Rewrite Amendments

Sections DZ 13, EH 37, EH 81, LE 3(3), OB 1 and Schedule 22A

Remedial changes have been made to the Income Tax Act 2004 on the recommendation of the Rewrite Advisory Panel.  The amendments ensure that provisions in the 2004 Act:

• have the same legal outcome as would be obtained under their corresponding provisions in the Income Tax Act 1994; or
• appropriately identify the provision as an intended change in Schedule 22A.

Background

At the time of enactment of the Income Tax Act 2004, the Finance and Expenditure Committee expressed concern that the new legislation could contain unintended policy changes.  To alleviate that concern, the committee recommended that a panel of tax specialists be appointed to review any submission that the 2004 Act contained an unintended policy change.  An unintended policy change is one that gives rise to a different outcome from the corresponding provision in the Income Tax Act 1994.  The Rewrite Advisory Panel accepted this review role.

These remedial amendments arise from this review and were added to the bill at the select committee stage of the legislative process.

Key features

The provisions affected are section DZ 13 (unamortised balances of expenditures in farming and agricultural sector), sections EH 37 and EH 81 (income equalisation schemes), section LE 3(3) (section LE 3 holding companies), the definition of "beneficiary income" in section OB 1, and Schedule 22A.

Application dates

The amendments are retrospective and apply from the beginning of the income year corresponding to the 2005-06 tax year.

Detailed analysis

Section DZ 13 and Schedule 22A

Section DZ 13 has been amended to more clearly reflect an intended policy change. 

Following the repeal of the 1994 Act, section DZ 13 of the 2004 Act was introduced to ensure that a person can continue to be allowed a deduction for the unamortised balance of certain types of expenditure to which section DO 4 of the 1994 Act applied.

Section DO 4 of the 1994 Act allowed a deduction for certain types of farming and agricultural expenditure but required that deduction to be spread over a number of years.  It contained the current spreading rules and two different set of amortisation rules for qualifying expenditure incurred in the 1995 and prior tax years. 

Most of these expenditures from the 1995 and earlier tax years were expected to be fully amortised by the end of the 2005 tax year.  However, because the amortisation of the expenditure could occur only if the expenditure was "of benefit to the business" in a tax year, there was a possibility that a person may have an unexpired balance of these qualifying expenditures at the end of the 2005 tax year.  As the 2004 Act repealed section DO 4 of the 1994 Act, a new rule was required in the 2004 Act to ensure that a person could amortise any remaining balance of these earlier expenditures.

Therefore section DZ 13 was enacted to ensure that unamortised farming and agricultural expenditures incurred in the 1995 and earlier tax years can be allocated to a tax year occurring after commencement of the 2004 Act.  As these expenditures are very long-dated, it was also considered appropriate for section DZ 13 to provide a way to terminate those earlier amortisation rules.

The policy intention for section DZ 13 was to provide for a person's unamortised balance of these qualifying expenditures at the end of the 2005 tax year to be allocated to the first tax year after commencement of the 2004 Act in which the "benefit to the business" test was satisfied.  However, the provision as originally enacted was unclear and did not achieve this purpose, with the result that the unamortised balances could not be allocated to any tax year.

The amendment to section DZ 13 ensures that a person is allowed a deduction for the amount of the unamortised balance of these qualifying expenditures at the end of the person's 2004-05 tax year.  This deduction is then allocated to the first income year after commencement of the 2004 Act in which the unamortised expenditure satisfies the criteria of "being of benefit to the business".

In addition, section DZ 13 was inadvertently omitted from Schedule 22A of the 2004 Act (the Schedule that contains a list of the intended changes made in the 2004 Act).  The amendment also corrects that omission.

Sections EH 37 and EH 81

The definition in section OB 1 of "specified period" as it relates to the income equalisation scheme has been amended to correct an inadvertent change in wording.

The definition of "specified period" in the 2004 Act contained an unintended change in that it changed the timing of the "specified period" to 30 September each year, being six months after 31 March each year.  Under the 1994 Act the "specified period" ended six months after the person's balance date for income tax purposes. 

The correct policy is that deposits to the income equalisation scheme should be made within six months of the end of a person's balance date for income tax purposes.  The amendment ensures that the 2004 Act continues that intended policy outcome.

Section LE 3 holding companies

Section LE 3(3)(e) has been amended to ensure that the tax outcome under the 2004 Act is the same as the 1994 Act.

Section LE 3 is part of the foreign investor tax credit rules and is intended to ensure that dividends paid by a New Zealand-resident company to its non-resident shareholders have an effective New Zealand tax rate of no greater than 33%.  This is achieved by providing the resident company paying the dividend with a foreign investor tax credit, which is then subtracted from the company's income tax liability for that tax year.

When the investment into New Zealand is through a New Zealand-resident holding company, however, that company may have insufficient taxable income to utilise the foreign-investor tax credit.  This will occur, for example, when all dividends the holding company receives from the New Zealand group of companies are either fully imputed dividends or exempt dividends.

This problem was addressed by section LE 3 of the 1994 Act.  Under section LE 3, and only for the purpose of the foreign investor tax credit rules, the New Zealand-resident holding company is treated in a similar way to a non-resident in relation to dividends it derives from its New Zealand group of companies.

This section LE 3 concession is limited to a holding company that derives dividends that are of the types listed in section CB 10 of the 1994 Act.  Section LE 3(3)(e) in the 2004 Act, as originally enacted, inadvertently changed the effect of the law by treating the section LE 3 holding company status as revoked if it derives dividends of any type referred to in sections CW 9 to CW 11 of the 2004 Act (the corresponding provisions to section CB 10 of the 1994 Act).

Section LE 3(3)(e) has been amended to restore the outcome that was achieved under the 1994 Act.

Beneficiary income

In section OB 1, the definition of "beneficiary income", in paragraph (b)(ii), has been amended to cross-refer to section CC 3(2).

The cross-reference to section CC 3, as originally enacted in the 2004 Act, was too broad and potentially led to the result that no accrual income could be included in beneficiary income.  The correct policy is that for taxation purposes, beneficiary income does not include income derived by a trustee from the forgiveness of a debt owed by the trustee, but otherwise may include accrual income.

The amendment corrects this position by ensuring the cross-reference is to section CC 3(2), which relates only to certain types of debt forgiveness.