Income Tax Amendment Act (No 2) 1985

This commentary item was published in Public Information Bulletin Volume 120, March 1983

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Charitable Trust Taxation

The following is the text of a press release issued on 30 August 1984 proposed amendments to section 61 (27) of the Income Tax Act 1976 concerning the exemption from tax of the business income of charities.

"Charitable Trusts Taxation - The Parliamentary Under-Secretary to the Minister of Finance, Mr Trevor de Cleene, announced today that an amendment to the Income Tax Act 1976 will be introduced during the current parliamentary session to remedy a deficiency in provisions relating to the taxation of the business income of certain charitable trusts.

Mr de Cleene explained that prior to 1982 the business income of a charitable trust was exempt from income tax except to the extent that it was applied for charitable purposes outside New Zealand. In 1982 that exemption was narrowed in a manner designed to prevent the use of certain kinds of charitable trusts for tax avoidance purposes.

Under those measures where business assets have been settled in charitable trust and a settlor, trustee or an associated person of either of them is able to materially influence any benefit to be derived by himself, the trust loses the general charitable trust tax exemption.

It has since become evident however that the 1982 measure is not of itself sufficient to counter the use of a charitable trust for tax avoidance in certain cases where a beneficiary of the trust is a recognised charitable institution.

Notwithstanding that a charitable trust may fall outside the general tax exemption provisions, the trustees would not be liable for tax on the income which is paid and applied to the charitable beneficiary during the income year.

Mr de Cleene added that this was clearly an unintended result and legislation would be introduced this session to close the loophole.

The amendment, which it is proposed will have effect from the income year that commenced on 1 April 1984, will ensure that the measures to prevent tax avoidance through the use of charitable trusts are not frustrated.

An amendment would also be introduced to ensure that the 1982 measures apply to non-exempt charitable trusts on income derived from the income year that commenced on 1 April 1983, irrespective of the date the assets were settled.

Mr de Cleene added that this would also give effect to the original intention of the 1982 amendments."

Confirmation of Previous Government Approvals to Amend Legislation

"The Parliamentary Under-Secretary to the Minister of Finance, Mr Trevor de Cleene, announced today the Government's intention to proceed with certain 1984 taxation legislative proposals which were announced by the former Government before the general election. The proposals will be effected by way of amendment to the Income Tax Act 1976.

It is intended that the necessary amendments to the Income Tax Act will be introduced later during this parliamentary session. "The actual form of the amendments will not be available until then" said Mr de Cleene. He did, however, confirm that the broad details of the approvals is the same in all respects as announced by the previous Government.

Briefly the approvals are:

• An amendment to close a loophole in relation to the deriving of interest on money lent. The present legislation does not cover the situation where money lent is paid or applied on behalf of, or for the benefit of, the borrower rather than being lent to him. This anomaly will be corrected with effect from 29 July 1983, being the commencement of the present regime for the taxation of interest.
• An amendment to make it clear that payments of external examination fees, such as School Certificate fees made by parents of children attending private or integrated schools will no longer qualify for the School Fees Rebate. This will bring the situation into line with that where children attend state schools.
• An amendment to exclude from the definition of taxable dividends two specific categories of company distributions to shareholders. The first category comprises distributions of assets made to shareholders on the winding up of a private company. The second concerns the tax consequences where a company incurs expenditure for the personal benefit of a shareholder.
• An amendment to protect those low income earners who mistakenly furnish a return of income when they are not obliged to do so. In these cases any small amount of tax which would otherwise be payable will be extinguished.
• An amendment to modify two of the conditions which must be met for a partnership to be entitled to claim a deduction for tax purposes of salary or wages paid to a partner. The amendment will remove an existing requirement that the partner be employed on a full time basis by the partnership. It will permit also the deduction of a bonus paid to the employed partner, whether or not the bonus has been predetermined and is specified in the terms of the partner's contract of service."

Deductibility of Accident Compensation Levies for Income Tax Purposes

"The Parliamentary Under-Secretary to the Minister of Finance, Mr Trevor de Cleene, announced today the Government's intention to amend the Income Tax Act during the current session to make it clear that Accident Compensation levies paid by employers and self-employed persons are deductible for income tax purposes, in the income year they become due and payable.

Mr de Cleene said that it was apparent there was a diversity of practice among employers and the self-employed as to the timing of the deduction of levies and in their annual accounts. Those practices ranged from the deduction of levies on an accruals basis by making provision in the accounts before the levies became due and payable to claiming the levies in the year they were paid.

He stated that the proposed amendment will clarify the position and will ensure that all levy payers adopt a common basis of approach in the claiming of levies as a deductible expense item.

Mr de Cleene said that the amendment will apply with respect to levies that become due and payable on or after 1 April 1985."

Phase Out of Export Incentives

The Parliamentary Under Secretary to the Minister of Finance, Mr Trevor de Cleene MP, today released details of the basis on which the export performance taxation incentives are to be removed. Mr de Cleene said that as previously announced, these incentives will be phased out on the same basis as that which was agreed to under CER in respect of the export of goods to Australia. This will affect each of the performance based taxation incentives in the following way.

Export Performance Incentive for Qualifying Goods

For the income years up to and including the year ending 31 March 1985 (or equivalent accounting year) the full incentive will be available. For the income year ending 31 March 1986 (or equivalent accounting year) the incentive will be 50 percent of the assigned or specified percentage.

For the income year ending 31 March 1987 (or equivalent accounting year) the incentive will be 25 percent of the assigned or specified percentage.

For the income year ending 31 March 1988 (or equivalent accounting year) and future years, no incentive will be available.

Export Performance Incentive for Qualifying Services

For the income years up to and including the year ending 31 March 1985 (or equivalent accounting year) the full incentive tax credit of 11.9 percent will be available.

For the income year ending 31 March 1986 (or equivalent accounting year) the incentive will be reduced by 50 percent to a tax credit of 5.95 percent.

For the income year ending 31 March 1987 (or equivalent accounting year) the incentive will be reduced by a further 50 percent to a tax credit of 2.975 percent.

For the income year ending 31 March 1988 (or equivalent accounting year) and future years, no incentive will be available.

Export Performance Incentive for Qualifying Tourist Services

For the income years up to and including the year ending 31 March 1985 (or equivalent accounting year) the full incentive tax credit of 10 percent will be available.

For the income year ending 31 March 1986 (or equivalent accounting year) the incentive will be reduced by 50 percent to a tax credit of 5 percent.

For the income year ending 31 March 1987 (or equivalent accounting year) the incentive will be reduced by a further 50 percent to a tax credit of 2.5 percent.

For the income year ending 31 March 1988 (or equivalent accounting year) and future years, no incentive will be available.

Export Performance Incentive for Qualifying Overseas Projects

For qualifying projects which commence up to or during the income year ending 31 March 1985 (or equivalent accounting year) the full incentive tax credit of 11.9 percent will be available, irrespective of the year in which the project is completed.

For qualifying projects which commence during the income year ending 31 March 1986 (or equivalent accounting year) the incentive will be reduced by 50 percent to a tax credit of 5.95 percent. This rate will apply to the earnings from that project irrespective of the year in which it is completed.

For qualifying projects which commence during the income year ending 31 March 1987 (or equivalent accounting year) the incentive will be reduced by a further 50 percent to a tax credit of 2.975 percent. This rate will apply to the earnings from that project irrespective of the year in which it is completed.

For qualifying projects which commence during the income year ending 31 March 1988 (or equivalent accounting year) and future years no incentive will be available.

The incentive legislation will not be removed until all qualifying projects entered into prior to the end of the income year ending 31 March 1987 (or equivalent accounting year) have terminated.

Mr de Cleene explained that the reference to "accounting year" was needed because many exporters do not balance on 31 March for taxation purposes. "The end of the financial year for these taxpayers can vary from 1 October of the previous year to 30 September of the year under consideration. For this reason I have prepared a chart to show how the phase out will affect exporters who balance on a date other than 31 March".

The chart prepared by Mr de Cleene is set out below:

"It can be seen from this chart that an exporter with a late balance date, say 31 August, will be eligible for the full incentives in respect of goods, services, etc., for the year ending 31 August 1985, half rates for the year ending 31 August 1986, quarter rates for the year ending 31 August 1987 and no incentive for those goods or services after that date," said Mr de Cleene. "On the other hand, an exporter with an early balance date, say 31 October, will be eligible for the full incentives for the year ending 31 October 1984, half rates for the year ending 31 October 1985, quarter rates for the year ending 31 October 1986 and no incentive after that date. While this may appear to provide substantial advantages to exporters who have had late balance dates, in fact these exporters had been disadvantaged in the past because they had to wait to gain benefits from changes to export incentives while those with the early balance dates had received an advantage. The export sales incentives were originally introduced with effect from the commencement of accounting years rather than from a set date, they had been amended on that basis in the past, and it would therefore be inequitable to terminate them on any other basis", Mr de Cleene said.

Mr de Cleene added that the Commissioner of Inland Revenue has advised that he would not be accepting requests from exporters for changes from an earlier to a later balance date which would give an undue advantage over the phase out period.