Remedial amendments

Remedial changes have been made to the Income Tax Act 2004 on the recommendation of the Rewrite Advisory Panel.

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.

The following 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 CB 9(1)(b) (sales of land by builders and associated persons of builders);
• section CD 32(15) (exclusions from dividends for available subscribed capital);
• section CD 33(2) (exclusions from dividends for capital gains);
• section CD 33(7)(b) (exclusion from dividends for capital gains);
• section EC 48 (replacement of bloodstock);
• section EI 6 (allocation across income years of income derived in anticipation);
• section EZ 35(3) (base price adjustment results under old financial arrangement rules);
• section OB 1 (definition of "shares of the same class"), section 394L(4A) of the 1976 Act (export market development credits and the imputation credit account); 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 CB 9(1)(b) and Schedule 22A

Section CB 9(1)(b) contains a policy change that, inadvertently, was not included in Schedule 22A at the time of enactment of the 2004 Act.

Section CB 9(1)(b) of the 2004 Act applies the test of whether or not a person is in business as a builder at the time at which the improvements began. Under the corresponding provision in the 1994 Act (CD 1(2)(d)), this test was applied at the time the land was acquired. The time at which this test applies is relevant to both a builder and an associated person of the builder. The change in the time at which the test is applied to the associated person is a notified policy change identified in Schedule 22A, and officials considered that the same change should be applied to the builder in drafting section CB 9(1)(b).

This policy change is now correctly identified in Schedule 22A.

Section CD 32(15)

Section 32(15) has been amended to ensure that the outcome under the 2004 Act is the same as that under the 1994 Act.

Under the 1994 Act, the definition of "available subscribed capital" limited the subscriptions amount of available subscribed capital (ASC) of an amalgamated company resulting from a long-form amalgamation to the aggregate ASC of the amalgamating companies. This limitation was unintentionally not included in the corresponding provision in the 2004 Act, section CD 32(15), and this has now been corrected.

Section CD 33(2)

In section CD 33(2), it is unclear whether the term "capital gains" is linked to the term "capital gain amount" that is used throughout section CD 33. This leads to a potential ambiguity that has been corrected by using the term "capital gain amount" consistently through the section.

Section CD 33(7)(b)

Section CD 33(7)(b) has been amended to correct an unintended change in relation to the treatment of certain capital gains. Under this provision, a capital gain is limited to a capital gain that is a gift.

Under the 1994 Act, section CF 3(7)(b)(which is the corresponding provision in the 1994 Act to section CD 33(7)(b)) included a range of amounts within the concept of "capital gain", but it did not restrict the concept of a capital gain to only a gift. In particular, the courts have indicated that the concept of capital gain in this context could include receipts from insurance claims and also capital compensation.

This amendment restores the position existing under the 1994 Act in relation to capital gains that are not gifts.

Section DB 9B

Section DB 9B is a new provision inserted to ensure that a deduction is allowed for an amount that is treated as a deduction under section EZ 34(6) or EZ 35(3) or (4) of the old financial arrangement rules.

Under the 1994 Act, an allowable deduction under section BD 2 included any amount allowed as a deduction in any of Parts C to I and Parts L and M.

Under the 2004 Act, Part D is an exhaustive list of deductions, and until Parts F to O are rewritten, any amount allowed as a deduction under a provision in Parts F to I continues to be a deduction under section DY 1. In addition, section DA 3 states that no provision in Part E supplements or overrides the general permission or overrides a general limitation.

As a result, in the 2004 Act the wording in sections EZ 34(6)(b) and EZ 35(3)(a)(ii) and EZ 35(4)(v) that purports to provide a deduction for the amount calculated under the base price adjustment under the old financial arrangement rules has no effect. This is an unintended change in outcome, and the new section DB 9B restores the deductibility of these amounts.

In addition, section DB 9B is intended to have the same relationship with section DA 3 as is set out in section DB 9 (which relates to the financial arrangement rules). However, this linkage was overlooked in drafting this new section and this will require an amendment in future legislation. This future amendment will provide that section DB 9B will supplement the general permission and override the general limitations.

Section EC 48

Section EM 3 of the 1994 Act permitted a gain on the sale of bloodstock to be offset against the purchase price of a replacement animal without requiring tracing of the actual sale proceeds.

The corresponding section in the 2004 Act (section EC 48) arguably indicates that the sale proceeds need to be separated from the general working capital of the taxpayer's business and specifically applied to the purchase of the replacement bloodstock. This would be a different outcome to that under section EM 3 of the 1994 Act.

Section EC 48 has been amended to ensure that the section cannot be read as requiring the sales proceeds on disposal of bloodstock to be tracked to specific replacement bloodstock.

Section EI 6

In section EI 6 of the 2004 Act, a person who derives income in anticipation (for example, key money on a lease) may allocate that income over the period of the contract. A requirement of this future spread of income is that the person must give a notice to the Commissioner setting out the income years to which the income is to be allocated.

In section EI 6 this notice is to be given in the tax year in which the income is derived. Under section EB 2 of the 1994 Act, this notice was to be given in the tax year following the tax year in which the income was derived.

Section EI 6 in the 2004 Act has been amended to restore the position existing under the 1994 Act.

Section OB 1 - Definition of "shares of the same class"

In section OB 1 of the 2004 Act, the drafting of the definition of "shares of the same class" provides for the three paragraphs (a), (b), and (c) to be alternative conditions to satisfy in order for shares to fall within this definition.

Under the 1994 Act definition of "shares of the same class", paragraphs (a) and (b) had to be satisfied cumulatively, and paragraph (c) was an alternative condition.

However, the 1994 Act also contained an unintended change in law in the definition of "shares of the same class", arising from an amendment in the Income Tax Amendment Act 1994 (applying from 1 July 1994). The 1994 amendment repealed and replaced paragraph (b) and, in doing so, inadvertently omitted the conjunction "and" between paragraphs (b) and (c). This left some ambiguity as to how the definition applied, and the 2004 Act was drafted as if each of the paragraphs was an alternative test.

Before this amendment in 1994, the rule in paragraph (c) was intended to permit a company (in particular, a unit trust) to elect to "subdivide" a class of shares (units) that meet the conditions in the original paragraphs (a) and (b) into a new class of shares. This new "sub-class" of shares would be formed on the basis of price or ownership despite it being a subset of the wider class. This subset of shares could have as few as one share.

Before the 1994 amendment, if the company chose to make this subdivision a class of shares on the basis of price and ownership, then that "sub-class" would be a separate class of shares. The original law was intended to ensure that shares treated as a share of the same class by virtue of paragraph (c) would not also be treated as a share of the same class under paragraphs (a) and (b).

The amendment restores the correct policy intent.

Section YA 5B

Section YB 4(1) of the 1994 Act provided for the continuing effect of section 394L(4A) of the 1976 Act. This provision ensures that a company is not required to pay further income tax if their imputation credit account has a debit balance at the end of an imputation year that can be attributed to an export market development expenditure tax credit (EMDE) arising before the end of the 1990 tax year.

Currently, there are still taxpayers with debit ICA balances that arose on receipt of EMDE refunds. These taxpayers rely on section YB 4(1) each year to grant relief from liability for further income tax.

Section YA 5B has been inserted to reinstate the effect of section YB 4(1) of the 1994 Act, but only so far as this rule relates to section 394L(4A) of the 1976 Act.