Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill

  • enacted

Commentary

Recommendation

The Finance and Expenditure Committee has examined the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill and recommends that it be passed with the amendments shown.

Introduction

The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill seeks to make amendments to various Acts, including the Income Tax Act 2007, the KiwiSaver Act 2006, the Tax Administration Act 1994, the Income Tax Act 2004, and the Tax Administration (Binding Rulings) Regulations 1999. The proposed amendments would introduce the following:

  • trans-Tasman portability of retirement savings

  • new rules for under-18-year-olds seeking to enrol in KiwiSaver

  • flexibility in a provision applying to resident co-operative companies that require members to hold shares in proportion to their trading stock transactions with the company

  • the effective cancellation of Branch Equivalent Tax Account debits that arose from conduit-relieved dividends

  • a further five-year tax exemption on profits for non-residents operating offshore rigs or seismic vessels in New Zealand

  • a number of new rules relating to binding rulings

  • an exemption from gift duty for gifts made to local or central government, donee organisations, and distributions of property made in accordance with certain Court orders

  • the addition of Cure Kids to the list of charitable donee organisations.

The bill also proposes various minor technical amendments.

This commentary discusses the more significant amendments we recommend to the bill. It also notes our views on some significant matters we considered on which we are not recommending amendments. It does not include discussion of technical or inconsequential amendments.

We are recommending amendments which would make some provisions relating to gift duty, Portfolio Investment Entities, and the Emissions Trading Scheme apply retrospectively. We are advised that taxpayers would not be adversely affected by these amendments, and that the amendments would not be unexpected by those whom they would affect as they effect clarifications of a minor nature which align with the policy intent of the original legislation to which they relate.

Trans-Tasman portability of retirement savings

Reallocation or transfer back to Australia of savings if membership is declined or invalid

We recommend amending clauses 75 and 76 of the bill to refer to the amount transferred rather than net amounts to be paid if an individual’s superannuation membership is found to be invalid. We consider that referring to net amounts might require unduly complex information collecting and record-keeping for providers, increasing their costs and making accounting unnecessarily complex. Using the phrase amount transferred instead of net would be consistent with current rules on invalid membership.

We also recommend an amendment to clause 76 to ensure that, in situations where KiwiSaver account amounts must be transferred back to the original Australian complying scheme because the KiwiSaver enrolment is deemed invalid, an individual could nominate another superannuation scheme in Australia if their original scheme would not accept a transfer, or the scheme no longer existed. This would close a gap in the bill, as the way it is currently drafted means that there are no options for completing the transfer if the original scheme is no longer in existence or will not accept such a transfer.

Fees first deducted from New Zealand-sourced savings

We also recommend the deletion of clause 2B from the KiwiSaver scheme rules (contained in clause 80 of the bill), which requires fees to be first deducted from the net value of amounts not transferred from Australia. We recommend the deletion of this clause because of the difficulty for providers of setting and administering separate fees. For example, compliance costs would rise, and it would necessitate the duplication of unit prices within KiwiSaver schemes.

Other matters

We considered amending the bill to take account of concerns about the transfer of superannuation funds that exceed Australia’s contribution threshold. Some submitters recommended that people who migrate to Australia should be able to withdraw their KiwiSaver funds in part to avoid being taxed on contributions exceeding the Australian contribution threshold, or that the amounts transferred to Australia be exempt entirely from the Australian contribution cap. We consider that this issue is not of great concern at present because of the relatively small amounts in Kiwisaver accounts that may be transferred; and Inland Revenue has advised us that it may raise this matter with Australian officials once KiwiSaver amounts become high enough to be affected by the contributions cap.

We also considered a number of other possible amendments. For instance, some submitters advocated aligning tax rates on investment income with Australia, to encourage consolidation of retirement savings. However, the intention of the bill is to improve labour market mobility and help move toward a single integrated superannuation market with Australia, rather than to achieve equal tax treatment on investments. Also, we note that it is difficult to align the two rates since, for example, Australia taxes capital gains on equities and New Zealand does not. Some submitters also advocated allowing New Zealanders who move permanently to Australia to withdraw their savings entirely upon emigration. As this would be contrary to the objectives of trans-Tasman portability, and to the concept of a single integrated superannuation market, we do not consider this appropriate.

We also considered extending trans-Tasman portability facilities to complying superannuation funds. We consider that, in principle, such funds should be able to offer portability; however, the arrangements currently refer only to KiwiSaver, and any extension would be a decision for the Governments of the two countries. We are advised that Inland Revenue will raise this matter with Australian officials.

KiwiSaver

Requirements for guardians

We recommend an amendment to clause 74(2) to make it clear that, for children aged under 16 years, agreement and joint signatures would have to be obtained from all the child’s guardians before the child could be enrolled in a KiwiSaver scheme. We consider this clarification necessary for consistency with the Care of Children Act 2004, which states that a guardian of a child must act jointly with any other guardians of the child in exercising his or her duties and responsibilities. For children aged 16 or 17, we consider that one guardian’s signature should be sufficient, because the 16- or 17-year-old would have to co-sign with his or her guardian to be enrolled. We consider it important that children close to 18 have some role in their enrolment and the consent process; furthermore, many young people begin working at this age. We believe that those aged 18 and over should not require guardians’ consent to enrol, as at this age young people are generally seen as adults in respect of certain rights, for example, to vote, and to marry without parental consent.

We understand that further information regarding evidence to verify guardianship, and evidence declaring that a child has no legal guardian, will be published by Inland Revenue in its Tax Information Bulletin. We were also advised that the same document will explain in more detail why it is appropriate for those under the age of 16 to require the signatures of all of their guardians, and for those aged 16 or 17 to co-sign with one of their guardians.

Temporary employment

We recommend the insertion of new clause 72B to ensure temporary employees who were already KiwiSaver members would be entitled to continue to have contributions made to their accounts. We have been made aware of a small anomaly in the KiwiSaver Act 2006, which has meant that the current definition of KiwiSaver deduction notice might prevent a current KiwiSaver member from choosing to receive employer contributions and having KiwiSaver deductions made from their pay if he or she began temporary employment. We consider that temporary employees should be able to participate in KiwiSaver and receive employer contributions if they are already KiwiSaver members, as the purpose of KiwiSaver is to encourage long-term saving by all workers. Temporary employees who are not already KiwiSaver members are currently able to issue a deduction notice to the employer.

Exemptions from automatic enrolment

We recommend the insertion of new clauses 72C–E, which would modify the exemption from the KiwiSaver automatic enrolment rules for certain employers. The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009, which we considered last year, introduced a provision to ensure that employers could not establish new schemes that are not KiwiSaver schemes for the purpose of avoiding automatic enrolment rules. A grandfathering clause was included in the bill to allow exemption from enrolment only if a scheme was in existence at the date of enactment of the legislation (6 October 2009). However, the grandfathering clause does not take into account various situations, such as mergers and acquisitions, which could result in a replacement agreement. This means that in such circumstances, an existing employer would lose their exempt status. As this is not intended, we recommend including in the bill a provision to ensure that exemptions for currently exempt employers can remain valid past 6 October 2009 in such circumstances.

Other matters

Inland Revenue advised us that it intends to consider a number of issues raised during submissions in more detail. They include the withdrawal provisions in relation to misled or misinformed members and incorrect enrolments, short-paid employer contributions, KiwiSaver hardship claims, and the withdrawal of Crown contributions in situations of serious illness.

We understand that another matter that was raised—allowing the sharing of KiwiSaver members’ address updates between Inland Revenue and providers—may be included for consideration in the next taxation bill.

We look forward to observing any progress on these matters.

Binding rulings

Application date

We recommend that clauses 53(4), 54(3), 59(4), and 60(3) be removed. This would ensure that the provisions relating to partially accepted applications would apply to all existing rulings. As the bill is currently drafted, the proposed amendments to the binding rulings provisions are limited to applications received after the date of Royal assent; for consistency and certainty, we consider that all existing rulings should benefit from the amendments after the Royal assent date.

We also recommend that clause 52(5) be amended so that the bill’s amendments to binding rulings would also apply to all applications that had not been declined on the grounds set out in section 91E(4)(ga) of the Tax Administration Act 1994, and to those that had not been finalised or issued before the bill was enacted.

Application of binding rulings proposals

We also recommend the deletion of clause 67. This clause would prevent Part 7 (Interest) of the Tax Administration Act 1994 from applying to a taxpayer who took a tax position relying on advice given to them as a taxpayer by the Commissioner. It provides that the advice in question must be provided in writing by the Commissioner (unless the advice is standard and relates to a common tax issue), given as official departmental advice, and apply specifically to that taxpayer. We consider that this clause essentially duplicates clause 68, and that its inclusion could create confusion.

Publication of rulings in the Gazette

The bill as introduced contains provisions to require the Commissioner to publish the making and withdrawal of public and product rulings in a publication of his or her choosing, rather than in the Gazette. However, the bill appears to have omitted references to other sections of the Tax Administration Act 1994 that require the Commissioner to publish these notices. For consistency, we therefore recommend that the bill also apply to sections 91AAK (notice of setting economic rate), 91AAQ(8) (determination of insurer as a non-attributing controlled foreign company (CFC)), and 91AAR(6) (determination relating to eligible relocation expenses) of the Act. These amendments are contained in new clauses 46B, 49B, and 49C. Some other clauses also still refer to the Gazette, as they allow the revocation of provisions effective after the day of publication of the Gazette. We are advised that Inland Revenue will consider this issue further some time in the future.

We considered whether the Commissioner should be required to specify the name of the publication in which he intends to publish rulings or determinations. We believe it is important that taxpayers have some certainty about where such notices are published, but are concerned that specifying a publication in legislation could lead to difficulties should the name of the publication change. Therefore, we do not recommend that the name of the publication where the Commissioner publishes rulings or determinations be specified in legislation. Nevertheless, we urge Inland Revenue to publish rulings in the Tax Information Bulletin, and to take steps to ensure that it is well known that rulings and determinations can be found in this publication.

Unacceptable tax position penalties and use-of-money interest

We recommend an amendment to clause 36 clarifying what is meant by the Commissioner’s official opinion. We were concerned that, as the bill is currently drafted, this could be interpreted to include only opinions concerning a specific taxpayer’s affairs, and might not include more general advice published by the Commissioner and applicable to taxpayers in general. In situations where the Commissioner might give a clear and unambiguous instruction to taxpayers that is later found to be incorrect, this could therefore result in the taxpayer being penalised for following an incorrect instruction, and having to dispute the imposition of penalties or request the remission of use-of-money interest.

We recommend an amendment to clause 69 to remove the word solely. As drafted, the bill provides for non-application of interest only where it arises solely because the taxpayer relied on a Commissioner’s official opinion. As the taxpayer might have relied on other advice in addition to the Commissioner’s official opinion, we consider the word solely inappropriate.

We carefully considered the view that penalties and use-of-money interest should not apply in cases where a taxpayer has relied upon general advice from Inland Revenue, and agree in principle with it. However, we believe that the relief from penalties and interest should apply only where the general advice applies to the taxpayer’s specific situation. We do not consider that the relief should apply to all published general advice, as taxpayers may interpret general statements in a way that Inland Revenue would not agree fitted their case. Penalties and interest might thus become easy to avoid, undermining the voluntary compliance objective of the policy. We have therefore not recommended any amendment to this end.

Other matters

We considered whether the Commissioner should be empowered to rule on a wider range of matters, as the Commissioner may form a view on various other matters when conducting an audit or investigation. However, we do not recommend a change to the bill in this area, as we recognise such a change might create administrative problems. For example, if the Commissioner could rule on a much broader range of issues, timeliness of rulings might become an issue; or, conversely, should the Commissioner be forced to provide an early determination about the facts of a complex case, it might not be possible to confirm all the pertinent facts. Further, we believe it is unreasonable to expect the Commissioner to rule on some of the matters suggested, such as the intention of a person entering into an arrangement.

We also considered amending the binding rulings provisions in the bill to impose time limits on the Commissioner regarding such rulings. However, as some applications can be complex and wide-ranging, we believe that some flexibility is needed. We were advised that if deadlines were set out in the legislation and the Commissioner were to miss a deadline, a negative ruling would be issued; if the taxpayer then chose to withdraw the application for a ruling or not to follow the ruling, there would still be no certainty for that taxpayer on the issue. This would defeat the purpose of binding rulings.

Branch Equivalent Tax Account debits

We recommend an amendment to clause 30 and the insertion of new clause 30G to reflect better the policy intent of the Branch Equivalent Tax Account (BETA) debit provisions; that is, that BETA debits should be unavailable for use only to the extent that they arose from dividends that were subject to conduit tax relief. We consider that a specific reference to those BETA debits generated in respect of tax liabilities that were offset by conduit relief under section RG 7 of the Income Tax Act 2007 needs to be added to these provisions to clarify the intent.

Our changes would ensure that the application date of the BETA debit provisions generally allowed debits arising from conduit relief to be used against pre-reform CFC income. As the clause is currently drafted, BETA debits would be cancelled as soon as the international tax rules applied, which might cause difficulties for companies that did not file an income tax return for CFC income earned before the reforms until the new international rules took effect. We note that these amendments would necessitate some restrictions to prevent manipulation of the rules.

Our proposed amendments also include ordering rules to make it clear how taxpayers should measure the amount of debit balance that is unavailable for use, which the Income Tax Act 2007 does not specify. We consider this clarification necessary, as some BETA debits have arisen for reasons other than conduit-relieved dividends, or used to offset tax liabilities, making it unclear in many situations which debits have been offset and which have not. An ordering rule would clarify this matter for taxpayers.

Other matters

We considered the view that all BETA debits, and not just those that arose from payment of tax, should be retained for a two-year transitional period. However, new international taxation rules have no potential for double taxation if no tax has been paid on a dividend because of conduit tax relief. Therefore, if the BETA debits were not cancelled, a company could still use them over the transitional period to offset any tax on attribution of foreign income, which would result in the company paying no tax at all during that time. We note also that allowing taxpayers to keep the debits would prolong conduit tax relief and allow non-taxation of passive income for two years. While it is difficult to estimate the exact fiscal cost of retaining all BETA debits, as this would depend on the amount of taxable foreign income earned by companies over the transitional period, Inland Revenue has estimated that it could be substantial, potentially more than $200 million.

Remedial and miscellaneous matters

Emissions Trading Scheme

We propose a number of amendments to the provisions relating to the tax treatment of emissions units. We recommend the insertion of new clause 9D to allow, from 1 July 2010, capital account treatment of emissions trading units allocated to owners of fishing quota. We consider that, because the rationale for allocation of units to owners of fishing quota is the loss of value to the quota, it would be inconsistent to apply revenue account treatment to these units.

We also recommend the insertion of new clause 20C to clarify the application of the market transfer rule to emissions units, as it is not clear that the generic market value transfer rule would apply. We propose that a market value transfer rule be established specifically for emissions units, and that this amendment be made retrospective from 26 September 2008, the date on which the former specific anti-avoidance provision was repealed. However, we recommend an exception to this proposed rule for forestry rights arrangements. We propose that, in order to avoid triggering a tax liability for a transferee, the rule which deems a transfer of emissions units for less than market value to be a transfer at market value should not apply to transfers of emissions units between a forestry rights holder and the landowner party to the forestry right. We propose that this amendment be effective retrospectively from 1 January 2009, before the first date of allocation of forestry emissions units.

Finally, we recommend that the ETS provisions in the Income Tax Act 2007 be amended to extend the capital treatment of emissions units allocated to interim entities in relation to pre-1990 forestry land to the ultimate owners of that land where it is to be eventually transferred under a Treaty of Waitangi settlement. This is covered in new clause 32(7C) of the bill. Under current law, revenue account treatment would apply to such situations; as this would be inconsistent with the purpose and character of Treaty forestry settlements, we consider these units should receive capital account treatment. Further, we recommend that this amendment take effect retrospectively from 1 April 2010, before the date on which any unit transfers are expected to occur.

Portfolio Investment Entities

We recommend a number of small amendments to the provisions governing portfolio investment entities (PIEs), the majority of which are for clarification purposes or to correct drafting errors. We recommend amendments to clauses 22 and 23 and the insertion of new clause 85C to ensure that foreign exchange losses relating to portfolio investments in offshore portfolio land companies would not have to be carried forward by the PIE. Under the bill as drafted, these losses would have to be carried forward, which was not the intention. Therefore, we also recommend that this amendment take effect retrospectively from October 2007, when the new PIE rules came into force.

We also recommend amendments to table 1 of schedule 6 of the Income Tax Act 2007 (contained in new clause 33E of the bill) to ensure the rates and thresholds in it are correct, and to make it clear that the 30 percent portfolio investor rate would apply to all non-resident investors, regardless of whether or not they had provided a notification. We recommend that these amendments apply retrospectively from 1 April 2010. Application from this date would not create problems for taxpayers, as the date of 1 April would be a widely expected choice.

Further, we recommend a clarification amendment to section LS 2 of the Income Tax Act 2007, contained in new clauses 27B and 27C, to ensure consistency with the policy intention of PIE credit rules. We recommend that this section be amended to provide investors with a credit for a PIE’s tax liability on that income rather than for PIE tax paid; and that this amendment apply retrospectively from October 2007.

Distributions to co-operative company members

We propose three amendments to the bill’s provisions in this area. We recommend that clause 7, which would insert new section CD 34B into the Income Tax Act 2007, be amended to make it clear that the election of deductible treatment would apply until a company notified the Commissioner otherwise. We also recommend an amendment to clause 12 to ensure that consistent terminology is used in sections DV 11(3) and CD 34B of the Income Tax Act 2007. We note the apparent inconsistencies in these sections, and are concerned they may cause confusion. Our recommended amendment would make it clear that section DV 11(3) refers to “the income year to which the distribution relates”. We also recommend that section CD 2 of the Act refer to new section CD 34B.

Gift duty

We recommend amendments to clause 82 and the commencement provisions in clause 2, so that the exemption from gift duty would apply to local authorities and council-controlled organisations from 1 July 2008, and to gifts made to donee organisations from 1 April 2008. We consider that these retrospective recommendations are necessary. No explicit consideration was given to the gift duty treatment of gifts to local authorities and council-controlled organisations when tax-related provisions in the Charities Act 2005 were being considered in relation to the Income Tax Act 2007, so gifts to such organisations have effectively been subject to gift duty since 1 July 2008. Applying the exemption from this date would preserve the exempt status of gifts to such organisations. Similarly, the exemption from gift duty for gifts to donee organisations should also be retrospective for consistency with the policy intention of this exemption, which is to align gift duty treatment with the policy of encouraging giving to charitable and philanthropic causes. We recommend that the date of 1 April 2008 apply to gifts to donee organisations, because on this date the limit was raised on qualifying donations for the purposes of individuals’ donation tax credit. We understand that applying these exemptions would involve some revenue, administrative, and compliance costs in situations where gift duty has been paid, but we are assured that these costs will be minimal.

We note that Inland Revenue is reviewing gift duty policy, and will consider a number of possibilities raised during submissions. We look forward to the results of the review.

Other remedial matters

We recommend a number of remedial amendments to the bill. They include amendments to effect the recommendations of the Rewrite Advisory Panel, amendments for transitional matters arising out of the life insurance provisions in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009, and minor technical corrections to drafting.

We recommend clarification amendments to clauses 18 and 85 of the bill regarding CFCs, to ensure the wording makes it clear that a New Zealand resident’s control interests in a foreign company must be less than or equal to the control interests held in the same company by the other party, and that the savings provision in clause 85(2)(b) would apply from (and therefore would include) the 2005/06 income year. We also recommend amendments to exclude foreign investment fund income calculated under the fair dividend rate method from the limit on foreign income. This would be effected by amending the definition of foreign non-dividend income in clause 32(3D) of the bill.

We also recommend that new clause 33D be inserted to amend schedule 4 of the Income Tax Act 2007, to provide a rate of tax for schedular payments to certain public office-holders. We consider that this amendment is necessary because the bill as drafted provides no authority for the payers of fees to certain public office-holders to withhold tax from the payments. Furthermore, the definition of honorarium in the Income Tax Act 2007 (as inserted by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009) compounds the problem by explicitly limiting the scope of the definition for the purposes of new provisions introduced by the 2009 Act relating to payments for volunteers, and the purposes of schedule 4, part B (rates of tax for schedular payments).

Finally, we recommend various amendments to clauses 28, 28C, 28D, 30C, 30D, and 30E of the bill, regarding imputation credits and tax pooling, to clarify policy intentions and remedy drafting issues in sections OB 6, OB 34, OB 35, OP 9, OP 32, and OP 33 of the Income Tax Act 2007. The amendments to section OB 6 would ensure that the provision applied only to a company that held an amount representing an entitlement to funds in a tax pooling account that the company had acquired from another person under the tax pooling rules. The amendments would also make it clear that the credit date where the purchasing company on-sells to another taxpayer the entitlement to the funds in the tax pooling account is the date the entitlement is transferred to the other taxpayer; and that the credit date in situations where the purchasing company requests the intermediary to refund the funds representing the purchased entitlement from the tax pooling account to the company is the date of the refund.

Charitable donee organisations

We considered a request by a submitter to be added to Inland Revenue’s list of charitable donee organisations. We have been advised that there is an established process for the consideration of additions to the register (schedule 32 of the Income Tax Act 2007), and are assured that requests by organisations to be added to the schedule are being considered promptly by officials. We therefore do not recommend that organisations seek to be added to the schedule via the select committee process. We consider that avoiding the standard registration process this way is unfair for those applying for addition to the schedule in the usual way, and note also that allowing such a short-cut would result in a lack of appropriate vetting of the organisation.

Other issues

Supplementary Order Paper No 105

We were also asked by the Minister of Revenue to consider supplementary order paper 105 in conjunction with the provisions in the bill. The measures in the SOP would reverse an amendment to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 that removed the immediate finished film deduction for films that received a grant from the screen production incentive fund and replaced it with a two-year deduction. The SOP introduces two other minor clarification amendments. The amendment to reverse the finished film deduction provision is intended to reduce the funding problems that New Zealand films receiving the incentive have encountered because the New Zealand Film Commission now pays the incentive after a film has been made, rather than by progress payments during the production process.

The proposed amendments to give effect to the SOP are contained in clauses 2(9B), 11C, 14C, 14D, 14E, 14F, 32(4C) and (4F), and 36(2B).

Appendix

Committee process

The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill was referred to the committee on 8 December 2009. The closing date for submissions was 10 February 2010. We received and considered 18 submissions from interested groups and individuals. We heard nine submissions.

We received advice from the Inland Revenue Department, our independent specialist tax adviser, Therese Turner, and our independent specialist drafting adviser, David McLay.

Committee membership

Craig Foss (Chairperson)

Amy Adams (Deputy Chairperson)

David Bennett

John Boscawen

Brendon Burns

Hon David Cunliffe

Aaron Gilmore

Raymond Huo

Rahui Katene

Peseta Sam Lotu-Iiga

Stuart Nash

Dr Russel Norman