TalkTax

Received anonymously:

The Rewrite Advisory Panel (RAP) was established to advise rewriters of the Income Tax Act 1994. The Income Tax Act 2004 saw the RAP becoming the arbiter on possible unintended legislative changes and the Income Tax Act 2007 saw it becoming the overseer of the clarity of that Act (see: www.rewriteadvisory.govt.nz)

In 2009, a submitter raised with the RAP the definition of ‘revenue account property’ (the second RAP referred to in the title but, to avoid confusion, I do not use that acronym in this note). The submitter said:–

“The definition of ‘revenue account property’ in the Income Tax Act 1994 (1994 Act) states:– ‘revenue account property’ means… property in respect of which any amount derived on disposition would be gross income of the person other than under section EG 19:’.

‘Revenue account property’ is defined in the Income Tax Act 2004 (2004 Act) as:– ‘revenue account property’, for a person, means–…(b) property that would produce income for the person if they disposed of it (not including income under section EE 41 (Effect of disposal or event)…’

The definition of ‘revenue account property’ in the Income Tax Act 2007 (2007 Act) is similar to the 2004 definition. The 2007 Act definition states:– ‘revenue account property’, for a person, means–…(b) property that would produce income for the person if they disposed of it (not including income under section EE 41 (Effect of disposal or event)…’

The issue is that under the same scenario a property can be revenue account property under one definition but not the other.

For example, a person purchased a product with the purpose of selling it but subsequently the market for that particular product collapses and the product becomes valueless.

Under the 1994 Act definition, a property is revenue account property if any amount derived on disposal would be gross income of the person. In this example, the product would be revenue account property on the basis that an amount would be gross income when the product was sold.

Under the 2004 Act and 2007 Act definitions, revenue account property is property that would produce income for the person if they disposed of it. In this example, the product would not be revenue account property as no income would be produced on the disposal as the product has become valueless due to the collapse of the market.

Therefore, in the above example, the product would be revenue account property under the 1994 Act definition but not under the definition in the 2004 and 2007 Act. Consequently, the person would be allowed a deduction for the cost of the product under section DJ 13 of the 1994 Act but a deduction is not allowed under DB 17 of the 2004 Act or section DB 23 of the 2007 Act as the product is not considered revenue account property.”

The RAP concluded that “an unintended legislative [change] arises in respect of section OB 1 of the Income Tax Act 2004 and section YA 1 of the Income Tax Act 2007”. Its decision was that the “Income Tax Act 2004 and Income Tax Act 2007 be amended retrospectively and Policy Advice consider the full policy implications’.

Also in 2009, the Taxation (International Taxation, Life Insurance and Remedial Matters) Act (the Act) was passed. The Act omitted the existing definition of revenue account property and substituted a new one, which reads, so far as relevant,–

‘revenue account property’, for a person, means property that–
(a)  is trading stock of the person;
(b)  if disposed of, would produce income for the person other than income under section EE 48 (Effect of disposal or event)…’

The Bill that became the Act was considered by both a select committee and the Committee of the whole House in 2009. Either one of those committees could have amended the definition of revenue account property in the manner recommended by the RAP if the IRD had recommended that it did so.

However, the IRD did not recommend that the definition be changed and, to a non-tax person like me, the reason is obvious. If the definition had been changed, it would have allowed taxpayers to declare no income but nevertheless to get a deduction. I would have assumed that the obvious was wrong, and that there must be some esoteric accounting/economics argument for saying that having a deduction from zero income is perfectly reasonable, if it had not been for the CIR’s argument in Foodstuffs (Wellington) Co-operative Society Ltd v CIR CIV 2009-485-1224 22/10/09 (High Court).

Paragraphs 7 and 8 of the decision state the facts of the case, ie,–

“[7] In its tax return for the year ending March 2004, the taxpayer claimed as a deduction the purchase price of [the] trading stock, being $2.3 million. It did not have an equivalent income entry attaching to the disposal of the shares by amalgamation.

[8] It is this aspect of the return that the Commissioner rejected. The Commissioner accepted the trading stock classification, but considered that s GB 1(1) of the [1994] Act applied to the disposal so as to deem the taxpayer to have received as income the value of the shares.”

The decision did not even have to go into the reasons for the CIR’s view; paragraph 31 said–

“[31] The Commissioner raised concerns about the implications of the situation if the taxpayer here was right in its arguments. The implications are obvious.”

If the CIR, the High Court, and even a non-tax person can see that a taxpayer allowed a deduction from no income gets a windfall, why did the RAP not see it? Will we ever see the definition of revenue account property amended as recommended by the RAP?