Issued
01 Oct 1988

Part I - Income Tax Amendment Act (No. 3) 1988

Archived legislative commentary on Part I - Income Tax Amendment Act (No. 3) 1988 from PIB vol 177 Oct 1988.

This commentary item was published in Public Information Bulletin Volume 177, October 1988

More information about Public Information Bulletins.

Section 2 - Definition of Extra Emolument

This section amends the definition of "extra emolument" where that definition relates to retiring allowances and redundancy payments.

As a result of amendments introduced in section 5 of the Amendment Act, retiring allowances paid on or after 1 October 1988 (as described in section 68(2) of the Tax Act) will be subject to FBT at 24 cents in the dollar. Redundancy payments (as defined in section 68) paid on or after 1 October 1988 will be subject to tax as follows:

  • 5% of the specified sum will be deemed to be assessable income, and
  • where the Redundancy Payment exceeds the specified sum, the excess will be subject to FBT at 24 cents in the dollar.

The amendment to the definition of "extra emolument" ensures that:

  1. No part of the Retiring Allowance will be deemed to be an extra emolument, and<</li>
  2. Only 5% of the specified sum relating to redundancy payments (as defined) will be deemed to be an extra emolument.

Section 3 - Low Income Rebate

Section 3 of the Amendment Act introduces a new section, 50D, to the principal Act to provide a rebate for low income earners. This rebate is designed to compensate low income earners for the increase in the lower marginal tax rate from 15 cents to 24 cents in the dollar.

This rebate is only available to natural persons, absentees do not qualify for the rebate.

The rebate, in general, increases at the rate of 9 cents in the dollar up to a maximum rebate of $855 at an income level of $9,500. The rebate abates at the rate of 4 cents in the dollar for every whole dollar that exceeds $9,500 income.

In general the rebate is calculated on income EXCLUDING income from interest, dividends, royalties, rents, or income derived from a trust. FOR SUPERANNUITANTS the rebate is calculated on income INCLUDING income from interest, dividends, royalties, rents, or income derived from a trust.

Paragraph (a) of subsection 50D(1) provides that for National Superannuitants, the rebate is calculated at 9 cents in the dollar of assessable income up to $9,500 per annum INCLUDING income from interest, dividends, royalties, rents, or trusts.
Paragraph (b) of subsection 50D(1) provides that for taxpayers, other than National Superannuitants, the rebate is calculated at 9 cents in the dollar of assessable income up to $9,500 per annum NOT INCLUDING income from interest, dividends, royalties, rents, or income derived from a trust pursuant to section 227 of the principal Act.
Paragraph (c) For both classes of taxpayer the rebate is abated as follows.
  X - Y
  X is defined as;
  Where the taxpayer is a national superannuitant $855.
  Where the taxpayer is not a national superannuitant an amount equal to the lesser of $855 or an amount equal to9 cents in the dollar of assessable income excluding income from interest, dividends, royalties, rent, or income derived from a trust.
  Y is defined as;
  An amount equal to 4 cents in each complete dollar of the amount of the taxpayer's assessable income that exceeds $9,500.

Subsection 50D(2) deals with the situation where the taxpayer qualifies for the Low Income Rebate for only part of the income year due to the taxpayer's arrival in New Zealand or departure from New Zealand during the income year.

Where the taxpayer is present in New Zealand for part of the income year, eligibility for the rebate is determined on the basis of the taxpayer's total assessable income for the income year, apportioned in relation to the number of days the person is present in New Zealand compared to the number of days in the income year.

Subsection 50D(3) gives the Commissioner the authority to determine the amount of the assessable income of the taxpayer having regard to the class or classes of income, where the taxpayer is present in New Zealand for only part of the income year.

Subsection (2) the Amendment Act deals with the transitional provisions that are needed for the 1988/89 income year because the Low Income Rebate comes into effect half way through the income year.

Paragraph (a) Limits the 9 cent rebate to the half year equivalent of 4.5 cents in the dollar.
Paragraph (b) Limits the maximum amount that can be claimed for the 1988/89 income year$427.50.
Paragraph (c) Reduces the abatement rate for the1988/89 income year to 2 cents in the dollar on income over $9,500.

Subsection (3) of the Amendment Act ensures that this rebate is taken into account in the computation of the taxpayer's income tax by amending section 57(2) of the principal Act to include the words "section 50D" in the list of rebates.

Subsection (4) Ensures that the transitional provisions that apply for the 1988/89 income year expire on the 1st of April 1989.

Subsection (5) of the Amendment Act provides that the Low Income Rebate comes into force on the 1st of April 1988 but the rebate will only be available for source deduction purposes after 1 October 1988.

This rebate will be incorporated into the new tax tables that take effect from 1 October 1988.

Section 4 - Incomes Wholly Exempt from Tax

Section 4 amends section 61 of the principal Act which deals with sources of income that are exempt from income tax.

Subsection (1) Repeals paragraph (11) of Section 61 which previously provided that gratuities granted or paid pursuant to the Defence Act 1971 to members of the territorial forces of New Zealand or the Air Force Reserve or as a cadet officer of the Air training Corps, were exempt up to a maximum amount of $300 in an income year. With the repeal of this paragraph such amounts are now fully taxable.

This treatment applies with effect from the tax on income derived in income year that commenced on 1 April 1988.

Subsection (2) Inserts a new paragraph (11A) into section 61 of the principal Act.

This new paragraph exempts from tax income derived from compensation payments distributed from the fund approved by the Minister in Charge of War Pensions and paid to ex-prisoners of war who were held in German concentration camps during World War II.

These compensation payments were only paid out in 1987 to ex-prisoners of war who were held in German concentration camps, with the intention that these payments would be exempt from tax and would thus not need to be declared for income tax purposes. Therefore this exemption is backdated to apply with respect to the tax on the income derived in the income year that commenced on the 1st of April 1987 so that none of these compensation payments will be subject to income tax.

If any taxpayer has included this type of compensation payment in the calculation of their assessable income, then they can apply to have their return reassessed.

Subsection (3) amends section 61(24) of the principal Act. This amendment makes a minor change to replace the approving authority for encouraging scientific or industrial research from the National Research Advisory Council, to the Royal Society of New Zealand.

This subsection applies retrospectively from 1 January 1987.

Section 5 - Retiring Allowances Payable to Employees

Retirement and Redundancy

Sections 2, 5, 11, 12 and 13 of the Amendment Act relate to the tax treatment of Retirement Allowances and redundancy payments.

Previously lump sum retiring allowances and redundancy payments were subject to a concessionary tax regime whereby the lump sum was deemed to be assessable income to the following extent only:

  • 5% of the specified sum (as defined in section 68)
  • Any excess over the specified sum.

This treatment has been discontinued for both types of lump sum payments and the tax treatment of redundancy payments paid on or after 1 October 1988 will differ from the treatment of retiring allowances paid on or after 1 October 1988.

Redundancy Payments

A definition of "Redundancy Payment" has been introduced into section 68(1) of the Tax Act. (See section 5(2) of the Amendment Act). The intention of the definition is to restrict the concessionary tax treatment to payments resulting from genuine redundancies.

Definition of Redundancy Payment

The definition of "Redundancy Payment" replaces the provisions of section 68(4) which provided that in certain circumstances a redundancy payment was deemed to be a retiring allowance paid on the occasion of a taxpayer's retirement. Subsection (4) is accordingly repealed. (Section (5)(1)(e) of the Amendment Act refers).

In order for a lump sum payment to qualify as a redundancy payment:

  • it must be made as a consequence of the termination of employment by an employer, and
  • the termination must be wholly or mainly as a result of the position of the employee becoming superfluous to the needs of the employer.

A lump sum payment to a seasonal worker can qualify as a redundancy payment as long as the above conditions are met. A payment relating to a seasonal lay-off would not qualify unless those conditions are met.

Other exclusions are:

  • Any lump sum payment made at the end of a fixed term contract, or a contract to complete a specific project. These severance payments do not constitute true "redundancy payments" and should be treated as monetary remuneration.
  • A payment made on the termination of employment, in lieu of notice. This is to be treated as monetary remuneration.
  • Paragraph (f) concerns the deferment of part of an employee's periodic salary or wages, in order to gain a tax free benefit when the employment is terminated. This type of arrangement would be an abuse of the "genuine" redundancy provision, and is therefore excluded.
  • Any payments made to a Director pursuant to a company's articles of Association are also excluded. Such payments would be treated as monetary remuneration.

The above exclusions are in addition to payments which are excluded from the operation of section 68 by subsection (5) of that section.

Tax Treatment

The tax treatment of redundancy payments paid on or after 1 October 1988 will be as follows:

  • 5% of the specified sum is deemed to be assessable income, and that amount will be subject to tax at source at the extra emolument rate, and
  • where the payment exceeds the specified sum, the excess is subject to FBT at 24 cents in the dollar. See examples in Appendix A attached.

Specified Sum Amendments

Changes made to the definition of "specified sum" are:

1. References to "employment or service" in the definitions of the term "specified sum", "year of service" and "season" have been amended to read "employment". (Section (5)(1)(a) of the Amendment Act).

2. A limit of $20,000 is placed on the specified sum. i.e., Where the recipient has been employed by the same employer for ten years or more the specified sum will be the lesser of:

  • one third of the total remuneration paid in respect of that employment for the 3 years immediately preceding the date of redundancy, or
  • $20,000. (See section 5(3) of the Amendment Act).

Where the recipient has been employed by the same employer for less than 10 years the specified sum is calculated according to the formula:

a × b 10

Where:

  • a is the number of complete years of service of the taxpayer in that employment, and
  • b is the lesser of:
    • one third of the total remuneration paid in respect of that employment for the 3 years immediately preceding the redundancy, or
    • $20,000.
  • (see section 5(4) of the Amendment Act). Also see examples in Appendix attached.

3. The term "total remuneration", as used in the definition of specified sum, is now defined in section 68. (See section 5(5) of the Amendment Act). The definition provides that only source deduction payments should be taken into account in calculating the specified sum.

Subsequent Employment

A new subsection (3A) in Section 68 of the Tax Act, (as introduced by section 5(7) of the Amendment Act) applies where a taxpayer who retires from or is made redundant from one employment, is subsequently re-employed by that employer or any other employer and then made redundant from that employment. The effect of the provision is that for the purpose of calculating the specified sum relating to the second redundancy payment:

  • (a) The number of years that the taxpayer has been employed is limited to the number of years in the subsequent employment, and
  • (b) Total remuneration relates only to total remuneration derived during the period of the subsequent employment.

Retiring Allowances

Retiring allowances paid on or after 1 October 1988 are deemed not to be assessable income in the recipients' hands but are subject to fringe benefit tax at 24 cents in the dollar. (See section 5(6) of the Amendment Act which repeals and substitutes section 68(2) of the Tax Act).

Payments to Directors

Section (5)(1)(g) of the Amendment Act repeals paragraph (a) of section 68(5). The effect of that paragraph was that previously certain payments made to Directors were excluded from the operation of section 68. The treatment of lump sum payments to Directors on or after 1 October 1988 will be as follows:

Redundancy Payments

  • The definition of redundancy payment excludes "any payment made by a company pursuant to its Articles of Association to any of its Directors". Any such payment would be treated as monetary remuneration in the Director's hands.
  • A redundancy payment made to a Director, which was NOT pursuant to the Articles of Association could qualify for the concessional treatment, as long as the definition of redundancy payment was satisfied.

Retiring Allowances

  • Any lump sum payment which satisfies the conditions of section 68(2) would not be assessable income in the Director's hands but would be subject to FBT at 24 cents in the dollar.
  • Any other lump sum payments made by an employer would be monetary remuneration and subject to tax in the Director's hands.

Payments to Shareholders or Related Persons

Existing provisions, see section 152 of the Tax Act, allow the Commissioner to disallow a deduction to an employer where the amount of a redundancy payment or retiring allowance paid to a shareholder or related person is considered to be excessive. Those provisions and the tax treatment of excessive amounts, (see section 152(4) of The Act), continue.

FBT will not be payable on any excess. For full details of the tax treatment of these amounts see Appendix B to this TPC.

Payments to Armed Forces

Section 68(6) is unaffected by the amendments. Certain defined gratuities are excluded from the operation of section 68, and the tax treatment of those gratuities continues on the previous basis.

Section 6 - Transitional provision for herd scheme

This section amends a transitional provision in the livestock legislation dealing with the herd scheme. Livestock written up to herd values at the end of the 1987 income year are deemed to be valued according to the provisions of section 86A of the Tax Act. This ensures that in the 1988 income year those livestock take for their opening and closing value, the herd value declared for the 1988 income year. This means that any increase in herd values above the 1987 values does not create a tax liability. This achieves the so called "inflation proofing" effect of the herd scheme.

Section 7 - FBT Paid Overseas not Deductible

This section amends section 106 of the Tax Act which disallows the deduction of certain types of expenditure. Specific mention is made in section 106 to fringe benefit tax paid in New Zealand but not to fringe benefit taxes paid overseas. This clause inserts a reference to fringe benefit taxes paid overseas to ensure that this expenditure is not deductible for New Zealand taxpayers.

The amendment takes effect from the income year commencing 1 April 1988.

Section 8 - Income Derived by Non-Specified Trusts

This section amends section 230 of the Tax Act. The exemption of $100 applying to income derived by non-specified trusts is withdrawn with effect from the income year commencing on 1 April 1988.

Section 9 - Determination of Specified Exemption

Section 9 of this amendment Act deals with the specified exemption that a national superannuitant can earn before the surcharge starts to apply.

Section 336BA of the principal Act sets out the procedure for calculating the specified exemption for a national superannuitant's other income before the surcharge starts to take effect.

Section 9 of the Amendment Act decreases the specified exemption from $7,800 to $7,202 for recipients of the single rate of National Superannuation and from $6,500 to $6,006 for recipients of the married rate of National Superannuation. The combined specified exemption for a married couple has decreased from $13,000 to $12,012.

This section comes into force on the 1st of April 1989 and will apply to source deduction payments derived on or after that date.

Subsection (1)

Inserts the decreased specified exemption levels into section 336BA(1) of the principal Act.

Subsection (2)

makes a consequential amendment to section 336L(1A) of the principal Act in order to specify the pay period equivalents of the new exemption level of $7,202 for recipients of the single rate of National Superannuation for the purposes of the "SAJ" code.

Subsection (3)

Makes a consequential amendment to section 336L(2) of the principal Act in order to specify the pay period equivalents of the new exemption level of $6,006 for recipients of the married rate of National Superannuation for the purposes of the "MAJ" code.

Subsection (4)

Makes an amendment to section 356(1) of the principal Act. At present, national superannuitants who receive more than $6,500 of taxable income in addition to their National Superannuation are excluded from being "pay period taxpayers" as the term is defined in section 356(1) of the principal Act.

This subsection consequently amends that definition as a result of the new specified exemption levels to ensure that only those national superannuitants who receive more than $6,006 of taxable income in addition to their National Superannuation will be excluded from being "pay period taxpayers"

Subsection (5)

Repeals the previous amendments to the specified exemption level.

Subsection (6)

Is the application date subsection. It provides for this section of the Amendment Act to come into force in the income year that commences on the 1st of April 1989.

Section 10 - National Superannuitant Surcharge Rate

This section amends section 336 of the principal Act. The amendment introduces a new national superannuitant surcharge rate to take effect from the 1st of October 1988.

Subsection (1) - of the Amendment Act amends section 336D(1) of the principal Act with the effect of increasing the surcharge rate from 18 to 20 cents in the dollar for each dollar of the national superannuitant's other income.

Subsection (2)

Amends section 336(2)(a) of the principal Act to allow surcharge deductions to be made from the national superannuitant's other income at the new rate of 20 cents in the dollar.

Subsection (3)

Provides for the national superannuitant surcharge to be assessed at a composite rate of 19 cents in the dollar for the 1988/89 income year.

Subsection (4)

Repeals the previous amendments to the surcharge rate.

Subsection (5)

Provides that subsections (1) and (3) of this section will apply for the 1988/89 income year and every subsequent year.

Subsection (6)

Provides that subsection (2) of this section shall apply in respect of every source deduction payment made on or after 1 October 1988.

Section 11 - Corrections to Definition of Fringe Benefit

This section corrects two drafting errors which occurred when section 336N(1) was amended by section 17 of the Income Tax Amendment Act (No. 2) 1988. The other effects of section 11 are outlined under the explanation of sections 11-13 following.

  • Subsection (1) ensures that Contributions to the Government Superannuation Fund are "contributions to a designated fund", which has the effect that such contributions are subject to FBT at the rate of 24 percent and not 48 percent.
  • Subsection (2) amends paragraph (db) of the definition of Fringe Benefit by deleting the word "Superannuation" immediately preceding the word "contributions". This ensures that contributions to any friendly societies, sick, accident or death benefit funds, as qualified under the definition "Contribution to a non-designated fund" in section 17 of the Income Tax Amendment Act (No. 2) 1988, will qualify for the 35 percent FBT rate rather than the 48 percent rate.

This amendment was needed because contributions in relation to these funds are not "superannuation" contributions.

Sections 11 to 13 - Fringe Benefit Tax on Retiring Allowances and Redundancy Payments

These sections impose a fringe benefit tax liability on:

  • Lump sum retiring allowances (as described in section 68(2) as amended), paid on or after 1 October 1988 and
  • The amount by which a redundancy payment (as defined in section 68), paid on or after 1 October 1988, exceeds the specified sum.

(Where a retiring allowance or redundancy payment to a shareholder or related person is considered by the Commissioner to be excessive, the deduction for any excess is disallowed in calculating the employer's assessable income, and FBT is not payable on the excess. For full details of the tax treatment of these payments see Appendix B).

The rate of FBT which will apply to these payments is 24 cents in the dollar.

These effects are achieved in the legislation in the following way.

Section 11(3) inserts two new paragraphs in the definition of "Fringe Benefit" in section 336N:

  • (dc) Relates to retiring allowances deemed not to be assessable income under section 68(2).
  • (dd) Relates to any amount of a redundancy payment (as defined in section 68 of the Tax Act) which exceeds the specified sum (as amended by sections 5(1)(a), and 5(3) of the Amendment Act).

Section 11(4)(a) is a consequential amendment which is required simply as a result of the insertion of the new paragraphs (dc) and (dd) in the definition of fringe benefit.

Section 11(4)(b) amends paragraph (k) of the definition of Fringe Benefit in section 336N. Previous to the amendment FBT did not apply to any benefit to which section 68 applied. This paragraph makes the necessary amendment.

Prior to the passing of this Amendment Act paragraph (f) of the definition of fringe benefits provided that FBT did not apply to any benefit provided by a private company to a major shareholder. Section 11(5) makes the necessary amendment to ensure that FBT can be imposed where appropriate.

Paragraph (j)(ii) of the definition of fringe benefit in section 336N provided, prior to this Amendment Act, that FBT would not apply to any benefit which is income that is exempt from tax in accordance with Part IV of the Tax Act. Section 68 (in Part IV of The Act) exempts from income tax:

  1. Retiring allowances, and
  2. Any redundancy payment, other than 5% of the "specified sum".

In order to ensure that FBT can be imposed, section 11(6) introduces two new subparagraphs to exclude the relevant benefits from the operation of paragraph (j)(ii).

Section 12 amends section 336O of the Tax Act (value of fringe benefit). Two new subsections have been inserted. They are:

Subsection (3C) - where a lump sum retiring allowance is deemed not to be assessable income under section 68(2) of the Tax Act, the value of the fringe benefit is the amount of that lump sum payment.

Subsection (3D) - Where part of a redundancy payment is deemed not to be assessable income by section 68(2A) of the Tax Act, the value of the fringe benefit is the amount by which the payment exceeds the specified sum.

Section 13 amends section 336S. (Fringe Benefit Tax imposed). The rate of FBT applying to redundancy payments and retiring allowances is 24 cents in the dollar.

Section 14 - Family Support Credit of Tax

Section 14 amends section 374D of the principal Act which deals with the family support credit of tax.

This section of the Amendment Act does two things. First, it increases from $15,000 to $16,000 the amount of income that a taxpayer, who is eligible for Family Support, can have before their Family Support starts to abate.

Secondly, the section increases the abatement rate from 18 cents to 30 cents in the dollar on so much of the taxpayer's income that exceeds $27,000. The new abatement rates and ranges are as follows:

On so much of the taxpayer's income that exceeds $16,000 but is not more than $27,000, the abatement rate is 18 cents in the dollar.

On so much of the taxpayer's income that exceeds $27,000, the abatement rate is 30 cents in the dollar.

These changes take effect from 1 October 1988.

Because the changes occur part way through the current income year, composite exemption levels and abatement rates are needed for the 1988/89 income year. These are as follows:

Where the taxpayer's income is less than $15,000, the abatement rate is zero.

On so much of the taxpayer's income that exceeds $15,000 but does not exceed $16,000, the abatement rate is 9 cents in the dollar.

On so much of the taxpayer's income that exceeds $16,000 but does not exceed $27,000, the abatement rate is 18 cents in the dollar.

On so much of the taxpayer's income that exceeds $27,000, the abatement rate is 24 cents in the dollar.

These abatement rates only apply for the 1988/89 income year and can be used in any 1988/89 assessments made after the date of assent of the Act (28 July 1988).

Section 15 - Guaranteed Minimum Family Income Credit Of Tax

Section 15 of the Amendment Act amends section 374E of the principal Act which deals with the Guaranteed Minimum Family Income Credit of tax.

Subsection (1) of the Amendment Act, amends section 374E(3) and 374E(4) to provide a Guaranteed Minimum Family Income of $15,288 inclusive of Family Support.

This amendment increases the Guaranteed Minimum Family Income from $270 to $300 per week inclusive of Family Support AND Family Benefit.

The formula in both subsections (3) and (4) of section 374E, has been changed. This change was necessary to ensure that GMFI is inclusive of Family Support in order to provide for greater flexibility in changing the GMFI level without creating high effective marginal tax rates where the family income exceeds the Family Support abatement threshold.

The new formula in section 374E(3) is as follows:

((x-y) x z/52) - w

Where;

X is the guaranteed Minimum Family Income Tax Credit of $15,288 per annum.

Y is the amount equal to the net specified income of the taxpayer for the income year.

Z is the number of weeks in the eligible period in which the person is a full-time earner.

W is the amount of Family Support that the person receives in the eligible period.

The new formula for section 374E(4) is as follows:

((x-y) x z/52) - w

Where;

X is the Guaranteed Minimum Family Income tax credit of $15,288 per annum.

Y is the amount of the net specified income of both spouses.

Z is the number of weeks in the eligible period in which the person is a full-time earner.

These changes to the Guaranteed Minimum Family Income legislation mean that the amount of GMFI that a taxpayer is entitled to will need to be calculated separately for each eligible period.

Subsection (2) of this Amendment Act provides that this section shall apply from the 1988/89 income year. Because these changes take effect from 1 April 1988, new certificates of entitlement, which take account of increased GMFI, will need to be issued.

Any excess entitlement in respect of the period from 1 April 1988 and the date the new certificate is issued will be available when the return is furnished at the end of the income year.

Section 16 - Credit of tax by Instalments

Section 16 of the Amendment Act amends section 374G(3) of the principal Act which deals with credit of tax by instalments for Family Support purposes.

Previously the Commissioner could only issue a new certificate if the taxpayer applied for a new certificate of entitlement in person.

The amendment now allows the Commissioner to withdraw any certificate of entitlement and, if necessary, issue an amended certificate where the Commissioner is satisfied that the original certificate of entitlement was incorrect due to changes in the taxpayer's circumstances.

The section has effect from the date the legislation was enacted, the 28th of July 1988.

Sections 17 to 22 - Provisional Tax

INTRODUCTION

Sections 17 to 22 deal with the new provisional tax regime. A general outline of the operation of the regime is provided below and is followed by a more detailed examination of each section.

The Government first announced its intention to change the provisional tax scheme in the Economic Statement released on 17 December 1987. A scheme along the basis of this announcement was introduced into Parliament in the Taxation Reform Bill (No. 4) and was referred to the Finance and Expenditure Select Committee who invited submissions on the bill. In the light of these submissions received the Government decided to defer the implementation of the announced scheme pending further consultation with tax practitioners. An interim scheme based largely on the current provisional tax provisions was enacted instead and will apply in respect of all provisional tax instalments that become due and payable on or after 7 November 1988.

QUESTIONS AND ANSWERS

Attached as Appendix C of this PIB are a series of questions and answers which have been prepared to help explain the new provisional tax scheme.

FLOW DIAGRAMS

Attached as Appendix D of this PIB are a series of flow charts outlining the provisional tax scheme.

GENERAL OUTLINE OF THE SCHEME

As stated above, the new provisional tax scheme will only apply in respect of provisional tax payments that become due and payable on or after 7 November 1988. The existing provisional tax rules will therefore remain for provisional tax payments due and payable before this date.

The new scheme is provided for by way of a new Part XII in the principal Act and a number of amendments in other Parts.

The major features of the interim scheme are as follows:

Provisional Tax - Past Year Income Boundaries

  • Provisional Income Last Year of $3,000 or less The provisional taxpayer is not required to pay provisional tax this year but this provision is subject to the interest charging/paying provisions and the estimation provisions which may apply depending on the taxpayer's current year provisional income.
  • $3,001 - $100,000 Provisional Income Last Year Provisional taxpayers pay provisional tax equal to last year's residual income tax (as defined) increased by 10 percent. Company taxpayers may make an adjustment to last year's residual income tax to take into account the reduced company tax rate. This is a transitional arrangement for the 1988/89 income year only.
  • $100,001 plus Provisional Income Last Year Companies may continue to make an adjustment to last year's residual income tax to take into account the reduced company rate. Individual taxpayers are not required to pay provisional tax on the basis of last year's residual increased 10 percent but instead may pay provisional tax on the basis of last year's residual income tax with no increase. This is to give individual taxpayers some benefit from the drop in the higher marginal tax rates and is also a transitional arrangement for the 1988/89 income year only.

Provisional Tax - Current Year Income Boundaries

  • Current Year Provisional Income of $3,000 or less The taxpayer is not a provisional taxpayer so is not required to pay any provisional tax and cannot be charged or receive interest.
  • $3,001 to $100,000 Current Year Provisional Income If the taxpayer is an individual no interest is charged or paid on any under/over payments of residual income tax unless the individual choose to estimate residual income tax. All non-individual provisional taxpayers may be charged interest or paid interest where under/over payments of residual income tax occurs.
  • $100,001 to $1,000,000 Current Year Provisional Income All taxpayers may be charged interest or receive interest.
  • $1,000,001 plus Current Year Provisional Income Taxpayers are required to estimate their residual income tax liability by the 3rd instalment date. All taxpayers may be charged interest or receive interest.
  • Estimation All provisional taxpayers may choose to pay provisional tax on the basis of their estimated liability at any time up until the taxpayer's 3rd instalment date. Estimating taxpayers will receive interest or be charged interest where over/under payments of residual income tax occur.

Interest for Under and Overpayments

  • All provisional taxpayers, except individuals who derived less than $100,000 provisional income and who did not pay their provisional tax on the basis of an estimate, will be liable to pay interest at the rate of 10 percent per annum on the amount by which their residual tax for the year exceeds their provisional tax payments made by the date of the third instalment.
  • Where a provisional taxpayer pays provisional tax in excess of the residual tax liability, that taxpayer is entitled to receive interest at the rate of 10 percent on the amount of the overpayment.
  • If a taxpayer commences to be liable to pay provisional tax in the income year, the Commissioner may remit any interest payable by the taxpayer up to a limit of $100. This is a transitional arrangement for the 1988/89 income year only.

Remission of Additional Tax or Interest

  • The Commissioner's discretion to remit additional tax for underestimation of provisional tax has been tightened. Remission will now only be considered under limited circumstances.

DETAILED EXAMINATION OF THE LEGISLATION

Section 17(1) of the Amendment Act inserts a new Part XII into the principal Act.

The new Part XII consists of sections 375-390.

Section 375 - Interpretation

This section is the interpretation section and lists 3 definitions relevant to the new Part XII of the principal Act.

  1. "Provisional Income" This term is given a meaning which is fundamentally different from that used in the old Part XII. The term is used throughout the new Part and is particularly important in relation to determining whether or not a person is:
    1. A provisional taxpayer;
    2. Liable to pay provisional tax;
    3. Required to make an estimate;
    4. Liable to interest under the new section 398A or eligible to receive interest under the new section 413A of the principal Act.
  2. Provisional Income is defined as the taxpayer's assessable income for the current year other than:

    1. Source deduction payments (as defined in section 6 of the principal Act); and
    2. Non-resident withholding income (as defined in section 2 of the principal Act).
  3. Because provisional income is used to determine a taxpayer's treatment under the new scheme and not for the purposes of calculating the amount of provisional tax payable, the deduction of losses and subvention payments under section 188 and section 191 of the principal Act are not taken into account.
  4. "Provisional Taxpayer" This definition, which is also used throughout the new Part XII, differs from that previously in the Act to the extent that it excludes persons who do not derive more than $3,000 provisional income in the income year. Previously such persons were provisional taxpayer but merely relieved from their obligation to pay provisional tax. Like the former definition, the new definition also excludes companies that do not have a fixed establishment in New Zealand and which are not deemed to be resident in New Zealand within the meaning of Part IV of the principal Act. A provisional taxpayer is therefore basically a person who derives more than $3,000 provisional income (as defined above) in an income year.
  5. "Residual Income Tax" In the new Part XII of the principal Act, the term "residual income tax" is used for the purpose of calculating the amount of provisional tax a taxpayer is required to pay and also to calculate the additional tax for underestimation to which an estimating taxpayer may be liable. The term is also used in other Parts of the principal Act, but is separately defined as required. Residual income tax is basically the tax figure at step 8 in the income tax return. This is the amount on which provisional tax has been based in the past and, subject to the uplift factor, will continue to be based on in the new scheme. The amount of the residual tax is basically the amount of the tax assessed and national superannuitant surcharge to which the taxpayer is liable in respect of the income year, reduced by the amount of:
    • (a) Any tax deductions made from source deduction payments.
    • (b) The amount of any superannuitant surcharge paid by way of deduction from source deduction payments (including National Superannuation).
    • (c) The amount of any Family Support or Guaranteed Minimum Family Income tax credits available under Part XIA of the principal Act.
    • (d) The amount of any export incentives under section 156F or section 156G.
    • (e) The amount of non-resident withholding tax paid.
    • (f) The credit for any amount of foreign tax paid.
    • (g) The credit allowed in respect of any tax paid on behalf of the taxpayer (being a beneficiary of a trust) by the trustee of the trust, or tax paid on behalf of the taxpayer by an agent of the taxpayer.

Section 376 - Application of This Part

This section is the equivalent of the former section 375 and sets out the application of the new Part XII.

Subsection (1) - provides for all provisional taxpayers (as defined in section 375) to be liable to pay provisional tax in accordance with the new Part XII.

Subsection (2) - states that the new provisional tax scheme will apply from the 1988/89 income year onwards.

Section 377 - Amount of Provisional Tax

This section sets out the amount of provisional tax a provisional taxpayer is liable to pay in respect of an income year. This is not to be confused with the amount payable in each instalment which is determined elsewhere in the Part.

Subsection (1) - establishes that the amount of provisional tax to which a person shall be liable in respect of an income year shall be an amount equal to 110% of the residual income tax of the previous year. (i.e. the amount shown in step 8 of last year's tax return increased by 10 percent.) This is the liability for all provisional taxpayers except those who derived less than $3,000 provisional income in the previous year (i.e. were not provisional taxpayers in respect of that year) or those who estimate their provisional tax liability.

Transitional Provision relates to 1989 year only. This applies to Provisional taxpayers with 1988 Provisional Income in excess of $100,000 - they may base 1989 Provisional Tax on 1988 Residual Income Tax without the 10% uplift.

Subsection (2) - relieves provisional taxpayers, who did not derive more than $3,000 provisional income in the previous year, from their obligation to pay provisional tax. Remember that taxpayers who do not derive more than $3,000 provisional income in the current year are, by definition, not provisional taxpayers.

Despite this provision, taxpayers who derive more than $1,000,000 in the current year will nevertheless be required to pay provisional tax on the third instalment date on the basis of their estimated liability. Similarly, interest may nevertheless be chargeable under the new section 398A of the principal Act.

Subsection (3) - liability. This subsection simply provides for the provisional tax liability for the year to be equal to the amount estimated, or last re-estimated, by the taxpayer.

Section 378 - Allowance for Provisional Tax Paid by Agent

This section is identical to the former section 382 of the principal Act. It provides for the provisional tax payable by a person to be reduced by any amount of provisional tax paid on that person's behalf by an agent.

Section 379 - Taxpayer to Calculate Amount of Provisional Tax, Subject to Adjustment by Commissioner

This section originates from section 384 in the former Part XII. Its purpose is to establish the amount of provisional tax to be paid before an assessment of the previous year's tax is made. For example, a taxpayer with a March balance date is required to furnish the tax return for the previous year by the 7th of July. This is also the date by which the first provisional tax instalment is due and payable. Because this means that the payment is due before an assessment is issued, the taxpayer has no accurate basis on which to pay the provisional tax. To overcome this problem, this section provides that the provisional tax payable shall be the amount calculated by the taxpayer in the return, subject to later adjustment.

Subsection (1) - provides that the amount of provisional tax a taxpayer is liable for shall be calculated by the taxpayer in the return in the manner required.

Subsection (2) - provides for the Commissioner to calculate the amount of provisional tax to which a taxpayer is liable if either:

  1. The taxpayer fails to furnish last year's return; or
  2. The Commissioner believes the return to be inaccurate or incomplete; or
  3. The person has not furnished a return but the Commissioner thinks the taxpayer is liable to pay provisional tax.

The amount of provisional tax calculated by the Commissioner under these circumstances will be treated as if it were the taxpayer's own calculation. Provisional tax payments will then be due and payable accordingly.

Subsection (3) - Following the determination of the provisional tax by the Commissioner, the Commissioner may issue a notice to the taxpayer setting out the amounts and times of provisional tax payments to be made. However, if the Commissioner fails to issue such a notice, the taxpayer will nevertheless be liable to the provisional tax.

Subsection (4) - prevents the application of the objections to the Commissioner's calculation under Part III of the principal Act.

Section 380 - Payment of Provisional Tax by Instalments

While section 377 sets out the amount of provisional tax a taxpayer is liable to pay in respect of the income of an income year, section 380 determines the amounts and times of instalments. The times of payment remain as before with 3 instalments required to be made in the fourth, eighth, and twelfth month of the taxpayer's accounting year. The actual dates are set out in the Eighth Schedule to the principal Act.

The section has been substantially rewritten from its predecessor which was the former section 385. The amount due in each instalment is now made explicitly clear and includes any "catch-up" from earlier instalments.

Subsection (1) - requires provisional tax to be paid in three instalments which become due and payable on the 7th day of the months specified in the Eighth Schedule to the principal Act. (i.e. the fourth, eighth, and twelfth month of the taxpayer's accounting year).

Subsection (2) - sets out the amount of provisional tax payable in each instalment in any case where the Commissioner has not issued a notice setting out the amounts of provisional tax payable. (i.e. before the previous year's return has been assessed.)

Subsection (3) - sets out the amount of provisional tax payable in each instalment that falls after the date on which the Commissioner issues a notice setting out the provisional tax due. (i.e. after the previous year's return has been assessed.)

Subsection (4) - provides for this section to be overridden by the provisions of the new section 381. (refer also to the commentary on that section.)

Section 381 - Amount of Instalments Where Return Not Furnished

This section originates from the former section 386 which dealt with interim returns. The section has been substantially redrafted to bring it into line with current practices.

The purpose of this section is to make provision for taxpayers who are not required to furnish the previous year's return by the due date of the first or second provisional tax instalment. These are taxpayers with early balance dates or taxpayers who are subject to the extension of time arrangements under section 17 of the principal Act.

Taxpayers may in this situation pay their provisional tax on the basis of their residual income tax for the year before last year. However, instead of increasing that tax by 10 percent, it must be increased by 20 percent. This arrangement only covers the first and second instalments. The provisional tax due on the third instalment remains based on the previous year's tax increased by 10 percent (see section 377(1)). If the return has not been furnished by that date, and the taxpayer pays an amount less than the correct amount (when this eventually becomes known), additional tax for late payment will be charged on the difference.

Subsection (1) - sets out to whom this section applies. I.e. Taxpayers who have legitimately not furnished their return for the previous year by the due date of the first or second provisional tax instalment.

Subsection (2) - provides for such taxpayers to pay their first and second instalments based on the residual tax for the year before last year, increased by 20 percent.

Section 382 - Estimated Provisional Tax

This section originates from the former section 387 and provides for provisional tax payments to be based on the taxpayer's estimated residual income tax for the income year rather than 110 percent of the residual income tax of the previous year. All taxpayers may use this basis of paying provisional tax in respect of any instalment during the year if they wish. Unlike the former section 387, these provisions are not restricted to taxpayers estimating downwards. Naturally, once a taxpayer has elected to use this basis for payment in respect of an instalment, all remaining instalments in respect of the income year must also be made on this basis.

While the option to estimate is open to all provisional taxpayers from any instalment date, taxpayers who derive more than $1 million provisional income must base their third instalment on an estimate. Such taxpayers can therefore not use last year's residual income tax increased by 10 percent as their basis for payment. Additional tax for underestimation will be charged under the provisions of the new section 384 (see commentary on that section for details.)

The provision for taxpayers to re-estimate their provisional tax during the income year is retained. Again re-estimates can only be made up to the date of the third instalment.

Subsection (1) - provides for any taxpayer to estimate their residual income tax for the income year and notify the Commissioner of that estimate. Under section 377(3) that estimate then becomes the provisional tax the taxpayer is liable to pay for the income year while section 380 sets out the amount payable in each instalment.

Subsection (2) - requires all taxpayers who derive more than $1 million provisional income in an income year to estimate their residual income tax for that income year and notify the Commissioner accordingly.

Subsection (3) - provides for provisional taxpayers to re-estimate their residual income tax at any time before the date on which their third instalment becomes due and payable.

Subsection (4) - provides for the Commissioner to estimate a taxpayer's residual income tax if the Commissioner has reason to believe the taxpayer's estimate is inadequate. The Commissioner's estimate is not subject to appeal but the taxpayer may submit a further estimate to replace the Commissioner's estimate.

Subsection (5) - restricts the amount the Commissioner may estimate under subsection (4) above in cases where the taxpayer was permitted to use last year's residual income tax as the basis for paying this year's provisional tax. The Commissioner may not require the taxpayer to pay more than the taxpayer would be required to pay if that taxpayer had not elected to make an estimate. However, no such limitation exists in respect of taxpayers who derived more than $1 million provisional income and who are required to make an estimate in respect of the third instalment.

Section 383 - Overestimates to be Set Off Within Specified Group

This section relates to wholly owned companies within a specified group of companies (as defined under section 191(4) of the principal Act). Companies within such a specified group may, for the purposes of the provisions relating to additional tax and interest, balance out any over and underpayments of provisional tax among each other.

For example, if one company in a specified group consisting of three companies overestimated and overpaid its provisional tax while the other two companies each underestimated and underpaid, the underpayments could be reduced by the amount of the overpayment in order to reduce the amount of interest and/or additional tax (including for underestimation) to be paid by the other members of the group.

Subsection (1) - restricts the application of this section to companies with 100 percent common shareholding within a group of companies. The section only applies for the purposes of:

  • section 384 - additional tax for underestimation.
  • section 398 - additional tax for late payment.
  • section 398A - charging of interest for underpaid tax.
  • section 413 - relief from additional tax.
  • section 413A - interest for tax overpaid.

Subsection (2) - provides for any company within a specified group of companies to allocate any overpayment of tax to any other company within the specified group to the extent that that company has underpaid tax. The Commissioner must be notified of any such allocation.

Subsection (3) - deems any provisional tax allocated by a company to another company in the specified group to be provisional tax paid by the company to which that tax was allocated rather than the company which actually paid the tax. The credit is deemed to be available on the date of the overpayment, not the date the transfer between companies takes place.

Subsection (4) - requires any company which allocates its overpaid tax to another company to notify the Commissioner in writing.

Section 384 - Additional Tax Where Income Tax Underestimated

This section replaces the former section 388 of the principal Act which charged additional tax of 10 percent where income was underestimated by more than 20 percent. This section has a number of notable differences to this former provision.

  1. Additional tax for underestimation is charged in any case where the taxpayer underestimates the residual income tax by more than 20 percent. Formerly the section operated on the basis of underestimation of income.
  2. Additional tax is charged on the difference between the provisional tax actually paid by the third instalment and the actual residual income tax for the income year. i.e. no longer on the difference between the estimate and 80 percent of the actual.
  3. The circumstances under which the Commissioner will remit the additional tax have been severely restricted. Taxpayers should therefore now expect to be liable to pay the additional tax unless one of the limited circumstances set out in subsection (3) apply.

Subsection (1) - limits the application of this section to provisional taxpayers who have estimated their residual income tax (and therefore their provisional tax), whether that estimate was a voluntary estimate or a required estimate, and the amount estimated is less than 80 percent of the actual residual tax calculated when the return for that year is assessed.

Subsection (2) - sets out the amount of additional tax to be charged. The amount is generally the difference between the provisional tax actually paid by the third instalment and the actual liability for the year.

As was the case under the former provisions, the amount of the additional tax is restricted in cases where the taxpayer voluntarily made an estimate. The additional tax is then restricted to the difference between the provisional tax paid by the third instalment and 110 percent of last year's residual income tax if this is less than the current year's actual residual income tax.

Subsection (3) - provides for the remission of additional tax if the taxpayer had underestimated the provisional tax because:

  1. The law was changed retrospectively and the change was made since the 1st day of the month before the third payment became due.
  2. The Commissioner changes a ruling.
  3. The taxpayer misinterpreted the law and that misinterpretation was entirely reasonable having regard to the circumstances of the case. The provision is primarily to protect taxpayers against the application of additional tax where that additional tax arose because of the taxpayers interpretation of areas of the law which are far from clear. It is not envisaged that this provision can be extended to cover situations where taxpayers have misinterpreted the law without taking reasonable precautions to find out their obligations. e.g. consult a tax professional.

Subsection (4) - deems additional tax charged under this section to be of the same nature as income tax and allows it to be recovered accordingly.

Subsection (5) - provides for the Commissioner to make an assessment of additional tax.

Subsection (6) - deems additional tax to be due and payable on the date of the third provisional tax instalment for the purposes of calculating the interest payable under the new section 398A of the principal Act which is inserted by section 19 of this Act. This means that interest will be charged (where applicable) on the additional tax.

Subsections (7) and (8) - originate from the former sections 388(6) and 388(7) which provided for the application of the objection provisions of Part III of the principal Act and the application of all other Parts of the principal Act as if additional tax were additional tax under section 398 of the principal Act respectively.

Section 385 - Reduction of Provisional Tax in Cases of Relief from Double Taxation

This section retains the former section 389 and allows the Commissioner to reduce the provisional tax payable by a taxpayer if the provisional tax required to be paid under Part XII of the principal Act is likely to be more than the residual income tax to which the taxpayer will be liable because of:

  1. Any exemption allowed under sections 289(3) or 289(4).
  2. Any credit for tax paid overseas under section 293.
  3. Any double taxation agreement.

Section 386 - Alteration Of Provisional Tax By Commissioner

This section originates from the former section 390 of the principal Act. It authorises the Commissioner to change the amount of provisional tax to which a taxpayer is liable. The change may result from an amended assessment, the refusal by the Commissioner to accept a taxpayer's estimate and the Commissioner replacing that estimate with the Commissioner's own estimate, or any other reason. The Commissioner must notify the taxpayer in writing when making such an adjustment.

If the amount of provisional tax is increased, any further amount payable must be paid by the date set out in the notice, but not within 30 days.

If the provisional tax is reduced and a refund results, the commissioner may set that refund off against any unpaid provisional tax or against any income tax owing in respect of a prior income year.

Subsection (1) - allows the Commissioner to make an alteration to the amount of provisional tax payable by a taxpayer and requires the Commissioner to issue a written notice of any such alteration.

Subsection (2) - provides for any increased provisional tax to be payable on the date specified in the notice but not within 30 days.

Subsection (3) - provides for any overpayment of provisional tax to be credited against any provisional tax overdue or any unpaid income tax in relation to a prior year.

Section 387 - Voluntary Payments of Provisional Tax

This section merely retains the provisions of the former section 391 and allows taxpayers to make voluntary payments of provisional tax in excess of that which is required to be paid under the principal Act.

Section 388 - Assessment and Payment of Terminal Tax

This section originates from the former section 392 of the principal Act and sets out the date by which terminal tax is to be paid. The due dates are set out in the Eighth Schedule to the principal Act and remain the eleventh month of a taxpayer's accounting year or 7 February, whichever is the earlier.

Section 389 - Provisional Tax to Be Credited Against Tax Assessed

This section retains the former section 393 and provides the authority to credit provisional tax against income tax.

Section 390 - Application of Other Parts to Provisional Tax

This section is the equivalent of the former section 394 of the principal Act and provides for the rest of the principal Act to apply to all amounts payable under Part XII as if those amounts were income tax levied under section 38.

Section 17(2) - is the application section for the new Part XII inserted by section 17(1). The new Part XII comes into force on 7 November 1988 and applies in respect of all provisional tax payments due on or after that date.

Section 18 - Additional Tax to be Charged If Default Made In Payment of Tax

Section 18of the Amendment Act amends section 398(5) of the principal Act by removing the word "wilful".

Section 398(5) provides the Commissioner with the power to set a new due date in respect of any tax to be paid following an assessment or re-assessment after the original due date has passed.

Under the previous wording of the section, the Commissioner was required to set a new due date in all cases unless it could be shown that the taxpayer was guilty of wilful neglect or default. The onus was therefore on the Commissioner to prove intent on the part of the taxpayer with the result that the setting of a new due date was virtually automatic.

The removal of the word "wilful" is intended to enhance the Commissioner's ability to refuse to set a new due date where the taxpayer is essentially at fault. In this way the taxpayer will not escape the imposition of additional tax for late payment which is levied under section 398.

Subsection (1) - removes from section 398(5), the word "wilful".

Subsection (2) - changes a reference in section 398(7) of the principal Act as a result of the new Part XII which was inserted by section 17 of the Amendment Act.

Subsection (3) - is the application provision and provides that this section will apply to the income year commencing 1 April 1988 and every subsequent year.

Section 19 - Interest to be Charged Where Residual Income Tax Exceeds Provisional Tax

Section 19 inserts a new section 398A into the principal Act which provides for the charging of interest, calculated on a daily basis at a rate set by Order in Council, on the amount equal to the difference between the provisional tax paid by the third instalment and the actual residual income tax to which the taxpayer is liable for the income year. All provisional taxpayers are liable to this interest charge with the exception of individuals who neither estimated their provisional tax liability nor have provisional income over $100,000.

Interest is charged from the third instalment date to the date the tax is paid or the date for payment of terminal tax whichever is the earlier.

Subsection (1) - sets out the definitions of terms used in the new section 398A.

  • (a) "Residual income tax" has the same meaning as detailed in section 375 which was inserted into the principal Act by section 17 of the Amendment Act.
  • (b) "Specified rate of interest" is the rate at which interest is charged. The rate is set by Order in Council but will initially be 10 percent.
  • (c) "Trustee income" means the income a person receives as a trustee but does not include any income of the trust distributed to any beneficiary of the trust. This definition is used in subsection (2) which excludes such income from the exemption provided under that subsection.

Subsections (2) and (3) - set out to whom the new interest regime applies.

Section 398A applies to every person who is a provisional taxpayer except natural persons with current year provisional income not exceeding $100,000 and who did not estimate their residual income tax under section 382(1) of the principal Act. The effect of this exemption is that by far the majority of individuals (approx. 95 percent) will not be subject to the interest charge unless they choose to estimate their provisional tax.

The proviso to subsection (3) excludes a trustee from the exemption to the extent of any trustee income.

Subsection (4) - provides for the imposition of interest during the period starting with the day after the third provisional tax instalment is due and ending on the day the terminal tax becomes due.

Subsection (5) - sets out how the interest imposed under subsection (4) shall be calculated. This is in respect of each day in the period and using the formula set out in the subsection.

Notice that interest is payable on all income tax that remains unpaid including additional tax charged for underestimation or late payment. However, interest is not charged on interest. Although interest is calculated daily, it is therefore not compounding daily.

Subsection (6) - deems the interest payable to be of the same nature as income tax and can therefore be recovered as such. This has the additional effect of ensuring that interest charged under this section is not a deductible expense for income tax purposes since the deduction of income tax is expressly prohibited by section 106(1)(f) of the principal Act.

Subsection (7) - provides for the remission of interest if a taxpayer pays terminal tax before the due date. For example, where the Commissioner issues an assessment notice and the taxpayer pays the tax within 30 days, interest will only be charged up to the date of the assessment notice. The taxpayer therefore knows how much is required to be paid to clear the entire debit. If no payment is made in the 30 day period following the issue of the assessment, interest continues to be charged from the date of the assessment to the terminal tax date.

Because interest is remitted, a tax liability may arise under the accruals rules. This effect is currently under review.

Subsection (8) - provides for the specified rate of interest to be changed by way of Order in Council.

Subsection (9) - provides for the Commissioner to remit any interest charged under this section if the Commissioner is satisfied that the interest resulted from either:

  1. A retrospective change in the law, or
  2. A change in the Commissioner's ruling or interpretation of the principal Act.

The discretion to remit interest only relates to that amount of interest resulting from increased income tax payable due to the events outlined above. This means that taxpayers must generally expect to pay interest on tax underpaid and the Commissioner will have only restricted power to remit that interest.

Section 19(2) - is the application provision and provides for the interest regime to apply from the income year commencing 1 April 1988 and every subsequent year.

Section 20 - Interest On Tax Overpaid

Section 20 inserts a new section 413A into the principal Act to provide for the payment of interest by the Commissioner in any case where a provisional taxpayer has overpaid provisional tax. The section is symmetric to the new section 398A inserted by section 19. It applies to the same categories of taxpayers and over the same time period.

Two notable differences are:

  1. The definition of the term "residual income tax" differs from that in section 398A to the extent that the amount may also be a negative amount.
  2. The amount on which interest is paid is the difference between the income tax payable for the income year and the provisional tax paid by the due date for the third provisional tax instalment. This effectively means that a taxpayer will not receive interest on overpayments of provisional tax which result from payments made after that date. (e.g. voluntary payments of provisional tax).

Section 21 - Amendments Consequential Upon Sections 17 to 20

Section 21 makes numerous minor amendments to various sections of the principal Act as a result of the new provisional tax rules introduced by sections 17 to 20 of the Amendment Act.

Subsection (1) repeals the definition of the term "estimated taxable income" which has now become redundant.

Subsection (2) redefines the term "provisional income" in section 2 of the principal Act as having the meaning assigned to it in the new section 375.

Subsection (3) redefines the term "terminal tax" in section 2 of the principal Act as including interest imposed under section 398A. In addition, reference is now made to section 388 rather than the former section 392.

Subsection (4) makes a consequential amendment to section 34 of the principal Act which deals with tax in dispute. The section is amended to make it clear that any interest imposed under the new section 398A on any tax in dispute shall be treated the same as that tax for the purposes of the tax in dispute rules. i.e. the payment of interest relating to deferrable tax is also suspended to the day of determination of final liability.

Subsections (5) - (18) make minor drafting amendments consisting mainly of changing references to sections in the new Part XII and the new sections 398A and 413A of the principal Act.

Section 22 - Transitional Provisions in Relation to Provisional Tax

This section introduces certain provisions to apply for the 1988/89 income year only. These transitional provisions, which result mainly from the lowering of the income tax rates, are as follows:

  1. Companies who pay their 1988/89 provisional tax in accordance with sections 380 or 381 of the new Part XII (i.e. companies who do not estimate their provisional tax liability but instead pay on the basis of the previous year's tax) may make an adjustment to take into account the reduction in the company tax rate from 48c/$ to 28c/$.
  2. The provision is not extended to corporate trustees, in respect of trustee income, who pay tax at the trustee rate rather than the company rate.

    Companies who either choose or are required to make an estimate of their residual income tax can, by the mere fact that they are estimating their tax rather than income, take into account the lower tax rate.

  3. Taxpayers who commence to be liable to pay provisional tax in the 1988/89 income year but who were not provisional taxpayers in the 1987/88 income year may have any interest imposed under the new section 398A remitted if that interest is not more than $100.
  4. Provisional taxpayers who are individuals and who earned more than $100,000 provisional income in the 1987/88 income year, may pay their 1988/89 provisional tax based on their 1987/88 residual income tax without the 10 percent uplift. This partially compensates these people for the reduction in the personal income tax rates contained in section 23 of the Amendment Act.
  5. Subject to future change by way of Order in Council under section 398A(7) of the principal Act, the specified rate of interest for over and underpayment of tax is set at 10 percent.

Subsection (1) - provides for companies (other than corporate trustees to the extent of any trustee income) to adjust their provisional tax to take account of the lower company tax rate.

Subsection (2) - defines trustee income for the purposes of subsection (1).

Subsection (3) - Allows the Commissioner to remit interest calculated under section 398A in relation to a taxpayer where that interest does not exceed $100. This remittance can only apply where the taxpayer was not a provisional taxpayer in the 1988 income year. This provision is for new provisional taxpayers who may not be aware of their obligations and become liable for interest.

Subsection (4) - Initially sets the rate of interest applying in sections 398A and 413A of the principal Act at 10 percent.

Subsection (5) - relieves provisional taxpayers who earned more than $100,000 provisional income in the 1987/88 income year from having to increase their tax for that year by 10 percent as the basis of calculating their 1988/89 provisional tax.

Subsection (6) - is the application subsection and provides for the transitional measures contained in this section to come into force on 7 November 1988 and to apply to all provisional tax instalments due on or after that date.

Section 23 - Basic rates of income tax for Individuals for 1988/89

Section 23 inserts into the First Schedule of the principal Act the following composite tax rate scale for individual taxpayers which applies for the 1988/89 income year.

Income range Tax rate (cents per $1)
0 - 9,500 19.5
9,501 - 30,000 27.0
30,001 - 30,875 36.0
30,876 and over 40.5

This composite rate scale is a combination of the tax rates applying for the current tax year from 1 April 1988 to 30 September and the new rates applying from 1 October 1988 to 31 March 1989. This composite tax rate applies ONLY for the 1988/89 income year.

The composite rate scale should be used for all "early" 1989 assessments and special tax codes made after the date on which the Income Tax Amendment Act (No. 3) 1988 receives the Governor-General's assent, i.e., the 28th of July. This includes "urgent" refunds for taxpayers departing from New Zealand.

Taxpayers eligible for the low income rebate, who have either received an early 1989 assessment or who have filed their 1989 tax return and are yet to be assessed, can have their return assessed or reassessed on the basis of the new rebate and Income Tax rates.

Section 24 - Basic Rates of income tax for Individuals for 1989/90

Section 24 inserts into the First Schedule of the principal Act, the following tax rate scale for individual taxpayers which applies for the 1989/90 income year.

Income range Tax (cents per $1) rate
0 - 30,875 24
30,876 and over 33

Refer to the commentary on section 26 of the Amendment Act for the use of these rates for PAYE purposes from 1 October 1988.

Section 25 - Basic Rates of Income Tax for Non-Specified Trusts

This section amends clause 9 of the First Schedule to the Income Tax Act. The effect is that from the commencement of the 1989 income year (year commencing 1 April 1988) income derived by specified trusts and non-specified trusts will be subject to the same tax regime.

Previously income derived by specified trusts was subject to tax at the greater of:

  • A flat tax at the rate of 35 cents in the dollar.
  • Rates according to the individual tax scale.

Non-specified trusts were subject to tax at individual rates.

For the income year commencing on 1 April 1988 both types of trust will be subject to tax at the greater of:

  • A flat tax at the rate of 35 cents in the dollar.
  • Rates according to the individual tax scale.

The removal of the distinction between specified and non-specified trusts results from a recommendation by the Consultative Committee on International Tax Reform.

The uniform treatment of trustee income is an integral part of the overall International Tax Regime. Further legislation will be introduced in the Taxation Reform Bill (No. 5) to remove the distinction between specified and non-specified trusts from 1 April 1988.

It is proposed that from the 1989 income year, trustee income will be taxed at the top marginal rate for individuals (33 cents in the dollar). This amendment will be made in a subsequent Act.

Section 26 - Changes to the Second Schedule

Section 26 makes the amendments necessary to incorporate the new tax rate scale (see section 24 of this Amendment Act), into the PAYE tax tables for use from 1 October 1988. It also changes the rates of tax in respect of secondary employment income, extra emoluments, and the no declaration tax rates from 1 October 1988.

Subsection (1) amends clause 3 of the Second Schedule which sets the "no declaration" rate of tax deduction. The rate has changed from two rates to one rate with effect from 1 October 1988. The new single rate is 33 cents in the dollar.

Subsection (2) amends clause 6 of the Second Schedule which sets the basic tax deduction rate which applies to secondary employment earnings at 28 cents in the dollar. This approximately reflects the new average marginal tax rate under the new rate scale.

Subsection (3) amends clause 9 of the Second Schedule to the principal Act which sets the basic tax deduction rate of extra emolument at 28 cents in the dollar.

Subsection (4) amends the appendix to the second schedule of the principal Act which inserts new PAYE tax tables which come into effect on the 1st of October 1988.

Sections 27-29: - Winding-up distribution tax

Comment

Sections 27, 28 and 29 of the Amendment Act, which were introduced into the Taxation Reform Bill (No. 4) by Supplementary Order Paper during the Committee Stages, give effect to one of the recommendations of the Consultative Committee on Imputation. The recommendation was accepted by the Minister of Finance and the Minister of Revenue.

In its Report published on 15 April 1988 the Consultative Committee proposed the winding-up distribution tax ("WUD") as a transitional measure primarily to encourage companies which have ceased trading, or may be intending to cease trading, to wind-up. Under the imputation system to be introduced this year only tax paid on company profits for the 1989 and subsequent income years will qualify for imputation credits. It was considered therefore that the taxation at personal tax rates of pre-1989 retained earnings and other taxable reserves would be an obstacle to winding-up.

The Consultative Committee recommended that distributions of retained earnings or other taxable reserves made by companies during the period from 1 April 1988 to 31 March 1989 inclusive in the course of winding-up should be subject to a special "winding-up distribution tax" at the rate of 10 per cent payable by the company. The WUD tax is to be levied on all distributions which would otherwise have been taxable as dividends in shareholders' hands if distributed on winding-up. The WUD tax will not apply to distributions of dividends RECEIVED by the company after 15 April 1988 (non-qualifying reserves).

Shareholders receiving dividends from which WUD tax has been deducted and paid by the company will be exempt from tax on the amount of those dividends. The exemption will also apply to any such dividends received by non-resident shareholders with the effect that those dividends will not be subject to non-resident withholding tax.

Legislation

The legislation giving effect to the WUD tax is contained in the Amendment Act and will not be incorporated into the Income Tax Act 1976. The provisions in the Amendment Act will be the legislative authority for the imposition of the WUD tax. However, as the legislation in the Amendment Act is read together with and deemed part of the principal Act, the provisions of the principal Act will apply to the WUD tax where appropriate.

Section 27

This section provides the exemption from tax for shareholders who receive dividends which have been subject to the WUD tax. The exemption will only apply where the entire amount of WUD tax payable on any distribution (including any penalty by way of additional tax) has been paid on or before 31 May 1989.

There will be no exemption for shareholders where only part of the WUD tax (including penalties) has been paid by 31 May 1989. Any partial payment will be refunded to the company.

Section 28

This section provides that companies will be liable for WUD tax where they pay dividends between 1 April 1988 and 31 March 1989 in the course of winding-up. For this purpose winding-up includes the dissolution procedure provided for in section 335A of the Companies Act 1955 ("short-form wind-up").

Subsection (1) imposes the liability for WUD tax on a company where it pays or distributes dividends to its shareholders. However, there is no liability for WUD tax in respect of dividends paid or distributed -

  • to a shareholder who is exempt from income tax, or
  • to a company that is exempt from income tax on dividends under section 63 of the Income Tax Act, or
  • from the non-qualifying reserves of the company (refer to explanation to subsection (3) of this section).

Under subsection (2)(a), upon application in writing by the company, the Commissioner may exempt from WUD tax any company which has distributed dividends to its shareholders during the period from 1 April 1988 to 31 July 1988. It is intended that this provision will apply only where a company has distributed all of its reserves before the enactment of the legislation and has no funds remaining to pay the WUD tax. In such a case the exemption for shareholders in section 27 will not apply and the shareholders will be liable for income tax on those dividends.

Under subsection (2)(b) a company may be exempt from liability to pay WUD tax where the Commissioner is satisfied that all the dividends have been included in the assessable income of the shareholders. This provision will ensure that the liability for WUD tax does not remain once the dividends have been assessed for income tax in the hands of the shareholders.

Subsection (3) defines what is meant by non-qualifying reserves and also provides an ordering rule in order to identify the source of a distribution for the purposes of applying the WUD tax. Dividends are deemed to have been paid firstly from non-qualifying reserves of the company to the extent of those non-qualifying reserves. For example:

31 March 1988 - Amount of revenue reserves $5000
30 June 1988 - Dividends received by company $1000
30 August 1988 - Dividends paid to shareholders $3000
1. Shareholders are liable for income tax on $1000
2. Company pays WUD tax on $2000
3. Shareholders are exempt from income tax on $2000

Section 29

Subsection (1) provides that every company liable to the WUD tax has to make a deduction of 10 per cent of the amount of the dividends paid or distributed at the time of making that payment or distribution. The WUD tax is to be calculated on the basis of the amount of the dividend received by the shareholders after the deduction of the WUD tax. For the purposes of the calculation of the amount of WUD tax, the correct result is achieved by calculating the tax on the same basis as GST is calculated on total sales, i.e., by taking the amount of the distribution before tax and dividing by 11 or multiplying by 0.0909.

Example

Amount of revenue reserves $5000.00
Amount of distribution (before payment of WUD tax) $5000.00
WUD tax payable (5000 divided by 11) 454.54
Dividends paid to shareholders $4545.46
WUD tax is 10% of dividends paid.  

Subsection (2)(a) provides the due dates for payment of the WUD tax. Payment is to be made to the Commissioner either -

  • on or before 31 August 1988, or
  • on the date of distribution,

whichever date is the later.

Subsection (2)(b) requires the company, upon making payment of the WUD tax, to furnish to the Commissioner a return in the prescribed form setting out the details required in the form. A new form (IR4B) has been developed for this purpose.

Subsection (3) sets out the late payment penalty provisions, i.e., 10% penalty compounding at six-monthly intervals.

Subsection (4) gives the Commissioner the discretion to make an assessment of the amount of WUD tax and any additional tax payable. The company may, on objection, establish either that the tax assessed is excessive, or that the company is not chargeable with the WUD tax or the additional tax.

Subsection (5) ensures that the assessment provisions of the Income Tax Act apply equally to a WUD tax assessment as to an assessment of income tax.

Under subsection (6) the provisions of the Income Tax Act relating to objections have the same application in respect of a WUD tax assessment as in respect of an assessment of income tax.

Subsection (7) prevents the WUD tax from being allowed as a deduction for income tax purposes.

Subsection (8) provides that, subject to the other provisions of the section, all the other provisions of the Income Tax Act apply to WUD tax as if it were income tax levied under section 38 of the Act and that WUD tax cannot be construed as income tax for the purposes of Part IV of the Act.

GST Implications

The provisions of the GST Act 1985 apply to distributions of dividends by way of property (distributions in specie or in kind). The distribution of property constitutes the supply of goods for GST purposes.

Where the distribution of property is made by a company that is a registered person GST is payable on the value of the property. However, a distribution of a taxable activity as a going concern or part of a taxable activity as a going concern where that part is capable of separate operation is zero-rated for GST purposes.

Where the distribution of property is made by a company that is not registered or not liable to be registered there is no GST payable.

Stamp Duty Implications

A distribution in specie of the assets of a company in liquidation to its shareholders is regarded as a conveyance from a trustee to a beneficiary and, as such, is exempt from conveyance duty under section 17(f) of the Stamp and Cheque Duties Act 1971. An exception is where a company does not appoint a liquidator in which case it is considered that the relationship of trustee/beneficiary does not arise for stamp duty purposes and the distribution is liable for conveyance duty.

However, the exception does not apply in the case of a short-form wind-up under section 335A of the Companies Act. In such cases it is considered that the absence of a liquidator does not prevent the creation of a trustee/beneficiary relationship between the company and its shareholders. The exemption in section 17(f) applies in those circumstances.

Operational Details

Companies liable for the WUD tax will be required to pay the tax to the Masterton District Office which will act as a collection and receipting base on behalf of the Department. After payment has been received the Masterton Office will forward to the District Office where the company's file is held all the relevant information for verification and any other action as may be necessary.

Copies of the explanatory pamphlet and the Form IR4B are being issued to all companies as well as to District Offices.