BILLS DIGEST. TAXATION (ANNUAL RATES, VENTURE CAPITAL AND MISCELLANEOUS PROVISIONS) BILL 2004 (2004 No 110-2)

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1 BILLS DIGEST TAXATION (ANNUAL RATES, VENTURE CAPITAL AND MISCELLANEOUS PROVISIONS) BILL 2004 (2004 No 110-2) As reported from the Finance and Expenditure Committee: 21 September 2004 Bills Digest No NEW ZEALAND PARLIAMENTARY LIBRARY

2 Bills Digest No Published by the Parliamentary Library Parliament Buildings, Wellington New Zealand. 01 November 2004 Prepared by John McSoriley BA LL.B, Barrister Legislative Analyst Ph. (04) (Ext. 9626) Fax (04) Caution This Digest was prepared to assist consideration of the Bill by members of Parliament. It has no official status. Although every effort has been made to ensure accuracy, it should not be taken as a complete or authoritative guide to the Bill. Other sources should be consulted to determine the subsequent official status of the Bill. Copyright NZ Parliamentary Library, 2004 Except for educational purposes permitted under the Copyright Act 1994, no part of this document may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, other than by Members of Parliament in the course of their official duties, without the consent of the Parliamentary Librarian, Parliament Buildings, Wellington, New Zealand. This document may also be available through commercial online services and may be viewed and reproduced in accordance with the conditions applicable to those services.

3 NZ Parliamentary Library, Bills Digest No TAXATION (ANNUAL RATES, VENTURE CAPITAL AND MISCELLANEOUS PROVISIONS) BILL 2004 (2004 No 110-2) Date of introduction: 29 March 2004 Portfolio: Revenue Select Committee: Finance and Expenditure Date report presented: 01 November 2004 PURPOSE The aim of the Bill is to make various amendments to tax legislation. The Inland Revenue Department has provided full details of all the amendments in the Bill as introduced: The Bill as introduced is described in Bills Digest No Supplementary Order Paper 2004 No 210 is described in Bills Digest No MAIN CHANGES TO THE BILL Venture capital exemption Section CB 2(1) of the Income Tax Act 1993 relates to non-residents exempt income. Certain non-resident venture capital investors that invest in New Zealand are exempted from liability to income tax. The exemption relates particularly to the profits earned from the sale of shares in certain unlisted New Zealand companies. Non-residents are eligible for this exemption if they are resident in a country that is subject to a double tax agreement with New Zealand and if they are not able to receive a tax credit in their country of residence if the income is taxed in New Zealand. The Bill provides that one of the ways to qualify as a qualifying foreign equity investor is to be structured in a limited partnership legally equivalent to a New Zealand special partnership. The Select Committee has recommended that this avenue of qualification be deleted from the Bill and that the venture capital exemption be provided to the individual partners of a partnership rather than to the partnership itself. Also recommended is the removal of the requirement for members of an incorporated body to be entitled to income proportionate to their capital interest and the omission of the requirement for a qualifying foreign equity investor to be resident in a particular country. However a residence test disqualifying funds that are resident in a country and are taxed as an entity by that country is added to the definition. The Select Committee has also recommended extending the venture capital provisions so that the exemption applies not just to the sale of shares but also to share options and also to interests purchased as convertible notes, where the interest has been held for at least 12 months and has been converted to shares before sale (Part 2, Clause 4, amending Section CB 2 of the Income Tax Act 1994).

4 NZ Parliamentary Library, Bills Digest No Refunds of excess tax The Select Committee has recommended an amendment to the new four year time limit for the payment of refunds of tax so that where a taxpayer has applied for an amended assessment (before the end of the four year period) that has been determined by the Commissioner, any refund resulting may be paid after the end of the four year time limit (Part 2, Clause 34 (amending Section MD 1 of the Income Tax Act 1994) and Clause 134 (amending New Section 45 of the Income Tax Act 1994)). PAYE by intermediaries The Taxation (GST, Trans-Tasman Imputation and Miscellaneous Provisions) Act 2003 introduced provisions allowing employers to use accredited intermediaries to assume the employer's PAYE obligations. The Select Committee has recommended several minor amendments to these rules (Part 2, Clause 54, amendments to Sections NBB2(1), NBB2(4) of the Income Tax Act 1994). Sale and leaseback of intangible assets The Select Committee has recommended an amendment to the definition of finance lease to include arrangements where an associate of the lessee has an option to acquire the lease asset, but under that option is not entitled to all the lease payments accruing after the acquisition of the asset (Part 2, Clause 65, amending Section OB 1 of the Income Tax Act 1994 in relation to the definition of the term finance lease ). Dispute resolution The Select Committee has recommended that amendments be made in relation to the requirement in the Bill that where a dispute between a taxpayer and the Commissioner of Inland Revenue has not been resolved, the Commissioner may not amend the tax assessment for the taxpayer without first completing the disputes process. The Select Committee has recommended that it be made clear that completing the disputes process means the following procedure is completed: the Commissioner issues a statement of position, to be considered and responded to in the taxpayer s statement of position, which is in turn considered by the Commissioner within the four year period. The Select Committee has also recommended that it be made clear that the associated person test captures only those people that are related to the taxpayer within the second degree of relationship. Also recommended is that certain exceptions to the four year time bar period for the utilisation of the dispute procedures be deleted from the Bill. At present, the taxpayer and the Commissioner may, by agreement, waive the four year time bar by up to six months, effectively increasing the time available for the dispute-resolution process. The Bill extends this waiver period to twelve months. The Select Committee has recommended that it be provided that the Commissioner of Inland Revenue cannot raise new issues during the period of the extension. Other definitional and clarificatory amendments are recommended (Part 3, Clause 84, New Sections 89N and 89O of the Tax Administration Act 1994). Australian unit trusts The Select Committee has recommended the insertion in the Bill of new provisions relating to Australian unit trusts (see Bills Digest No 1104) (Part 2, Clause 65, insertion of a new subclause(27b), new definition of taxable bonus issue )).

5 NZ Parliamentary Library, Bills Digest No February 2004 storms In the aftermath of the storms and resulting flooding that hit the country in February 2004, a number of issues about the application of business tax policy to particular circumstances arising out of that occurrence were identified. At the time, the Taxation (Disaster Relief) Act 2004 was passed, and Supplementary Order Paper 218 introduces further technical amendments intended to clarify the tax rules as they apply to those impacted by those particular storms. They are not intended to have wider application to circumstances involving other extreme weather events, but the Inland Revenue Department informed us that a wider review of this area of tax policy is planned 1. After Supplementary Order Paper 218 was released, the Bay of Plenty was also affected by storms. While these storms were more localised and on a smaller scale, they gave rise to similar issues as those addressed by the Supplementary Order Paper. It is therefore appropriate to extend these provisions, along with those in the Taxation (Disaster Relief) Act 2004, to those storms. We recommend amending the amendments contained in Supplementary Order Paper 218 to extend the provisions to apply to people affected by recent storms in the Bay of Plenty 2. The Taxation (Disaster Relief) Act, in defining qualifying event, referred only to emergencies where a declaration of civil emergency was made under the Civil Defence Emergency Management Act It is also possible for a declaration to be made under the Civil Defence Act 1983, and we recommend amending the definition of qualifying event introduced by the Taxation (Disaster Relief) Act to provide for declarations under the 1983 Act, to apply from 1 February 2004, being the date that the latest Act came into force 3 (Part 2, Clause 65, amending Section OB 1 of the Income Tax Act 1994, new subsection (20B), substituted definition of qualifying event (affecting Section MB 3B of the Income Tax Act 1994 and Section 183ABA in the Tax Administration Act 1994). NZ Parliamentary Library, Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill (2004 No 110-2), As reported from the Finance and Expenditure Committee, Commentary, pp 20 and 21). 2 Ibid., p Ibid., p. 21.