February 2004 and July 2005 floods

Sections EF 1(5), EG 19(3), EZ 9, EZ 9B, GD 1 and OB 1 of the Income Tax Act 1994

Sections CX 41B, DO 5B, DP 3B, EA 3, EE 41, EW47B, GD 1 and OB 1 of the Income Tax Act 2004

Section 177D of the Tax Administration Act 1994

Section 48A of the GST Act 1985

Introduction

Several amendments deal with technical matters identified in a review of the circumstances faced by businesses as a consequence of the storms that occurred around New Zealand in February 2004 and in the Bay of Plenty area in July 2004. The amendments:

• create a deduction for the tax loss on commercial buildings destroyed in the storms;
• create a deduction for the tax loss on farming land improvements destroyed in the storms;
• exclude gifts of trading stock and consumables, made as a result of the storms, from the anti-avoidance provision that treats them as sales and purchases at market value;
• provide relief for consumables that are destroyed;
• deal with tax issues related to new start grants; and
• correct an oversight in the definition of "qualifying event".

Background

The amendments were introduced by means of Supplementary Order Paper 218 and as a result of submissions made to the Finance and Expenditure Committee.

Other than the amendment in relation to destroyed consumables, all these measures apply only to those affected by the storms throughout New Zealand in February 2004 and in the Bay of Plenty in July 2004. Long-term solutions are being developed separately.

Key features

Destroyed buildings

If buildings are disposed of for less than their adjusted tax value, the loss is generally not deductible. Section EG 19(3) of the Income Tax Act 1994 has been replaced and part of section EE 41(2) of the 2004 Act has been replaced so that the general rule does not apply to buildings that were destroyed or rendered useless for the purpose of deriving income as a result of the storms around New Zealand in February 2004 or in the Bay of Plenty area in July 2004.

Destroyed land improvements

Certain improvements to land used for farming, aquaculture or forestry businesses are deductible over time if they continue to be used in a farming business. The types of improvements and their rates of deduction are set out in Schedule 7. While deductions are permitted for the cost of any repairs or maintenance, deductions were not permitted for losses on disposal of farming land improvements. Section EZ 9B has been inserted into the 1994 Act and sections DO 5B and DP 3B have been inserted into the 2004 Act to permit a deduction for the diminished value of improvements destroyed or made useless for the purpose of driving income as a result of storms around New Zealand in February 2004 or in the Bay of Plenty area in July 2004.

Gifts of trading stock and consumables

Under the previous rules, if a business disposed of trading stock for less than market value, it was deemed to have sold it at market value. The law treated donated trading stock (such as a cow) or consumables (such as hay) as being sold at market value by the donor, and purchased at market value by the donee. Donors were effectively taxed on the profit, and donees received a deduction for the market value as though they had purchased the stock.
Therefore sections GD 1(4) in both the 1994 and 2004 Acts have been replaced. The anti-avoidance provision no longer applies to trading stock that is donated as a result of the storms around New Zealand in February 2004 or in the Bay of Plenty area in July 2004. Trading stock in these provisions is taken to include both stock and consumables.

Destroyed consumables

The tax law provides a deduction for the cost of consumables such as hay that is purchased or produced by a taxpayer for use in a business. However, there was a technical problem: the law required that, at some point, the consumables had to be used in the course of deriving income. Arguably, if they were destroyed by a flood or fire they could not be used in the course of deriving income. Section EF 1(5)(a) of the 1994 Act and section EA 3(4) of the 2004 Act have been replaced so that goods destroyed or rendered useless for the purpose of deriving income are not required to be added back as unexpired expenditure.

New start grants

New start grants are being provided to farmers forced to leave their properties as a result of the floods to ensure that those with less than $65,000 in equity will receive a grant of up to $65,000 (GST-inclusive) per family.

"New start grant" has been defined in section OB 1. Section EZ 9 of the 1994 Act has been replaced so that amounts forgiven as a prerequisite for the payment of the new start grants are not income under the accrual rules or section CE 4. This applies only to the extent that the amounts forgiven cannot be set off against losses of the taxpayer, the taxpayer's business or, in certain cases, the losses of an associated taxpayer. New sections CX 41B and EW 47B have been inserted into the 2004 Act for the same effect.

Consequential amendments have been made to:

• move the definition of "business of farming" from section OB 1 into section EZ 9 of the 1994 Act because it does not apply to any other provisions;
• section 177D of the Tax Administration Act 1994; and
• section 48A of the Goods and Services Tax Act 1985.

Definition of "qualifying event"

The definition of "qualifying event" in section OB 1 has been expanded to include:

• the storm that occurred during the month of July 2004 in the Bay of Plenty area; and
  
• any naturally-occurring event that occurs after the month of July 2004 in respect of which a state of emergency is declared under the Civil Defence Act 1983 and the Governor-General by Order in Council declares to be a qualifying event. This corrects an oversight in the original legislation.

Application date

The definition of "qualifying event" is effective from 1 February 2004, and the other amendments apply for the 2003-04 and subsequent income years.