Tax consequences of natural disasters

Sections CX 41, DF 1, DO 5B, DO 7, DP 3B, EC 5B, EH 36, EH 63, GD 1, MB 3B and OB 1 of the Income Tax Act 2004 and section DC 1 of the Income Tax Act 1994

Several amendments address problems which arose from the floods in February and July 2004. The amendments provide that:

• Deductions for expenditure for which a restorative grant is made under the Agriculture Recovery Programme do not have to be reduced in the income year in which the expenditure was incurred; instead the grant is considered to be income in the year in which it is received.
• Livestock donated because of a self-assessed adverse event is treated as leaving the donor's business at zero-value and entering the recipient's business at zero-value.
• Taxpayers affected by a self-assessed adverse event can make late estimates of provisional tax.
• Deductions for losses on farm, horticultural, forestry and aquacultural improvements are allowed when the improvement is destroyed or irreparably damaged.

Background

Previous amendments to the Taxation (Disaster Relief) Act 2004 and the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004 provided short-term solutions to problems arising from the floods in the Lower North Island and the Bay of Plenty in February and July 2004. However, the need for longer term solutions was recognised by government. Several solutions were consequently developed in consultation with Federated Farmers and the New Zealand Institute of Chartered Accountants.

The Finance and Expenditure Committee subsequently recommended that deductions for losses on farm, horticultural, forestry and aquacultural improvements be allowed when the improvement is destroyed or irreparably damaged, and where the damage is not caused by the owner or an associated person (or their failure to act).

Key features

Restorative grants

The government made restorative grants as part of the Agriculture Recovery Programme for those affected by the floods in 2004. Sections CX 41(3) and DF 1(1) have been amended to ensure that deductions for expenditure for which a restorative grant is made will not have to be reduced in the income year in which the expenditure was incurred; instead the grant will be considered to be income in the year in which it is received. This ensures that unexpected use-of-money interest consequences do not arise.

The amendments in relation to restorative grants apply retrospectively from the 2003-04 income year, so that they apply to grants made to taxpayers affected by the floods in February 2004 and in the Bay of Plenty in July 2004. Section DC 1(1)(a) of the Income Tax Act 1994 has therefore been amended.

Donated trading stock

Amendments were made to deal with stock that is donated for use in farming, agricultural, or fishing businesses that are affected by a self-assessed adverse event.

Section EC 5B treats livestock as leaving the donor's business at zero-value and entering the recipient's business at zero-value, where that livestock is donated or supplied for consideration worth less than market value because of a self-assessed adverse event.

Section GD 1(4)(b) ensures that the anti-avoidance provision does not apply to such stock.

The separate definitions of "self-assessed adverse event" in sections EH 36 and EH 63 have been replaced with a definition in section OB 1.

Late election of provisional tax

Section MB 3B of the Income Tax Act 2004 was amended so that taxpayers with a farming, agricultural or fishing business affected by a self-assessed adverse event can request the Commissioner to accept a late estimate of provisional tax. The provision previously applied only to those affected by a qualifying event (that is, an event in which a civil defence emergency is declared).

Improvements destroyed by natural causes

Sections DO 5B, DO 7 and DP 3B allow deductions for losses on farming, horticultural, forestry and aquacultural improvements where the improvement is destroyed or irreparably damaged and rendered useless for the purposes of deriving income by an unexpected event, such as an earthquake or flooding. The damage must not be caused by the owner, an agent of the owner, or an associated person (or their failure to act). What is meant by "irreparably damaged" is that the improvement has no continuing economic value for the taxpayer.

Application dates

The amendments to the trading stock rules, provisional tax provisions, and deductions for losses on land and aquacultural improvements apply from the 2005-06 income year.

The amendments in relation to restorative grants apply retrospectively from the 2003-04 income year.