Part I - Income Tax Amendment Act 1988

This commentary item was published in Public Information Bulletin Volume 174, May 1988

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This Act amends the Income Tax Act 1976 to give effect to:

• the repeal of the overtime and shift work rebate
• the amendment to the Social Security Act 1964, which changed the age at which Family Benefit ceases from 16 years of age to 15 years
• the inclusion of the Alhay Buhay Foundation Trust in the list of charitable organisations
• changes to section 61 (incomes wholly exempt from tax) which provide:
  • - the exemption for income derived by disabled persons from sheltered workshops is increased from $25 to $50 per week
  • - income derived from ACCESS Training allowances is exempt
  • - certain special annuities are exempt.
• changes to the definitions of "Variable Principal Debt Instrument" and "Implementation date"
• changes to the treatment of Exchange Gains or Losses at close of business on 31 March 1987
• an amendment to section 106B to ensure that certain persons in receipt of withholding payments are subject to the record keeping requirements
• correcting an incorrect reference to the GST Act in section 140B
• allowing a deduction for expenditure incurred in complying with both the Income Tax Act and the Goods and Services Tax Act
• the repeal of the:-
  • - Co-operative Dairy Companies
  • - Co-operative Milk Marketing Companies
  • - Co-operative Pig Marketing Companies
• respective appeal authorities
• the intention of the fringe benefit tax provisions in relation to the calculation of low interest loans. In particular those loans issued prior to the introduction of FBT which do not have reviewable interest rates
• the change whereby certificates of entitlement can be delivered by Inland Revenue directly to the Social Welfare Department.

Section 1 - Short Title and Application

This section provides that this Act is to be read together with, and form part of, the Income Tax Act 1976. Where a specific application date is not provided for in any section of this Act, it will apply with effect from the 24th of March 1988, the day on which the legislation received the Governor General's assent.

Section 2 - Overtime and Shift Work Rebate

The overtime and shift work rebate was repealed with effect from the 1st of October 1982. This amendment simply repeals the section of the Act (section 45) which granted the rebate.

This section comes into force on 1 April 1988.

Section 3 - Overtime and Shift Work Recognition Authority

This section repeals section 46 of the Income Tax Act. Section 46 set up an Overtime and Shift Work Recognition Authority which is no longer required, following the abolition of the rebate.

This section comes into force on 1 April 1988.

Section 4, 16, and 17 - Family Benefit Cessation

These sections amend sections 50C (Transitional Tax Allowance), 374D (Family Support), and 374E (Guaranteed Minimum Family Income) respectively.

These amendments are consequential changes made because of the amendments to the Social Security Act 1964, which changed the age at which Family Benefit ceases from 16 years of age to 15 years.

These amendments bring the Transitional Tax Allowance, the Family Support and the Guaranteed Minimum Family Income tax credits, into line with the cut off age for the family benefit.

These consequential amendments have no practical effect in relation to payments already made, but will apply to future payments.

These sections have been deemed to come into force on 1 October 1986.

Section 5 - Rebate in Respect of Gifts and Money and Payment of School Fees

This section amends section 56A of the Income Tax Act 1976 which allows a rebate in respect of gifts of money and the payment of school fees. This amendment includes in the list of charitable organisations, the Alhay Buhay Foundation Trust.

This section shall apply to donations made on or after the 1st of April 1987.

Section 6 - Incomes Wholly Exempt from Income Tax

This section amends section 61 of the Income Tax Act 1976 which provides for certain types of income to be wholly exempt from tax.

Subsection (1) - Disabled persons from sheltered workshops

This subsection increases the exemption from tax of income derived by disabled persons from sheltered workshops, from $25 to $50 per week.

This subsection applies to income derived on or after the 1st of April 1988.

Subsection (2) - ACCESS training allowances

This subsection exempts from tax, income derived from ACCESS Training allowances.

This subsection applies to ACCESS Training allowances derived on or after the 1st of April 1987.

Subsection (3) - Monetary annuities from Consolidated Account

This subsection retrospectively exempts special annuities that are granted, and not designated as taxable, by Cabinet.

This subsection applies to income derived from special annuities on or after the 1st of April 1982.

Section 7 - Interpretation - Definition of "Variable Principal Debt Instrument" and "Implementation date"

Subsection (2) of this section removes from the definition of "variable principal debt instrument" all call debt that -

1. Is denominated in New Zealand dollars and
2. Does not contemplate further advances at call under the same financial arrangement.

Where an asset is sold and the vendor accepts as part settlement debt fixed in New Zealand dollars and at call (a common mechanism in estate-planning practice), that debt is not a variable principal debt instrument.

If in the above example the debt had been fixed in Australian dollars, sterling, deutschmarks or any other currency not New Zealand dollars the debt would be a variable principal debt instrument.

A financial arrangement that allows further advances at call (such as a cheque account whether in New Zealand dollars or any other currency) remains a variable principal debt instrument.

Subsection (1) of this section is consequential upon subsection (2). It deals only with those financial arrangements that were previously treated as variable principal debt instruments, but are now excluded from the definition of variable principal debt instrument by the enactment of subsection (2). Its only purpose is to provide an implementation date for those instruments.

The implementation date provided is 31 March 1987. All such financial arrangements entered into on or before 31 March 1987 are not subject to sections 64B to M of the Income Tax Act. All such financial arrangements entered into after 31 March 1987 are subject to sections 64B to M.

This section shall apply from the commencement of the accrual tax accounting regime.

Section 8 - Transitional Provision for Variable Principal Debt Instruments - Treatment of Exchange Gain or Loss at Close of Business on 31 March 1987

Subsection (1)

This subsection repeals section 64K of the Income Tax Act and replaces it with a new section 64K.

The new section 64K(1) is exactly the same as the old section 64K, except that it is now a subsection. This is a drafting convenience and does not affect the meaning of the provision.

Section 64K(2) is the substantive new provision. It remedies an oversight in the law as it previously stood.

Section 71(5) of the Income Tax Act provides that section 71 shall not apply in respect of any financial arrangement to which sections 64B to M apply. Section 64L provides that income and expenditure in respect of a financial arrangement to which sections 64B to M apply are to be calculated pursuant to sections 64B to M. Section 104 provides a deduction for any expenditure or loss incurred, and income tax is levied only on income derived. Prior to the enactment of the accrual tax accounting regime unrealised exchange variations were not expenditure or losses incurred or income derived. Sections 64B to M did not previously provide any treatment for the unrealised exchange variation on a foreign currency denominated variable principal debt instrument at close of business on 31 March 1987.

Given that -

1. Foreign currency denominated variable principal debt instruments are subject to sections 64B to M; and
2. An unrealised exchange loss is not an expenditure or loss incurred and
3. An unrealised exchange gain is not income derived -

any unrealised exchange variation on a variable principal debt instrument at close of business on 31 March 1987 was not brought to account for income tax purposes. If it was a gain, the gain was not assessable; if it was a loss, the loss was not deductible.

The new section 64K(2) brings such exchange variations to account on 1 April 1987. It applies only for the purpose of determining the income tax treatment of the unrealised exchange variation on a foreign currency denominated variable principal debt instrument at the close of business on 31 March 1987 and for no other purpose.

Section 64K(2) operates by -

1. Deeming the variable principal debt instrument to have been repaid in full on 1 April 1987 (section 64K(2)(a) refers); and
2. Providing that the amount of the deemed repayment shall be the same as the amount of the deemed acquisition price of the variable principal debt instrument on 1 April 1987 under section 64B(2) (section 64K(2)(b) refers) and
3. Providing that, notwithstanding section 71(5), the amount of any exchange variation arising on the deemed repayment shall be dealt with under section 71 - that is, any loss is deductible if a deduction is allowed by section 71 and any gain is assessable if included in assessable income under section 71 (section 64K(2)(c) refers).

Subsection (2) - Repeals

This subsection consequentially repeals earlier amending legislation.

The amendments in section 8 of the Amendment Act apply from the commencement of the accrual tax accounting regime.

Section 9 - Limitation of deduction for motor vehicles where insufficient records are kept

This section amends section 106B of the Tax Act which requires taxpayers to maintain records of motor vehicle usage to substantiate claims for expenditure and depreciation.

The purpose of this amendment is to ensure that persons in receipt of withholding payments who are not limited to claims for deductions by section 105 and the Fourth Schedule (being all withholding payments other than casual agricultural payments) are subject to the record keeping requirements. Prior to this amendment companies and employees were exempted from maintaining records of use of motor vehicles. However, the definition of "employee" in section 2 of the Act includes all persons in receipt of source deduction payments, which is further defined in section 6 of the principal Act to include withholding payments. As a result persons receiving withholding payments were not subject to section 106B, although they are in general treated as self employed persons for ACC levies and claims for expenditure.

Subsection (1) - Record keeping requirement

This subsection amends section 106B(2) by amending paragraph (a) so as that the record keeping requirements apply to:

"any person other than a company and other than a person who is subject to section 105 of this Act"

Persons subject to section 105 include persons in receipt of salary, wages, extra emoluments and casual agricultural payments (the latter being a withholding payment subject to the expenditure limitations of section 105). Therefore all persons in receipt of other withholding payments will be obliged to maintain the same records of use of motor vehicles as any other self-employed person.

Full details on the requirements of section 106B are contained in PIB 147.

Subsection (2) - Application

This section applies from the income year which commences on 1 April 1988.

Section 10 - Accounting for goods and services tax

This section amends section 140B of the principal Act by removing an incorrect reference to the Goods and Services Tax Act 1985 and substituting the correct reference.

Section 140B(6)(a)(ii) of the Income Tax Act 1976 currently provides that the cost price of an asset for depreciation purposes shall be reduced by any amount of input tax deductible under section 20(3)(a) of the GST Act in relation to an adjustment made in terms of section 21(5) of the GST Act. The reference to section 20(3)(a) is incorrect as it is section 20(3)(e) of the GST Act that specifically provides for an input tax credit in respect of a section 21(5) adjustment.

Subsection (1)

This subsection replaces the expression "section 20(3)(a)" with the correct reference "section 20(3)(e)".

Subsection (2) - Application

This amendment applies with respect to the income year that commenced on the 1st day of April 1986 being the commencement date off section 140B of the Income Tax Act 1976. This is to avoid any confusion that may have arisen in relation to this drafting error.

Section 11 - Expenditure relating to determination of liability to tax

This section amends section 165 of the principal Act by repealing this provision and introducing a new section that allows, as a deduction for income tax purposes, the expenditure incurred in complying with both the Income Tax Act and the GST Act.

Currently, the Income Tax Act does not contain any specific provision that would allow a deduction of the costs incurred by a registered person in complying with their GST obligations. It is arguable that expenditure incurred in respect of the preparation and filing of GST returns is deductible in terms of section 104(b) of the Income Tax Act as being expenditure necessarily incurred in the carrying on of a business for the purposes of producing assessable income. Costs incurred in objecting to assessments and determination of the Commissioner are not necessarily incurred in the carrying on of a business and therefore are not deductible in terms of that section.

To remove any uncertainty and recognise the fact that these costs are necessarily incurred by taxpayers in producing their assessable income, section 165 has been amended to allow a deduction for such costs. The costs incurred in complying with any GST obligation will be deductible unless income derived by the taxable activity carried on by the registered person is not assessable for income tax purposes.

Subsection (1) - Expenditure relating to determination of liability to tax

This subsection repeals section 165 of the Income Tax Act and substitutes a new section. The following is a commentary on the new section.

Section 165

Subsection (1) - Interpretation

This subsection defines for the purposes of this section the meaning of the terms 'goods and services tax payable', 'registered person', 'taxable activity' and 'taxable period' by reference to the Goods and Services Tax Act 1985.

Subsection (2) - Deduction Allowance

This subsection provides a deduction, in calculating the assessable income of a taxpayer, for any expenditure incurred in relation to:

1. The preparation and the filing of income tax returns.
2. The preparation and the filing of GST returns.
3. The preparation, institution, or presentation of an objection or appeal against an assessment or a determination made by the Commissioner in respect of a taxpayer under the Income Tax and GST Acts.
4. A contribution by a taxpayer towards the expenditure of any other taxpayer. This applies where the other taxpayers expenditure is deductible under the provisions of this section and the contributing taxpayer has objected or appealed against an assessment or a determination on a related matter.

Subsection (3) - Deemed Assessable Income

This subsection deems any amount received by way of reimbursement, recovery, or by award of the Court in respect of an amount allowed as a deduction under this section to be assessable income.

Subsection (4) - Exemption

This subsection provides that no deduction shall be allowed under this section for expenditure incurred in relation to:

1. A matter or assessment arising in relation to either an income tax return or a GST return where the Commissioner is of the opinion that the return was fraudulent or wilfully misleading.
2. An offence under any of the Inland Revenue Acts.
3. A penal tax assessment issued in terms of the Income Tax Act or GST Act provided that the assessment is not subsequently cancelled.
4. An objection or appeal that the Commissioner considers is of an inconsequential or frivolous nature.
5. A matter or assessment arising in relation to the GST Act in respect of a taxable activity carried on by the registered person that does not constitute a business for income tax purposes.

Subsection (2) - Application

This subsection provides that the new section 165 shall apply with respect to the tax on income derived in the income year that commenced on the 1st of April 1985. This will enable a taxpayer to claim for income tax purposes any expenditure incurred in relation to:

1. The requirement to register for GST.
2. The determination of taxable periods and accounting basis.
3. The preparation and filing of GST returns.

It should be noted that the GST Act has also been amended to allow an input tax credit of the GST component of such expenditure (section 11 of the GST Amendment Act 1988 refers).

Section 12 - Co-operative Dairy Companies, Section 13 - Co-operative Milk Marketing Companies, Section 14 - Co-operative Pig Marketing Companies

These sections amend sections 201, 202 and 203 respectively to replace references to the respective appeal authorities with references to the Taxation Review Authority.

The amendments come into force in the 1st of April 1988.

Section 15 - Value of fringe benefit

This section amends section 336O(2) of the Tax Act, which provides the method to be used to calculate the value of low interest loan fringe benefits. In particular, the amendment is concerned with loans issued prior to the introduction of fringe benefit tax (1 April 1985) which do not have reviewable interest rates.

Non-reviewable interest rate loans issued prior to 1 April 1985 are valued for fringe benefit tax purposes at the non-concessionary rates of interest as specified in the Income Tax (Fringe Benefit Tax, Interest on Loans) Regulations 1985.

Prior to this amendment, in order to qualify as a non reviewable interest rate loan, there must have been an express provision in the loan agreement specifying that the interest rate was not subject to review. However, as a result of the High Court decision in the case of Waitomo District Council v CIR it was found that .section 336O(2)(b) may never have application because it is not legal practice to insert such a clause into a loan agreement. The Judge concluded that the wording of the proviso was not consistent with its intention. In his view the intention of the proviso was that there must not be an express provision for review of the interest rate in the loan agreement if it is to qualify as a non-reviewable loan.

Subsection (1) - Value of fringe benefit - loans

This subsection amends paragraph (b) of the proviso to section 336O(2) to realign the legislation with legal practice.

That paragraph now reads:

"The rate of interest payable on that loan is not subject to review."

Subsection (2) - Application

This section shall apply to the tax on fringe benefits provided on or after the quarter commencing 1 April 1988. However, as the High Court decision was made on 11 August 1987, being within the quarter which commenced on 1 July 1987, the Courts interpretation of the intention of the legislation will be applied in relation to that quarter and each subsequent quarter. Unless there is a current objection held on this matter for any quarter prior to that which commenced on 1 July 1987 no reassessments will be made. This amendment merely provides legislative authority to the Courts interpretation.

Where an employer considers that an agreement made prior to 1 April 1985 will now qualify as a non-reviewable interest rate loan that employer will be required to submit to the Department a copy of the loan agreement, any variations to that agreement and any relevant correspondence. From those facts, the Department will determine whether the loan qualifies as a non reviewable interest rate loan and whether the benefit to the employee should be valued using the non-concessionary rates of interest.

Section 18 - Credit of Tax by Instalment

This section amends section 374G of the Income Tax Act 1976 which provides for the Family Support tax credit to be paid by instalments.

This section provided that where any Family Support was paid through the Social Welfare Department, the certificate of entitlement was to be delivered to the applicant who in turn delivered it to Social Welfare.

The amendment will now allow the certificate of entitlement to be delivered, by Inland Revenue, directly to the Social Welfare Department.

This section shall have effect from 24 March 1988, the date of Governor-General's assent.

Section 19 - Additional tax to be charged if default made in payment of tax

Subsection (1) - Additional tax imposition

This section repeals paragraph (1) of section 398(2) of the principal Act and substitutes a new paragraph. The amendment corrects a drafting error which allowed a one-day grace period before the imposition of additional tax where there was a default in the payment of tax. This amendment removes the one day grace period so that additional tax is not imposed on any amount of tax remaining unpaid at the expiry of either the due date of the tax or the date of demand of the tax.

Subsection (2) - Application

Subsection (1) of this section applies to the payment of 1987 terminal tax and 1988 provisional tax.