Land and Income Tax Amendment Act (No. 2) 1969

This commentary item was published in Public Information Bulletin Volume 42, September/October 1967

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Public Information Bulletin No. 54 — February 1970 (PIB No 54)

Land And Income Tax Amendment Act (No 2) 1969

Here are the notes on the Land and Income Tax Amendment (No 2) Act promised in Public Information Bulletin No. 53.

Application Of Act

Section 2. Except where otherwise stated the amendments apply to tax on income derived during the income year that began on 1 April 1969.

Mining Companies Defined

Section 3 defines a "mining company" and a "mining holding company". The terms are relevant to later sections.

Tax Rebate For Visiting Experts

Section 4 grants a special tax concession to visiting experts who provide certain services in New Zealand. The concession is a rebate which limits the average rate of tax to 35 percent of the taxable income from services as a visiting expert.

Housekeeper Exemption Extended

Section 5 extends the housekeeper exemption. A working wife can now claim this exemption for payments to a woman or a day nursery, creche, play centre or kindergarten to care for a child or children while she works. The exemption is $240 or the amount paid, whichever is less.

Building Societies Letting Properties

Section 6 provides for the taxing of Building Societies on rental income from property.

Stock And Share Option Schemes

Section 7 deals with the taxing of benefits under stock and share option schemes. It amends section 88C of the Act to state more clearly that there is no taxable benefit from a stock or share option when on the taxpayer ceasing employment, or on his death, the shares must be transferred back to the employer or to the person from whom they were acquired for an amount not greater than that paid under the option agreement. The amendment is effective from 11 December 1968 — the date of the passing of the Land and Income Tax Amendment Act (No. 2) 1968.

Calculation Of Profit Or Loss On Sale Of Mining Shares

Section 8 provides that the one-third deduction for calls paid on mining shares is to be taken into account in calculating any profit or loss on the shares when they are sold by a person who is required under the general tax law to return that profit or loss for tax purposes.

Sharemilkers And Leasehold Farmers Buying Their Own Farms

Section 9 allows a sharemilker or a farmer quitting a leasehold farm to spread forward for a period of five years for assessment purposes the excess income arising from the sale of livestock if the stock is sold in order to purchase a farm. This income may be allocated in any way he wishes to the year of sale or to any one or more of the 5 following income years.

Supplementary Depreciation On New Hotels, Motels, And Farm Buildings

Section 10 provides an additional ordinary depreciation allowance called "supplementary depreciation".

The allowance is-

• 1 percent on the cost of a new hotel or motel or new extensions
• 6 percent on the cost of new farm buildings and extensions, other than farm residences and employee accommodation.

However, the combined value of the supplementary depreciation plus ordinary depreciation is not to exceed 10 percent of the cost.

The allowance applies to new buildings or new extensions first used on or after 1 April 1969.

Concessions To Oyster And Mussel Farmers

Section 11 allows mussel farmers deductions for certain development expenditure similar to that already deductible by rock oyster farmers.

The section also-

• extends the qualifying period for both oyster and mussel farmers to 1971.
• allows the optional spread of the expenditure over the year incurred and the following 9 years.

Donations By Companies For Research Widened

Section 12 widens the allowance of donations by companies to include not only donations for research but also gifts to approved institutes for education and training purposes which are important in the economy.

• The previous $1000 restriction on the deduction is removed.
• Qualifying donations up to 5 percent of the company's assessable income may now be deducted.
• Any gift over $5000 to any one institute requires the prior approval of the Minister of Finance.

Pensions Payable By Proprietary Companies To Former Employees

Section 13 amends certain conditions on the deduction of pensions paid by companies to some former employees or their widows. The conditions now apply only to proprietary companies where the pension is paid to a person who is or was a shareholder or a relative of a shareholder.

A deduction may be allowed where -

• the former employee was a bona fide full-time employee, and
• the pension is reasonable.

Export Market Development And Tourist Promotion Expenses Continued

Section 14 amends the export market development expenditure provisions in relation to the costs of making investigations and preparing information, designs, estimates and other material for the prospective supply of certain services outside New Zealand. The qualification that such costs had to relate to a specific tender is now removed.

The section also extends the qualifying period for both export market development expenditure and tourist promotion expenditure for a further year until 31 March 1973.

Increased Exports Incentive Deduction

Section 15 amends the increased exports incentive provisions.

• Certain classes of goods which do not normally qualify for the concession can be declared by Order-in-Council to be "export goods" for the purposes of the section. The range of goods for which such an order can be made is now extended to include certain goods previously imported into New Zealand and re-exported notwithstanding that the added value in New Zealand is less than 15 percent of imported cost.
• "Minerals" are defined for the purposes of the section. It clarifies the situation as regards scrap metals in particular. Exports of metals in scrap form do not qualify but exports of ingots and billets produced from scrap now qualify.
• A guaranteed deduction scheme is now provided. In any year the deduction per dollar of export sales is to be no less than the exporter would have been entitled to in the previous year, ignoring any guarantee for that year. If the usual 15 percent deduction based on the increase in export sales is greater, however, the exporter gets this greater deduction.
• Non-resident companies carrying on in New Zealand undertakings declared by Order-in-Council to be "special development projects" do not qualify for the incentive.

Deduction For Calls On Shares In Mining Holding Companies

Section 16 provides for a deduction for calls paid on shares in "mining holding companies". The deduction is one-third of the capital subscribed that will be used for mining development. Calls paid which are to be used for other purposes do not qualify.

Deduction For Calls On Shares In Mining Companies

Section 17 continues the one-third deduction for calls paid on shares in mining companies. The deduction is not allowable to

• a mining holding company which pays the calls out of capital received from its own shareholders and for which they have had a deduction under the previous section.
• Any company which pays calls out of "re-investment profit" arising from a sale of mining shares. The company's tax on a re-investment profit is deferred as long as the profit remains invested for mining purposes. (See section 21 below.)

Income Equalisation Scheme Now Extends To Forestry Income

Section 18 allows individuals deriving assessable income from, forestry in New Zealand to make deposits to the Income Equalisation Reserve scheme. The whole of the income from forestry may be deposited, except assessable income to which section 96 of the Tax Act applies (Section 96 relates to the income derived from the sale of timber from trees planted on farms to provide shelter or to prevent erosion or from trees planted under a Forestry Encouragement Agreement. This section already provides a spread of the income over five income years.)

Grouping Of Companies

Section 19 amends section 141 of the Tax Act which deals with the assessment of companies included in a group of companies. The amendments provide that -

• the tests for grouping are to be applied at midnight on 31 March instead of at any time during the income year.
• temporary changes in shareholding, voting power or entitlement to profits in order to avoid or take advantage of the group assessment procedure are to be ignored.

These amendments apply to tax on income derived during the income year that began on 1 April 1968.

Assessment Of Mineral Mining Companies

Section 20 amends section 152 of the Tax Act which provides that the taxable income of companies mining specified minerals is to be determined by reference to the dividends they declare. This amendment extends this special basis of assessment to companies which are engaged in exploring or searching in New Zealand for the minerals specified or in development work relating to such exploration or development even though they have not yet begun to derive income from actual mining.

Profits Of Companies From Sale Of Mining Shares

Section 21 contains new provisions for deferring the assessment of profits derived by companies from the sale of mining shares if these profits — described as re-investment profits — are re-invested for mining purposes.

Assessment Of Petroleum Mining Companies

Section 22 amends section 153 of the Tax Act in the same way as section 20 deals with mineral mining companies. The special basis of assessment applying to petroleum mining companies is now extended to New Zealand companies engaged in exploring or searching for petroleum in New Zealand or in development work in such exploring or searching even though they have not yet begun to derive income from actual mining operations.

Companies With Shares In Exploration Companies

Section 23 reduces the deduction that a holding company may claim for amounts written off loans to a mineral or petroleum mining company where the loan is made by the holding company from -

• calls received from shareholders for which they have had the one-third deduction.
• "reinvestment profit" referred to in section 21.

Definition Of Specified Trust Amended

Section 24 excludes from the definition of a specified trust a trust which is created to vary-

• the terms of a will, or
• the distribution of an estate on intestacy,
• for the sole purpose of settling out of court an application under the Family Protection Act 1955 or a claim under the Law Reform (Testamentary Promises) Act 1949.

The amendment first applies to tax on income derived in the income year that began on 1 April 1968.

Excess Retention Tax

Section 25 redefines a privately controlled investment company for excess retention tax purposes.

Refunds Of Excess Retention Tax

Section 26 applies to companies which are no longer subject to excess retention tax but which have paid that tax in an earlier year. The effect of the amendment is that an excess distribution in any of the six years following the year the tax was paid is to be carried back to enable a refund of the excess retention tax to be made. Any insufficient distribution in any intervening year is to be ignored. The section first applies to any distribution of income in the accounting year corresponding with the income year which began on 1 April 1968.

Social Security Income Tax

Section 27 provides for several amendments to the wording of various Acts consequent on the abolition of social security income tax.

Remember

• These notes give only brief explanations of the amended sections and should be read together with the Act.
• Copies of the working notes given to our staff will be available on request shortly. These give more details.