Income Tax Amendment Act (No 2) 1985

This commentary item was published in Public Information Bulletin Volume 129,Supplement 1, July 1984. More information about Public Information Bulletins.

Certain types of company distributions to be exempt from tax

The Minister in Charge of the Inland Revenue Department, the Hon. John Falloon, today announced proposals to amend the Income Tax Act to exclude two specific types of company distributions to shareholders from the definition of a taxable dividend.

The first of these proposals affects the legislation which applies to distributions of assets made to shareholders on the winding-up of a private company. The existing legislation is worded in such a way that the value of these distributions is taxed as a dividend to the shareholders to the extent that it exceeds the amount of the company's paid up capital. The Minister explained that at present the general position is that when a company sells its assets on winding-up, the excess of the selling price over the cost may be distributed to shareholders as a tax free dividend. "The particular problem which has been brought to my notice is where a company transfers assets to its shareholders on winding-up, no part of the value of the asset is a tax free dividend, even if that value exceeds cost price. Such excess is required to be taxed as a dividend even though it would have been exempt had the company sold its assets and distributed the proceeds to the shareholders in cash. This situation is clearly anomalous and I have agreed that the legislation be remedied for the current tax year and future years", Mr Falloon said.

The second proposal concerns the tax consequences where a company incurs expenditure for the personal benefit of a shareholder. Under the present law such expenditure must be treated as a dividend. Mr Falloon said that this has two effects. First, the expenditure is disallowed as a deduction to the company and therefore the company's assessable income is increased by that amount. Secondly, the shareholder who benefits from the expenditure is treated as having received a taxable dividend equal to the amount of that expenditure. The Minister explained that circumstances do arise where expenditure which is for the benefit of a shareholder is simply the result of an adjustment made for tax purposes in the allocation of expenditure between business and private purposes. "In these cases", Mr Falloon said, "the Commissioner of Inland Revenue is nevertheless required to include the adjusted amount in the shareholder's income as a taxable dividend. The proposed amendment will permit the Commissioner to exclude any adjustment of expenditure from being treated as a taxable dividend provided the amount of expenditure adjusted for tax purposes is repaid by the shareholder and the adjustment does not arise from any wilful act or negligence by the company or its shareholders."

Government to Relax Tax Rules for Partnership Salaries

The Minister in Charge of the Inland Revenue Department, the Hon. John Falloon, today announced that he had approved the drafting of an amendment to the Income Tax Act to relax 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 partners.

Mr Falloon explained that in terms of general tax law, as it existed prior to last year, the Commissioner of Inland Revenue had no power to permit a deduction from taxable income for any salary, wages or bonus paid to a person who is a partner in that partnership. To alleviate this problem, the Government introduced legislation last year to specifically permit such a deduction where certain conditions are met. Two of those conditions require that the partner work for the partnership as his or her principal occupation and that he or she be employed under a contract which sets out the amount of remuneration payable. "The New Zealand Society of Accountants has made submissions to me that these requirements are too restrictive", the Minister said. "The Society has submitted that the deduction should also be available in respect of partners employed on a part-time basis. This is because, in practice, two, three or more partnerships, particularly those involved in horticulture, may employ the same person to manage their business. If that person is a partner in those partnerships, the existing legislation does not permit a deduction to any partnership for the remuneration paid. I have agreed with the Society's view that the legislation should be extended to cater for these circumstances."

Mr Falloon said that the other point which had been raised by the Society was that in regard to a bonus which a partnership wishes to pay to an employed partner, it is not practical for the amount of the bonus to have to be predetermined and specified in the partner's contract of service. "The Society argues, and I agree, that this present requirement does not allow a partnership sufficient flexibility in its dealings with the employed partner. Accordingly, I have agreed to its removal."

The Minister confirmed that it was his intention that both these amendments would apply with effect from and including the current tax year.

Press Releases

The following are the texts of two press releases issued in May on the subject of the eligibility, for the school fees rebate, of fees paid to a private or integrated school for School Certificate or other external examinations.

School Fees Rebate Allowed for External Examination Fees in 1984

Release by Commissioner on 19 May 1984:

"Taxpayers whose children attend private or integrated schools can now claim, in 1984 tax returns as part of the school fees rebate, fees paid for external examinations," the Commissioner of Inland Revenue, Mr John Simcock, announced today.

Mr Simcock explained that a recent Taxation Review Authority decision ruled that the school fees rebate may be claimed in respect of external examination fees paid in respect of a child attending a private or integrated school.

"As a result of that decision", Mr Simcock said, "taxpayers with a child who attended a private or integrated school last year may claim the school fees rebate for external examination fees paid in the last financial year from 1 April 1983 to 31 March 1984".

Mr Simcock confirmed that the examinations referred to were School Certificate, University Entrance, Bursary and Scholarship examinations.

"Some taxpayers who may be eligible may already have furnished their 1984 returns and not know that they were entitled to claim for these fees, said the Commissioner. "These people need only write to their local tax office enclosing the receipt for the fees paid advising also the school attended by the child concerned and we will attend to their claim."

Release by the Minister in Charge of the Inland Revenue Department on 21 May 1984:

School Certificate Fees Tax Loophole to be Closed

The Minister in Charge of the Inland Revenue Department, the Hon. John Falloon, announced today that the Government intends to amend the Income Tax Act this year to make it clear that payments for external examination fees made by parents of children attending private or integrated schools will not qualify for the school fees rebate.

Mr Falloon referred to a recent Taxation Review Authority decision which held that School Certificate examination fees paid in respect of a child attending a private or integrated school qualify for the school fees rebate.

He explained that the original purpose of the school fees rebate was to provide some form of indirect assistance to those parents who meet the costs of educating their children outside the state school system. "It was never intended that the rebate should extend to include external examination fees and it is inappropriate that they should qualify for the rebate," Mr Falloon said. The proposed amendment would merely clarify and confirm this intention.

"The proposed amendment will apply in respect of the 1984/85 income year. Although taxpayers whose children attended private or integrated schools last year will be able to claim in their 1984 returns for School Certificate and other external examination fees paid last year, future payments will not qualify for the rebate," the Minister said.