Income Tax Act 2007: Commentary on parts of the act - M to Z
Part M - Tax credits paid in cash
Part M contains rules relating to tax credits that are paid rather than applied to satisfy a person's income tax liability. In particular, it includes the rules for the Working for Families tax credits, and the superannuation savings scheme (KiwiSaver and complying superannuation funds).
The Working for Families (WFF) tax credit rules are placed outside Part L because they mostly relate to the delivery of tax credits to eligible people on an interim basis during a tax year. This Part provides for the calculation of the various credits, which are then dealt with under Part L. Similarly, the placement of tax credits under the superannuation savings scheme in Part M ensures that it is not confused with tax credits that relate to satisfying a person's income tax liability.
Subparts MA to MC contain the general provisions for the WFF tax credit rules. Subpart MB contains the rules for calculating the amount of income on which thefamily tax credit is based. Subpart MC lists the rules under which a person may be entitled to a WFF taxcredit.
Subparts MD to MF provide for the calculation and delivery of the various components of the WFF tax credits.
Subpart MK contains the rules providing the tax creditfor the KiwiSaver scheme and complying superannuation funds.
Part O - Memorandum accounts
Part O contains the rules relating to memorandum accounts. The term "memorandum account" is a new, generic term covering imputation credit accounts, FDP accounts, CTR accounts, branch equivalent tax accounts, ASC accounts, Maori authority credit accounts and policyholder credit accounts.
The main purpose of Part O is to provide a way of tracking payments of tax, tax-relief amounts, and other types of payment made by or to certain entities in a way that enables the subsequent delivery of a tax credit under Part L or other tax benefits to people with interests in these entities. As a result, Part O indirectly relates to the core provisions via Part L and other provisions.
This Part draws common rules together and sets out separate tables for credits and debits that summarise the credit and debit rules for each type of memorandum account. These tables follow their related subpart. There are no intended changes in legislation listed in Schedule 51 for Part O.
Subpart OA contains the general rules that apply to all memorandum accounts. Examples of general rules include how to determine the balance of a memorandum account at any time, continuity rules that must be satisfied to preserve the carry-forward of credits in corporate entities from one tax year to the next, and how to calculate a maximum permitted ratio for attachment of certain credits to certain distributions.
Each subpart, from OB to OK, contains the specific rules for each type of memorandum account. These specific rules detail the credit or debit amount and the time at which they arise. Each subpart also quantifies the credit amount that may be attached to a distribution from the entity.
Each subpart also states the consequence of an account having a debit balance at 31 March and the additional amounts that may be payable as a result. Subpart OB deals with imputation credit accounts, subpart OC with FDP accounts, subpart OD with CTR accounts, subpart OE with BETA accounts, subpart OF with ASC accounts, subpart OJ with policyholder credit accounts, and subpart OK with Maori authority credit accounts.
Subpart OP contains the rules that set out how a consolidated group of companies applies the individual and general memorandum account rules. It also sets out specific memorandum account rules that apply only to a consolidated group of companies.
Drafting improvements in Part
The main improvements in the clarity of the legislation are expected to arise from:
- restricting Part O to provisions relating to memorandum accounts, and as a result, moving tax payment and the tax refund rules to Part R;
- having separate tables for credits and debits that summarise the rules for credits and debits for each type of memorandum account;
- rationalising common rules into a new subpart OA; and
- drawing together common rules that apply to all or most memorandum accounts, such as consolidated group rules and the resident's restricted amalgamation rules.
Tables have been used at the end of each subpart to provide quick access to the credits and debits that arise within each type of memorandum account. A separate table has been set out for all credits and debits, with a brief description of their nature, the date of the credit or debit and a link to the provision that defines that particular credit or debit.
A number of repetitive rules have been rationalised and placed in a new subpart OA. For example, in the 2004 Act, a separate rule creates the opening balance for each type of memorandum account in each subpart. A similar situation arises for the rules relating to resident's restricted amalgamations, as these rules apply to most memorandum accounts.
Two minor consequential drafting changes have been added as a result of a newly defined term "memorandum account" to allow the drafting of some general rules in the rewritten subpart OA:
- In the definition of "tax position" in the Tax Administration Act 1994 (TAA), paragraph (j) includes the new term "memorandum account". Before this amendment, paragraph (j) of this definition referred to an undefined phrase "tax account". The phrase "tax account" does not appear elsewhere in the TAA and is used only once in the 2004 Act, in section MBB 2. It is clear from the language of the defined term "tax position" that the phrase "tax account" is intended to refer to the various memorandum accounts in Part M of the 2004 Act.
- In section 22(2) of the TAA, paragraphs (k) and (kb) have been combined and now refer only to memorandum accounts, other than a CTR account or an ASC account.
Part R - General collection rules
Part R consolidates the rules that set out how and when a person satisfies their obligations for amounts imposed under Part BB. The rules relating to tax payments and refunds from subparts MB to MD of the 2004 Act have been moved to Part R. Those rules related to terminal tax, provisional tax, PAYE intermediaries, tax pooling, early payment discounts and the use of tax refunds.
When a person satisfies an obligation under Part R, in most circumstances, a credit of tax will arise under Part L. When a company satisfies an income tax or FDP obligation, the company is generally required to account for those payments under the memorandum account rules in Part O.
Subpart RA draws together the general rules that relate to several different payment types. In particular, Part R provides a clear link from the obligations imposed
under section BB 2 to the detailed rules for each payment type in the relevant subparts. Subpart RA also contains a set of common rules - for example, the date by which payment is required - and the treatment of amounts withheld by the payer as being received by thepayee.
Subpart RB contains the rules that relate to the satisfaction of a person's terminal tax under section BC 8. This subpart also incorporates section NG 3 of the 2004 Act, which applies to a person with non-resident passive income when the NRWT withheld by the payer of the income is treated as the income tax liability in relation to that income.
The provisional tax rules are set out in subpart RC. These rules describe the circumstances in which a person has a provisional tax obligation, the methods for calculating the amount of provisional tax payable for a tax year, and the payment methods relating to a person's provisional tax liability for a tax year.
The PAYE and ESCT rules are now located in subpart RD because of the similarity in their operation. These rules define the PAYE rules and list the types of payments to which they apply. They also show how an employer calculates the amount of PAYE or ESCT to be withheld and when the amount withheld is to be paid to the Commissioner.
Subparts RE, RF and RG set out the rules describing when and how amounts are withheld from payments consisting of resident and non-resident passive income, as well as amounts in relation to foreign dividends received by a New Zealand company. These subparts also describe when and how these amounts are paid to the Commissioner or are treated as being paid.
Subpart RM consolidates the rules dealing with refunds of overpayments of taxes and other obligations under the Act. Subpart RP sets out the rules relating to PAYE intermediaries and tax pooling accounts.
The Income Tax (Withholding Payments) Regulations 1979 have been moved to and consolidated with associated provisions in subpart RD. Some administrative rules (which mainly relate to information and notification requirements) have been moved to the Tax Administration Act 1994.
Drafting improvements in Part R
A number of rules have been rationalised in subpart RA to avoid unnecessary duplication. Because of the intention to align payment dates, all payment dates are now located in subpart RA.
In the 2004 Act, payment and collection rules were spread through many of the subparts and related to:
- the treatment of an amount withheld from a payment of income for income tax and other purposes;
- the treatment of the various payment obligations as a debt due to the Commissioner; and
- who must satisfy the various payment obligations.
A minor clarification has been made in the provisional tax rules in relation to the attribution rule for services in section NC 37(5) of the 2004 Act. It is now clear that the period of time by which a return of income is filed includes an extension of time agreed to by the Commissioner. This minor clarification provides a consistent rule for those who have similar requirements for provisional tax purposes.
Part Y - Definitions and related matters
Definitions continue to be located at the end of the Act, just before the transitional provisions. Subpart YA lists the defined terms, whether the substance of a definition is set out in section YA 1 or is located close to its operating rules. An example of this latter approach is the definitions of the different types of trusts:
- "Complying trust" is defined in section HC 10.
- "Foreign trust" is defined in section HC 11.
- "Non-complying trust" is defined in section HC 12.
Subpart YB defines "associated person". This definition has been restructured to better communicate the concepts underlying the various codes which define "association".
The meaning of "control" is set out in subpart YC, and includes the voting interest and market value interest rules. Subpart YD sets out the rules relating to residence and source. Subpart YE contains the rules describing how references to balance dates and years are intended to be read throughout the Act. General rules for currency conversion appear in subpart YF.
Intended changes in Part Y
Section YA 1 - Definition of "land"
This definition has been rationalised. In particular, the first three paragraphs apply generally for the Act.
Section YA 1 - Definition of "mortgage"
This definition was introduced into the Income Tax Act at a time when mortgages were part of the system of land tax. The definition has been updated and simplified and now applies generally for the Act.
Section YA 1 - Definition of "natural resource"
The concept of "natural resource" is found in two definitions in the Act and is also a term used in many of New Zealand's double taxation agreements. The 2004 Act does not define this term, and as part of the rewrite objective is to provide clear legislation, it is desirable to define it.
The new definition of "natural resource" is derived from a review of all natural resource-related definitions within other New Zealand legislation. The definition in section YA 1 includes land, water, air, soil or subsoil, minerals, geographic or geologic features, electromagnetic spectrum, forms of energy, living organisms, ecosystems and any rights or interests in any of these things.
Section YA 1 - Definition of "pay"
The definition draws together a number of related terms and applies them generally for the Act. The Interpretation Act 1999 makes it clear that all parts of speech and grammatical forms of a word (for example, "pay, paid, and payment") are to have the same meaning throughout the Income Tax Act, unless the context dictates a different meaning.
Use of the defined term "tax year" in business-related rules
In the rewrite of Parts F to O of the 2004 Act, officials identified a number of provisions through the Act that refer to the defined term "tax year" (31 March year), when the context of these rules indicates that the reference should be to the defined term "income year" (balance date-related). This is particularly evident in rules relating to commercial activities.
The affected provisions are listed in the appendix to Schedule 51. The term "tax year" has either been omitted from the rule, as the term is unnecessary in the context of the rule, or has been rewritten to better reflect the income year context of the rule.
Part Z - Repeals, amendments and savings
Part Z contains the transitional rules, which have the same function as the equivalent rules set out in Part Y of the 2004 Act. The transitional rules apply from the beginning of the 2008-09 income year corresponding to the 2008-09 tax year.
Part Z also contains:
- repeals of enactments (section ZA 1 and Schedule48);
- consequential changes required for other Acts of Parliament, including the Tax Administration Act 1994 (section ZA 2 and Schedules 49 and 50);
- transitional rules relating to the commencement (section ZA 3);
- savings of binding rulings (section ZA 4); and
- savings of accrual determinations (section ZA 5).
The transitional provisions provide that:
- the plain language legislation is to have full effect from the date the legislation comes into effect; and
- no change in the effect of the law from the 2004 Act is intended unless notified as a change in Schedule 51.
The 2004 Act can be used as an interpretive guide but only in cases when the meaning of a provision in the 2007 Act is unclear or gives rise to absurdity. This rule does not apply when changes in the law are intended and notified, or provisions in the Act are subsequently amended and introduce new policy. The provisions of the 2004 Act may also be used to identify that an unintended change in policy has occurred in the rewritten Act. The transitional provisions do not address this situation, however, so a non-legislative process is being developed for this purpose.
The most important transitional provisions are those in sections A 2(2), ZA 1(2) (When repeal effective), ZA 3(3), (4) and (5) (Intention of new law), and ZA 4 (Saving of binding rulings).
Subsections ZA 3(1) and (2) ensure that errors in other specific sources that reference corresponding provisions between the 2004 and 2007 Acts can be corrected, as contemplated by the Privy Council in the case of Vela Fishing Ltd v CIR (2003) 21 NZTC 18,123.
Section ZA 3 - Transitional provisions
The transitional provisions in section ZA 3 are intended to:
- provide a clear signal to users of the new law that no change from the 2004 Act is intended;
- preserve existing case law and Inland Revenue practice and policy statements as much as is reasonably possible;
- require the 2004 Act to be used as a guide to interpreting the meaning of the 2007 Act when the meaning of the new law is unclear or ambiguous;
- ensure that each of the provisions listed in Schedule 51 is not subject to the transitional provisions; and
- ensure that any provision that has been amended to introduce new policy after the new legislation comes into effect is not subject to the transitional provisions.
It is reasonable to expect that the drafting of legislation in a comprehensive rewrite project will result in some inadvertent law changes. The courts may interpret new phrases and wording in a way that moves the interpretation of the rewritten Act away from the policy contained in the 2004 Act. For this reason, great care has been taken to ensure that the provisions in the 2007 Act are unambiguous and reflect the policy of the 2004 Act.
This has involved a process of testing and consultation on the drafting throughout the bill; from the development of the exposure draft, through to the introduction copy and reported-back versions of the bill.
Each of the drafts of legislation was reviewed on at least one occasion by a private-sector tax specialist. Significant levels of private-sector consultation also provide assurance that the rewritten legislation is intended to reflect accurately the current law unless notified.
Unintended changes in legislative outcome
It is still possible for a provision in the 2007 Act to contain an unintended change in legislative outcome. However, when the provision is clear and does not lead to an absurdity, the 2004 Act cannot be used as a guide to interpretation. In this situation, the 2004 Act can only be used to support a submission that there has been an unintended change in outcome.
The government has also given a commitment to promote retrospective amendments to the 2007 Act in circumstances when a provision in that Act contains an unintentional change in outcome of the law compared with the 2004 Act. This commitment is intended to avoid disadvantaging taxpayers who rely on the current law.
There will be occasions, however, when there will be differing views on whether a provision in the 2007 Act contains an unintended change in law. The Rewrite Advisory Panel has a role in this process. It consists of a representative from the New Zealand Law Society, the New Zealand Institute of Chartered Accountants, the Treasury, Inland Revenue and the independent chair. Its functions are to:
- consider any case brought to its attention on whether a provision in the 2007 Act has changed the effect of the law set out in the 2004 Act;
- advise the government of its conclusion on each case; and
- maintain a watching brief on the consistency of drafting of future income tax legislation.
This role of the Panel is intended to give taxpayers assurance that there will be a transparent process in place when the legislation comes into effect for determining whether it contains any changes in law, and to provide assurance that the drafting of income tax legislation will follow the styles and practices adopted in the 2007 Act.
One concern that arises when considering enacting retrospective legislation is that any changes may have an adverse impact on a taxpayer's previously filed tax position. This impact will be considered when introducing the retrospective legislation. There remains the possibility that a future government will decide to retain the unintended change in policy. This arises because future governments and parliaments are not bound by an earlier government's policy or commitment to change the law.
Taxpayers who rely on the transitional provisions in coming to their tax position and who have been adversely affected by a government decision not to change the law are still required to meet their tax obligations.
They may be entitled to relief from penalties and use-of-money interest, however. The relief is to be available only if the person involved has taken reasonable care in taking an acceptable tax position, as provided for in section 141A of the Tax Administration Amendment Act 2004.
If, however, a person takes an unacceptable tax position resulting in a shortfall of tax in excess of the thresholds referred to in section 141B of the Tax Administration Act 1994, they may be liable for penalties and use-of-money interest.
Section ZA 4 - Binding rulings
Section 91G of the Tax Administration Amendment Act 2004 states that a binding ruling does not apply from the date a taxation law is repealed or amended if the repeal or amendment changes the way the taxation law referred to in the ruling applies.
A significant consideration is the potential cost to both taxpayers and Inland Revenue if new rulings become necessary because existing binding rulings applied for a period after the rewritten legislation comes into effect.
The same approach adopted for the 2004 Act has been adopted for the 2007 Act binding ruling section ZA 4. This section ensures that a binding ruling continues to apply to the provisions that correspond to provisions of the 2004 Act that were the subject of the ruling (if the ruling continues to exist). For example, a binding ruling issued for three years, on the basis of the equivalent former legislation, with effect from the 2007-08 to 2009-10 tax years will result in the binding ruling remaining effective until the end of the 2009-10 tax year.
Binding rulings are not intended, however, to apply to any provision that does not have a corresponding provision in the old law. The two typical cases when this occurs are provisions:
- listed in Schedule 51; and
- those amending the 2007 Act to enact new policy.
The reference to the new law as being the law which "corresponds to the old law" means it is Parliament's intention that taxpayers and Inland Revenue should not have to go to the time and effort of obtaining or issuing replacement binding rulings. To support this, section ZA 4 specifies that the Commissioner is prohibited from making a new binding ruling if the existing binding ruling is to continue to have effect. In other words, the intention is that the requirement that the new law "corresponds to the old law" is not intended to be given a narrow, obstructive interpretation that would prevent binding rulings being saved.
In the vast majority of cases, it is anticipated that there will be no doubt over the existence of the "corresponding" new law. It should be very clear that there is a new law which corresponds to and expresses the same ideas as the old law, even though it uses plainer language and is located under a different section number.
Section ZA 5 - Savings of accrual determinations
The "preservation" approach adopted to save binding rulings has been applied to continue accrual determinations in a similar fashion.
Date published: 02 Mar 2008