This Act contains numerous amendments to the main Tax Act, many arising from the recommendations of the 1967 Taxation Review Committee.
These expressions are also defined in the section.
One of the other circumstances in which the term "associated persons" is relevant deals with stock options - section 14. The other, section 26, deals with the application of the proprietary provisions to a limited type of overseas subsidiary.
- Any two companies which have 50 percent common shareholding.
- Any two companies which are controlled by the same persons.
- A company and any shareholder (not a company) who holds 25 percent of the paid–up capital of that company.
- Any two persons who are relatives.
- A partnership and any person who is an associated person of any partner (e.g., a relative).
Income From Business Controlled By Non–Residents
Section 20 of the main Act allows the Commissioner to determine the taxable income when a business controlled by non–residents appears to produce insufficient taxable income.
Section 6 now provides that the Commissioner is not to apply these provisions if the income in question is already returned for New Zealand tax purposes by another taxpayer.
Non–Resident Investment Companies
Limitation on Tax Payable
Section 7 provides for tax concessions in respect of interest and dividends derived by non–resident investment companies (see reference in section 3 above) from "development projects". In future, the tax on interest derived by non–resident investment companies from a development project will be limited to –
- the rate of tax payable in the country of residence of the non–resident investment company, or
- 15% of the gross interest provided the two parties to the loan agreement are not associated persons.
Section 8 continues the rebate granted to non–resident investment companies, of the additional 5% tax payable by. non–resident companies.
Tax Concessions On Special Development Projects
Section 9 provides for certain tax concessions in respect of business profits derived by overseas enterprises engaged in New Zealand in processing minerals to the primary metal stage and whose undertakings have been declared "special development projects" for the purposes of this section.
Rebate To Avoid Extra Tax On Back Pay
Section 10 grants a tax rebate when pay for an earlier income year is included as income of a current year and is received as the result of an order of the Court of Arbitration or other wage fixing tribunal.
Donations To Sir Walter Nash Vietnam Appeal Allowable As A Special Exemption
Section 11. Donations to the appeal will qualify for a special exemption up to the overall limit of $50 for charitable donations.
Interest Exemption For Non–Residents
Section 12 withdraws the $60 interest exemption from non–residents. The change applies from 1 April 1969. See section 40 which, in general, limits the tax on interest to overseas residents to 15% of the gross interest.
Income From Certain Overseas Pension Funds Exempt From Taxation
Section 13 grants exemption from New Zealand tax on interest derived by an overseas pension fund, provided it is exempt from tax in its home country.
Stock And Share Options– Tax On Benefits
Section 14 deals with the taxation of benefits conferred under stock and share option schemes entered into after 18 July 1968.
Transfer Of Trading Stock Between Group Companies
Section 15. Any profit on the transfer of trading stock from one company to another in the same "group" need not be taken into account until the stock leaves the group. It may be valued for tax purposes at the same value as the first company could value it - see section 27 which defines a "group" of companies.
Agreements Void For Income Tax Purposes Only
Section 16 amends section 108 of the main Act to make it clear that the voiding of agreements and arrangements under the section is for income tax purposes only. Rights as between the parties to the agreements or arrangements are not affected. This amendment applies to agreements or arrangements made or entered into after 11 December, 1968.
Deduction Of Expenditure Or Loss
Existing practice made clear
Sections 17, 18 and 19 clarify the existing practice and also provide specific authority for the deduction of expenditure incurred in producing non–assessable income.
The effect of the sections is –
- Assessable income is divided into two classes - dividend income and other income. Expenditure incurred in producing either class of income must first be deducted against that class of income. The division is made so that the proper tax rebate is allowed against dividend income.
- Any expenditure or loss incurred in producing non–assessable income may be deducted in the calculation of that income only. Similarly the costs of producing assessable income may be allowed only against that assessable income.
Section 20 provides that expenditure of a private or domestic nature, or incurred to produce exempt income, is not to be allowed as a deduction. There is no change here in the existing practice. The provision was made necessary because of the more liberal provisions for expenditure claims or losses made in the first 1968 Amendment Act - see page 8 of Public Information Bulletin No. 47.
Losses On Disposal Of Buildings
It has long been the practice not to allow a deduction for losses on the sale, demolition or destruction of a building unless it was purchased as a speculation or is a "temporary" building. Section 21 confirms this practice and also defines a "temporary" building.
Section 22 continues the provision for a deduction of depreciation on buildings based on fair wear and tear. The allowance for expenditure incurred in altering assets, which does not increase the value of the asset, is also maintained.
Special Depreciation On Tourist Hotels - New Allowance
Section 23 provides for a 20% special depreciation allowance on new hotels or extensions to existing hotels to provide tourist accommodation. The construction of the hotel must be a project approved by the Minister of Finance on or after 19 July 1968 and before April 1972. The allowance is spread over four years at the rates of 10%, 5%, 3% and 2%. Application for approval of projects should be made through the Tourist Accommodation Development Committee, c/o Government Tourist Department.
Ordinary Depreciation Recovered On Sale Of Buildings Not Assessable
Section 24 makes it clear that ordinary depreciation recovered on the sale of a building (other than "temporary" buildings) will not be assessed. A recovery of special or initial depreciation will be assessed as in the past.
Calls Paid On Shares In Mining Companies - Deduction Allowable
Section 25 amends section 129C which allows a deduction of one–third of the calls paid on shares in mining companies. The amendment makes it clear that the deduction will be allowed even if the company's mining is unsuccessful, or if the company has not started deriving income.
Proprietary Companies - Application Of Provisions To Overseas Subsidiaries
Section 26 limits the proprietary provisions to certain classes of overseas subsidiaries of New Zealand companies. Generally the provisions will only apply if income which should have accrued to the New Zealand holding company has been diverted to the overseas subsidiary, or the income of the latter arises from payments from the holding company.
Grouping Of Companies For Tax Purposes
Section 27. The main effect is that the income of two or more companies comprising a "group" are added together to determine the rate of tax which they will pay. Generally "grouping" will arise when two or more companies have common shareholding of 66 2/3% or more.
Group companies which are wholly–owned by the same shareholders are entitled to set off a loss incurred by any one such company against profits earned by the others. In other cases, a company in profit in a "group" of companies, which are not completely owned by the same shareholders, will be able to deduct subvention payments made to make up losses of another company in the group.
Overseas Life Insurance Companies - Limitation Of Tax On Interest
Section 28 has limited application to some life companies which invest in New Zealand, but do not carry on the business of issuing life policies here. The section re–enacts existing provisions under which interest derived from certain debentures issued before 26 August 1966 is taxed at the special rate applying to life insurance companies. The section now also limits the New Zealand tax on this interest to 15% of the gross amount of the interest.
Petroleum And Mineral Mining Companies
Section 29 deems those companies subject to the special basis of assessment to have paid appropriate dividends when funds not required for development are held for a period longer than 6 years. Any amount taxed in this way will not be taxed again when paid out as a dividend.
Section 30 amends the special basis of assessment for petroleum mining companies by re–defining "irrecoverable" expenditure.
Section 31. A holding company of a mineral mining subsidiary may now claim a deduction for amounts written off advances to the subsidiary in the same way as holding companies of petroleum mining or exploration companies.
Changes In Taxation For Some Trusts
Sections 32, 33 and 34 bring in some changes and rewrite the existing provisions for taxation of trusts. The main points are –
(1) Inter vivos trusts created on or after 19 July 1968, with some exceptions, are defined as "specified trusts".
All trusts arising on a will or intestacy and inter vivos trusts which are not "specified" trusts are referred to below as 'other' trusts.
(2) Adult Beneficiaries
Income will be assessed as beneficiary's income in both "specified" trusts and "other" trusts when –
- the adult beneficiary, either under the provisions of the trust itself or by virtue of a discretionary act of the trustees is entitled in possession to the receipt of the trust income during the accounting year, or
- the income is paid or applied for the benefit of the adult beneficiary either during the accounting year or within six months after.
(3) Infant Beneficiaries
- In "other" trusts –
- income is assessable as beneficiary's income if it-
- is indefeasibly vested during the accounting year by the trust instrument (a vesting by discretionary act of the trustee will not be recognised) or
- is paid or applied within the accounting year or six months thereafter.
- In "specified" trusts-
- Income will be assessed as beneficiary's income only if it is paid or applied within the accounting year or six months thereafter - there is no provision for "vesting" for infant beneficiaries in these trusts.
(4) "Paid or applied" is defined as a bona fide transaction which places the income in question beyond the possession and control of the trustee in his capacity as trustee of the particular trust. There is a proviso as regards infant beneficiaries in specified trusts, that if income which initially meets this test subsequently comes back within the possession or under the control of the trustee or is used for the purpose of any business carried on by him, it will be treated as "trustee's income" and not as beneficiary's income.
(5) All other income not dealt with above will be treated as trustee's income.
(6) For trustee's income in specified trusts, the minimum rate of tax is 35c in the $ and no special exemption is allowed against this income.
Maori Authorities With 20 Or Less Beneficiaries
Section 35 confirms the position when the beneficiaries in a Maori Authority number 20 or less. Tile Authority is assessable as agent of the beneficiaries whether or not the income has been distributed. The beneficiary is also taxed on his share of the income, subject to an appropriate credit for the tax paid by the Authority.
Source Of Income Derived By Non–Residents
Sections 36 and 37 restates the law on the taxation of income derived by non–residents to provide that if income such as interest and royalties arises from a business carried on in New Zealand by the payer, the whole of that income has a source in New Zealand.
Excess Retention Tax Now Payable Only By Privately Controlled Investment Companies
Section 38 repeals excess retention tax except for privately controlled investment companies. This applies for the accounting year corresponding with the 1967 income year.
Non–Resident Investment Companies
Section 39 continues the existing provision that interest derived by a non–resident investment company from development investments is not subject to non–resident withholding tax. However, it is liable for New Zealand tax up to the amount of the "home" rate in an end of year assessment. See earlier comment on section 7.
Non–Resident Withholding Tax On Interest Now A Final Tax
Section 40 provides for the 15% non–resident withholding tax on interest to be a final tax unless the borrower and the lender are "associated persons". See definition of this term in section 5.
Refunds Of Tax - Period Of Refund Extended
Section 41 extends the period in which tax refunds may be made from six to eight years. The change generally applies to tax overpaid under any assessment made or altered after 1 April 1962.
Tax Deductions To Be Preferential Claim
Section 42 deals with the preference given to unpaid tax deductions on the bankruptcy or liquidation or receivership of an employer. The section achieves the original intention that unpaid tax deductions rank in preference immediately after certain debts referred to in section 308 of the Companies Act (in the main wages, holiday pay and workers compensation claims). The new provisions apply to unpaid tax deductions made on or after 11 December 1968.