Land and Income Tax Amendment Act 1971

This commentary item was published in Public Information Bulletin Volume 65, February 1972

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Application of the Act

Sections 2 and 5 provide that except where otherwise stated the Act will apply to the 1971/72 year. This means -

• Part I which relates to land tax, applies to assessments of land tax on land held at 31 March 1971 and subsequent years.
• Part II applies to income tax on income derived during the year that commenced on 1 April 1971.

Land Tax

Section 3. The effect of this section is to "freeze" the unimproved value of land as at 31 March 1970 as the basis on which land tax on land held as at 31 March 1971 and subsequent years is to be assessed. The need for this amendment arose from the change in the land valuation system which came into force last year. Under the new system "land values" instead of unimproved values are shown on District Land Valuation Rolls.

Section 4 provides for objections to special valuations made for land tax to be referred by the Commissioner of Inland Revenue to the Valuer-General.

Income Tax

Incentive Allowances Extended

Section 6 extends the following incentives -

Incentive	New Expiry Date Ending 31 March
Special Depreciation Allowance on-
Plant and machinery, employee accommodation.	1973
New farm buildings and extensions.	1973
Private bathrooms or showers in hotels.	1973
New buildings and extensions for meat storage for export.	1975
Buildings providing tourist accommodation.	1975
Additional Depreciation on-
Expenditure on buildings to meet hygiene requirements in meat and fish export industries.	1975
Investment Allowance on-
New plant and machinery for manufacturing.	1973
New farming or agricultural plant and machinery.	1973
Plant, machinery and buildings for redevelopment projects in the West Coast.	1973
New plant and machinery for fishing.	1973
Development Expenditure-
Farming or agricultural business.	1973
Rock oyster or mussel farming.	1973
Export market and tourist promotion.	1975
Value of time spent by principal in export market development.	1975
Increased Export Incentive-	1977

Businesses Controlled by Non-Residents

Section 7 defines the term "business" for the purposes of section 20 of the tax Act as including any profession, trade, manufacture or undertaking carried on in New Zealand irrespective of whether or not it is carried on for pecuniary profit. This definitions to be used when enterprises operating in New Zealand are controlled from abroad.

Assessment of Superannuation Funds

Section 8 amends section 77 of the principal Act. It makes it clear that any superannuation fund which becomes liable for income tax is taxed in the same manner as a subsisting company.

Universal Superannuation Rebates

Section 9 increases the rebate from income tax for superannuitants to

• $58 for a full year, or
• $4.45 per pay period where payment is received for more or less than 13 pay periods.

The rebate is limited to the amount of tax payable.

Rebates to Minority Shareholders in a Group of Companies

Section 10 introduces a tax credit or rebate for minority shareholders in companies which have been assessed at higher rates of income tax under the grouping provisions of section 141 of the principal Act. The main features of the new rebate are -

• It is allowable only on application.
• The minority shareholder's proportion of the company's increased tax liability is calculated by the Department.
• This amount is then
  • included in the shareholder's assessment as a dividend. AND
  • allowed in full as a credit against income tax payable by the shareholders.

Housekeeper Exemption

Section 11 amends section 83 of the principal Act to make it clear that the exemption is not allowable to an absentee.

Donations

Section 12 extends section 84B of the principal Act to enable individuals to claim, within the overall limit of $100, an exemption for cash donations made to the Food Bank of New Zealand.

Life Insurance Exemption

Section 13 amends the exemption for life insurance and superannuation contributions in four ways -

• When a policy on the life of a taxpayer or his spouse has been assigned for the benefit of a child, a special exemption is not allowable unless the child is a dependant. This brings these policies into line with those on the life of a child.
• An instalment or part payment of a premium qualifies for a special exemption.
• An exemption is not allowable for premiums on policies assigned or mortgaged as security for borrowing money to be invested in or loaned to property syndicates made up of more than 10 persons.
• When a person is a member of the Government Superannuation Fund or of an employer-subsidised fund for part only of an income year the basic maximum exemption he can claim is $700 increased by $21 for each complete month the taxpayer was not a member. This is subject to the following two conditions -
  • The maximum overall exemption for life insurance premiums and superannuation is $950.
  • The exemption allowable for contributions to the Government Superannuation Fund or an employer-subsidised fund is not to exceed $700.

Building Society Dividends

Section 14 makes a technical amendment to ensure that Building Society dividends derived by companies continue to be treated as assessable income.

Incorrect Accounting Practices

Section 15 prescribes the adjustments to be made where profits derived from a business in previous years have been understated or overstated because of incorrect accounting practices.

Interest on Estate Duty

Section 16 specifies that interest on Estate Duty is not an allowable deduction. This confirms existing practice.

Special Depreciation

Section 17 amends the definition of "plant or machinery" in section 114A of the principal Act. An effect of the amendment is that leased cars will no longer qualify for the special depreciation allowance. Rental service vehicles, taxi cabs or buses will continue to qualify.

Gifts by Companies

Section 18 relates to gifts made to approved educational and research institutes. The change made is that a deduction of up to $1,000 is allowable in any year regardless of the assessable income derived by the donor company.

Misappropriation of Funds

Section 19 inserts a new section 129CE in the principal Act. The section allows a deduction of a payment made by an innocent partner to a third person whose funds have been misappropriated by another partner, where there was a legal liability to make good the loss.

A new section 129CF is inserted by section 20. Previously losses due to embezzlement or misappropriation by ordinary employees were generally deductible but such losses were not deductible where the employee had a substantial degree of control or management of the taxpayer's business. The new section 129CF authorises a deduction for the latter losses.

Offsetting of Company Losses Against Subsequent Profits

Section 21 extends section 137 of the principal Act to include -

• Companies with no paid-up capital, and
• Organisations, such as incorporated societies,

which are defined as companies for income tax purposes and which do not have share capital.

The section also contains provisions designed to combat "trafficking" in loss companies.

Grouping of Companies

Section 22 amends section 141 to -

• Exclude from the grouping provisions any company which is declared by the Minister of Finance not to be a proprietary company,
• Extend the existing provisions relating to losses to include circumstances where all or some of the companies in a group do not have paid-up capital or do not have share capital.

Convertible Notes

Section 23 extends the deduction allowable for interest on convertible notes to all New Zealand companies. The amendment applies to note issues made on or after 11 June 1971 provided the notes are required to be converted within 5 years.

Assessment of Life Insurance Companies

Section 24 provides that the special basis of assessment of life insurance companies only applies to those companies that distribute the greater portion of their surplus funds to policy holders by way of reversionary bonuses.

Property Syndicates

Section 25 inserts a new section 153BB into the principal Act. It makes special provision for associations engaged in acquiring, holding or dealing in real property.

The main features of the new section are -

• It applies to unincorporated associations with more than 10 members formed for the main purpose of holding real property for investment or re-sale,
• These associations are treated as companies for income tax purposes,
• Interest paid to members will not be deductible and together with any other distributions to members will be treated as a dividend,
• Associations formed before 3 September 1971 will generally not be affected. Certain other specified associations are also excluded from the section.

Mining Companies

Section 26 contains new provisions relating to companies engaged in mining for specified minerals or for petroleum. The main changes introduced by the new provisions are -

• In future the assessable income of mining companies will be calculated on a factual income basis.
• Exploration and development costs up to a defined stage in production will be deductible as and when they are incurred.
• Income from mining will be assessed at a concessional rate which is 1/3 less than the rate applicable to ordinary companies.

Dependent Relative Exemption

Section 30 increases from $700 to $850 the amount a dependent relative may earn before the taxpayer's right to claim an exemption in his PAYE tax code is affected.

This section applies from 1 April 1972.

Amendments and Repeals

Sections 28, 31 and 32 provide for consequential amendments and repeal spent provisions.