Vol 32 No 3 April 2020
CONTENTS 1 In summary
2 New legislation Order in Council Taxation (Use of Money Interest Rates Setting Process) Amendment Regulations 2020 Tax Administration (Direct Credit of Refunds of Excess Financial Support and Student Loan Payments) Order 2020 4 Legislation and determinations 2020 International Tax Disclosure Exemption ITR31 10 Interpretation statement IS 20/01: Income tax – treatment of the receipt of lump sum settlement payments 18 Standard practice statement SPS 20/02: Loss offset elections between group companies 24 Legal decisions – case impact statement Court of Appeal decides forgiveness of debt can be a charitable gift qualifying a taxpayer for donation tax credit 27 General article Check out beta version of Tax Technical site now
ISSN 1177-620X (Online) Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
YOUR OPPORTUNITY TO COMMENT Inland Revenue regularly produces a number of statements and rulings aimed at explaining how taxation law affects taxpayers and their agents. Because we are keen to produce items that accurately and fairly reflect taxation legislation and are useful in practical situations, your input into the process, as a user of that legislation, is highly valued. You can find a list of the items we are currently inviting submissions on as well as a list of expired items at www.ird.govt.nz (search keywords: public consultation). Email your submissions to us at [email protected] or post them to: Public Consultation Tax Counsel Office Inland Revenue PO Box 2198 Wellington 6140 You can also subscribe at www.ird.govt.nz/public-consultation to receive regular email updates when we publish new draft items for comment.
Ref Draft type Title Comment deadline PUB00332 Interpretation statement Goods and services tax – unconditional gifts 10 April 2020 PUB00334 Question we’ve been asked Can owners of existing residential rental properties claim 10 April 2020 deductions for costs incurred to meet Healthy Homes standards? PUB00349 Question we’ve been asked Income tax - natural love and affection exception to debt 10 April 2020 remission income for look-through company PUB00308 Interpretation statement Goods and services tax – supplies of residences and other 17 April 2020 real property PUB00338 Public ruling Investment in US limited liability companies 17 April 2020 PUB00310 Interpretation statements Overseas rental properties 21 April 2020 and determination Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020 IN SUMMARY
New legislation IN SUMMARY Order in Council
Taxation (Use of Money Interest Rates Setting Process) Amendment Regulations 2020 2 An Order in Council has been made to ensure that the Commissioner’s use of money interest paying rate cannot be set at a negative rate.
Tax Administration (Direct Credit of Refunds of Excess Financial Support and Student Loan 3 Payments) Order 2020 An Order in Council has been made to include refunds for excess payments of financial support and student loan deductions as tax types refundable by direct credit under section 184A of the Tax Administration Act 1994.
Legislation and determinations 2020 International Tax Disclosure Exemption ITR31 4 The scope of the 2020 exemption is the same as the 2019 exemption.
Interpretation statement IS 20/01: Income tax – treatment of the receipt of lump sum settlement payments 10 This interpretation statement considers the income tax treatment of lump sum payments received to settle claims that are both capital and revenue in nature. In particular, it considers when apportionment will be required. The statement is a re-issue of IS 16/04; in the course of considering some related issues, it came to Inland Revenue’s attention that paragraph [68] of IS 16/04 was incorrectly stated as quoting from Case 96 (1996) 17 NZTC 7,603. The quote was instead from the Commentary to Binding Ruling BR Pub 05/12 Taxability of payments under the Human Rights Act 1993 for humiliation, loss of dignity, and injury to feelings. Paragraph [68] has now been corrected and IS 16/04 republished as IS 20/01.
Standard practice statement SPS 20/02: Loss offset elections between group companies 18 This standard practice statement updates and replaces SPS 17/03 Loss offset elections between group companies. Example 3 has been expanded to clarify that late loss offset elections can be made where at the original time of filing the loss company’s return, the loss company was unaware of the group companies’ profit outcome. It also recognises that not all additional late loss offsets will result in an amendment to assessments. However, the same rationale as set out in the SPS 16/01 on amending assessments will also apply when the Commissioner considers whether to accept late loss offset elections.
Legal decisions – case impact statement Court of Appeal decides forgiveness of debt can be a charitable gift qualifying a taxpayer for donation tax credit 24 This was an appeal of the High Court’s decision that Nancy Lois Roberts’ forgiveness of debt was a “charitable or other public benefit gift” within s LD 3(1)(a) of the Income Tax Act 2007 (the ITA) qualifying her for a donation tax credit (Nancy Lois Roberts v Commissioner of Inland Revenue [2018] NZHC 2153). The Court of Appeal upheld the High Court’s decision and found that: For the purposes of s LD 3(1)(a), the term “monetary” means “of or pertaining to money”; - In this context, “monetary” is not limited to include only cash, credit cards, cheques and bank transfers as the Commissioner submitted; - In this context, “monetary” also includes a right to receive cash, such as sums standing to the credit of a bank account, or invested in securities; and - Mrs Roberts’ forgiveness of debt was a monetary gift that was paid.
General article Check out beta version of Tax Technical site now 27 We’re building a new Tax Technical website to help people find tax technical answers more quickly.
1 Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
NEW LEGISLATION This section of the TIB covers new legislation, changes to legislation including general and remedial amendments, and Orders in Council.
TAXATION (USE OF MONEY INTEREST RATES SETTING PROCESS) AMENDMENT REGULATIONS 2020
Taxation (Use of Money Interest Rates Setting Process) Regulation 1997 An Order in Council has been made to ensure that the Commissioner’s use of money interest paying rate cannot be set at a negative rate. NEW LEGISLATION The Taxation (Use of Money Interest Rates Setting Process) Regulation 1997 outlines the methodology to be used when setting the use of money interest rates. This has been amended to specify that when setting the Commissioner’s paying rate, that it must be set at the higher of: • The 90-day bank bill rate minus 100 basis points; or • 0% In effect, this prevents it being set at a negative rate. Background The use of money interest (“UOMI”) rates are a cornerstone of the tax compliance system in New Zealand. UOMI interest is paid by the taxpayer where tax has been underpaid and by the Commissioner where tax has been overpaid. The rate of UOMI payable for overpaid tax is referred to as the Commissioner’s paying rate. The legislated twin objectives of the UOMI provisions are to: • fairly compensate the party (either the Crown or the taxpayer) that does not have the use of its money; and • encourage taxpayers to pay the right amount of tax at the right time. The method used for setting the overpayment rate is outlined in the Taxation (Use of Money Interest Rates Setting Process) Regulation 1997. This method uses the Reserve Bank of New Zealand (“RBNZ”) 90-day bank bill rate minus 100 basis points (1%). When the UOMI rates were last set, at the start of July this year, the UOMI for the Commissioner’s paying rate was reduced to 0.81%, as the 90-day bank bill rate was 1.81%. However, since then, the RBNZ has decreased the Official Cash Rate (“OCR”) further to 1.00. This has caused the 90-day bank bill rate to drop to 1.27% for the month of January 2019. Key features The measure prevents the Commissioner’s use of money interest paying rate being set at a negative rate. Application date(s) The Order in Council came into force on 9 April 2020.
2 The Order 9April on inCouncil 2020. comes into effect date(s) Application the optimal to dates choose to implement crediting type. direct flexibility refunds of for each tax RevenueInland the necessary through Orders the inCouncil legislated progressive paid, types for was toexcess implementation allow tax tax for various Whilst the intent that was the Commissioner eventually Revenue Inland of would required be to credit direct all refunds of tomoved START Revenue’s Inland of inthe nextphase for April 2020. transformation planned business project, and student and The automated are administration deductions to loan self-service support be online processes. financial of to Revenue’s Inland platform(START), technology new and more enables and improves information which modernises flows, implemented was when machine their and gaming duty crediting direct administration for income tax moved was Compulsory Background provide an exemption hardship undue when crediting direct is cause or impracticable. would 184Astill the the 4(1)of allows Commissioner Student to 2011.Section Act insection Scheme Loan defined as deductions wage or 1991.Student are Act deductions salary loan and domestic inthe maintenance Support Child support child defined as means Financial and student support the credit direct refunds of deductions. for excess loan support payments financial of Tax Administration and Student Credit Financial (Direct Excess Payments) of Loan Support Refunds of Order 2020mandates related to cheques. and weretaxpayer by eliminating taxpayers introduced to with system time benefit delays the postal associated and costs The provisions credit 184Aand via 184Brequire direct to refunds paid to account abank insections be nominated tax by the the 184Aof Tax credit by direct under section refundable types Administrationtax 1994. Act and studentAn as to Order made refunds include deductions for inCouncil excess been loan support has payments financial of Sections 184Aand the 184Bof Tax Administration Act 1994 SUPPORT STUDENT AND LOAN PAYMENTS) 2020 ORDER TAX FINANCIAL ADMINISTRATION EXCESS OF REFUNDS CREDITOF (DIRECT Department Revenue Inland Tax Information Bulletin
Vol 3April 2020 32No 3
NEW LEGISLATION Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
LEGISLATION AND DETERMINATIONS This section of the TIB covers items such as recent tax legislation and depreciation determinations, livestock values and changes in FBT and GST interest rates.
2020 International tax disclosure exemption ITR31
Introduction Section 61 of the Tax Administration Act 1994 ("TAA") requires taxpayers to disclose interests in foreign entities. Section 61(1) of the TAA states that a person who has a control or income interest in a foreign company or an attributing interest in a foreign investment fund ("FIF") at any time during the income year must disclose the interest held. In the case of partnerships, disclosure needs to be made by the individual partners in the partnership. The partnership itself is not required to disclose. Section 61(2) of the TAA allows the Commissioner of Inland Revenue to exempt any person or class of persons from this requirement if disclosure is not necessary for the administration of the international tax rules (as defined in section YA 1) contained in the Income Tax Act 2007 ("ITA"). To balance the revenue forecasting and risk assessment needs of the Commissioner with the compliance costs of taxpayers providing the information, the Commissioner has issued an international tax disclosure exemption under section 61(2) of the TAA that applies for the income year corresponding to the tax year ended 31 March 2020. This exemption may be cited as "International Tax Disclosure Exemption ITR31 "("the 2020 disclosure exemption") and the full text appears at the end of this item. Scope of exemption The scope of the 2020 disclosure exemption is the same as the 2019 disclosure exemption. Application date
This exemption applies for the income year corresponding to the tax year ended 31 March 2020. AND DETERMINATIONS LEGISLATION Summary In summary, the 2020 disclosure exemption removes the requirement of a resident to disclose: • An interest of less than 10% in a foreign company if it is not an attributing interest in a FIF or if it falls within the $50,000 de minimis exemption (see section CQ 5(1)(d) and section DN 6(1)(d) of the ITA). The de minimis exemption does not apply to a person that has opted out of the de minimis threshold by including in the income tax return for the income year an amount of FIF income or loss. • If the resident is not a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10%, if the foreign entity is incorporated (in the case of a company) or otherwise tax resident in a treaty country or territory, and the fair dividend rate or comparative value method of calculation is used. • If the resident is a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10% if the fair dividend rate or comparative value method is used for the interest. The resident is instead required to disclose the end-of- year New Zealand dollar market value of all such investments split by the jurisdiction in which the attributing interest in a FIF is held or listed. The 2020 disclosure exemption also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and FIFs.
4 A "widely-held entity" for the purposes of this of A "widely-held disclosure entity" is for an the entity purposes which is a: calculation of methods are used. treaty resident territory, or inatax country tax and are otherwise or dividend incorporated rate the if fair comparative or value disclosureNo is required by for non-widely-held attributing taxpayers interests that inFIFs are income interests than less of 10% 2020 disclosure exemption. agreements agreements and iscollection limited negotiated to tax with the double the 40countries territories or listed inthis information exchange tax include agreement" not the agreementsFor tax term the does avoidance or doubt, "double of euro-based investments split into toeuro-based be the will need underlying jurisdictions. which the is FIF held, listed, managed. or Investments organised denominated to ineuros this able meet test be will not and so proxy it is accepted as areasonable long -thatis be as held will also is at 90-95%accurate least -for the in underlying jurisdiction managed. the In event residence that asplit is by optionof currency determined, easily tax inwhich not the afurther investment marketdollar investments of value inwhich the split by the attributing jurisdiction interest is inaFIF held, listed, or organised comparative calculation of is method value the that, end-of-year for each calculation they method, disclose New Zealand The disclosure required, by widely-held entities, attributing of interests dividend rate the fair the or which use inFIFs YAsection the 1of ITA. Portfolio investment entity, widely-held company, in widely-held and widely-held are superannuation fund GIF all defined • • • • below. The 40countries agreement territories or tax have inforce with adouble at which New Zealand does as 31March 2020are listed • • • calculation methods: following A resident is required an attributing to disclose interest the of through one arises of loss the aFIF income or FIF if use inaFIF Attributing interest in aFIF required interests these to disclose to the Commissioner. interests These are considered below. detail infurther Generally, an income interest residents hold who acontrol or interest inaforeign company, an or attributing interest are inaFIF Commentary Department Revenue Inland Finland Fiji Denmark Republic Czech China Chile Canada Belgium Austria Australia widely-held group investment ("GIF"). fund widely-held or superannuation fund; widely-held or company; investment investment-linkedportfolio entity (this aportfolio includes or life fund); agreement inforce at as 31March 2020. resident tax have not territory or with inacountry tax adouble which New Zealand does otherwise or is incorporated dividend rate thefair if comparative resident or methods, value is awidely-held not entity and the attributing interest dividend rate thefair if comparative resident or methods, value is a"widely-held entity" or rate returnattributable deemed of income, FIF or cost or methods; Malaysia Korea Japan Italy Ireland Indonesia India KongHong Germany France South Africa South Singapore Samoa Russian Federation Poland Philippines Papua Guinea New Norway Netherlands Mexico Tax Information Bulletin Viet Nam United States America of Kingdom United United Arab Emirates Turkey Thailand Taiwan Switzerland Sweden Spain
Vol 3April 2020 32No 5
LEGISLATION AND DETERMINATIONS • • for the current year, years: and for each the of four previous tax minimis threshold, required they will be to they have apply the unless than rules FIF less attributing $50,000 of interests inFIFs required to continue year. to applythe ineach tax rules subsequent FIF Where previously has outthe opted of de aperson return note opting that outthe minimis of Please threshold de income tax is aperson generally for the loss. income year or FIF out the opted minimis of has threshold who de This by applyto including inthe not minimis exemption de aperson does CQ the 5of ITAunder section the 6of ITA DN under section loss FIF or interests. these of inrespect arises interests remains under$50,000at all times duringthe income year. This income FIF no disclosure exemption is because made Interests inforeign entities the if total cost atrustee the have of not held by as anatural do acting disclosed not also to be person minimis De • • • • • • • • • • • • • have not and do disclosed: to be However, the interests following the 43of ITA) 31to are EX EX exempt (under sections an attributing from being interest inaFIF • • • • • interests of the 61(1)of TAAThe section that of types within fall the scope are: FIF interests Department Revenue Inland apply the rules). FIF had more thanthe person $50,000inattributing interests (note inFIFs that have required years they for would these been to exempt from the and/or rules); FIF had attributing no the person interests they had foreign no (for example, inFIFs shares, only or had foreign shares which were information). foreign Revenue's Overseascertain Inland pensions guide annuities pensionsor (see and annuity schemes for more (IR257) treated been New Zealand not and which has an attributing as interest by inaFIF the person interest residenta beneficial of atax inaforeign not acquired was first whilst which superannuation was scheme the person an interest held by anatural is who anon-resident transitional or person resident New Zealand currency. thederiving of interest any disposing or gain or profit for New Zealand currency consideration or readily convertible to interestscertain held by anatural inaforeign where inacountry entity person exchange located controls prevent the person an interest grey-list incertain resulting companies from the acquisition shares of share underan employee scheme an interest grey-list incertain resulting companies from shares acquired under aventure investment agreement an interest grey-list incertain New Zealand venture owning companies companies capital country an interest venture incertain investments capital inNew Zealand resident start-up that companies migrate to agrey-list separate disclosure is required this of an interest as inaforeign company) interestscertain more 10%or of inaforeign company that inAustralia is treated (although to tax, resident, and subject as an interestas inaforeign company) an income interest more 10%or of in acontrolled foreign company (although separate (“CFC”) disclosure is required this of account savings Australian Australian superannuation scheme, exempt regulated sector public Australian or superannuation fund retirement an interest held by anatural inaforeign that superannuation person scheme is an Australian fund, approved deposit distributions interestscertain inan Australian unit trust that aNew Zealand RWT has proxy with either turnover ahigh high or to account maintain afranking (refer other (keyword: to exemptions)) Revenue's Inland website www.ird.govt.nz interestscertain inAustralian list the of Australian the resident on official included companies Stock Exchange and required the Aof ITA. 25,part an interest inschedule inan entity specified an entitlement from aforeign to benefit life insurance policy resident New Zealand of tax was the person an entitlement from aforeign to aperson’s if benefit superannuation scheme, interest acquired first inthe whilst was scheme treated the interest interest aFIF as inareturn 20May before 2013and income for years all subsequent income filed of an entitlement acquired from aforeign the to aperson interest if benefit superannuation scheme, 1April before 2014and the of inaforeignrights ITA acompany to company for the anything be or purposes deemed aunit trust) (eg, Tax Information Bulletin
Vol 3April 2020 32No 6
LEGISLATION AND DETERMINATIONS Please note thatPlease is requirement amandatory electronic filing disclosure. for CFC ir458). (keyword: at online www.ird.govt.nz The spreadsheet accessed IR458 must form be return electronically inmyIR. Alternatively, complete return can you the myIR income tax attachment disclosure when online form preparing income tax your return the of electronic into income process. tax part myIR it your as filing accountsubmit the by form logging and uploading computer. your on to the paper aworking the spreadsheet able save as form will be optionyou choose you If When completed, • • The forms for disclosure all interests of are: inaCFC Format disclosure of to the applied foreign be 17should company it if 14to were as thisof EX aCFC. exemption, EX sections Toapplied. determine whether aresident an income has interest more 10%or of inany entity that for the purposes is aCFC, not To determine whether the 17of aresident ITA 14to an income has interest EX EX sections more 10%or of for CFCs, be should c. b. a. all foreign the interests following regardless considered: the residence. companies of to of country For this be need purpose, A resident is required an income interest to disclose more 10%or of inaforeign company. to This applies to obligation disclose Income interest 10%ormore of in aforeign company Click ‘Other ways to this’ this on do web to page access the spreadsheet IR458 form. and-organisations/types-of-business-income/foreign-investment-funds-fifs/file-a-foreign-investment-fund-disclosure found at www.ird.govt.nz/income-tax/income-tax-for-businesses- be forms and IR458 can IR449 IR448, The IR447, IR443, return electronically inmyIR. Alternatively, complete return can you the myIR income tax attachment disclosure when online form preparing income tax your into myIR your accountby logging and attaching line. it with to disclosure’ aweb ‘FIF inthe message subject return or the of electronic into income process, tax part myIR it your as filing accountsubmit the by form logging and uploading computer. your on to the paper aworking the spreadsheet able save as form will be optionyou choose you If When completed, options. the spreadsheet return using IR458 all other myIR or income tax disclosures may noted above, filed attachmentAs be form requirement, electronically. made disclosures must be these than by individual investment is as the general requirement the 61of TAA. section of order In exempt to from be the general disclosures are these rather above by country discussed As online. and comparative for widely-held value filed entities, must be The spreadsheet IR458 return the and myIR disclosure income tax dividend options rate for fair attachment which reflect forms, • • • • • • The forms for the disclosure interests FIF of are follows: as Format disclosure of Department Revenue Inland myIR income tax returnmyIR income tax attachment form spreadsheetIR458 form, or returnmyIR income tax to make attachment used electronic disclosures (this form for all be methods) can form spreadsheet toIR458 make (this form used electronic spreadsheet disclosures for all be methods) can form for form theIR449 cost method for form theIR448 comparative (for individuals method non-widely-held value or entities) dividend for rate form theIR447 fair (for individuals method non-widely-held or entities) rate for form the returnIR443 deemed of method an income interest held by an associated person (not being a CFC) as defined by subpart YB of the YBof ITA. by subpart defined as aCFC) an being income interest (not person held by an associated an income interest held indirectly through foreign any interposed company an income interest held directly inaforeign company Tax Information Bulletin
Vol 3April 2020 32No 7
LEGISLATION AND DETERMINATIONS iii. ii. i. 3. Exemption the YA context unless have insection requires, meaning as expressionsOtherwise, the same used the 1of ITA. the YBof ITA. is insubpart contained persons" The relevant "associated of definition • • this of disclosure exemption:For the purpose 2. Interpretation requirements the 61of TAA insection to make disclosure their of interests, for the 31March income year ended 2020. and attributing interests inforeign investment inrelation (“FIFs”) funds to is required which not any person to comply with the This the 61(2)of exemption Tax is under section made Administration 1994(“TAA”). Act It interests details inforeign companies 1. Reference This exemption may cited "International as be Tax ITR31". Disclosure Exemption the 61of TaxPersons required to with section not comply 1994 Administration Act for the administration the of international is FIFs or necessary an not exemption and so rules is for this made tax group. under either Therefore the rules. FIF or CFC disclosure non-residents' of transitional or inforeign residents' companies holdings Under the international non-residents and transitional rules, residents tax are required not to calculate attribute or income toforeign or atransitional and FIFs; companies resident with interests inaforeign company an or attributing interest inaFIF. to company interestsThis an operating its overseas inNew Zealand of applyfor (through example would abranch) inrespect in Interests held by non-residents and transitional disclosed. to residents inforeign be need not do and FIFs companies Interests non-residents held by and transitional residents returnmyIR income tax attachment filed. must for be form CFCs where the interest all otherIn cases, inaforeign company is an attributing not interest inaFIF, the spreadsheet IR458 or form in aFIF, then the appropriate previously, disclosure for the discussed calculation as method, made. must be To disclosure meet requirements, disclosure of onlyform one is required for each interest. the If interest is an attributing interest required an interest both to disclose held inaforeign company and an attributing interest inaFIF. interest inaFIF. with an income interest aperson For example, greater 10%or of inaforeign company that is is aCFC not strictly thatIt aresident is possible may required an interest be to disclose inaforeign company constitutes which also an attributing Overlap interests of Department Revenue Inland set out intheset commentary. agreement agreement tax tax inforce means adouble atdouble as 31March the of 2020inone 40countries territories or as the if were FIF andas aCFC, interests incontrolled foreign attributing of (“CFCs”). companies are the In applied case interests to sections be those inFIFs, to determine the 17of Tax Income an income interest 14to EX EX more, 10%or sections of 2007(“ITA”) Act applyfor New Zealand has a double tax agreement tax inforce adouble New Zealand has at 31March 2020. interest and that income year, to the extent resident that territory or with inacountry the tax or is FIF which incorporated rate comparative or calculation is value method required not the to 61(1)of TAA comply with section that of inrespect GIF, an attributing has who interest inaFIF, other than income interest adirect dividend the fair more, 10%or and of uses investment is who aportfolio entity,Any not person widely-held company, widely-held widely-held or superannuation fund inwhich thesplit by the attributing jurisdiction interest is inaFIF listed. held or the end-of-year market New Zealand dollar by investments, the of value Commissioner, inan electronic format prescribed required the to 61(1)of TAA comply with section that of inrespect interest and that income year, discloses the if person a foreign dividend rate the fair comparative or PIE and uses equivalent, calculation for value that method interest, is not GIF, an attributing has who interest inaFIF, other than interest adirect more 10%or of inaforeign company that is not investment is who Any aportfolio entity, person widely-held company, widely-held widely-held or superannuation fund requirednot the to 61(1)of TAA comply with section for that interest and that income year. the 6(1)(d)of ITA, to DN due arises CQ the the minimis of loss exemption application de or section 5(1)(d)or insection is that is an attributing not persons, interest inaFIF, that or is an attributing interest income which FIF no of inrespect ina FIF an income interest holds who Any than person less of 10%inaforeign company, including interests held by associated Tax Information Bulletin
Vol 3April 2020 32No 8
LEGISLATION AND DETERMINATIONS Technical Specialist Haydn Clark This exemption 6March is on signed 2020 the of TAA.section 7 This exemption authority is under delegated from by acting the me made Commissioner Revenue Inland of pursuant to iv. Department Revenue Inland with section 61(1) of the 61(1)of TAAwith section that of inrespect interest and that income yeareither if the apply: of following both or attributing interest inthe inaFIF year ending to income year 31March corresponding the 2020,is tax required not to comply Any transitional or non-resident person resident an income has interest who acontrol or interest inaforeign company an or • • • • no FIF income or loss arises in respect of that interest in that FIF under sections CQ 5(1)(f) or DN 6(1)(f) of the of ITA. that of inrespect interest arises 6(1)(f) loss income or DN FIF no or CQ inthat under sections 5(1)(f) FIF the 2(1)(d)of ITA; DN or and/or that of attributedno inrespect interest arises loss income or CFC inthat foreign CQ company under sections 2(1)(d)
Tax Information Bulletin
Vol 3April 2020 32No 9
LEGISLATION AND DETERMINATIONS Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
INTERPRETATION STATEMENTS This section of the TIB contains interpretation statements issued by the Commissioner of Inland Revenue. These statements set out the Commissioner's view on how the law applies to a particular set of circumstances when it is either not possible or not appropriate to issue a binding public ruling. In most cases Inland Revenue will assess taxpayers in line with the following interpretation statements. However, our statutory duty is to make correct assessments, so we may not necessarily assess taxpayers on the basis of earlier advice if at the time of the assessment we consider that the earlier advice is not consistent with the law.
IS 20/01: Income tax – treatment of the receipt of lump sum settlement payments
All legislative references are to the Income Tax Act 2007 unless otherwise stated. Summary 1. The focus of this statement is setting out how the Commissioner will treat a lump sum payment received under a settlement agreement for claims that (if successful) would have resulted in receipts of both a capital and revenue nature. 2. Whether a settlement payment is taxable depends on what it is paid for – in this case, what was given up in return for the payment – and its nature in the hands of the recipient. It is essential to first determine what a payment is for before determining whether apportionment is necessary. 3. It has been suggested that two High Court of Australia decisions: McLaurin v FCT (1961) 12 ATD 273 and Allsop v FCT (1965) 14 ATD 62 McLaurin and Allsop are authority for the proposition that, if an undissected settlement payment includes both capital and revenue amounts, the whole amount will be treated as capital. To the extent that McLaurin and Allsop stand for this proposition, the Commissioner’s view is that they would not be followed in New Zealand. Rather, where possible, New Zealand courts would seek a reasonable basis for apportioning a lump sum. 4. Given this, where a single undissected sum is received, it should be apportioned between its capital and revenue elements where possible. Any apportionment must be made on an objective basis. The starting point for determining an appropriate apportionment will be the settlement agreement and any related documents (for example, the statement of claim (if there is one)). Where necessary, the circumstances surrounding the agreement and other relevant evidence (such as evidence of any negotiations between the parties) should be considered. The onus of proof is on the taxpayer to show the apportionment is appropriate. 5. In the rare circumstance where the payment cannot be appropriately apportioned, the whole amount should be treated the same. Where the lump sum includes an amount that is taxable under a provision in Part C, the taxpayer has the burden of proving what part of the amount is not taxable. If a taxpayer is unable to show what part of a lump sum payment is capital, the Commissioner’s view is that generally the whole amount should be treated as income. Introduction 6. We have been asked to clarify the Commissioner’s position on how to treat lump sum payments made to settle claims partly capital and partly revenue in nature. There has been uncertainty as to how such payments should be treated. In STATEMENTS INTERPRETATION particular, some people have taken the view that the lump sum should be treated as always wholly capital and, therefore, not subject to income tax. This is based on an interpretation of two High Court of Australia decisions: McLaurin v FCT (1961) 12 ATD 273 and Allsop v FCT (1965) 14 ATD 62. This item sets out the Commissioner’s view on this issue. Analysis How to determine whether an amount is capital or revenue 7. To decide whether a payment is capital or revenue, it is necessary to determine what the payment is for (Buckley & Young Ltd v CIR (1978) 3 NZTC 61,271 (CA)). The character of a cause of action discharged by a payment will determine the nature of the payment (Federal Coke Pty Ltd v FCT 77 ATC 4255 (FCA)). Therefore, where a payment is received in return for settling claims, it is necessary to consider what the nature of any payment received would have been if those claims had been successful. A payment received to settle claims of a revenue nature would be revenue. A payment received to settle claims of a capital nature would be capital (Case V8 (2001) 20 NZTC 10,092). This is regardless of the nature of the
10 16. 15. 14. 13. 12. 11. New Zealand approach Apportionment 10. 9. Department Revenue Inland 8. taxpayer for the losses specified inthe statement claim. of specified for thetaxpayer losses were intended read to together. be considered Judge Barber that the settlement payment to made compensate was the the mediation agreement referred to the settlement attached agreement and the statement documents claim, of these statement claim, of the mediation agreement, the settlement agreement and the circumstances As surrounding the case. consideredJudge Barber that indetermining the character to the of consider settlement the payment necessary it was with”connection the proceedings. entered also It was into by all parties. in inor denial liability of the in“full settlement parties and final all issues of between received $170,000from the the designer of machine and $100,000from the manufacturer. The agreement a included $1,050,561.25.Mediation of resulted compensation claimed settlement inan outcourt of under which the taxpayer fruit-processingand manufacturer defective an of allegedly misrepresentation machine, and The negligence. taxpayer astatement breach had filed claim and storage of alleging contract of by the facility) supplier akiwifruitof packhouse Case V8considered the characterisation alumpsum of settlement the (the taxpayer operator payment. that In case, any put had forward not made. taxpayer argument be should to as how apportionment the as the that result. of Ultimately, evidence to case justify sufficient the on facts be possible not was apportionment process”. scientific kindof by some however, mere on cannot, and Apportionment there speculation based must be notedthat also He “calculated “absolute that be could precision” the apportionment required, not it necessary was was nor to not itself, of areason apportion. not, was difficult might be an apportionment and the fact to the agreement. the that view Richardson Jtook likely was asituation rare to be impossible where was apportionment to item. aparticular This by is considering done the terms the of contract and, where relevant, the context and background is to apportionment of determineRichardson Jnotedthat how much an have of amount the the parties purpose attributed were how the paid amounts apportioned. to be specify not (restrictivewere capital for both covenant) and revenue (payment to made remove The elements. contract did employee) Buckley &Young The agreements of payments at concerned aseries made aimed removing employee. an unsatisfactory However, an all-or-nothing approach where arise can for to apportionment. basis the fails provide taxpayer areasonable rather than where is applying anapproach all-or-nothing to possible, the of New Zealand apportion courts approach. rather than inthe income, Commissioner’s are principles relevant the view same to Buckley both. &Young shows the Although Buckley apportionment. on &Young New Zealand cases leading considered expenditure of the apportionment and revenue This elements wherever is demonstrated possible. inRichardson J’s judgment inBuckley &Young the of –one The Commissioner considers apayment the is approach to into to the of apportion capital New Zealand seek courts its At treatment issue is the tax and revenue to alumpsum of paid settleclaims acapital nature. both of inthisamounts statement that assume aprovision income. apply to Cwould treat inPart the assessable amount as with inconnection employment).s CE derived 1(amounts the Unless context requires, references otherwise to “revenue” context settlement of common provisions payments, that and from sCB derived business) applyinclude 1(amounts could underaprovision “income” exempt C(and not it inPart must be the income). excluded In or For an amount taxable, to be to go and consider on apportionment. necessary be not it would thatIn case, or wholly revenue wholly or (Buckley &Young (at 61,275): incidental to or the is other. ancillary sought it may proper to characterise be such In the acase payment capital wholly as Commissioner’s view, An exception generally to apportioned. this such payments be is should where the of one advantages and revenue to apayment made Sometimes below, settleclaims acapital nature. will be both of discussed inthe As LJ). Diplock way inwhich aright to claim may (London arise &Thames Haven Ltd vAttwooll Wharves Oil [1967] 2All ER 124at 134per to rights makelegal the claims for payment –that whether is, under statute or incontract made tort or inany or other
payment for which deduction is sought. [Emphasis added] ispayment sought. for which deduction payment is character. adual of the The true statement character identifying of the of the of the problem highlights importance distinct and separately by the advantages other payment. 124,139-140).In may There gained identifiable cases be 1 K.B. the the of the payment character (cf.Anglo-Persian affecting not Company Oil Limited (H.M. vDale Inspector ofTaxes) [1932] the and may that other provision incidental, or advantage is conclusion the one merely be proper payment secures ancillary characterisation of mayDifficulties where arise agrees the to director employee or resign and to give arestrictive covenant. The Tax Information Bulletin
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INTERPRETATION STATEMENTS 26. 25. 24. In 23. 22. 21. 20. 19. 18. 17. Department Revenue Inland this effect, Hardie Boys J suggested that Hardie may Jsuggested Boys apportionment haveimpossible. this been effect, intended theOn other to to hand, out work from Hardie Jappears have trying the contract Boys how much been the parties apportionment appropriate. was withThis, inconjunction implications from providedthe for the Richardson J’s basis contract, that conclusion the TRA’s have commercial would fee of level been inthe circumstances attributing (ie to avalue that element the of contract). determiningIn willingto an appropriate Richardson Jwas take into account apportionment, the TRA’s to as what finding apportioned. (income) and for the restraint held the The services also payments acting be majority could trade(capital). for of both were incharacterpayments the received capital payments as partly were underacontract for services received inreturn involved settling aclaim for liquidated squarely damages (which was within the of one exceptions notedinMcLaurin and distinguished by the McLaurin facts supported not was McLaurin of basis This the on considered was awhole. and must be as arguedThe that also apportioned taxpayer the be not $100,000could claim against to the the company go deed. behind and that possible not it was amount (together with interest attributable was to the consideration tax) withholding for the less paid assignment the of the company). However, Jconsidered that settlement of it the Doogue made clear that deed the $99,999of settlement against the the discontinuanceabout directors and shareholders his of proceedings (rather than to settle his dispute with remuneration to Sayer paid for Mr humiliation bring argued it monetary the was that of as (capital). $100,000was part no remuneration monetary and $50,000as had attributedThe the Commissioner other had assessed $50,000to compensation claim against the company. amount (together with interest attributable was to the consideration tax) withholding less for the assignment Sayer’s Mr of directors and shareholders from any claims that had he against them. providedthat The the $99,999of deed settlement company SayerMr to agreed to all claims assign asecond that might he have against the company and to the release time, the settlement, company of Sayer Mr inconsideration $130,944.30.Under owed the the deed of amount $100,000, of SayerMr entered settlement of into and assignment adeed with the directors and shareholders the of company. At that company’s to interest well as liability him, as damages. and exemplary against the action directorstook and shareholders the of company that for any aresult might he as suffer shortfall the of to Sayer windupthe and $5,000for (atotal $117,142).Mr to costs of applied company feelings and also and injury dignity awarded remuneration, for compensation lost Sayer Mr including compensation $62,142as $50,000for humiliation, of loss vCIR (1999)19NZTCSayer award 15,249involvedan employment court dismissal. The for wrongful Employment Court his In view, (at 7,608): the inthe apportionment of claimed this amounts originalbasis proceedings. afair was consideredJudge Barber the all of available evidence and circumstances the payments apro on to rata and chose apportion The argued taxpayer that feelings)). and hurt the entire to settlement feelings. payment for compensation injury was (for humiliation, amounts dignity of revenue income) and loss of capital (for loss amounts (between apportioned be should the Taxation so lost had been Review Authority had to consider whether (and how) alumpsum settlement payment Case S96(1996)17NZTC 7,603related against an employer. grievance proceedings to personal The settlement agreement Foregoing the right to characterise an it not bring. incident did not) settlement; the sue was of payment. relevant as seen –even not though there was parties may claims that havecapital been have the could taxpayer (but did that(considered the the inmore fact agreement below), the detail ageneral settling all included issues clause between and revenue acapital nature, both of have required. would been for Unlikecompensation losses apportionment inAllsop that that The established judgment it suggests if the had been for settlementcompensation revenue losses. payment was and the for repair statement per profits of as costs the for loss taxpayer claim, of the settlement payment being income, was ingredients the of original claim by the made taxpayer. held the that, Judge Barber payment as to made compensate was the between the apportioned payment received alumpsum, be it was not as could The argued taxpayer that, because
Henwood vCIR (1995)17NZTCHenwood (Richardson Jand Hardie J)held that Appeal the of 12,271the of Boys Court majority [Emphasis added] injury. feelings for to compensation settlement each of apportionment reality, afair incommercial was personal and what, The be issue Agreement. must by the Settlement available may what of limit evidence, imposed and have regardless been itheard has element by thistheI consider that now fixed the toAuthority of settlements be because needs the taxable non to to allocate each element their 11 of (which found he inclause contract). the any In of absence indicationto and Allsop and (which are considered below). Doogue Jrejected the taxpayer’s(which are considered Doogue below). argument the that on basis it and Allsop and Tax Information Bulletin on the thaton basis the settlement agreement inSayer
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INTERPRETATION STATEMENTS 31. 30. 29. 28. United Kingdom law case 27. Conclusion onNew Zealand approach Department Revenue Inland 35. 34. 33. 32. depended, for example, on when (at on Tilley’s Mr to 285): so do for example, impossible not depended, it was employment ceased), Porter considered that although there indetermining were the difficulties amount attributable to each (which component commented that, the on issue practicability, of Tilley’s Mr Lord accountants for apportionment. had provided abasis the Lord of Crown,behalf Thankerton point, the had On accepted same treated the amount be should apportionable. as the but head not Viscount under one other, noted that due Simon was considered the if court tax the Attorney-General, on to as how theevidence agreement the calculated. of amount parties was between that rights surrendered.the the agreement there two had been the was amount Nor between that any other apportioned and, to the extent the payment inconsideration There made income. was salary, it of areduction was of nothing in was Lords of heldThe that, to House the extent the payment received was for surrendering aright to capital it was apension, £2,000ayear inconsideration of for instalments. alumpsum equal payment toagreed £40,000intwo areduced of salary managing to director. be ceased he Tilley Mr to agreed the release company from the to obligation pay the and pension to agreed £6,000ayear to andagreed of had also £4,000ayear for pay of 10years after pay apension him Tilley Mr asalary (Inspector ofTaxes) vHaughey [1993]3All ER 801).It concerned the managing director acompany. of The company had Wales Lords of more by the Lords House recently of followed vTilley (which was the of House adecision was inMairs lumpsum settlement considered payments. undissected of 41 (UKCA). the apportionment cases Both Two are directly point on Wales United Kingdom cases Wadman v vTilley and Carter [1943]1All ER 280(HL) the well relevant as as context the parties, athave the and background. documentation between looked where determining In there so. will an apportion appropriate the for doing courts basis is areasonable apportionment, haveThe is tended New Zealand courts to that position The take abroad approach default the to courts apportionment. agreement, at 52-53: to determineemployment income). The considered the the of court possible value unexpired it term was the of claims for the taxpayer’s was the of One possible claims. share 1942(this up to be the of would 2December profits the price for the cancellation insettlement the inpart, paid and of present agreementpayment past of was, and, inpart, had toThe Appeal of determine Court whether employment It the of considered income. any £2,000was the part Subsequently,the profits. determined it that was Carter’s Mr share have £1,090. would the been of profits the of calculated. view In agreement, longer no make could Carter Mr been not any claim against Pierce Mrs for ashare of upto the cancellation his 1942),but date his salary paid share (2December had been for the the 1942year of had profits future claims” might he have against her under the management At contract. the time the agreement Carter Mr made was consideration his of agreeing to the transfer the of licence to the purchaser settlement and infull “all of present and past, andPierce Carter Mrs Mr entered into an agreement under which Pierce Mrs to agreed pay £2,000in Carter Mr except business. of inthe course theof ordinary business, the assets of or any premises of the or part goodwill withthat without possession part his or she not, sublet could consent, Carter’s Mr premises. consent to the required assignment aterm was it was Carter’s as Mr of agreement with Pierce Mrs Pierce) and the licence wished to the for the lease assign premises chattels and to the sell goodwill, and stock relating to the 1942the 24June 1949.In on The employer (Mrs 1942and ended termthe the of business. 30January agreement on began aquarter plus share week £10per of of the of net profits the resident as for asalary employed manager house apublic of Wadman v consideredA similar issue inCarter was by Appeal the of UKCourt referred was to back Commissioners The the case Special to determine the possible. not appropriate apportionment. was have would mean apportionment amounts estimated not did to calculatedrespective exactly) be they be not could (as calculate theobjectively of given the values rights upinreturn respective the for the lumpsum payment. The fact Therefore, Lord Porter inconsidering to considered possible, whether was whether an apportionment possible it was
[Emphasis added] injury. constantly which personal but has of one to estimated with doubt indealing no to ascertain, cases be difficult a period say, time of the duringwhich an injured length workman have would continued to received earn had wages not he his injury, choice the of time his of retirement. there doubt No than, but the are resultant nomore difficulties incalculable figure seems the commencement the were of matters, pension others many on dependent the amongst on Appellant’s unascertainable that and said there the the inasmuch of cessation as made salary were be materials no could acalculation such which upon for the only salary. It faintly of reduction was the of argued Crown behalf on but it was that such possible; adivision not was It only remains, therefore, whether to the see from sum separated attributable that to be the payable thecan of release pension Tax Information Bulletin . In that case, the taxpayer (Mr Carter) was was Carter) the (Mr taxpayer that. In case,
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INTERPRETATION STATEMENTS 44. 43. 42. 41. 40. 39. 38. Australian law case 37. 36. Department Revenue Inland taxpayer was paid £37,500. paid was taxpayer Asettlement negotiated was underwhich the improperly office. under the of demanded colour the had been amounts the that on basis Council the paid of fees the that recovery Privy the sought the were taxpayer payable, fees legally not by adecision Following Transport fees. for the permit deductions allowed totalling £54,868and had been fees permit Allsop this on basis. arguednot the case had the parties This that on the claims valuing of may respective because basis. given upand apportioning be possibility theuncommunicated of reasons payer for making the payment were relevant). not Further, there the of discussion no was relevant not also willingto It was was pay what had payable. originally the for (ie was the claimed other party party one concerned withThe was establishing what court had agreed the parties have therefore, The derived. otherwise court, the would held the taxpayer entire innature. capital sum was Commissioner’s argument that the settlement payment character the it income on had the the basis was same profits as inthe taxpayer’sincluded for entire by compensated one claim was not) or sum. There for the basis factual no was circumstances, by Theconsidered the (whether fire court considered the the amount awhole. damage must caused be as unliquidated damages underacompromise that treats payment. such In the payment undissected asingle as However, appropriate not considered was the court apportionment where apayment is only made for claims for the distinct by calculation. claims were ascertainable Wadman by calculation”.ascertainable this Wadman In v context, referred the court to Carter claims where the of claims at some are specific of least for liquidated are or amounts that amounts are “otherwise The accepted court that it may appropriate payment a single be amixed of nature to apportion insettlement made claimed). amount payments considered (not for each individualcourt item and the accepted undissected made offer for asingle was determined by the payer’s (the Commissioner Railways) uncommunicated for reasons agreeing of to pay the The amount. item However, claimed. considered the court the character the of payment inthe hands the of recipient be not could by the and make the could to taxpayer taxpayer as guess thesupplied by the aconfident amount valuer allowed for each determined theclaimed, theof on alist valuation. on basis items The accepted of court the valuation based was The Commissioner for compensation the revenue considered being income, the items £11,000of was compensation to to the as how the at. taxpayer arrived amount was theand of the inthe valuer taxpayer course arriving at his valuation. However, found information no the court given was the valuer by the There out by avaluer Commissioner between employed discussions Railways. various carried of had been avaluation on the as of for items which the made, claims had been based The property of was £12,350lump sum offer the fire. £12,350and the accepted of offer taxpayer settlement it “infull all claims of for damage arising out of” innaturecapital that for amounts and some were revenue innature. The Commissioner asettlement Railways made of the of claimsthat were by the Some Commissioner owned had that spread for Railways. amounts of from were aproperty in McLaurin this on The Australian leading issue are cases Australia the of High Court decisions in McLaurin and ashare upto cancellation profits of date and had then repudiated the contract. entitledbeen to recover from Pierce Mrs damages his for breach salary as paid the of had he if been employment contract, to have entitled) which the would taxpayer been to bore the aggregate £1,090and the have of sum the would taxpayer the sum £1,090(the of the the of share on proportion made basis be the of should profits The found apportionment court gave to regarding when back referring the Commissioners. General apportionment the case to as how the up. the made This amount parties was emphasis valuation on between is consistent with the order the court Wales with Consistent vTilley, there elements. consideration no was given to to determine trying any agreementrespective the the on of values from this the seen that lumpsum based concerned be withIt was can the apportioning court
. [Emphasis value added] inestimating its difficulty there is noinsuperable amatter estimate, of be the of must agreement the of to value the the of the calculation though unexpired portion Appellant Lordships with their agree any to fix sum …But which represented respectfully we income. impossible must be payment, the whole acapital the £2,000and saythat arising but aprofit the it from Crown was his employment: might equally well have argued it that, was as Mr. of to to to any argue point Mustoe sought the portion that, consideration impossible as lumpsum£2,000,it of one was was concerned a taxpayer who was in the transport business. The taxpayer had paid the The had Commissioner paid taxpayer for Motor business. inthe transport was who concerned ataxpayer as an example of a case that liquidated claims included acase and of Wales an example as where of some vTilley acase of an example as had made claims for a total amount of £30,240 as compensation for damage to property as aresult claims had as made afire of for for compensation damage atotal amount to £30,240as of property that in principle there must be apportionment, and we think that on the facts of the present case, the of case, [inWales present think we and that the on facts vTilley apportionment, there] that be inprinciple must Tax Information Bulletin the amount was paid for. the paid amount was relevant not It was what and Wales and v vTilley. It gave Carter and Allsop and
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INTERPRETATION STATEMENTS 54. 53. Although 52. Conclusion onapportionment 51. 50. 49. 48. 47. 46. 45. Department Revenue Inland calculation” than the inMcLaurin amounts Similarly, the making amounts upthe lumpsum inWales any vTilley to more by be seem not “ascertainable easily do liquidated more no of damages assistance was to than the court any other right that valued. be could according to the of the values differentapportioned respective this In claims. regard, there the an amount fact was of alumpsum to as cover paid found thethe £2,000was the all court of given rights up. It found that £2,000had to be situation, to easier argue be it that would had implicitly However, the the on parties agreed amount allocated. to be an amount to equal to the that amount the allocated of liquidated £1,090)was such In head. a damages (inthat case where to concluded the assist with the court acase court determining not It was any agreement the parties. between Wadman v the agreement The fact approaches to inCarter apportionment. possible. found that was up. the the this, made In of courts apportionment absence no sum was McLaurin estimatedobjectively for different values elements the of the On agreements. other hand, Australia the of High Court in inWalessettlement The Wadman payments. courts v vTilley Carter and theIn Commissioner’s view, the Australian have taken and UKcourts different lumpsum approaches to apportioning therewere for apportionment. so basis no identified, was not The held that Court the entire the payment as received alumpsum, capital the amount was as ingredients was which of Securities vSpedley FCT Ltd 88ATCexample, at 4128: 4126(FCA) for to as have how the evidence agreement the calculated. of amount See, parties the was sought courts between possible, McLaurin treatedamount be should capital. as therefore, claim. to The court, determine for any found the paid amount that whole specific was possible any specific limitedagreement to) was ageneral covering (and, inthat clause release contained all potential not it case, was claims, to for evidence calculated as the how the amount the parties what (ie looking they for). As the agreed paid amount was consider not The did attempting court to the claims value respective given to up. Rather seems the have court been (at 65): have willingto would he apportion before been taxpayer. particular, In to evidence had to calculated as the how the amount Jappears have seeking Windeyer parties been thought to by the the of paid have payment fees received arefund permit of had part against was as No the Government. JheldWindeyer the consideration for the payment claims of the avariety of the had might release or was be taxpayer to attributablewas solely the refundthe paid. of fees considered the entire payment by way made the of was compromise payment of all claims of part the had. No taxpayer CJand Taylor the for the all providedthe potential of settlement paid release amountAs was Barwick claims, deed J interference with the taxpayer’s (even such by vehicles and though no his the made claims business taxpayer). had been CJ and TaylorBarwick Jconsidered have the would taxpayer had claims valid against the Commissioner for unlawful Commissioner’s argument. The considered the income. amount court allowed, was there for the basis had been factual no was which adeduction The Australia of High Court rejected the Commissioner’s argument the that, payment as arefund expenditure of was for under the relevant legislation. charges with the had arising inconnection or omitted taxpayer costs, or done out anything of to and expenses done be demands, dues, arbitrations, action, of debts, Commissioner causes for Motor Transport proceedings, suits, from all actions, Motor Transport. providedthat, inconsideration The deed the the of Government payment, and the released the taxpayer the of without Government made The and the the on was Commissioner any settlement part liability of for admission deed
in the assessment of his taxable income. his of taxable in the assessment by that the amounts paid deductions appellant for arefund particular road of charges as as had been allowed and which had been from the material appear not computed, and received was paid It that does us it, before of the any sum £37,000,or part of definite [Emphasis added] to up.Theas the made to way evidence was as it the inwhich way another or the from side settlement is one scant. seen, was After negotiation, an entire accepted. agreement, of sum $200,000was of payment there but Its the noagreement subject was was and Allsop and Allsop and McLaurin distinguished Wales Wadman v vTilley Carter and seemed concerned with trying to find evidence of agreement between the parties as to as how the evidence agreement the of lump concerned to parties with find trying between seemed inlater followed have Australian been determining In also whether is decisions. apportionment or Allsop or . , this, arguably,, this, the explain fully different not does Tax Information Bulletin were willing to accept apportionments based on on were based willing to accept apportionments included a liquidated amount did not appear aliquidated amount included appear not did
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INTERPRETATION STATEMENTS 64. 63. 62. 61. 60. 59. 58. 57. How should an appropriate determined? be apportionment 55. Neither Department Revenue Inland 56. approach than the that Australian suggested McLaurin It been has one. the Commissioner’s view, is more the consistent broad approach cases taken inNew Zealand apportionment with the UK Allsop to different, have able argue the would had been taxpayer that been that, McLaurin the if Sayer suggest did facts All relevant factors need to be considered toAll relevant for apportionment. be when determining basis need areasonable factors revenue nature. Allsop of required be the on would facts apportionment apportionment. In Allsop it is essential to above, out work what the payment discussed rather is As considering for before than apportionment. Wadman v intended tobe cover more or one claims inCarter (as an incidental element as included asettlement of itit may will be agreement inCase and V8 Sayer). other (as In cases, circumstances, some In dependent. similarly fact The will be relevance from all liability ageneral of releasing clause aparty help determine what the payment for. made was toEvidence prior settlement relevant the negotiations may of parties be and other they also if between background facts later negotiations the between parties. Cros vRyall (1935)19TC 444(KBD)). situations In it is with likely assistance along evidence of inbetween, some of to be tobasis the statement claim, of it may little of relevance no or be indetermining du an appropriate (see apportionment it inthe settlement agreement inCase V8).At (as the other the if end dispute the of adifferent spectrum, on settled was astatement circumstances.particular For example, claim of is likely highly to relevant be where there is an express linkto The terms any of statement considered. astatement helpful claim be How of should claim of the is on will depend appropriate to calculate estimate) (or the theclaims of value respective given upinreturn for the payment. Where it there may intended be evidence how the of the is parties insufficient) amount (or no apportioned, to be up.made may the parties thetimes, care total only amount about the of payment and may have not given any to thought as how it is want ahigher payment and humiliation, for hurt but their employer may prefer ahigher Other payment wages. for lost agreements is that they with may represent an competing employee parties interests. For a compromise example, between Often to there as up. how the made The agreement the no lumpsum was parties nature will be between settlement of Case S96 at 7,606). (see arrangement to elementamount the allocated capital is excessive, the agreement is asham, avoidance the or agreement atax of is part the Commissioner may accept not where such into an apportionment taking account the relevant circumstances, the However, and revenuegenerally an appropriate capital amounts. be for determining between basis the apportionment Where that established to the be the it parties can settlement have how agreed the payment is up, made this will at the surrounding to circumstances look it is likely and other, necessary to be related documentation. considering well as any As settlement for and tothe paid amount agreement, split it and was revenue into capital parts. its The ultimate basis. is to an on objective apportionment aim of undertaken determineAny must what be apportionment Allsop Allsop McLaurin As avaluation on introducedthe basis. Committee legislation Asprey to be in1975that apportion specific time) 40years and Parliament to chosen had not overturn them by legislation. This despite arecommendation was by Allsop and McLaurin that argued leave the He to to Commissioner seeking the appeal that was 2001).In High Court. 2000,23November S278of No case, It is noted that McLaurin lump sum. a for apportioning inNew Zealand. basis Rather, areasonable followed seek be would New Zealand courts where possible, Tocapital. the extent that McLaurin treated amount settlement the will be and revenue whole payment capital anif undissected amounts, as both includes applied –however,applied mean that not this such does an argument have accepted. necessarily been Rather, would in are relevant. not However, their criticisms are inAustralia. equally inNew Zealand valid as inNew Zealand, the High Court’shave applied never been considering for reasons not overturning McLaurin McLaurin , the High Court denied the application for leave to appeal. This was because the cases had stood for (at that had stood the cases the for leave application , the This denied to High Court because appeal. was and Allsop and and Allsop and and Allsop and the agreement consisted entirely the In Commissioner’s ageneral of clause. release view, no nor Walesnor Wadman v vTilley Carter and should be overturned despite their be longevity.should Ultimately, although McLaurin critical of and Allsop and have also been judicially by Australia criticised thehave of vCSR FCT High Court Ltd been also (see stand forstand this proposition, the Commissioner’s is view that not they would as the full payment the to full made as settle aclaim was by a the of taxpayer ). This will generally aquestion characterisation, of be have been applied inNew Zealand. The in court haveapplied been Tax Information Bulletin and Allsop and are authority for the propositionthat,
Vol 3April 2020 32No and and and and and and
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INTERPRETATION STATEMENTS Settlement payment Settlement Lump sum Income Tax references Subject –treatment“IS tax 16/04:Income the of receipt lump of Pub“BR 05/12:Taxability payments of under the Human Related rulings/statements References 68. 67. 66. 65. apportioned be thatAmounts cannot Department Revenue Inland No 12 (December 2016):33 (December No 12 Tax payments” settlement Informationsum Bulletin Vol 28, 2005): 4 Taxto feelings” Information Bulletin Vol 6(August 17,No 1993for humiliation, dignity, of Act loss Rights and injury payments underpayments the Human Rights Act humiliation, 1993for loss ofdignity and tofeelings injury : This is consistent also with the Commissioner’s to out inthe Pub set BR Commentary as 05/12Taxability position of Buckley &Young (at 61,283): the Commissioner’scapital, is view that treated generally amount be the should This whole income. as is consistent with is to ataxpayer If unable alumpsum of payment show what is part provingof the of amount what is taxable. part not However, where the the underaprovision thehas an amount burden lumpsum includes taxpayer that C, inPart is taxable the of amount comeswithin taxable. thepart of aprovision none amount will be C, inPart under aprovision Where “income” C. it inPart must be no for an amount taxable, totreated be noted above, As the same. There may rare situations be where is possible apportionment no thatapportionment the Commissioner considers and reasonable. is fair the Commissioner may,an apportionment, and the the on information relevant depending make available, facts an The the has burden taxpayer proving of make that not Where is any does reasonable. ataxpayer apportionment theIn Commissioner’s an appropriate to inmost view, situations. find for apportionment basis possible it will be
. [Emphasis added] the on taxpayer any of payment be such would the regarding taxability The proof of onus settlement court of and whether the not or agreement is by the Commissioner settled Human Rights underthe Act. Human Rights regardless whether of so This the aresult be payment as humiliation, made would dignity, to an of of out was feelings. loss injury or to the anask agreement parties what steps amount to to they areasonable took evaluate attribute what be objectively would to Where the amount about attributed doubt the Commissioner may some he has to humiliation, dignity, to of feelings, loss injury or … him discharge upon proof the of onus thereIf evidence is to insufficient arrive at aconclusion, any answer mere to must be and the will speculation have taxpayer failed Wales vTilley [1943]1All ER 280(HL) Securities vSpedley FCT Ltd 88ATC 4126(FCA) McLaurin (1961)12ATD vFCT 273(HCA) vCIR (1995)17NZTCHenwood 12,271(CA) Federal Coke 77ATC Ltd vFCT Pty 4255(FCA) 2001 vCSR 2000,23November FCT S278of Ltd No du Cros vRyall (1935)19TC 444(KBD) Case V8(2001)20NZTC 10,092 Case S96(1996)17NZTC 7,603 vWadmanCarter (1946)28TC 41 (UKCA) Buckley &Young Ltd vCIR (1978)3NZTC 61,271(CA) Allsop (1965)14ATD vFCT 62(HCA) references Case . In these cases, the whole amount received should be amount the received whole be should cases, these . In Tax Information Bulletin
Vol 3April 2020 32No 17
INTERPRETATION STATEMENTS Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
STANDARD PRACTICE STATEMENTS These statements describe how the Commissioner will, in practice, exercise a discretion or deal with practical issues arising out of the administration of the Inland Revenue Acts.
SPS 20/02: Loss offset elections between group companies
Introduction Standard practice statements describe how the Commissioner of Inland Revenue (the Commissioner) will exercise a statutory discretion or deal with practical issues arising out of the administration of the Inland Revenue Acts. PRACTICE STATEMENTS STANDARD This Statement sets out certain practices that the Commissioner will accept for offsetting losses by election between group companies. It also sets out the consequences of specific events that can impact on a loss offset and how these should be addressed. The Statement does not consider all questions relating to loss offsets within a group of companies and accordingly is not a fully comprehensive guide to Subpart IC of the Income Tax Act 2007. All legislative references in this Statement refer to the Income Tax Act 2007, unless otherwise specified.
Application This Statement applies from 12 February 2020 and replaces SPS 17/03 Loss offset elections between group companies published in Tax Information Bulletin Vol 30, No 1 (February 2018).
Standard practice Summary 1. The purpose of the loss offset provisions is to allow those companies that incur losses to utilise those losses even where different entities are involved. This means that there is similarity in the tax treatment of a group of companies, each carrying on separate enterprises, as compared with a single company that carries on the same enterprises in separate divisions. 2. This Statement sets out the application of certain pre-requisites and other aspects of loss offset provisions in Subpart IC which allow loss offset elections to be made. It discusses the requirements for giving notice, the Commissioner’s practice with respect to part-year losses and explains what should happen when the loss company’s loss or the profit company’s net income is increased or reduced. It also sets out the requirements for there to be a valid election and/or subvention payment. 3. A loss company must be resident in New Zealand in terms of s IC 7. The loss company must have maintained a 49% continuity of ownership from the time of the loss to the time of the offset. The profit company(ies) and the loss company must have at least 66% common ownership. The amount of loss offset(s) will be limited to the amount of profit(s) in the profit company(ies). The amount must be fixed by the election in a manner that binds the electing company but need not be quantified in the election. Refer to [13] to [15] for more detail in this area. 4. The loss company must notify the Commissioner of an election for the loss offset and where applicable of a subvention payment within the timeframe under s IC 9. The election may be notified in a tax return or separately from the tax return. The Commissioner may agree to an extension of time for filing the election so long as the request for an extension of time is made and approved before an offset is made. Detailed discussion 5. Subpart IC provides for the sharing of losses between companies that are in the same group of companies. A company may make its tax loss available for subtraction from the net income of another group company. 6. There are two methods of sharing losses which may be used together. The first is for the loss company to notify an election in its tax return for the loss to be made available to the profit company. Any such election is irrevocable. That election must be notified to the Commissioner no later than the 31 March that follows the end of the loss company’s year of offset, or within such further time as the Commissioner may allow: s IC 9(2). 18 15. 14. 13. 12. Prerequisites 8. 7. Department Revenue Inland 11. 10. 9. resident Zealand inNew it be: must not resident adual be company, 6(1)must not undersIC The company loss for the period commonality that though is, Zealand inNew through establishmentbusiness Zealand. afixed inNew a on carrying Zealand inNew be or incorporated 6(1)must be undersIC The company loss for the period commonality 49% continuity ownership of IA5(2),(3)and (6). ss from the time is the incurred loss until is the offset: loss The company forward. loss must haveThere balance carried for an income aloss year or acompany loss with must be atax present. must be the factors following proceed can offset Before aloss pay asubvention amount not to payment creating does an enforceable obligation. merely records an intention to pay asubvention amount payment to initself will a“payment”. not to simplyresolving Also, discharged where longer no suethe the can payer payee notedthat for the payment. It be should an accounting that entry transfer. Other discharging amount of methods to also can an obligation “payment”. An will generally obligation be payment agreement discharged discharged. payment, bank by cheque or The be an actual been has can cash obligation Consequently, inthe subvention payment when the context, underthe obligation “payment” subvention satisfied will be c) b) a) willsubvention apply: the principles following payments, 2010it is acceptedfrom December that inthe any of “payment” absence of statutory inthe definition context of Previously the Commissioner the that view took asubvention payment required actual payment However, made. to be time thesuch Commissioner as further 9(1)and (2). may IC ss allow: that later no payment made must be than the 31March that the end company’s follows the of within or loss offset, year of company’s The payment to available company net the losses. loss and notice to the Commissioner company by the loss of subvention payment against to made the company company’s the profit loss is offset net income and reduces the loss Another sharingis of method for the aloss company profit to make a“subvention payment” to company. the loss A the Commissioner to election. accept alate offset loss the of processing return and issuing the taxpayer’s amount not to do notice an exercise assessment of the of discretion by The Commissioner must approve the to application apply the discretion The and agree mere to make offset. the loss an extension agreed the time beyond of return. to file losses late to election offset by the made latest company’smust be aloss time to return. file income tax The Commissioner discretion has to accept a company’s inthe loss mayThe included election be return income tax separately made or return. from the tax An election it is equally referring elections, todiscusses notices subvention of payments made. out the requirements reduced. sets or It also income is increased for there Where election. avalid to be this statement and explains what when company’s happen the should loss year losses, the or to company’s profit loss part respect net the requirements It discusses made. to elections be for giving notice, the Commissioner’s offset loss allow with practice which provisions IC inSubpart offset loss of this stated Statement above, aspects As out the certain of application sets • • Loss company Loss entry isentry to made record The this. accounting is entry treated the payment as the of subvention payment. to the allow subvention company’sdecide the of loss insatisfaction payment An applied accounting to debt. be past companyprofit to resolves make asubvention payment to company. the loss The company profit company and the loss company to anA loss obligation has pay adebt to company aprofit purchases from the for company. past profit The 1 Example clear agreement between the parties thatclear agreement the the parties obligation. this between will satisfy pre-existing a“payment” there generally to unless cause be ajournal will entry not sufficient Making is obligation. a Payment may by accounting made be entries where agenuine crediting they cause inthe payee’s a account off set or accountingcertain entries. There are ways inwhich may several an obligation discharged equivalent including payment be its or by or incash The meaning requires ordinary parties. adischarge obligations of between liable to income tax in another country by reason of domicile, residence or place of incorporation: s IC 7. sIC residence incorporation: of place or inanother domicile, of to by reason country liable income tax or agreement, tax the of double agreementtreated resident Zealand being not inNew tax for the as purposes under adouble Tax Information Bulletin
Vol 3April 2020 32No 19
STANDARD PRACTICE STATEMENTS 1 22. 21. 20. The election 19. 18. 17. 16. Department Revenue Inland This (search “IS keyword: statement 13/02”). found at www.ird.govt.nz be can discretion exercised to be favourably. The Commissioner will generally extend the required timeframe to make offset loss exceptional be not with for the company need asingle enterprises that the on same in separate carries Acase divisions. treatmentThere separate compared inthe on enterprises, as tax similarity be should each carrying agroup of companies, of even whereregime which is that to different to companies losses utilise those allow those incur losses entities are involved. consideringIn to offset an application the of apply this loss discretion, the of purpose the mindful Commissioner will be the 9(1). Commissioner sIC the within of made time election: payment the for notifying same be must also may inthe made theof return, election be by or separate asubvention notice. Note of that payment, the inthe case However, is elected). when the offset the Commissioner agree can to alater date 9(2).The sIC notification for the election: (that inthe must generallyby 31March year made toAn is, election offset inthe March 31 the be year following loss year of company. by the loss notified must be loss The company by: give notice loss can the election of tax toAn election offset net income to nil. is such to an amount that be mightthe offset provide reduce to election that would the loss company’s be profit the tax where the maya formula used result applying that known be of at the be could time formula For the of instance, election. inthe inamanner by That the quantified notice election that election. of fixed be not company is, the binds loss but need The amount. amount dollar must be refer should An election to an aspecific amount that as identification of is capable agrees to pay company the 8. company’s loss the exceed s IC loss loss: tax the can amount subvention of Nor payment companies. total net profit all incomethe of that elected the company profit the year, exceed company must not profit net the income of for the elected tax The offset to amount loss be of the or –whethertax certain rights conferred the by Companies Act 1993could give rise toa“shareholder decision-making right”. Statement. found inthe Interpretation guidance common ownership be on More can detailed Statement: IS 13/02Income this of at 66%commonownership. the least agroup form Whether scope is companies companies outside of two not or insIA5(6).Agroup must have companies of defined as group continuity for inthe the period companies same whole of be There company the group must loss more as and inthe all or companies one companies companies same of profit must be sHA22. company: company may from another only qualifying A qualifying receive offset aloss • • • Late electionsLate and extensions time of them filing for amount A specific Amount loss of company Profit • • • • This because: is permissible amount the of company’s profit net aformula. income by using uptois loss still the and the its of question an election time to is some whether file to Company offset now elect Acan accountants are waiting information further on from their That clients. information arriving There inafew days. will be than less $2,000, ie the amount Company of A’s However, loss. tax Company B’s accounts have still prepared to the be as $10,000.It of isloss anticipated that and that Company inprofit Bwill be the amount about the of net income will be agroupIn it is accounts consisting found, once haveprepared, its companies, been that two of Company atax Ahas 2 Example relevant companies as well as the respective amounts (or formula for calculation of the amounts) of net loss to be offset. for torelevant calculation formula the (or net of of theamounts well amounts) loss be respective as as companies aseparate noticesending to the Commissioner. the of to out numbers the notices set names These need and IRD completing the appropriate company’s return, boxes inthe loss income tax or e-filed completing the appropriate company’s boxes inthe loss return, income tax or the amount to be offset is already inthatthe amount offset fixed to it is be controlled by the formula. at the with time making finality of the election; ascertained be income cannot matter not it does that (even the if to accounting commit could the the of staff accounts) finalisation the firm net amount; dollar aspecific as subsequentlythe amount identified will be intime; the notified Commissioner will be Tax Information Bulletin
Vol 3April 2020 32No 1 20
STANDARD PRACTICE STATEMENTS 2 26. Part-year losses 25. Department Revenue Inland 27. 24. 23. This (search 16/01). SPS keyword: statement found at www.ird.govt.nz be can It is possible to offset apart-year 4)provided the requirements (sIP following to loss 4(2)are out insIP offset set It met: as is possible treated be would elections arequest as to under s113(TAA). amend an assessment company. onlyprofit of one inrespect to election already asingle remembered As noted, it must be that any further for instance company aloss is limited not 5(4).However, sIC cases, insome made and irrevocable: be can elections further withdraw it company cannot an election, made Once aloss has that change or that of election any It is election. part final continuity change innet loss. income or accept the She of will also month’s pro-rata allocation balances. income and expenditure to determine the pre and post in continuity, the Commissioner will accept the of end-of-month the use balance sheet figuresfor determining provision at the transactions the pre change end to the post and of or reports out month, significant the backing taxpayer subject Where a company abreak has inshareholder way continuity through part amonth accounting and its system balances • • • • • whether This allowed. the rationale late 16/01Requests will is be out inSPS set election toamend assessments then rationaleforward), the that 113(TAA) same to applies amendments undersection will equally apply to deciding Where the late relates election to company’s the other loss than losses acurrent brought available tax (losses year net loss exercised where the approval under s113(TAA) applied. be would companythe to loss is already amend seeking aposition taken the with discretion regard will only be to offset, the loss then allowed, the discretion exercised. will be will be Where offset the If loss allowed. will be whether offset the loss To on the to based decision exercise will be election summarise this the the discretion late aspect, offset to loss notify (TAA) election. alate the offset Commissioner extend denied, not loss would the be for notifying timeframe would discretion to extend the date for This making an election. means that where an amendment to unders 113 an assessment Tax Administration 1994(TAA) Act -where this involves achange to to a(current the applied be -should year) net loss that rationale It is the that election. same logical relatesany offset loss subsequent to an amendment the under s113 of a(current of an amendment required offset provide year) to will net be not to for loss, aloss position that apply does tax However, allowed. be would whereelections offset where aloss company the already that loss has position taken atax Further elections facts and erred when it took its tax position (refer 16/01–Requests position SPS [59]of para and erred tax its when it toamend took facts assessments). (TAA) The is reason that aware companySection 113 not the loss was offset. to aloss allow the of applied full be would within election the return. time company their for the loss to income tax offset The company file loss no loss made late. At return, its the filed time filing of been company unaware the loss was the of group company’s outcome. profit the preparation returns those of had taken time. Consequently, returns the income tax had for the companies profit return previously sometime prepared there had been and filed were numerous inthe companies group profit and The given reason for requesting the extension offset. the loss year of is that company’s although the loss income tax 10AprilA request on after to 31March is extend the of filed election year following the date offset for making aloss 2 Example – 7)within (sIP required the election timeframes 9. undersIC for elections offset loss a valid denominatorsratios, etc, and disclosure statements. different The part-year be year accounts from to due full accounts necessity will of different Administration (Financial Statements) Order require not 2014.This does the preparation notes of to the accounts and legislation, at the income tax of required level underthe 2013and thefor Financial the Tax Act purposes Reporting statements are required prepared to be inaccordance with the generally accepted accounting adjusted practice, net income for the relevant the of income year. corresponding part The Commissioner’s is view that the financial information accounts contain sufficient should These to indicate the calculation the of amount the of company’s companythe loss and the company profit provide the Commissioner with adequate statements financial 6. under sIP and span, tocontinuity the from ownership end of the company the of inthe 2(1)applies beginning common loss undersIC and span, common is component more no loss the than amount the of the tax net income that the company profit derives inthe 2(1)),and insIP defined inthe arises (as component commonspan loss the tax
As stated above, loss offsets are limited to the company’s offsets profit loss stated above, As for the 8refers). profit year (sIC Tax Information Bulletin
Vol 3April 2020 32No 2 . 21
STANDARD PRACTICE STATEMENTS 34. 33. 32. 31. 30. 29. assessments Amended 28. Department Revenue Inland loss off-sets. loss to other within companies additional profit the losses group. all must the meet Any relevant election further criteria for company. by the for the made forward loss to back be balance carried can the loss election added Afurther will be loss for the company profit the remains deduction upto valid the tax reduced amount the of The net income. “unused” Where company’s aprofit is and therefore amended assessment the offset), reduced the net has of level income loss (below company. by the loss offset aloss of the on company’s profit Itnotification focus will not change innet income. the The on emphasis will be 9(2)).This out all must the insIC meet (set criteria election offsets. time for loss period the of additional company by the net made income loss within inrespect be the can statutory election afurther an offset, Where company’s aprofit is and consequently amended assessment additional of has net income that the subject be could already, discussed As name the to company profit any companies. the or 16/01. SPS amendment subject will be and time, state on it must the be additionalall the for amount example offset, criteria for an to election, out be above set remains must revoked. meet The election The election first be further and cannot valid additional losses. for those made Where company’s be the can loss election afurther is and therefore amended assessment to offset, additional has losses 11(5). sIC inthe preceding paragraph: company discussed within timeframe the same company, the dividend may reduced to the be extent the of subvention this payment portion is repaid to the profit where the the resultsIn reduction case inasubvention payment treated being adividend inthe as hands the of loss (ii) (i) consequently is taken: entitled not the then amount will be elected the action to following offset Where and company’s the election) loss the offset is inthe (having level reduced below loss amended assessment loss its There are four situations are: These that assessments. may brought by amended about be respectively.net losses income or aconsequence offsets. there for additional elections loss As for further may aneed be the Commissioner may company loss resulting or for reduced aprofit or amend an assessment cases, inincreased some In may upon. agreed be maytaxpayers their adifferent discuss with individual positions the approach Commissioner the on facts and depending time of shareholder since of the lapse loss there continuity asignificant for the part-year. been has such In circumstances, to prepare it may difficult be part-year particularly where cases accounts to out above, some In set the detail of level • • • • Reduced profit Increased profit loss Increased Reduced loss the loss offset allocated to 11(4). each sIC company: profit allocated offset the loss time the Commissioner as further may allow, proportionately is the reduced allocated to loss the original amount of is reduced within loss or within that such election 6months tax subsequent its notified company the of loss being to make not pursuant the is companies company to this allocated profit the 11(3).If reduced to loss loss does IC be where there is more the Commissioner than to company as profit to how that one company the notify loss will need and offset, available the to reduced loss be the of company profit the assessment will as reflect is necessary agent, simply amend for the company the profit assessment inaccordance 113(TAA). with section election further No where there is company only profit one then the Commissioner will, usually after consultation with the company its or the company profit the reduced the net has of level income amount below offset. the of loss and the company profit an additional of offset: has net income that the subject be could the is available increased; loss thethe is amount offset; available reduced loss below to originally be elected Tax Information Bulletin
Vol 3April 2020 32No 22
STANDARD PRACTICE STATEMENTS National Advisor, Technical Standards Services -Legal FalkRob This Standard Statement Practice 2020. 12February is on signed 39. 38. 37. 36. 35. to amend assessments Requests Department Revenue Inland failed, for whatever tofailed, reason, so. do and has agree to known losses, where amend to an assessment previously the has offset taxpayer had the opportunity company’s Generally, made. amendments reduced, will or those be net income is the increased Commissioner will not It is the Commissioner’s that practice that having so company’s the election loss approved afurther the or profit loss inerror.made the to on taxpayer show The that will be onus this the case. was was position the initial unless to position tax position anotherCommissioner tax correct amend tax will not correct one The positions. are each tax correct that offset positions exclude or include noted that aloss both tax It be should taking is relevantcorrectness, inconsidering accepted. whether be should the election out the implemented. circumstancesto 16/01sets SPS be when the Commissioner may to ensure amend assessments may to revised, the companies to taxpayer consider need be whether needs election s113(TAA) changes those allows the or made toWhere be needs election there and afurther election are offset any the on loss consequential impacts relevant amended. net why income was the companies’ profit consideringCommissioner it may why company will be an aloss error that made be In not with case, their initial offset. loss at from the company’s amending looked loss will be Requests view. of point that This the for example, means, inthe immediately are discussed preceding paragraphs. Examples elections. offset loss and the further availability of already election made Changes company the of company profit to loss or offset the may on the loss assessments impact Tax Information Bulletin
Vol 3April 2020 32No 23
STANDARD PRACTICE STATEMENTS In October 2008, Mr and Mrs Roberts lent $1,708,080.90 to the Trust and Roberts Mrs 2008,Mr October In (the Loan). Charities Commission. and her late jointly husband the Trust Charitable established Oasis Roberts Mrs (the Trust) in2007and registered it with the Facts RevenueInland will continue to monitor the situation amendment. inlight the of judgment and the proposed Reading 4March Stageon 2020. Second The amendment is inthe contained Taxation (KiwiSaver, Student the and Remedial Matters) Loans, The Bill. passed has Bill announcement. taken inreliance aposition the on current areturn legislation and have credit filed claim the donation before or date tax the of to the commencement 1April 2008,being date the of ITA. provision apply to have Asavings who would taxpayers already amendment applyretrospectively would The proposed credits. for donation tax that qualify not to debtforgiveness clarify does However, 2019, the Minister 17December on statement Revenue of amedia issued an urgent proposing remedial amendment credits. for donation tax aresult forgiveness of this have qualify As of who debtcan taxpayers of judgment, gifts made Impact • • • means “of to s LD of 3(1)(a),the money”; term “monetary” For pertaining or the purposes the upheld High Court’sThe Appeal of Court and found that: decision v Commissioner ofInland Revenue 2153). [2018]NZHC within sLD the 3(1)(a)of Tax Income gift” benefit 2007(the ITA) Act credit her (Nancy for adonation tax Lois qualifying Roberts the of This High Court’s an forgiveness appeal a“charitable was debtwas of that Lois decision Roberts’ other or Nancy public Summary credit for donationtaxpayer tax a qualifying gift acharitable forgiveness be debt can of decides Appeal of Court Department Revenue Inland Keywords Act(s) date Decision Case purely reviews factual decisions for the of brief general interest readers. our of they do represent out Revenue nor Inland policy, reviews set not do attitude our case These to are the These decision. the bare and grounds essentials The readers. for for the busy outline decision. notes also the facts principal summaries and keywordsdeliver will help to the you case legislationrelevant quickly at Short and section identify issue. Act We've given references full including the citation where details to the of each Details italready case, has reported. been and the Supreme Appeal, of Court Court. This LEGAL DECISIONS – CASE NOTES –CASE DECISIONS LEGAL Mrs Roberts’ forgiveness of debt was a monetary gift that gift paid was forgiveness amonetary debtwas of Roberts’ Mrs and invested insecurities; aright includes to also receive sums such to as standing this cash, In the credit account, or context, abank of “monetary” submitted; is limited transfers not and to creditcheques bank cards, only include cash, this theIn Commissioner as context, “monetary” section of the of TIB section gift; statutorygift; interpretation monetary gift; benefit public or charitable credits; donation tax forgiveness trust; charitable debt; of appeal; Interpretation 1999,s5 Act TaxIncome LD 2007,ss 1and LD 3 Act 2019 17 December Commissioner ofInland Revenue vNancy Lois [2019]NZCA Roberts 654 sets out brief notes recent out by of brief the decisionsmade Taxation sets tax Review Authority, the High Court, Tax Information Bulletin
Vol 3April 2020 32No 24
LEGAL DECISIONS – CASE NOTES 11. 10. 9. extrinsic and aids The history legislative 5. 4. 3. inthe legislation The wordsused 2. 1. Decision relating to paid Roberts credits Mrs todonation the forgiveness tax debt. of The Commissioner Revenue Inland of (the Commissioner) anotice issued 4May on 2016requiring repayment of the of portion worth of debt that forgiven. was with the $91,577.24,which corresponded $274,732 totalled credits The donationforgiveness tax gift. acharitable debtwas of years the that on basis the of credit amounts She five Loan. then for the each those adonation of claimed repay tax specified the Trust which released Gift of executed each Deeds In income year ending 2011to Roberts 2015,Mrs to from liability Department Revenue Inland 8. 7. 6. legislative history. legislative of form the of record, Parliamentary they part form unless are reliable, orthodox, or an especially not comments by officials, that provide not did anyparaphrase[ing]” real assistance in interpreting statutory at language, [58]–[62].It notedthat references to “cash donations” from were differing the statutory considered language “money”) “imprecise by the as Court that differed reports from the statutoryReferences language commentary (such and officials’ as papers indiscussion generated (the discussion legislation or Commissioner and the by officials commentary ) at vRoberts [58]. the actual wording the of between The adisconnect found of that Court somewhat there years, of for anumber been, has provided for the no support interpretation contended or “money” of “monetary” by the Commissioner. The considered Court the extensive legislative the of donations history charitable provisions found it so, and, indoing reference): of for ease by Appeal the of Court Zealand at ofNew ed) [3](footnotes (Laws Money omitted). (online follows The as letters “money” werethat added defines interpretingIn the word “money”, and inparticular, definitions relied the also dictionary on Court Zealand New the of Laws land,chattel of excludes agift services. or is intended to mean “of toLD 3(1)(a),“monetary” money”. pertaining or The accepted Court that the term “monetary” interpretingIn the word “monetary”, s of that and concluded definitions for the purposes the relied Court dictionary on more that is (for the paid” 2011to more $5of of 2013years), gift that and “a is(for the paid” 2014to monetary 2015years). the words “a insLD 3(1)(a)used “charitable of $5or The of notedthe gift gift” Court definition other or benefit public the requirements dual to satisfy cross-checked against the of the Interpretation it purpose must be purpose, Act. will determine the interpretation, correct purpose noting that even the if the meaning of inisolation of text plain appears the s5(1)of InterpretationThe applied Court 1999,which provides that Act the text the of statutory provision and its undersLD the 3(1)(a)of ITA gift” “monetary entitled was to and she that received. credits the donation MsRoberts tax the dismissed Commissioner’sThe Appeal of Court a being that of holding aforgiveness capable appeal, debtwas of and bank transfers.and bank payments and thecash like, and held that the text sLD of 3(1)(a)is limited not to credit cheques cards, only include cash, Accordingly, the rejected the Court Commissioner’s were limited and “money” only to that the assertion words “monetary” clear thatland and it was Parliament intend not did within to such sLD 3(1)(a). include gifts chattels property, goods, and personal services, of gifts include it would as wide Furthermore, too at [C]was the definition • NZCA 654(the Commissioner) at vRoberts [38])held that: and inapt for the general statutory context. The (inCommissioner Court ofInland Revenue vNancy Lois [2019] Roberts attracted outThe in[B]this was set to Court narrow context too the at widerdefinition [A]was the definition as • narrow sense. narrow commonground It notes was just coins. bank meaning of or that to the inthis money provision confined not was Parliament clearly intended that by debiting payment achieved and crediting thus excluding be could accounts, a inforeign including money and natural as ordinary currency. meaning, inrelation property. is the If and used personal term to “money” paying into money it is Court construed to be inits even, or exceptionally, to all personal include sense inapopular [C]The term used in securities. may all real be also aright but also to onlynot actual cash receive sums such to as standing cash, the invested credit account, or abank of in the small various denomination notes bank and incoins is limited. to [B]The include term is used money sometimes [A] The generally However, term coins. well banknotes as includes as “money” the paid that amount money of be can Tax Information Bulletin
Vol 3April 2020 32No 25
LEGAL DECISIONS – CASE NOTES the decision. the they do representCouncil, out Revenue nor Inland policy, set and the summaries not These do Supreme attitude our Court. to summaries are notes by the decisionsmade of brief TaxationCase Review Authority, Privy Appeal, of Court the High Court, this document About 14. 13. 12. arguments Policy Department Revenue Inland avoidance inthis context, at [64]–[66]. the Commissioner. It noted that there are now robust statutory mechanisms to inplace with deal any instances tax of the on circumstancesdepending the found that Court avoidance were the of concerns giving, tax overstated about by investigation Whilesignificant and checking may required rebate debts. of be for tax claims inrelation cash, of to gifts by suggestions that unpersuaded greater also The was Court administration with will costs arise the forgiveness of inclusion the drafting of statutory provisions. and specific by more detailed concerns addressed these this, be could about compliance and administrativeavoids significant were costs It exaggerated. considered that Parliament if concerned was that theThe with agreed concerns Court Roberts Mrs advanced under the grounds that excluding forgiveness debt of donations avoidance) which result could were intax persuasive. or compelling statutory compliance and administrative non-cash valuing language of (avoiding significant and costs the difficulty argumentsThe the her found that Commissioner interpretation Court the advanced of to none policy support the of Tax Information Bulletin
Vol 3April 2020 32No 26
LEGAL DECISIONS – CASE NOTES Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
GENERAL ARTICLE
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27 Inland Revenue Department Tax Information Bulletin Vol 32 No 3 April 2020
REGULAR CONTRIBUTORS TO THE TIB
Tax Counsel Office The Tax Counsel Office (TCO) produces a number of statements and rulings, such as interpretation statements, binding public rulings and determinations, aimed at explaining how tax law affects taxpayers and their agents. The TCO also contributes to the "Questions we've been asked" and "Your opportunity to comment" sections where taxpayers and their agents can comment on proposed statements and rulings. Legal Services Legal Services manages all disputed tax litigation and associated challenges to Inland Revenue's investigative and assessment process including declaratory judgment and judicial review litigation. They contribute the legal decisions and case notes on recent tax decisions made by the Taxation Review Authority and the courts. Technical Standards Technical Standards sits within Legal Services and contributes the standard practice statements which describe how the Commissioner of Inland Revenue will exercise a statutory discretion or deal with practical operational issues arising out of the administration of the Inland Revenue Acts. They also produce determinations on standard costs and amortisation or depreciation rates for fixed life property used to produce income, as well as other statements on operational practice related to topical tax matters. Technical Standards also contributes to the "Your opportunity to comment" section. Policy and Strategy Policy advises the Government on all aspects of tax policy and on social policy measures that interact with the tax system. They contribute information about new legislation and policy issues as well as Orders in Council.
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The Tax Information Bulletin (TIB) is available online as a PDF at www.ird.govt.nz (search keywords: Tax Information Bulletin). You can subscribe to receive an email alert when each issue is published. Simply go to www.ird.govt.nz/aboutir/ newsletters/tib and complete the subscription form. There is a TIB index at the link above which is updated annually.