Part I - The Income Tax Amendment Act (No 2) 1988
Archived legislative commentary on Part I - The Income Tax Amendment Act (No 2) 1988 from PIB vol 174 May 1988.
This commentary item was published in Public Information Bulletin Volume 174, May 1988
Section 1 - Short Title
This section provides for this Act to be read together with and be deemed part of the Income Tax Act 1976. It also provides that except where the Act contains a different application date, it comes into force on the 17th of March 1988.
Section 2 - Rebate for Support of Dependent Relative
This section repeals section 55 of the Income Tax Act 1976 which provided a rebate for the support of dependent relatives. This rebate is abolished with effect from 1 April 1988.
Section 3 - Rebate in Respect of Gifts of Money and Payment of School Fees
This section amends section 56A of the Income Tax Act 1976 which provides a rebate in respect of gifts of money and payment of school fees. The rebate available under this section for payment of school fees is abolished with effect from 1 April 1988. For the income year commencing on the 1st of April 1988, only donations to charitable organisations will be eligible for the rebate.
Section 4 - Special Exemption in Respect of Life Insurance Premiums and Other Specified Contributions
This section gives effect to the announcement in the 17 December economic statement that the special exemption for life insurance premium payments and contributions to superannuation schemes will be abolished as from 17 December 1987. For the 1988 income year the amount of the special exemption is the lesser of:
- Premia/contribution made between 1 April 1987 and 16 December 1987.
- Maxima provided by the new section 59(5A).
- Ensures that the operation of section 59(5) of the Principal Act (maximum levels for the special exemption) is confined to income years which commenced on or before 1 April 1986.
- Inserts the new section 59(5A) in the principal Act. The new section provides that for the 1988 income year the maximum amount of the deduction allowable shall be:
|*||Where the taxpayer contributed to a subsidised superannuation scheme for the whole of the period 1.4.87-16.12.87||$1,200.00|
|*||Where the taxpayer did not belong to a subsidised superannuation scheme at any time during the period 1.4.87-16.12.87||$1,400.00|
|*||Where the taxpayer was a member of a subsidised superannuation scheme during any part of the period 1.4.87-16.12.87||$1,200.00 increased by $23 for each month during which the taxpayer was not a member of a subsidised superannuation scheme during the period1.4.87 - 16.12.87.|
- Provides that the special exemptions allowable in terms of sections 59(3) (special exemption for premiums) and section 59(4) (special exemption for superannuation contributions) cease in respect of insurance premiums or superannuation contributions paid on or after 17 December 1987.
Section 5 - Foreign Pension Funds
Section 5 repeals the interest exemption in 61(20) for foreign pension funds. The exemption is removed as from 5 o'clock on 16 March 1988.
This measure is part of the general review of the taxation of life insurance and superannuation funds.
Section 6 - Standard Value of Livestock
This section amends section 86 of the Tax Act which deals with the setting of standard values for livestock. The standard values set annually for each class of livestock are, from the 1989 income year, 70 percent of a three year rolling average of declared average market values.
The amendment limits the standard value set each year for each class of livestock to a maximum of the average market value declared for that year. The reason for this is to limit the distortions created by any substantial downwards fluctuations in average market values which could mean the standard value for a year is set higher than the average market, or herd, value for that year (because of the effect of higher values of earlier years in the three year rolling average).
Section 7 - Valuation of High-Priced Livestock
This section amends section 86C of the Tax Act which sets out the high priced livestock regime.
Two amendments are made to the regime.
- Livestock whose physical condition at the time of purchase makes them incapable of ever being used for breeding are excluded from the regime.
- The entry point for goats is raised from 3 to 4 times the declared average market value.
The amendments apply for the 1988 income year and all future years.
Section 8 - Transitional Provisions in Relation to Livestock Revaluation
This section amends section 86G of the Tax Act which contains transitional provisions necessary for the change in livestock taxation.
Two amendments are made to section 86G.
amends section 86G(2) which deals with the election of livestock valuation schemes in the transitional period. The legislation at present requires farmers who wish to make an election under section 85A for the 1988 or 1989 years to do so when furnishing their 1987 return of income (or earlier). However, this is not possible for persons who commence farming after furnishing their 1987 returns. The amendment ensures that a taxpayer commencing farming, or recommencing to farm a type of livestock that was farmed prior to the 1987 income year, is excluded from the transitional provision. The amendment makes it clear that new farmers, or existing farmers who purchase stock not farmed prior to 1987, can use section 85A and make their livestock valuation election for that stock when furnishing the return of income for the year in which the valuation is to first apply.
amends section 86G(8) which sets standard values for the 1987 and 1988 income years. The same limitation as that imposed by section 6 of this Amendment Act is imposed on the 1988 standard values, i.e., 1988 standard values are limited to a maximum of the 1988 average market values. Any adjustment will automatically be made when the 1988 standard values are set.
Section 9 - Deduction for Expenditure or Loss Incurred in The Production of Income From Employment
This section amends section 105 of the Income Tax Act 1976 to repeal the deduction available to taxpayers for expenditure incurred in deriving income from employment.
This section also repeals;
- the standard deduction which is the lesser of $52 or 2 percent of the taxpayers income from employment: and
- the Fourth Schedule to the Income Tax Act 1976.
repeals the existing section 105 and inserts a replacement section.
The effect of the amendment is that no deduction will be allowed for expenditure incurred in the production of income from employment after the 1st of April 1988. The only deduction available to taxpayers who derive this type of income will be in respect of the expenses incurred in having their tax return completed, which will continue to be deductible under section 165 of the Act.
In addition, no deduction will be allowed for depreciation on an asset to the extent that it is used in the production of income from employment after 1 April 1988.
of section 9 amends section 336A of the Act (National Superannuitant Surcharge definitions) to repeal the definitions of "income from employment" and "standard deduction entitlement" for 1989 and future years as these are no longer required.
of section 9 amends section 336B(1) of the Act (Calculation of other income for National Superannuitant Surcharge purposes) by removing item C from the formula in that subsection. (Item C took the standard deduction entitlement into account in calculating 'other income' of national superannuitants). The amendment applies for 1989 and future years.
Section 10 - Gifts of Money by Medical Practitioners to New Zealand Medical Education Trust
This section repeals section 145 of the Income Tax Act 1976 which allowed a deduction for gifts of money paid by medical doctors to the New Zealand Medical Education Trust. This deduction is to be abolished with effect from 1 April 1988. Gifts made on or after that date will be ineligible for the deduction, irrespective of the accounting year of the taxpayer.
Section 11 - Gifts of Money by Companies to Universities, Approved Institutions, and Individuals for Education or Research
This section repeals section 146 of the Income Tax Act 1976 which allowed a deduction for gifts of money made by companies to universities, institutes and individuals for study or research. This deduction is to be abolished with effect from 1 April 1988. Gifts made on or after that date will be ineligible for the deduction, irrespective of the accounting year of the taxpayer.
Section 12 - Contributions to Employees Superannuation Schemes
This section amends section 150 of the Act to remove the deduction previously available for contributions by private companies to subsidised employee superannuation schemes on behalf of employees who are "major shareholders" as defined in section 336N of the Act (essentially, shareholders who hold more than 10 percent of the shares or voting rights in a private company). The amendment is associated with the removal of the fringe benefit tax exemption for superannuation contributions and insurance premiums made by sections 17 to 20 of this Act.
Section 150 of the Act allows a deduction for payments made by employers to any subsidised superannuation scheme in respect of their employees. The section at present contains a provision to deny a deduction for contributions made in respect of employees who are "shareholder-employees" as defined in the section (essentially, employees who hold more than 20 percent of the shares or voting rights in the company).
The amendments made by sections 17 to 20 of the Amendment Act will impose a liability for fringe benefit tax in respect of insurance premiums and superannuation contributions which were previously exempted from the tax by paragraphs (1) and (m) of the definition of fringe benefit. However, the exemption from fringe benefit tax available in respect of benefits provided to "major shareholders" will continue to apply. For those employees the legislation denies the employing company deductibility of the cost of providing fringe benefits to them. This amendment to section 150 ensures the continuation of that effect in relation to payments that would otherwise be deductible under that section. In so doing, it harmonises with other provisions in the Act which deny deductibility for the cost of benefits provided to 'major shareholders'. The removal of deductibility for superannuation contributions made in respect of major shareholders applies to all contributions to subsidised employee superannuation schemes made on or after the 1st of April 1988. The company's accounting year is not relevant to this application date.
Sections 13 and 14 - Export Market Development and Tourist Promotion Expenditure
The incentives provided by section 156F (export market development and tourist promotion incentive) and section 156G (export market development activities incentive for self-employed taxpayers) are being phased out over the 1988, 1989 and 1990 income years. The phase-out regime allows a tax credit to be paid at a rate which is greater than the current company tax rate of 48 cents. As the company tax rate has been reduced the rates for the incentives are amended by sections 13 and 14 of this Amendment Act as follows:
|Income Year||Old Rate||New Rate|
Section 15 - Partial Exemption for Mining Companies
Section 217 of the Income Tax Act provides that the amount of tax payable by a mining company on its taxable income from mining shall be two thirds of the amount that would otherwise have been payable. With the reduction of the company tax rate the Government has decided not to continue with this tax concession.
Section 15 of this Amendment Act repeals section 217.
Section 16 - Non-Resident Mining Companies
Currently these companies are liable to tax at 48 cents in the dollar. (See clause 4 of Part A of the first schedule). As from 1 April 1988 these companies will be taxed at the rate for non-resident companies of 33 cents in the dollar. This amendment achieves by amending section 221(3) to substitute the existing reference to clause 4 with a reference to clause 8.
Sections 17 to 20 - Fringe Benefit Tax
These sections impose a fringe benefit tax liability on those insurance premiums, superannuation contributions and payments to certain funds which were previously exempted from fringe benefit tax by paragraphs (1) and (m) of the definition of "fringe benefit" in section 336N of the Act. The liability is imposed in respect of all premiums and contributions paid on or after the 17th of December 1987. Premiums and contributions paid between the 17th of December 1987 and the 30th of June 1988 are deemed to have been provided during the June quarter, making the tax on them payable on the 20th of July 1988.
Fringe benefit tax on insurance premiums and contributions to superannuation and other funds which were previously exempt from the tax will be payable at two rates as follows:
- 24 cents in the dollar for payments to:
- - superannuation category 1 schemes approved by the Government Actuary on or before the 17th of December 1987.
- - sick, accident or death benefit funds (as defined in section 60 of the Act) which had been approved by the Commissioner on or before the 17th of December 1987.
- 35 cents in the dollar for payments to:
- - superannuation category 1 schemes not approved by the Government Actuary on or before the 17th of December 1987.
- - all superannuation category 2 schemes.
- - sick, accident or death benefit funds (as defined in section 60 of the Act) which were not approved by the Commissioner on or before the 17th of December 1987.
- - any fund that does not come within the definition of sick, accident or death benefit fund in section 60 of the Act but to which paragraph (d) of the definition of "specified fund" in section 59 of the Act applies. (Essentially, any fund which provides benefits solely in respect of personal accident, disease, sickness or death and which has been approved by the Commissioner for the purposes of section 59 of the Act but not for the purposes of section 60).
- - any insurance fund of a friendly society that does not qualify for the 24 cents rate.
- - any policy of life insurance or policy of pension insurance, as defined in section 59 of the Act, for the benefit of an employee or the spouse or any child of an employee.
- - any policy of personal accident or sickness insurance, as defined in section 59 of the Act, for the benefit of an employee or the spouse or any child of an employee.
Fringe benefit tax on insurance premiums and contributions to superannuation schemes which were previously subject to the tax will continue to be liable for the tax at the rate of 48 cents in the dollar. (In particular, superannuation category 3 schemes).
Section 17(4) of the Amendment Act also removes the exemption in relation to tuition fees and examination fees paid by employers the education of employees or employees' children. (The exemption applied where the employer contracted with the educational institution for the education of an employee or an employees child. Reimbursement of expenses incurred by employees is monetary remuneration and falls outside the scope of fringe benefit tax).
The exemption is removed from the 1st of April 1988.
These effects are achieved in the legislation in the following way.
Section 17(1) inserts two new paragraphs, (da) and (db) in the definition of "fringe benefit" in section 336N. The purpose of this amendment is to enable the distinction to be drawn as to the types of payments which are subject to the tax at the rates of 24 cents in the dollar and 35 cents in the dollar respectively.
Section 17(2) is a consequential amendment which is required simply as a result of the insertion of the new paragraphs (da) and (db) in the definition of "fringe benefit".
Section 17(3) is a technical amendment. The definition of "expenditure on account of an employee" in section 2 of the principal Act includes insurance premiums other than those referred to in paragraph (b) of the definition. The effect is that the payments referred to in the exclusions from paragraph (b) have technically been subject to fringe benefit tax but have been exempted from the tax by the exemption provided in paragraphs (l) and (m) of the definition of "fringe benefit" in section 336N. With the removal of the exemption provided by those paragraphs with effect from 17 December 1987 these benefits are now liable for fringe benefit tax.
Paragraph (j)(ii) of the definition of fringe benefit exempts benefits which are exempt from income tax under Part IV of the Act, other than certain income to which section 73(2) of the Act applies. While the payments covered by the exclusion from paragraph (b) of the definition of "expenditure on account of an employee" are not specifically exempted from income tax, the amendment provided by section 17(3) of the Amendment Act removes any doubt as to the intention of the legislation. It excludes, from the exemption provided in paragraph (j) (ii), payments to which paragraphs (b)(i), (b)(ii) and (b)(iii) of the definition of "expenditure on account of an employee" apply, with effect from the 17th of December 1987. This makes it clear that these payments are liable for fringe benefit tax.
Section 17(4) repeals subparagraph (ix) of paragraph (j) of the definition of "fringe benefit". This subparagraph provides an exemption from fringe benefit tax for those tuition fees and examination fees paid by an employer in respect of the education of an employee, or the child of an employee, which would otherwise have been subject to fringe benefit tax.
This exemption is repealed with effect from the 1st of April 1988.
Section 17(5) effects the repeal of the exemptions contained in paragraphs (l) and (m) of the definition of fringe benefit.
Section 17(6) defines the expressions "contribution to a designated fund" and "contribution to a non-designated fund". These definitions are required because benefits which fall within the first of these definitions are subject to fringe benefit tax at the rate of 24 cents in the dollar, while contributions to the latter are subject to the tax at the rate of 35 cents in the dollar. The definitions are self explanatory, the contributions included being explained more fully in the introductory explanation of the effect of sections 17 to 20 of the Amendment Act set out earlier in this publication.
Section 17(7) introduces a definition of "specified insurance premium". As with the definitions inserted by section 17(6), this definition is included to clarify the types of insurance premiums which were previously exempt from fringe benefit tax and which will now be subject to the tax at the rate of 35 cents in the dollar.
Subsections (8) and (9) of section 17 set out the application dates for the amendments contained in the section. The amendment contained in subsection (4), repealing the fringe benefit tax exemption for tuition fees and examination fees, applies from the of April 1988. From that date payment of fees which were previously exempt will be subject to fringe benefit tax at the rate of 48 cents in the dollar.
All the other amendments apply with respect to fringe benefits provided on or after the 17th of December 1987.
Section 18 of the Amendment Act amends section 336O of the Act by inserting two new subsections. Section 336O is the section which sets out the rules governing the manner in which fringe benefits are to be valued. The new subsection (3A) provides that the value of any specified insurance premium is to be the amount of the premium paid by the employer. The new subsection (3B) provides that the value of any contribution to a designated fund or contribution to a non-designated fund is to be the amount of the contribution made by the employer. The amendment applies to all benefits provided on or after the 17th of December 1987.
Section 19 of the Amendment Act amends section 336S of the Act in relation to the rate of fringe benefit tax. It provides that from 17 December 1987 fringe benefit tax will be payable at the following rates:
- 48 cents in the dollar for all benefits other than those that are contributions to a designated fund, contributions to a non-designated fund or specified insurance premiums.
- 24 cents fund in the dollar for contributions to a designated fund
- 35 cents in the dollar for contributions to a non-designated fund and for specified insurance premiums.
Section 20 does not specifically amend section 336T of the principal Act. Instead, it deems any benefit that consists of a contribution to a designated fund, a contribution to a non-designated fund or a specified insurance premium which was provided between the 17th of December 1987 and the 30th of June 1988 to have been provided during the June quarter. The effect is that the total value of those benefits must be included in the fringe benefit tax return for the June 1988 quarter and the tax paid on the 20th of July 1988.
Section 21 - Amount of Salary and Wages Where Superannuation Contributions are Deducted at Source
For the purpose of calculating tax deductions, an employer is required, in terms of section 341 of the Tax Act, to adjust the amount of the gross income where superannuation contributions are deducted at source. Section 21 repeals the provision with effect from 1 April 1988.
The adjustment under section 341 ensures that the aggregate of the amounts deducted under the provision during any year cannot exceed $1,200. As the change in the special exemption retains that maximum for the period 1 April 1987 to 16 December 1987 the operation of section 341 for 1988 is appropriate for taxpayers whose contributions exceeded $1,200 during the period 1 April-16 December 1987. However, it is not required after 1 April 1988 and is accordingly repealed from that date.
Section 22 - New Company Tax Rate and Consequential Changes
On 10 February 1988 the Minister of Finance announced that the new company tax rate was to be 28 cents in the dollar, for companies resident in New Zealand, and 33 cents for non-resident companies, and that these rates would apply from 1 April 1988.
Section 22 gives effect to this announcement and also makes several consequential amendments to Part A of the First Schedule to the Income Tax Act.
The effect of section 22 is that the following rate changes are made:
|Taxpayer||Old Rate||New Rate|
|(for income year commencing 1.4.88)|
|New Zealand Resident Company||48c||28c|
|Non Resident Company||53c||33c|
|Insurers (to which sec 209 applies)||53c||33c|
|Non-Resident Mining Operators||48c||33c|
|Insurance Underwriters (to which sec 210 applies)||53c||33c|
|Trustees of Group Investment Funds||48c||28c|
Section 22 (subsections 2 and 3) also provides legislative authority for, companies who estimate their income for the income year ending 31 March 1989 under section 387 of the Act to use the new company tax rates for provisional tax purposes. Companies who use the previous year's income for provisional tax purposes for the year ending 31 March 1989 will need to continue to use the old company tax rates.
It should be noted that section 387 applies only to taxpayers who estimate that their income for the 1989 year will be less than 1988. It does not apply where taxpayers wish to estimate their 1989 income at a higher level than that achieved, or expected to be achieved, in 1988. In all cases other than those to which section 387 applies, the company tax rates that apply for the 1988 year must be used.
In cases where the income estimated for the 1989 year is significantly less than the 1988 figure, the company may be required to provide budgetary and other forecasts in support of the estimate. If the information does not support the estimate made, the Department will invoke the provisions of section 387(3) to require a higher amount of provisional tax to be paid. If the information supporting a company's estimate is not provided the provisions of section 387(3) will be invoked to require provisional tax to be based on the company's 1988 income. It should be noted, however, that if the Commissioner does invoke the provisions of section 387(3) for any reason, the provisional tax payable will be based on the new company tax rate of 28 cents in the dollar.
It is considered that section 383 would not allow the Commissioner to adjust the rate of provisional tax payable for 1989 to the new 28 cent rate in the absence of specific legislative authority.
Companies with early balance dates, who have based their provisional tax on estimated 1988/89 income may adjust the provisional tax payable on the second instalment by the provisional tax overpaid on the first instalment as a result of using the old rate of tax. This would apply to companies with balance dates falling in October and November.
Alternatively, if a company has paid its first instalment of provisional tax and wishes to take advantage of the estimation provisions of section 387 for any future instalment, it may use the new rate of tax in calculating future instalments.
The new rate of tax for companies resident in New Zealand is 28 cents in the dollar and for non-resident companies 33 cents in the dollar.
Section 23 - Twelfth Schedule
This section amends the Twelfth Schedule to the Tax Act which sets out all the various types and classes of specified livestock.
The amendment makes four changes.
- Mixed age ewes are described as "rising three and four year ewes", rather than "three and four year old ewes".
- The "Five and six year old ewes" class is renamed "Rising five year and older ewes".
- The "Angora and Angora Crosses" type is redescribed as "Purebred and G1 to G3", rather than "Purebred and G1 to G4".
- The "Other fibre and meat producing goats" type is described as "including Cashmere or Cashgora producing and G4".