farming, horticulture, horse-breeding, yacht-building, exporting and importing businesses, yet not be liable for any debt of the partnership in excess of the capital contributed. Prior to this amendment special partnerships also enjoyed certain tax advantages over other kinds of investment vehicle. These advantages are graphically demonstrated when comparing a special partnership with a limited liability company:

  1. The assessable income of the business is only taxed once, i.e., in the hands of the partners, whereas a company's taxable income is taxed twice; first as the company's income and second as the shareholder's income in the form of dividends.
  2. The losses were deductible by the individual partners against income derived from other sources, thus reducing their tax liability. If a company makes a loss the shareholders do not gain such a benefit.
  3. The partners could claim deductions for expenditure incurred by the partnership in excess of their capital contribution.

A taxpayer on the maximum marginal tax rate wishing to reduce his tax liability found joining special partnerships most attractive. The special partnership structure allowed investment in high risk ventures solely to obtain a tax loss. The knowledge that their own financial loss would be no greater than the amount of capital introduced and that they may obtain a tax saving encouraged taxpayers to form special partnerships. The type of ventures entered into by special partnerships tend to take at least three to four years before a profit is made. In the interim period the investor got a return for his investment in the form of tax losses, such losses being offset against his other income and subsequently reducing his taxation liability.

The Amendment

In the 1986 Budget the Minister of Finance announced that the Income Tax Act was to be amended to remove the taxation advantages for investors in special partnerships. A brief overview of the new regime is as follows:

  1. The losses of a special partnership are to be contained within the partnership and expenditure comprising the loss will not be deductible from other income of the individual partners,
  2. The losses may be set off in future income years against any profit made by the partnership,
  3. The carry-forward of losses will be subject to a 40 percent common-ownership test,
  4. The new regime will apply to the partners in any partnership:
    • registered on or after 1 August 1986.
    • registered prior to 1 August 1986 where that partnership obtains additional capital after that date from any source, other than capital obtained:
  5. from any partner who was committed to provide further capital to the partnership in instalments; or
  6. prior to 1 April 1987 which was required to meet any commitment involving the incurring of expenditure by the partnership under an unconditional contract entered into before 1 August 1986 by the general partner and notwithstanding any change in the composition of the special partnership.
    • formed in any other country under legislation similar to Part II of the Partnership Act.

An Analysis of Section 35:

  • Subsection (1) introduces a new section (section 211B) into the Income Tax Act.
  • Subsection (2) provides the application date for the new regime.

New section 211B is divided into 13 subsections.

Subsection (1) defines certain terms for the purposes of this section.

Subsection (2) stipulates the special partnerships to which the section will apply.

Subsection (3) provides that no deduction shall be allowed and no income shall be derived by the partners from the partnership if it sustains a loss.

Subsection (4) provides for the loss carry forward and the loss offset.

Subsection (5) provides that the loss offset must be in the order that losses were incurred.

Subsection (6) sets out the 40 percent common holding test.

Subsection (7) ensures that to the extent that any income of a partnership is reduced by any loss the partners will not be taxable on that income.

Subsection (8) covers the situation where there is cancellation or remission of a debt which has been taken into account in calculating any partnership loss which has been carried forward.

Subsection (9) provides that should a special partnership later repay a remitted or cancelled debt a deduction to the partners is allowed in the income year in which the payment is made.

Subsection (10) sets out for the purposes of subsection (8) the circumstances in which a debt is deemed to have been remitted or cancelled.

Subsection (11) authorises the Commissioner to determine the amount of the partnership loss sustained by the partnership.

Subsection (12) provides that if a special partnership first registered prior to 1 August 1986 is renewed or continued in conformity with the appropriate provision in the Partnership Act then for the purposes of section 211B that renewed partnership is regarded as having been first registered prior 1 August 1986 for the purposes of subsection (2) of the section.

Subsection (13) provides that a reference to an income year shall, where the partnership furnishes a return of income for an accounting year with an annual balance date other than 31 March under Section 15 of the Act be deemed to be a reference to the accounting year corresponding with that income year.

Subsection (2) of section 35 is the application section and provides that section 211B shall apply with respect to the tax on income derived in the income year commencing on 1 April 1986 and in every subsequent year.

Explanation of Section 211B

Subsection (1)

Subsection (1) defines the following terms for the purposes of the section:

  • "Additional capital, in relation to a special partnership means -
    • any capital contributed by a partner:
    • any capital used, or to be used, for the acquisition of any asset, other than trading stock, for use in the business of the partnership.

Capital is a more expansive term than simply money. For example the introduction by a partner of his property other than money may constitute a capital contribution for the purposes of this section. It is not possible to give a precise test of what actually constitutes a capital contribution. It is a question of mixed law and fact which must be determined taking into account the nature and form of the property contributed and the use or value of that property to the partnership.

This term is important in that a special partnership registered prior to 1 August 1986 is not subject to the new regime unless there is an injection of additional capital from any source on or after 1 August 1986.

"Allowable deduction" means a deduction that is allowable (but for this section) under the provisions of this Act to the partners for any outgoing (a defined term) of the partnership.

The definition takes into account the possibility that one or more of the partners is a non-taxpayer. When deciding whether an outgoing is an allowable deduction it is the nature of the outgoing that is crucial, not the nature of the partner, because the definition treats all partners as if they were taxpayers resident in New Zealand.

"Allowance" means an amount for which a deduction is allowable under this Act other than any amount of expenditure or loss.

An example of an allowance is depreciation. Under section 108 of the Income Tax Act the Commissioner may allow such deduction as he thinks fit for the depreciation of certain assets.

"Income" means the gross income derived by the partners from the business or businesses of the partnership.

For the purposes of this definition gross income is all the items and amounts that under the provisions of the Income Tax Act are included in or are deemed to be income or assessable income. Note that the term "gross" is already a defined term in section 2 of the Income Tax Act and means, in relation to an amount, that amount without any deduction whatsoever from that amount.

"Net income" means the residue of the income of the partnership after deducting the allowable deductions of the partnership.

For the purposes of this definition the terms "income" and "allowable deductions" are defined separately in subsection (1). The net income is calculated as if the partnership were a taxpayer resident in New Zealand incurring the "outgoings" and deriving the "income" of the partners in carrying on the business or the businesses of the partnership.

"Outgoing" means any expenditure, loss, or allowance.

"Partnership loss" means the excess (if any) of the allowable deductions of the partnership for the income year over the income of the partnership for the income year.

This loss is calculated as if the partnership were a taxpayer and resident in New Zealand incurring the outgoings and deriving the income of the partners in carrying on the business or businesses of the partnership. The general nature of a partnership presented some special problems in drafting section 211B. A partnership is a legal relationship between two or more persons and is not a separate entity. Nothing exists apart from the partners and it is the partners who derive the income and incur the outgoings of the partnership. The objective of section 211B, however, is to prevent individual partners from deducting from their other income the expenditure comprising any loss sustained by the partnership. The definitions of "net income" and "partnership loss" therefore require the special partnership to be regarded as deriving the income and incurring the outgoings of the partners for the purposes of calculating the net income or loss of the partnership. It is, of course, only the income derived or the outgoings incurred in carrying on the business or businesses of the partnership that are taken into account.

"Registered", in relation to a special partnership formed in a country or territory outside New Zealand, means registered in that country or territory by a procedure similar or equivalent to the registration of a special partnership under Part II of the Partnership Act 1908.

"Special partnership" means

  • a special partnership registered under Part II of the Partnership Act 1908:
  • an association of persons registered as a special partnership under Part II of the Partnership Act 1908:
  • in relation to any country or territory outside New Zealand, a partnership or an association of persons formed in that country or territory which, if formed in New Zealand, would be registered as a special partnership under Part II of the Partnership Act 1908.

This definition includes an association of persons which although registered as a special partnership may legally not conform with the provisions of Part II of the Partnership Act 1908. This definition does not include associations of persons that never intended to operate as a special partnership. Rather it includes those partnerships which have been registered under Part II of the Partnership Act, but which, because of some technical noncompliance with the provisions of the Partnership Act, may argue that they are not special partnerships and, therefore, are not subject to section 211B.

Subsection (2)

Subsection (2) stipulates which special partnerships are within section 211B.

New special partnerships

The section applies to all special partnerships registered on or after 1 August 1986 (i.e., the day after the Budget announcement). There is no exception to this stipulation. All new special partnerships are bound by this new section.

Existing special partnerships

The section applies to existing special partnerships (i.e., those special partnerships registered prior to 1 August 1986) where there is an injection of "additional capital" into the partnership from any source on or after 1 August 1986. There are, however, two exceptions to this. The first exception is where the partnership obtains capital

  • from any partner who, prior to 1 August 1986, became committed to provide further capital to the partnership in instalments.

The second exception is where the partnership obtains capital

  • prior to 1 April 1987 in order to meet any commitment involving the incurring of expenditure by the partnership, under an unconditional contract entered into before 1 August 1986 by or on behalf of a general partner acting in the capacity of a general partner for the partnership, notwithstanding any change in the composition of the partnership.

The main points to notice about this subsection are that:

  • If a special partnership is registered on or after 1 August 1986 then that partnership is subject to the new regime in this section.
  • If a special partnership is registered prior 1 August 1986 then -
    • (a) If there has not been an injection of additional capital into the partnership on or after 1 August 1986 the partners in the partnership follow the tax law as it existed at budget night, i.e., the partners are regarded as deriving the income and incurring the outgoings of the partnership.
    • (b) If there is an injection of additional capital into the partnership on or after 1 August 1986 from any source whatsoever that partnership will be subject to the new regime. This condition is mitigated by providing that certain injections of additional capital will not cause the partnership to be subject to the new regime. For example, where a partner who joined a partnership prior 1 August 1986 was committed to provide capital to the partnership in annual instalments then when the partner makes his instalment payment after 1 August 1986 that payment will not be regarded as an injection of additional capital. Similarly, if the special partnership needs to incur expenditure due to an unconditional contract that it entered into before 1 August 1986 then the injection of capital to satisfy that requirement does not constitute an injection of additional capital, provided the capital to meet the expenditure is contributed before 1 April 1987.
    • For the purposes of this subsection a partnership that was first registered prior to 1 August 1986 and which reregisters for a further period is regarded as having been registered prior to 1 August 1986. (see subsection (12)).

Subsection (3) - Loss Containments

Subsection (3) is the operative provision of this new regime. It provides that where a special partnership sustains a partnership loss,

  1. no deduction shall be allowed to any partner for any outgoing (i.e., any expenditure, loss or allowance) of the partnership; and
  2. the partners are deemed not to have derived the income of the partnership.

This subsection is the loss containment provision of the section. Its effect is to deny to the partners in the partnership a deduction for any outgoing of the partnership. It also prevents any item of income of the partnership which would otherwise be derived by a partner from being included in the assessable income of the partner.

It is important to note that this subsection applies only "where in any income year a special partnership sustains a partnership loss". If the special partnership does not sustain a loss then it is not subject to loss containment, (since there is no loss to contain). A special partnership which does not make a loss is treated for tax purposes like any other partnership.

Subsection (4) - Loss Carry Forward Provisions

This subsection provides for the carry forward of special partnership losses and the set off of those losses against subsequent net income of the partnership.

  • The special partnership must first sustain a partnership loss in an income year. (Subsection (11) gives the Commissioner the power to determine the amount of the partnership loss sustained by a partnership);
  • The special partnership is entitled to claim that any partnership loss be carried forward.
  • The loss must be carried forward to the next income year following the year in which the loss was incurred and deducted against the "net income" of the partnership (if any) for that year, so far as that income extends. This provision is similar to that for the carry forward of losses for companies in section 188 of the Income Tax Act 1976.
  • Where the loss cannot be deducted or set off in the next income year or the loss exceeds the net income for that year, then the loss or the excess may be carried forward to the next income year to be deducted from or set off against the net income of the partnership. This process continues until all of the available losses have been deducted or set off.

Subsection (5) - Order of Set Off

This subsection is complementary to subsection (4). It provides that where partnership losses incurred in 2 or more income years are carried forward in accordance with the provisions of this section those losses shall be deducted or set off in the same order as those losses were incurred.

Subsection (6) - Common Partners Test

This subsection provides that a special partnership is not allowed to carry forward the claimed loss unless it conforms to a 40 percent common partners requirement.

If a special partnership claims to carry forward the whole or part of a partnership loss to a later income year the claim shall not be allowed unless the Commissioner is satisfied that, at all times during the period specified in the subsection, not less than 40 percent of the certified capital of the partnership was held directly or indirectly by or on behalf of the same partners.

The specified period is the period commencing with the year of loss and ending with the end of the later income year.

The requirement is that at least 40 percent of the certified capital of the partnership must be held directly or indirectly by or on behalf of the same partners. If a special partnership does not satisfy this requirement then the partnership is not entitled to carry forward its accumulated losses. Partnership losses are never available to be set off against the income of any of the partners.

Subsection (7) - Treatment of Partners

This subsection provides that where a partnership loss is carried forward and subsequently deducted or set off against the net income of the special partnership the partners in the partnership shall be deemed not have derived that income to the extent to which it has been deducted or set off.

This subsection is required because of the nature of a special partnership. Partnerships are merely a relationship between the constituent members and as such are not separate legal entities. So even if a partnership loss was set off against the income of a partnership under section 211B the partners would nonetheless derive the net income of the partnership and be taxable on it. This subsection therefore ensures that the partners do not derive such net income.

Subsection (8) - Remission of Debts

This subsection makes provision to cover the situation where there is a cancellation or remission of a debt which has been taken into account in calculating any loss which has been carried forward. That loss is to be reduced by the amount of the debt remitted or cancelled. The provision explicitly states that, to give effect to the subsection, the Commissioner may at any time, alter any assessment notwithstanding anything in section 25 of the Tax Act. Thus there is no time limit within which the Commissioner may issue an amended assessment making any such adjustment.

Subsection (9) - Deduction to Partners

This subsection is complementary to subsection (8). It provides that where a special partnership pays an amount in respect of a debt to which subsection (8) applies, the amount paid shall be allowed as a deduction to the partners in the income year in which the payment is made. The deduction is allowed to the partners, rather than the partnership, because it is the partners who incur the expenditure.

The deduction is limited to the amount: of the debt to which the payment relates. Thus it excludes any excess that may have been paid in respect of the debt.

This subsection allows a deduction to the partners in the income year in which the payment is made. However it is important to note that this subsection is subject to subsection (3) of this section. This means that if in the income year in which the payment is made the special partnership sustains a partnership loss then the partners' deduction is not available to the partners because if the special partnership sustains a loss then the loss containment provisions of subsection (3) apply. The deduction permitted by this subsection is treated the same as any other outgoing of the partnership where the partnership sustains a partnership loss.

Subsection (10) - Remission or Cancellation of Debt

This subsection is complementary to subsection (8) and describes the circumstances in which a debt is deemed to have been remitted or cancelled:

  • a debt is remitted where the partners are discharged from liability for the debt without fully adequate consideration in money or money's worth;
  • a debt is cancelled where the partners are released from liability by the operation of the Bankruptcy Act, Insolvency Act, the Companies Act or by any deed of composition with the partnership's creditors;
  • a debt is cancelled where it has become irrecoverable or unenforceable by action through lapse of time.

Subsection (11) - Notice of Loss Determination

This section provides that the Commissioner shall determine the amount of the partnership loss sustained by a special partnership.

The determination of loss by the Commissioner is made where

  • a special partnership has furnished a return in respect of any income year and,
  • the return shows, or purports to show, that the partnership has sustained a partnership loss in the income year; or
  • notwithstanding what the return shows, the Commissioner ascertains that the partnership has sustained a loss.

Any such determination is a determination of loss for the purposes of sections 19 and 29 of the principal Act as if the special partnership were a taxpayer. Hence the Commissioner must issue a notice of determination of loss to a special partnership and the partnership will be able to object to the determination.

Subsection (12) - Partnership Renewal

This subsection applies to any special partnership registered prior 1 August 1986. Where such a partnership is renewed or continued in conformity with section 58 of the Partnership Act 1908 beyond the time originally agreed on for the duration of the partnership the partnership shall be regarded, for the purposes of subsection (2) of this section, as having been registered prior 1 August 1986.

This subsection enables a special partnership registered prior 1 August 1986 to continue to be treated as an existing partnership if it is renewed. It is not considered crucial that the partnership maintain the same composition of partners for the purposes of this requirement. However it is important to remember that if the partnership should become subject to the loss containment provisions of this section then the composition of the partners is important (see details of subsection (6) above).

Subsection (13) - Balance Dates

This subsection provides that every reference in this section to an income year shall, when the partnership furnishes a return of income for an accounting year other than 31 March, be deemed to be a reference to the accounting year corresponding with that income year.

Subsection (2) of Section 35 - Application

This is the application provision.

Section 211B shall apply with respect to the tax on income derived in the income year commencing 1 April 1986 and in every subsequent year.

1987 Tax Returns for partners in some special partnerships may therefore reflect the new regime set out in section 211B.

Section 36: Application of Excess Retention Tax

Section 36 amends section 248 of the principal Act to ensure that a New Zealand privately controlled investment company whose income is derived exclusively or principally from the Cook Islands or a company in respect of which an Order in Council has been made under section 62 of the principal Act, is no longer specifically exempt from the application of Part V of the Act.

The amendment is made in conjunction to the amendments in Sections (22) and (23). Part V of the Act imposes excess retention tax upon certain privately controlled investment companies which have made insufficient distributions of income. Section 248 of the Act exempts certain classes of companies in relation to the tax and this clause removes the exemption in respect of income derived exclusively or principally from the Cook Islands or in respect of income for which an Order in Council has been made under section 62 of the Act.

Section 37 - Value of Fringe Benefit - Subsidised Transport Benefits

Section 37 amends section 336O of the principal Act by substituting subsection (3), the method for valuing subsidised transport benefits provided to employees of transport operators.

Prior to this amendment, which has effect from the quarter commencing 1 April 1987, the value of the benefit was 25 percent of the highest priced fare for that class of travel provided. However, where the employer purchased a fare from another operator for the benefit of an employee that benefit was also valued at 25 percent regardless of the amount that the employer had actually paid for that fare.

This amendment replaces the method of valuing subsidised transport benefits and provides that such benefits are to be valued at the greater of:

  • 25 percent of the highest priced fare for that class of travel; or
  • the price paid or payable by the employer for the transportation being provided to the employee.

It is to be noted that this method of valuing only applies to subsidised transport benefits provided to employees of transport operators (as defined in section 336N) and not to benefits provided to employees of travel agents. Travel benefits from travel agents are to be valued in accordance with section 336O(5) at the price paid or payable by the employer for the benefit being provided.

Section 38 - Regulations - Prescribed Rate of Interest

Section 38 amends section 336W of the principal Act to allow for regulations to set the fringe benefit tax prescribed rate of interest quarterly as opposed to annually.

The prescribed rate of interest is used to calculate the value of low interest loan benefits provided to employees. Where the interest rate applicable to a loan is less than the prescribed rate a liability for fringe benefit tax arises.

Prior to this amendment the prescribed rate of interest could only be set annually with effect from 1 April. If there had been any change to the market interest rates after 1 April there was no means of adjusting that rate to reflect upon that change until the following year. If no change to the rate was made prior to 1 April, the rate applicable to the previous year remained as the prescribed rate until the following 31 March.

This amendment enables the regulations to be made at quarterly intervals to change the prescribed rate to apply for the following quarter. This allows for changes to be made quarterly to reflect upon changes in the market. Where it is considered that no change is necessary the rate applicable to the previous quarter will continue to apply.

The amendment to section 336W requires that any change to the prescribed rate of interest is to be made by regulation at least one month prior to the commencement of the following quarter. This is intended to provide the employers with sufficient time in which to adjust their records to reflect upon the changes made. Once the regulation is made an advertisement will appear in the New Zealand Gazette and the press will be advised. An item will also appear in a public information bulletin and all offices will be advised.

This amendment applies in respect of fringe benefits provided on or after 1 April 1987. Where a loan was provided to an employee prior to 1 April 1987 the fringe benefit is also to be valued at the new prescribed rate as it is the interest which is the benefit as opposed to the actual loan. The only exception to using the latest prescribed rate of interest is where a loan with a non-concessionary rate of interest was provided prior to 1 April 1985. In these cases the benefit is valued in accordance with the rates set out in the Income Tax (Fringe Benefit Tax, Interest on Loans) Regulations 1985.

Prior to the quarter commencing 1 April 1987 the rate will be reviewed and if it is considered necessary the rate will be altered with the change being advertised. The rate will again be reviewed prior to 1 June (being one month prior to the commencement of the following quarter) and in each subsequent quarter.

Section 39 - Payment of Provisional Tax by Instalments

This section provides for the payment of provisional tax in three equal instalments due on the 7th day of the months set out in the Eighth Schedule to the principal Act, as substituted by section 44(1) of this Amendment Act. Payments will fall due on the 7th day of the 4th, 8th, and 12th month of the taxpayer's accounting year. The schedule of new payment dates for both provisional tax and terminal tax is set out in Appendix A to this circular.

Subsection (1)

This subsection makes the following amendments to section 385 of the principal Act.

Paragraph (a) - Increases the number of provisional tax instalments from 2 to 3.

Paragraph (b) - Provides for the provisional tax payments to be made on the 7th day of the months specified in the substituted Eighth Schedule to the principal Act. The new-look Schedule now only lists the months for payment instead of the dates for payment.

Paragraph (c) - Repeals section 385(2) of the principal Act. This section provided for the three instalment option for certain taxpayers engaged in a farming or agricultural business. With the advent of three instalments for all provisional taxpayers, this provision has become obsolete.

Subsection (2)

With the repeal of section 385(2), the distinction between 2 and 3 instalment provisional taxpayers in section 385(4) also became obsolete. This section is redrafted in recognition of this fact and is substituted by this subsection.

Subsection (3)

This subsection substitutes a new paragraph (b) in section 386(2) of the principal Act. The old paragraph (b) is redrafted in order to:

  1. Recognise that there is no longer a distinction between 2 and 3 instalment taxpayers; and
  2. Provide for all 3 provisional tax instalments to be of equal amount.

Subsection (4) - First Applies to 1988 Provisional Tax

This subsection provides for the new provisional tax payment regime to first apply in respect of 1988 provisional tax.

Note: As a transitional measure the payment dates for 1988 provisional tax differ from the dates applying in respect of subsequent years. Refer to the commentary to section 44 of this Amendment Act for details.

Section 40 - Payment of Terminal Tax and Repeal of One Months Grace

This section provides for the payment of terminal tax in the 11th month of a taxpayer's accounting year for taxpayers with balance dates on or before 31 March. Other taxpayers must pay terminal tax by 7 February each year.

The section also provides for the abolition of the one month grace after the due date for payment before a 10 percent late payment penalty is imposed. This one month grace is removed in respect of both provisional and terminal tax payments.

The provisions will apply equally in respect of individuals and companies.

Subsection (1) - All Provisional Taxpayers Included

This subsection amends section 392(2) of the principal Act to provide for all payments of terminal tax to be payable on the 7th day of the month specified in the Eighth Schedule to the principal Act. Whereas the terminal tax payment dates specified in the "old" Schedule only applied in respect of companies, the new Schedule applies in respect of all taxpayers.

Subsection (2)

A definition for the expression "terminal tax" is included in section 2 of the principal Act.

Subsections (3) and (4) - Family Support Payments

These subsections make consequential amendments to section 374J of the principal Act. Section 374J relates to the payment of family support tax credits by way of instalments set off against provisional tax.

As a consequence of the new 3 provisional tax payments regime and the abolition of the one month grace before a late payment penalty is imposed, it became necessary to amend the timing that tax credits are credited against provisional taxpayer's accounts, to coincide with the new rules.

Subsection (5) - Provisional Tax Estimates

This subsection makes a consequential amendment to the estimation of assessable income provisions contained in section 387 of the principal Act to provide for the timing of such estimates to be synchronised with the new payment dates. Under the previous arrangements a taxpayer could estimate his assessable income at any time before the expiry of one month after the due date for payment of any provisional tax instalment. With the abolition of the one month grace provision, it has become necessary that estimations be made on or before the due date.

Subsections (6), (7) and (8) - Repeal of One Months Grace

These sections amend the provisions of section 398 of the principal Act to provide for the removal of the one month grace period before a late payment penalty is imposed.

The new provisions provide for the 10 percent penalty to be imposed from the day immediately following the due date. Similarly the incremental penalties are applied 6 months after the due date and every 6 months thereafter.

Subsection (9)

This subsection consequentially repeals section 32(2) of the Income Tax Amendment Act (No. 2) 1977.

Subsection (10) - Payment of Self-Employed AC Levies

Makes a consequential amendment to the Accident Compensation Act 1982. Self-employed AC levies must be paid by 7 February each year in order to coincide with the due date for payment of terminal tax for the majority of taxpayers. The one month grace for payment of AC levy is therefore withdrawn. This also applies to payments made under the Optional Scheme for which both an election must be made and a payment made by 7 February each year. However, the Optional Scheme cover year remains at 8 March to following 7 March each year.

Subsection (11) - Application

This is the application section and provides for the new payment arrangements to apply in respect of the 1987 terminal tax.

Subsection (12) - Provides for subsection (10) of this section to first apply in respect of AC levies for which the due date is 7 February 1988.

Section 41 - Relief from Additional Tax

This section amends section 413(4) of the principal Act which provides for the Minister of Finance to approve cases for remission of tax where the amount exceeds a certain limit.

The amendment increased the limit, which was last reviewed in 1977, from $1,000 to $5,000 and applies from 15 December 1986, the date this Amendment Act received the Governor-General's assent.

Section 42 - Relief in Cases of Serious Hardship

This section amends section 414(5) of the principal Act and increases the limit under which cases have to be referred to the Minister of Finance for remission of tax in cases of serious hardship, from $1,000 to $5,000.

This section will apply from 15 December 1986, the date this Act received the Governor-General's assent.

Section 43 - Publication of Names of Tax Evaders

Section 43 amends section 427 of the principal Act which requires the Commissioner to publish from time to time, in the Gazette, particulars of offenders against the Act.

The section has been amended to ensure:

  1. the names of persons convicted of aiding, abetting, or inciting tax deduction offences are published in the Gazette; and
  2. the names of persons convicted of certain offences relating to the Family Support Tax Credit scheme are published in the Gazette; and
  3. the names of persons who have penal tax imposed under section 374O of the Act (Family Support Tax Credit) are published in the Gazette.

Subsection (1) adds the words "or paragraph (ba)" to paragraph (b). This provides that the names of offenders who have been convicted of aiding, abetting, or inciting an offence under paragraph (a) or (b) of section 368(1) of this Act (tax deduction offences) or paragraph (b) of section 33(1) of the Income Tax Assessment Act 1957, shall have their names published in the Gazette.

Subsection (2) substitutes a new paragraph (ba) to section 427. It adds to the paragraph reference to any offence committed under:

  1. Section 374N(d) - makes it an offence for anyone to falsely claim to have paid any instalments of Family Support Tax Credit, and subsequently attempt to obtain a refund from the Commissioner.
  2. 374N(g) - makes it an offence for any person to -
    • A Attempt to obtain a certificate of entitlement or a tax credit by means of a false of [sic] misleading application or declaration.
    • B Give false information or mislead or attempt to mislead the Commissioner, any other officer, employer, or other person in relation to any matter which would affect a certificate of entitlement or a tax credit.
  3. 374N(k) - makes it an offence to aid or abet any other person to commit any offence under either of the above paragraphs (d) or (g).

Subsection (3) adds to paragraph (c) of section 427 reference to section 374O of the Act which imposes penal tax where any person falsely pretends to have made a payment of Family Support Tax Credit and has attempted to obtain a refund from the Commissioner for that payment or part of the payment.

Subsection (4) is the application date for the other subsections which shall apply to offences committed on or after 1 October 1986.

Section 44 - Dates for Payment of Income Tax and Provisional Tax

This section substitutes a new Eighth Schedule into the principal Act. This new Eighth Schedule - refer to Appendix A of this circular contains, for each balance date, the months for payment of provisional tax instalments and the month for payment of terminal tax.

The payments fall due on the 7th day of each month listed and apply in respect of all provisional taxpayers (i.e., companies and individuals). The new Schedule contains two separate payment schedules; one to apply for the 1987/88 income year and one to apply in respect of the 1988/89 and all subsequent years. The Schedule applying for the 1987/88 income year contains certain transitional arrangements which apply for that year only. These transitional arrangements are as follows:

  1. Taxpayers with an October balance date will have a due date for payment for the 1st instalment of 1988 provisional tax of 7 March 1987 (instead of 7 February 1987 under the new Scheme).
  2. Taxpayers with a February, March or April balance date will have a due date for payment of their 1st instalment of 1988 provisional tax of 7 September 1987 (instead of 7 June, 7 July and 7 August respectively).

Subsection (1)

This subsection substitutes the new Eighth Schedule to the principal Act.

Subsection (2)

This is the application section and provides for the new payment dates to first apply in respect of

  1. 1987 terminal tax: and
  2. 1988 provisional tax.

Appendix A

New Eighth Schedule to Principal Act

"EIGHTH SCHEDULE Sections 385, 392

MONTHS FOR PAYMENT OF INCOME TAX AND PROVISIONAL TAX

1. Months for payment of instalments of provisional tax in respect of income derived in the income year commencing on the 1st day of April 1987 under section 385 of this Act and months for payment of terminal tax in respect of income derived in the income year that commenced on the 1st day of April 1986 under section 392 of this Act -

vthe Month Preceding the Balance Date Month of Balance Date Month for payment of First Instalment of Provisional Tax Being the Month of payment of Second Instalment of Provisional Tax being the Month Preceding the Balance Date Month for payment of Third Instalment of Provisional Tax being the Month of the Balance Date Month for payment of Terminal Tax Being the First such Month Succeeding the Balance Date
OCTOBER MARCH JUNE OCTOBER SEPTEMBER
NOVEMBER MARCH JULY NOVEMBER OCTOBER
DECEMBER APRIL AUGUST DECEMBER NOVEMBER
JANUARY MAY SEPTEMBER JANUARY DECEMBER
FEBRUARY SEPTEMBER OCTOBER FEBRUARY JANUARY
MARCH SEPTEMBER NOVEMBER MARCH FEBRUARY
APRIL SEPTEMBER DECEMBER APRIL FEBRUARY
MAY SEPTEMBER JANUARY MAY FEBRUARY
JUNE OCTOBER FEBRUARY JUNE FEBRUARY
JULY NOVEMBER MARCH JULY FEBRUARY
AUGUST DECEMBER APRIL AUGUST FEBRUARY
SEPTEMBER JANUARY MAY SEPTEMBER FEBRUARY

2. Months for payment of instalments of provisional tax in respect of income derived in the income year commencing on the 1st day of April 1988 and in every subsequent income year under section 385 of this Act and months for payment of terminal tax in respect of income derived in the income year commencing on the 1st day of April 1987 and in every subsequent income year under section 392 of this Act -

Month of Balance Date Month for payment of First Instalment of Provisional Tax Being the Month Preceding the Balance Date Month of payment of Second Instalment of Provisional Tax being the Month Preceding the Balance Date Month for payment of Third Instalment of Provisional Tax being the Month of the Balance Date Month for payment of Terminal Tax Being the First such Month Succeeding the Balance Date
OCTOBER FEBRUARY JUNE OCTOBER SEPTEMBER
NOVEMBER MARCH JULY NOVEMBER OCTOBER
DECEMBER APRIL AUGUST DECEMBER NOVEMBER
JANUARY MAY SEPTEMBER JANUARY DECEMBER
FEBRUARY JUNE OCTOBER FEBRUARY JANUARY
MARCH JULY NOVEMBER MARCH FEBRUARY
APRIL AUGUST DECEMBER APRIL FEBRUARY
MAY SEPTEMBER JANUARY MAY FEBRUARY
JUNE OCTOBER FEBRUARY JUNE FEBRUARY
JULY NOVEMBER MARCH JULY FEBRUARY
AUGUST DECEMBER APRIL AUGUST FEBRUARY
SEPTEMBER JANUARY MAY SEPTEMBER FEBRUARY

3. For the purposes of clauses 1 and 2 of this Schedule, the term 'balance date'. in relation to income tax in respect of income derived by any taxpayer in any year or other period, means the date of the annual balance of the taxpayer's accounts for that year or other period, being a year or other period in respect of which the taxpayer is required by this Act to furnish a return of income".

Appendix B

Cost Price Market Value or Replacement Price

Section 86B Income Tax Act 1976

COST PRICE

1. GENERAL

The adoption of cost price as an option for livestock valuation will involve the need to analyse all farm costs so that an apportionment can be made between the cost of:

  • the animal (based on weight of meat produced)
  • the animal produce (milk, wool, velvet, etc)
  • the non-livestock activities (cropping, forestry, administration etc.)

Any person selecting cost price as the basis for valuing their livestock will therefore be required to keep very detailed and specific records.

These records must be sufficiently adequate and clear enough to enable the apportionment of costs and the determination of the cost of individual animals or batches of livestock, where they have a common cost, to be easily identified and monitored.

It will be a requirement that there is sufficient analysis and a trail record of information kept to enable the tracing of costs and other relevant data back to the prime source of information.

In addition to the cost data it will also be compulsory that a livestock register is kept. This register must contain a full record of:

  • inward and outward stock movement
  • identification marks of individual animals (or batches of animals with a common cost)
  • source or destination of stock
  • cost of stock purchased (per animal or batch)
  • estimated carcass weight of all immature inward and outward stock at time of acquisition or sale
  • estimated carcass weight of immature stock, including homebred stock, at balance date.
  • estimated weight of produce (wool, fibre, velvet) purchased on live animals.

There will also be a need for stock identification so that individual animals or animals of a specific batch can be traced. The use of ear tags is considered to be a minimum requirement.

If the Commissioner is not satisfied that the taxpayer has sufficient records to accurately determine the cost price of that specified livestock, the option to value livestock at cost shall not apply.

2. FARM COSTS

The farm costs can be broken down into:

  1. Costs specific to an activity other than meat production (e.g., cropping expenses, shearing costs, dairy shed costs). These are not included in calculating the cost of the animal.
  2. Direct farm costs:
    1. Livestock Costs:
      • Animal health (includes all costs incurred in maintaining the breeding stock).
      • Fodder.
      • Freight In (of livestock).
      • Insurance.
    2. Farm Working Expenses:
      • Plant Hire
      • Power
      • Rates
Seeds only maintenance for existing pasture, doesnot include costs in bringing land into production.
Top dressing
Wages - Permanent (Contracting costs should be included in outstanding items, e.g., shearing, cropping).
  - Casual

There is no notional wage of a self-employed farmer but there must be a wage allowance for a shareholder/employee.

If a taxpayer maintains adequate records specific costs can be charged against production costs.

(iii) Repairs and Maintenance:

  • Farm buildings
  • Fences and yards (does not include new fences)
  • Plant and machinery
  • Protective clothing
  • Tools and hardware
  • Tracks and drains (does not include new tracks or drains)
  • Water supply and irrigation (does not include new water supply or irrigation)

If a taxpayer maintains adequate records, specific costs (e.g., woolshed maintenance) can be charged against production income (e.g., wool sales).

(iv) Vehicle expenses (fuel, maintenance, registration and insurance):

  • Utility vehicles
  • Trucks
  • Tractors
  • Motorcycles

Motorcar expenses are treated as indirect farm costs - see paragraph (c) below;

(v) Depreciation:

Buildings, vehicles, plant and capitalised development expenditure.

If a taxpayer maintains adequate records, specific depreciation (e.g., dairyshed plant) can be charged against production income (e.g., milk sales).

(c) Indirect farm costs - These are administration costs which are not to be included in the calculation of livestock cost:

  • Motorcar expenses and depreciation
  • Farm insurance (not elsewhere included)
  • Interest
  • Accounting
  • Legal
  • Farm advisory
  • General
  • Rent

3. APPORTIONMENT OF DIRECT FARM COSTS BETWEEN LIVESTOCK TYPES

The direct farm costs must be apportioned between the cost of producing the "various" types of livestock on the farm.

  • (a) Calculate direct farm costs relating to livestock valuation:
    • (i) livestock costs (excluding purchase price).
    • (ii) a portion of all direct farm costs based on land used (e.g., cash crops v livestock use). This apportionment should be on an area basis unless a taxpayer produces an otherwise acceptable basis.
  • (b) Apportion the amount allocated to livestock use between the various types of livestock (e.g., sheep, cattle, deer, goats etc) based on stock units carried at opening balance date.

The stock units are:

Livestock Stock Units
Adult sheep 1.0
Immature sheep 0.7
Breeding cows - dairy 7.0
- beef 6.0
Rising one-year cattle 4.0
Rising two-year cattle and others 5.0
Adult deer 2.0
Immature deer 1.5
Adult goats 0.7
Immature goats 0.5
Adult pigs 1.5
Immature pigs 1.0

The following example illustrates the conversion of livestock numbers to equivalent stock units.

Livestock No. on hand No. on hand
1.4.88 31.3.89
Adult sheet [sic] 1,000 1,100
Immature sheep 500 400
Rising 2-year cattle 100 100
Adult deer 150 170
Immature deer 108 120
  l,858 1,890

Total stock units at opening balance date:

Class 1.4.88 Stock Units per head Equivalent Stock Units
Adult sheep 1,000 1.0 1,000
Immature sheep 500 0.7 350
Rising 2-year cattle 100 5.0 500
Adult deer 150 2.0 300
Immature deer 108 1.5 162
    Total opening stock units 2,312

Taxpayer wants to use cost price scheme for the deer which equals 462 stock units carried on the farm.

The farm expenses are:

  1. Costs to specific activities:
    • Shearing expenses $1,360.00, Woolshed depreciation $150.00
  2. Direct farm costs:
(i) Livestock costs $3,027.00
  (excluding purchase price)  
(ii) Farm working expenses $13,402.00
(iii) Repairs and maintenance $2,245.00
(iv) Vehicle expenses $1,537.00
(v) Depreciation $821.00
  Total Direct Farm Costs $21,032.00

Direct farm costs applicable to deer =

21,032.00 x 462 = $4,202.76
2,312

4. APPORTIONMENT OF COSTS BETWEEN DUAL PRODUCTS FROM A LIVESTOCK SPECIES -

Dual products are produced by all livestock other than beef cattle and pigs (e.g., fibre and meat, milk and meat, velvet and meat). The costs must be apportioned between the production of meat and the production of the animal products on the basis of the weight of each product.

The system guidelines are:

  1. For wool and other fibre (and velvet) the weight produced for allocation purposes will be restricted to the weight sold plus or minus the net change in closing stocks on hand in an income year (weight sold minus opening stock on hand plus closing stock on hand).
  2. Milk weight will be that produced and sold during the year.
  3. The weight of meat produced will include all production from livestock up to one year of age for pigs and two years of age for all other livestock species. The calculation will be based on carcass weights and will include the following:
    1. carcass weights of immature livestock derived from killing sheets plus
    2. estimated carcass weights of all relevant classes of livestock sold live (and as recorded in the livestock register) plus
    3. estimated carcass weight of all rising one-year stock returned at closing balance plus
    4. estimated carcass weight of all rising two-year stock retained at closing balance (not pigs) minus
    5. estimated carcass weight of all stock less than two years of age (one year for pigs) purchased during the year (carcass weight estimation made at time of introduction to the farm) minus
    6. estimated carcass weight of all rising one-year stock at opening balance.
  4. This system will estimate total meat production for an income year. In the case of beef cattle, fattening steers and bulls older than two years should also have meat production estimates included in the total estimate. All estimates of carcass weights for inward and outward stock movements will be recorded in the livestock registers. Stock sold at less than one week of age will be excluded (e.g., bobby calves).
  1. (iv) Costs specific to a particular product will be allocated directly to that product (e.g., shearing to wool, dairyshed expenses to milk production).
  2. (v) All other costs allocated to a specific livestock species will then be apportioned in direct proportion to the weight of each product produced.

e.g. Number and classes of deer farmed

Class Opening Stock Closing Stock Opening Carcass weight kg/head Closing Carcass weight kg/head Number Purchased during year Carcass weight at purchase kg/head
Rising 1yr hinds 35 20 35 40 - -
Rising 1yr stags 28 30 45 40 5 25
Rising 2yr hinds 25 30 65 70 5 50
Rising 2yr(+) stags 20 40 80 85 10 40
Mixed-agehinds 145 165 N/A N/A N/A N/A
Breeding stags 5 5 N/A N/A N/A N/A
  258 290     20  
Meat Production for the Year kg
(a) Carcass weight of immature stock from killing sheets; plus 1,600  
(b) Estimated carcass weight of immature stock - live sales; plus 2,000  
(c) Carcass weight (est) of immature closing stock; minus 7,000  
(d) Carcass weight (est) of immature opening stock; minus - 5,710  
(e) Carcass weight (est) of immature purchase stock - 775  
  Net carcass weight production for year 4,615 kg  
  Plus weight of velvet produced 85 kg  
  Total production from deer 4,700 kg  

Cost of meat products

Costs apportioned to deer farming
Total weight of deer product
Thus, cost per kilogram of carcass weight = 4,206
4,700
  = $0.90/kg

5. THE LIVESTOCK IS VALUED AS FOLLOWS:

(a) Purchase mature livestock

  • These can be valued as a batch if a pen lot is purchased or as individuals. The costs assigned to livestock will be retained for the remainder of their life on the farm. The only adjustment to the value will be for deaths or sales.
  • The cost of the livestock is:
    • (i) The purchase price of the livestock plus
    • (ii) Costs incurred in delivering the animal onto the property (e.g., freight inward, quarantine fees, insurance).

(b) Purchase of immature livestock

  • The cost price of the livestock will be:
    1. Purchase price of livestock plus
    2. Costs incurred in delivering the animal on to the property plus
    3. The additional costs associated with the estimated carcass weight increase (see paragraph 4).

EXAMPLE

Taxpayer purchased 5 rising hinds for $980.00 each - delivery costs to farm was $50.00 and the estimated average carcass weight on arrival on the farm was 50kg. Weight at balance date 70kg. The cost of the livestock would be:

(i) Purchase price $980.00
(ii) Delivery costs $50.00 รท 5 = $10.00
(iii) Cost to produce increased carcass weight  
  Est Carcass Weight at balance date 70kg  
  Est Carcass Weight at purchase 50kg  
  Weight gain 20kg  
  x production cost per kg 90.0 cents kg $ 10.00
  (see paragraph 4) Cost of livestock = $1,008.00

(c) Homebred stock (first year)

  • The cost of homebred stock less than one year old at balance date will be calculated as follows:
    1. Any specified cost relating to that progeny, e.g., net cost, AI (Artificial Insemination) cost plus
    2. The average cost per kilogram of estimated carcass weight multiplied by the estimated weight of those animals, being valued, on hand at closing date plus
    3. The depreciation of breeding stock (based on book value/cost) pertaining to meat production averaged over all progeny. The depreciation rate used will be the same as the rate used for the high price stock regime. This figure is only used for calculating the cost of the offspring and is not shown in the accounts, i.e.,
  • Sheep 25%
    Cattle 20%
    Stags 20%
    Other Deer 15%
    Goats 20%
    Pigs 33 1/3%
  • (where breeding stock are bailed the bailment fee will be used in lieu of depreciation).
  • e.g., Taxpayer has natural increase of 120 Fawns which had an average closing weight of 40kg each.
  • Cost of the Fawns would be:
    Farm Total Total per Offspring
(i) Specified costs relating to production of progeny Nil Nil
(ii) Depreciation of breeding stock:
145 mixed-age hinds @ $2,000 x 15%
$43,500  
  Cost per fawn: $43,500 / 120
5 breeding stags @ $4,000 @ 20%
$4,000 $362.50
  Cost per fawn: $4,000 / 120   $33.33
(iii) Average cost of growing offspring (hinds) to 40 kg at
closing balance @ 90c/kg
N/A $36.00
  (see para (4))    
  Cost per rising l-year hind (homebred)   $431.83

(d) Homebred Stock (from first balance date till maturity)

  • Livestock are deemed to be mature at the age of two except for pigs which are mature at one year of age.
  • The costs of homebred stock are:
    1. The costs of those livestock as calculated at the closing balance of the previous year plus
    2. The estimated increase in carcass weight (multiplied by the average cost per kilogram of carcass weight) between opening balance date and, either closing balance date or the date the livestock (except pigs) turn two, whichever is earlier.
    3. e.g.
  $/head
(i) Cost of rising l-year hind at opening balance date $431.83
(ii) Cost of estimated carcass weight gain from rising l-year to rising 2-years (70kg-35kg) i.e., 35kg @ 90 cents/kg $31.50
  Cost per rising 2-year hind (homebred at rising 1-year) $463.33

(e) Captured livestock over two years of age

  • The cost of captured livestock is:
    1. The total annual recovery costs incurred divided by the number of livestock captured plus
    2. The costs incurred in transporting the animal to the farm plus
    3. Any vet or drug costs incurred on capture.

(f) Captured livestock less than two years of age

  • The cost of captured immature livestock is:
    1. Costs of capture (see paragraph (e)) plus
    2. The additional costs associated with the estimated carcass weight increase from date of arrival on the farm to balance date (see paragraph 4).

(g) Continuing cost of mature livestock

  • The cost assigned to relevant livestock at the closing balance date when they reach maturity will be retained for the remainder of their life on the farm. No depreciation will be allowed at time of sale or death.

MARKET VALUE OR REPLACEMENT PRICE

The requirement of these options will be relatively straightforward.

Market Value

The market value of livestock can be used as an alternative to cost price. Market value is the value that the livestock would be worth on the open market if they were available for sale in the normal course of business to an arms-length party at balance date.

Market value should not be reduced by any selling costs such as the cost of transport from farm to sale yards or slaughterhouse.

What will be required is a valuation certificate for each class of livestock from a competent independent valuer. The certificate must include stock numbers and either the market value or replacement price as at balance date.

Replacement Price

The replacement price of livestock is the price the taxpayer would pay at balance date for livestock of the same class and quality as the livestock on hand at that balance date which are to be valued at replacement price.

What will be required is a valuation certificate for each class of livestock from a competent independent valuer. The certificate must include stock numbers and either the market value or replacement price as at balance date.

Appendix C

Determining Real Cost of Good/Service For Income Tax Purposes

A flowchart determining real cost of good/service for income tax purposes

Larger version of image

Section 21(1) Adjustments

A flowchart determining real cost of good/service for income tax purposes - s21(1) adjustments

Larger version of image

S 21(5) Adjustments

A flowchart determining real cost of good/service for income tax purposes - s21(5) adjustments

Larger version of image