Land and Income Tax Amendment Act (No. 2) 1972

This commentary item was published in Public Information Bulletin Volume 69, September 1972

More information about Public Information Bulletins. 

Application of the Act

Section 2 provides that, except where otherwise stated, the amendments in the Act will apply to the 1972/73 income year.

Dividend Rebate

Section 3 extends the scope of the dividend rebate. It will now be 10 percent of the dividends included in the taxable income where the taxable income is $4,000 or less. Above $4,000 of taxable income the rebate is the smaller of-

• 10 percent of the dividends included in the taxable income, or
• $400 reduced by 10c for every $1 by which the taxable income exceeds $4,000. Thus if the taxable income is $8,000 or more there will be no dividend rebate.

Universal Superannuation Rebate

Section 4 amends the rebate from tax on the Universal Superannuation benefit for the 1971/72 year and the part of the 1972/73 year (up to the end of June 1972) for which the rebate continues to be allowable. It is fixed at $5 for each pay period for which the Superannuation benefit was received. Thus a person receiving the benefit for the whole of the 1971/72 year is entitled to a maximum rebate of $65. In the 1972/73 year the maximum rebate will be $20.

Coinciding with the increase in the Universal Superannuation benefit no rebate will be allowable in respect of the benefit received for any period after 5 July 1972.

In future a PAYE withholding tax will be deducted at the time of payment of Universal Superannuation and this will be allowed as a credit when annual tax is assessed.

Non-Resident Pensioners' Rebate

Section 5 makes an adjustment to an existing rebate given to overseas residents who receive certain pensions and superannuation payments from New Zealand. It is consequential on the general 7 1/2 percent rebate from personal income tax given for 1973.

Child Exemption

Section 6 reduces the child exemption to $35 (previously $135 or $140) for 1973 and eliminates it completely for subsequent years.

Dependent Relative Exemption

Section 7 extends the dependent relative exemption so that it will apply to a child for whom a Family Benefit is not payable.

Donations and School Fees

Section 8 increases to $200 (previously $100) the overall limit for qualifying charitable donations and school fees.

Life Insurance Exemption

Section 9 amends the life insurance exemption provisions consequent upon the elimination of the child exemption. It preserves the existing situation in which a taxpayer may claim premiums on policies on the life of a child who is dependent on the taxpayer.

Exempt Income

Section 10 exempts income derived by certain classes of taxpayers as follows

• Primary producer boards and marketing boards.
• Income derived before the date of distribution of an estate and applicable charitable bequest.
• The New Zealand Racing Authority.
• The Totalisator Agency Board.
• Racing and trotting clubs.
• Non-profit organisations up to $500 of assessable income provided the rules prohibit distribution of income to members.
• Interest derived by New Zealand residents from United Kingdom post-war credits or in cases where the interest relates to a period when the taxpayer was not resident in New Zealand and the interest is exempt from tax in the country of origin.

Section 11 - See section 17 below

Deduction for Certain Interest and for Payroll Tax

Section 12 amends section 112of the principal Act to-

• Allow a company to claim a deduction for interest on money borrowed to buy shares in another company when the two companies are assessed in the same "group" for tax purposes.
• Qualify the general prohibition against the deduction of payroll tax for income tax purposes.

Section 18 later in the Act allows a deduction of payroll tax on wages which are themselves deductible.

Deduction of Expenditure to Prevent or Combat Pollution

Sections 13 and 16 introduce new provisions for the deduction by business taxpayers of certain expenditure on land not otherwise deductable to prevent or combat pollution of the environment. Section 13 relates to non-farming taxpayers. Expenditure incurred on the land in constructing earthworks, ponds, settling tanks or similar improvements for the purpose of treating industrial waste is deductible in equal instalments over 5 years with a minimum annual deduction of $1,000, or the amount remaining available for deduction if this is less than $1,000.

Farming taxpayers are entitled under section 16 to class similar expenditure incurred by them as development expenditure.

Special Investment Allowance

Section 14 amends the existing section 117A dealing with the investment allowance on new manufacturing plant or machinery.

It gives effect to the Budget proposals-

• To extend the scope of the allowance to all new plant or machinery which qualifies for the special depreciation allowance.
• To increase the rate of the allowance from 10 percent to 20 percent in respect of qualifying plant or machinery acquired, installed or erected on or after 23 June 1972.
• To give a further 10 percent allowance in respect of plant or machinery which is used in a redevelopment project in the West Coast region of the South Island.

Important points are-

The allowance does not apply to-

• second-hand plant or machinery,
• cars other than taxis or hire cars,
• hand tools or loose tools,
• units of plant or machinery costing less than $100,
• plant or machinery acquired, installed or erected on or after 23 June 1972 but to which the taxpayer was committed on or before that date either under a firm contract or pursuant to a plan embracing plant or machinery.

Compensation for Failure to Comply With Lease Covenants to Repair or Maintain

Sections 11 and 17 introduce new provisions governing the deduction and assessment of compensation payments for failure to comply with covenants in a lease of land to repair or maintain the land or improvements on it.

Section 11 inserts a new section 88E in the tax Act. It provides that any compensation received by an owner of land (including a lessor in the case of a sub-lease) is to be assessable in the year of receipt, with provision to spread forward as the taxpayer elects, up to four succeeding income years.

There are special provisions covering subsequent sales and cases in which the property ceases to be used in production of assessable income before the four years have elapsed.

Section 17 allows the lessee to claim a deduction for the compensation provided it is in respect of expenditure which itself would have been deductible. The deduction may be claimed in the year of payment or in that year and in any one or more of the three preceding years.

Deduction for Payroll Tax

Section 18 inserts a new section, section 122A, in the tax Act providing for the deduction for income tax purposes, of payroll tax. The main features are-

• It applies to overseas payroll tax as well as New Zealand payroll tax.
• For the payroll tax to be deductible, the wages in respect of which the payroll tax is paid must be deductible for New Zealand tax purposes.
• The deduction first applies to payroll tax on chargeable wages which are paid or payable on or after 1 March 1972 ie the first deductible payroll tax will normally be that paid in April 1972 in respect of March wages.
• The payroll tax is deductible on the basis it is "incurred" in the month that it is payable and not the month in which the chargeable wages were paid.

Gifts by Companies for Education or Research

Section 19 clarifies the basis on which the 5 percent of assessable income limitation on gifts by companies for education or research is to be calculated. The limitation is calculated on the assessable income of the company before any deduction is made either under that section or under the new section 126B (see section 20 below).

Charitable Gifts by Public Companies

Section 20 inserts a new section, section 126B, in the principal Act providing for a deduction in respect of gifts of money by "public companies" to any of those societies, associations, organisations, trusts or funds to which section 84B of the Act applies. Briefly, these are-

• Societies etc in New Zealand carried on for charitable, benevolent, philanthropic or cultural purposes within New Zealand, and
• The following specifically named societies-
  • CORSO.
  • The Red Cross.
  • Lepers Trust Board and Mission to Lepers.
  • Volunteer Service Abroad (VSA).
  • Commonwealth Foundation.
  • Sir Walter Nash Vietnam Appeal.
  • Food Bank of New Zealand.

The deduction is limited to $1,000 for gifts to any one donee in any year and there is an aggregate limitation for all gifts of the greater of-

• $1,000, or
• 5 percent of the company's assessable income before taking into account any donations under section 126B itself or under section 126A (education or research).

For the purposes of the section, a public company generally means any corporate body which is not a private company under the Companies Act 1955. It specifically includes a subsidiary of a public company and any public or local authority.

Increased Export Sales Incentive Deduction

Section 21 provides for the two matters announced in the Budget-

• increasing the general incentive deduction from 15 percent to 20 percent of the increased export sales,
• changing the base period for the calculation of the increased export sales from the first 3 of the 5 preceding years to the first 3 of the 6 preceding years.

These changes apply first for the income year 1972/73. The base in relation to export sales made in 1972/73 will therefore be the same base as applied for 1971/72.

Trade Union and Professional Association Subscriptions

Section 22 removes the $20 limitation on the deduction under section 129CC of the principal Act for fees and subscriptions which are paid to trade union or to professional associations and which are directly related to the employment of the taxpayer. There is now no limit on the deduction under this heading.

Deduction of Costs and Expenses Relating to Tax Litigation

Section 23 inserts a new section, section 129CG, in the principal Act providing for the deduction of costs incurred by a taxpayer in relation to the determination of his liability to tax including costs incurred in pursuing an objection. This can include legal fees, Court costs, witnesses' fees and accounting cost

This also includes a contribution made by one taxpayer towards another taxpayer's costs (for example a test case) provided the point involved affects both and each has objected to his assessments.

Any reimbursement of costs must be taken into account as assessable income when received. This includes costs awarded by the Court.

The deduction does NOT extend to costs relating to any matter or assessment arising from a fraudulent or wilfully misleading return, or to any offence under the Inland Revenue Acts, for example a prosecution, or to any penal tax assessment or to any objection or appeal of an inconsequential or frivolous nature.

Deduction of Interest at a Floating Rate on Debentures

Section 24 amends the general prohibition in section 142 of the principal Act against the deduction by companies of debenture interest at a floating rate.

This interest may now be claimed if the Commissioner is satisfied that under the terms of the debenture the race of interest payable is determined by a fixed relationship to banking races or general commercial rates.

Tax Rate Applying to Life Insurance Companies

Section 25 amends the preferential tax race applying to life insurance companies.

As from the 1971/72 income year the tax payable by a life insurance company in respect of its taxable income from life insurance business is to be 40 percent of the tax calculated at ordinary company rates.

Mining

Sections 26-32 amend the existing legislation and make a number of new provisions affecting taxpayers engaged in searching for or mining petroleum or any of the "specified" minerals. The main points are-

Sections 26 and 27 concern New Zealand mining companies (as defined). The amendments largely clarify the existing provisions as, for instance, the acquisition or disposal of an interest in a mining asset is to be treated in the same way as the acquisition or sale of the whole asset.

Section 28 clarifies the situation when a mining subsidiary repays or is deemed to be able to repay advances which were made by, and previously claimed as a deduction by a holding company.

Sections 29 and 30 extend with some modifications last year's legislation affecting New Zealand mining companies (as defined) to-

• Resident mining operators who will-
  • be able to claim as and when incurred all costs of exploration and development associated with petroleum or minerals,
  • not (unlike mining companies) be able to claim 2 years provision in advance,
  • be able to set off a mining loss against non-mining assessable income up to 50 percent of the latter,
  • be assessed at full rates on any mining income.

• Non-resident mining operators who will-
  • be able to deduct all costs of exploration and development as and when incurred - also 2 years provision for such costs,
  • be assessed at a flat 45c in the $ on any income from a mining venture in New Zealand.

Section 31 deals with past exploration or development expenditure incurred by resident and non-resident mining operators.

Section 32 contains a number of consequential mining amendments.

Interest Derived by Marketing Authorities

Section 33 repeals section 154A of the principal Act relating to the taxation of interest on loans made out of certain accounts by marketing authorities. The repeal is associated with the exemption of marketing authorities under section 10 of the Amendment Act.

Bonus Issue Tax

Sections 34 and 35 both deal with bonus issue tax.

Section 34 provides that the rate of bonus issue tax applicable to any bonus issue is to be that fixed by the last Annual Tax Act passed immediately prior to the making of the bonus issue.

Section 35 changes the date of payment of bonus issue tax. Instead of being assessed at the end of the year and paid by the company with its terminal income tax, it will now be self-assessed by the company and be due on the 20th of the month following the month in which the bonus issue is made.

Both these changes apply to bonus issues made on or after 1 April 1973.

Due Date for Land Tax and Payment Date for Income Tax by Companies

Section 36 inserts a new section 204 in the principal Act providing for the-

• Permanent fixing of the due date for land tax as 7 October each year instead of having to prescribe the due date annually.
• Payment of income tax by subsisting companies and some other taxpayers in two instalments each year.
• Fixing of the due dates of those instalments by reference to the taxpayer's balance date. This will advance the payment of tax for some taxpayers.
• Implementation of the two instalment basis in two stages. The first in 1973/74 has general application and affects tax on income derived in the income year ending on 31 March 1973 (or equivalent balance date). The second in the following year affects companies with "early" balance dates in the tax year.
• Fixing of the terminal tax due date For PAYE companies by reference to the balance date in line with that above for subsisting companies. Generally, this will take effect in 1974/75 in relation to terminal tax on income derived in the income year ending on 31 March 1974 (or equivalent balance date).

Taxpayers Who Now Pay by Instalments

With these general outlines in mind the following taxpayers will now pay in two instalments -

What to Pay

• First Instalment-
  • One-third of the tax payable in the preceding year. Note this may be reduced if the estimated income tax for the current year will be less than the tax of the previous year.

• Second Instalment-
  • Actual tax due for the current year less the amount paid as the first instalment.

The following table sets out the position for the two years 1973/74 and 1974/75.

Subsisting Companies

Tax on Income Derived in Year Ending 31 March 1973

The only exception to this in the first year (1973/74) will be in a case where a taxpayer changes balance date to a date earlier than 31 March in the income year and furnishes a return for a period of less than 12 months. In this case, the pattern of payments laid down for general application from 1974/75 onwards will apply to that taxpayer for 1973/74. This is-

Income Year Ending 31 March 1974

Subsequent years follow the same pattern.

Terminal Tax Due by PAYE Companies

Subsequent years follow the same pattern.

Again, the only exception to the pattern of payments for the first year (1972/73 income year) is that of a PAYE company which changes its balance date to a date earlier than 31 March and furnishes a return for a period less than 12 months. In such a case the pattern of payment laid down for general application for 1974/75 (1973/74 income year) and the future will apply to that company for terminal tax on 1972/73 income.

Hardship Relief for Divorced and Separated Persons Supporting Children

Section 37 introduces new hardship relief provisions into the tax Act. They apply to divorced and separated persons who support their children who are not living with them. In these cases the new provisions will enable relief to be given where the taxpayer is no longer entitled to a child or dependent relative exemption and also does not receive the increased family benefit payable since July 1972.

The relief when serious hardship can be shown is in the form of additional exemptions. Up to $135 may be granted for each child, up to 3 children, supported.

New Company Tax Rates

Section 38 amends the First Schedule to the principal Act. It changes the basic rates of tax for companies.

• For resident companies the basic rate is now-
  • 20c in the $ increased by .002c for every $1 of income up to $6,250. On the income over $6,250 the rate is a flat 45c in the $.

• For non-resident companies the basic rate is-
  • 25 increased by .002c for every $1 of income up to $6,250. On the income over $6,250 the rate is a flat 50c in the $.

Both these new rate scales apply to income derived in the income year ended 31 March 1972 (or equivalent balance date). They are also adopted by the Annual Act 1972 in respect of tax on income derived in the 1972/73 income year.

Insurance Underwriters

Section 39 makes no substantive change in the existing law relating to insurance underwriters. For many years they have been liable to tax on a taxable income calculated as 10 percent of gross premiums and the tax rate applicable to that taxable income has been the maximum rate for resident companies which gave an effective tax rate of 5% of the gross premiums. This amendment merely formalises the rate as 50c in the $ on the taxable income.

Continuation of Tax Incentives

Section 40 replaces the existing Third Schedule to the principal Act with a new Schedule. This new Schedule contains the extended terminating dates for all the taxation incentives listed. In addition it contains a brief description of each particular connectional deduction instead of just the Act section reference as previously. The Schedule of the new terminating dates is set out at the end of this Bulletin.

Minor Drafting Amendments

Section 41 makes two very minor reference corrections.

Tax Deductions from the Superannuation Benefit

Section 42 authorises the Social Welfare Department to make payment of the tax deductions now being made from the Universal Superannuation benefit in one sum on the 31 March each year.

New PAYE Tax Deduction Tables

Section 43 and the First Schedule to the Amendment (No 2) Act provide for the new weekly PAYE tax deduction tables in respect of salary and wages, secondary employment earnings (now 19c) and shearer's daily earnings over $8.

These new tables and rates take into account the 10 percent reduction from 1 July 1972 (7 1/2 percent for the full year) announced in the Budget and have the same effect as the arrangements brought into force by the Land and Income Tax Amendment Act 1972.

Provisional Tax for 1972/73

Section 44 deals with the calculation and payment of provisional tax for the current year 1972/73. This is necessitated by the changes in special exemptions, rebates and tax races from those applying in the 1971/72 income year which would normally provide the basis for 1972/73 provisional tax. The changes which may be taken into account, in the calculation of 1972/73 provisional tax are-

• Reduction of the child exemption to $35 for the 1973 year.
• Withdrawal of this exemption and the dependent relative exemption for tax code purposes.
• The extended dividend rebate.
• The reduced rebate in respect of Universal Superannuation.
• The classifying of the Universal Superannuation as a source deduction payment.
• The general 7 1/2 percent rebate from income tax which may be deducted wholly from the first instalment.

None of these changes apply to a company.

The Department has produced a new form IR 3P to assist taxpayers in the calculation or recalculation of their 1972/73 provisional tax. It is available at any post office or office of the Department. However, taxpayers if they prefer, may use the basis set out in the 1972 tax return, form IR 3, in calculating their 1973 provisional tax. Whatever is paid by way of provisional tax is of course subject to adjustment when the 1973 return is furnished.