Remedial changes have been made to the Income Tax Act 2004 on the recommendation of the Rewrite Advisory Panel. The amendments ensure that provisions in the 2004 Act:
- have the same legal outcome as would be obtained under their corresponding provisions in the Income Tax Act 1994; or
- appropriately identify the provision as an intended change in Schedule 22A.
At the time of enactment of the Income Tax Act 2004, the Finance and Expenditure Committee expressed concern that the new legislation could contain unintended policy changes. To alleviate that concern, the committee recommended that a panel of tax specialists be appointed to review any submission that the 004 Act contained an unintended policy change. An unintended policy change is one that gives rise to a different outcome from the corresponding provision in the Income Tax Act 1994. The Rewrite Advisory Panel accepted this review role.
The remedial amendments arose from this review and were added to the bill at the select committee stage.
The provisions affected are:
- section DB 9B (Base price adjustment under old financial arrangement rules);
- section DB 36 (Bribes paid to public officials);
- section EE 33 (Transfers of depreciable property between associated persons in a non-qualifying amalgamation);
- section EX 36(1) (Immigrant's accrued superannuation entitlement exemption);
- section EY 8(3)(b) (Meaning of "life insurance");
- section FC 1 (Amounts derived by non-residents from renting films);
- section NG 1(2) (Application of NRWT rules);
- section OB 1 (Definition of fixed rate share); and
- Schedule A (Identified policy changes).
In addition, some corrections to cross-references and terms used are made within sections EX 52, EX 53, OD 5(6F), and OD 8(3).
The amendments are retrospective and apply from the beginning of the income year corresponding to the 2005–06 tax year.
Section Db 9b (base price adjustment under old financial arrangement rules)
Section DB 9B was inserted in the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 to provide for a deduction on certain amounts calculated under the base price adjustment within the old financial arrangement rules. The relationship between this section and section DA 3 was inadvertently overlooked in its enactment.
This amendment completes the amendment recommended by the Rewrite Advisory Panel by setting out the relationship between section DB 9B and section DA 3. The new subsection states that the section supplements the general permission and overrides the general limitation. This is consistent with the application of section DB 9, which relates to a deduction for certain amounts calculated under the base price adjustment with the financial arrangement rules.
Section DB 36 (Bribes paid to public officials)
Section DB 36 permits a deduction for a corrupt payment made to a foreign official in New Zealand. This is an unintended change in the policy underlying the rule, although the corresponding rule in the 1994 Act (section DJ 22) was ambiguous.
The policy of this rule is that a corrupt payment (a bribe) made to a public official is not deductible. This policy complements the policy in sections 105 to 105E of the Crimes Act 1961 and clarifies the extent to which this type of payment is not a deduction for income tax purposes. This policy applies in determining a person's taxable income for a year, and includes payments made both in and out of New Zealand whether paid to a New Zealand or foreign public official.
There are two exceptions to this general policy, but they relate only to payments made to foreign public officials.
- The first exception is if the payment is made to a foreign public official related to routine government activity and is a very minor amount.
- The second exception is when the payment is made outside New Zealand and the payment is not illegal in the country which the foreign public official represents.
Section DB 36 is amended to more clearly reflect the underlying policy than the present rule.
Section EE 33 (Transfers of depreciable property in a non-qualifying amalgamation)
Section EE 33 of the 2004 Act is the rewrite of the combined effect of section EG 17 and FE 5(2) of the 1994 Act. The purpose of the rule is to ensure that associated companies cannot have uplift in the depreciable value of the asset base for depreciable property transferred in a non-qualifying amalgamation. However, section EE 33 inadvertently omitted a reference to the test of association.
This amendment restores the test of association, and also reverses the order of sections EE 33 and EE 34. The reversal of the section order places the more generally applicable rule before the more specific rule, and also provides that in a non-qualifying amalgamation, the rule in the new section EE 34 will override the general rule in the new section EE 33.
This amendment restores the effect of the law to that existing in the 1994 Act. Section FE 5(2) is also amended to indicate its relationship with the new section EE 34.
Section EX 36(1) (Immigrant's accrued superannuation entitlement exemption)
Section EX 36(1) of the 2004 Act contained an unintended change in law in that the words "to the extent that" qualify subsections (2) to (9) of section EX 36. This indicates that apportionment should be applied to all of these subsections.
However, in the corresponding provisions in the 1994 Act (the definition of "interest in an employment-related foreign superannuation scheme" in section OB 1 of the 1994 Act), apportionment is required for the provisions that correspond to subsections (2) to (4).
The amendment corrects section EX 36(1) to apply the apportionment rule just to subsections (2) to (4). This restores the requirement that subsections (5) to (9) are to be satisfied without any apportionment.
Section EY 8(3)(b) (Meaning of "life insurance")
In section EY 8(3)(b)(i), subparagraph (b)(i) did not contain a reference to a specified cause named in a policy of accident or medical insurance. This was considered to narrow the meaning of "life insurance" from that set out in section OB 1 of the 1994 Act. The policy intent of the 1994 Act wording was to ensure that minor non-life benefits set out in a medical or accident insurance policy would not come within the life insurance taxation rules. An example of the type of benefit contemplated in this policy is funeral expenses.
This amendment restores the wording of the law to that set out in the definition of "life insurance" in the 1994 Act.
Section FC 21 (amounts derived by non-residents from renting films)
Section FC 21 rewrites section CN of the 1994 Act. Sections CN 2(1)(b) and CN 2(4) were omitted in rewriting the section. In the 1994 Act, CN 2(1)(b) extended the application of the film renter rule in section CN 2 of the 1994 Act to New Zealand-resident companies that were controlled by non-residents. Section CN 2(4) of the 1994 Act prevented tax being imposed twice on rentals. This could otherwise have occurred if rentals derived by a person subject to this rule were on-paid to another person under an agreement relating to those rentals.
The reason for removing the application of the film renter rules to New Zealand-resident companies was set out in the exposure draft of the Rewrite Bill (published in 2001). This drafting change was intended to facilitate the rationalisation of the provision with the transfer pricing rules, as sections CN 2(1)(b), CN 2(4) and section GD 13 were considered to be addressing the same policy question.
This amendment to Schedule 22A clarifies that this rationalisation relating to the film renter rules is an intended change in law.
In addition, the effect of section CN 2(4) of the 2004 Act is reinstated. The omission of this rule from section FC 21 in the 2004 Act potentially led to tax being imposed on a film rental derived by a non-resident operating through a fixed establishment in New Zealand, and again on certain on-payments related to that film rental to another non-resident if the source of the payment is in New Zealand. The amendment restores the law as it was under the 1994 Act to prevent this potential dual imposition of taxation.
Section nG 1(2) (application of NRWT rules)
The Taxation (Core Provisions) Act 1996 removed the exclusion for exempt income from section NG 1. In making this change, it was intended that readers would rely on the core provisions exempt income rule to ensure that income of this nature would not be liable for nonresident withholding tax.
In the 2004 Act, the change in terminology from "gross income" to "income" in NG 1, coupled with the Core Provisions Act change has led to uncertainty about whether non-resident withholding tax can be imposed on non-resident withholding income that is exempt income.
The policy is that non-resident withholding tax should not be imposed on exempt income. This amendment clarifies the section to ensure that the policy is expressed clearly.
Section OB 1 (Definition of fixed rate share)
In the definition of a fixed rate share in the 2004 Act, it is unclear whether the term "dividend" in that definition includes an amount of any imputation credit or dividend withholding payment credit attached to the dividend. This is because the term "dividend," as defined in sections CD 3 to CD 13, includes the amount of an imputation credit and dividend withholding payment credit attached to the dividend (section CD 9 is the relevant provision).
The policy intent is an imputation credit or a dividend withholding payment credit that is attached to a dividend is not taken into account in determining whether the share on which the dividend is paid is a "fixed rate share".
The definition of "fixed rate share" has been amended to remove that uncertainty and reflect the policy more clearly.