Chapter 2 - The Rewrite Project

Introduction Principles of statutory interpretation Aspects of the rewritten statute Aspects of the rewrite project Additional recommendations

Functional organisation

2.126 The committee’s report describes the Act’s functional organisation in paras 2.59 to 2.62. The decision to move from the regime-by-regime structure that New Zealand and all other jurisdictions with which the committee is familiar to a functional organisation was both major and brave. There is a very heavy cost, one that can be justified only if there are commensurate benefits.

2.127 The cost is the obvious one: if taxpayers want to discover how a particular regime applies to them it makes sense for them to be able to find the regime set out in one place in the Act. This remark applies equally to regimes that are defined by reference to business form, such as dividend imputation or controlled foreign companies, and to regimes defined by reference to industry segment, such as life insurance or forestry. Indeed, for two or three years now it has become a cliché among tax advisers that there is a captive and increasingly impatient market waiting for the commercial publisher who will dismember the 1994 Act and reassemble it in a thematic form.

2.128 The committee has no doubt that, other things being equal, a regime-by-regime structure is superior to a functional structure from the point of view of comprehensibility by, and ease of use for, users of the Act. The committee envisages that a regime-by-regime structure would begin, after the core provisions, with a part or parts of the Act that would set out the substantive rules that apply to all forms of income in the absence of special considerations. Later parts would contain regimes that are activity-specific (such as forestry or life assurance), or that are specific to certain investment or trading structures (such as companies or foreign entities).

Claimed advantage of functional structure

2.129 As far as the committee has been able to discover, the only advantage claimed for the functional structure over a regime-based structure is that the former allows to be brought together in one place provisions from different regimes that, within their several dispensations, operate similarly to one another. There are said to be four benefits.

If several rules turn out to contain almost the same language they can be consolidated into an omnibus rule that can be made to apply within a number of separate areas of the Act.

Even if there cannot be consolidation the rules can be rewritten using standardised phraseology.

A functional scheme reduces repetition.

In the view of officials most importantly, a functional scheme will help future policy makers and drafters.

2.130 The committee does not find these benefits compelling. The second can be achieved whether the rules in question are gathered together or scattered. It is simply a matter of applying a common drafting template to rules that operate in a similar manner to one another wherever they may be found in the Act. It is true that common drafting templates have not been applied consistently in the past, but that is more a result of fashions of parliamentary drafting coming and going, rather that of any great difficulty in the task itself.

2.131 At first sight, the first suggested benefit carries more weight. Consolidation of numbers of similarly-phrased provisions into a single omnibus rule has attractions. However, it is not clear to the committee just how extensive this consolidation will be able to be. There are two or three provisions in subpart GC, being specific anti-avoidance rules, that might be able to be consolidated. Probably, at least some of the associated parties rules in subpart OB could also be consolidated. No doubt there are other examples. However, the committee suspects that, like the examples that it has given, most of the rules that might benefit from consolidation would be discovered to be ancillary rather than substantive provisions. Further, the committee suspects that the total of such provisions would turn out to be a rather small fraction of the whole Act, too small to justify the formalistic rebuilding of the statute in the functional scheme that has taken place.

2.132 Thirdly, although a functional scheme stands to reduce one kind of repetition it increases another. The reduction may come about as a result of the consolidation of rules that have similar language, which was described above. As explained by drafters, the increase comes from the need in each subpart to reintroduce, at least to some extent, the topic of a rule that, in a functional scheme, is isolated from the other rules that are part of the rule’s regime.

Help for policy makers and drafters

2.133 As it was explained to the committee, the functional scheme will help future policy makers and drafters when the Act is amended or when new regimes are added. The segregation into statutory parts of rules that relate to deductions, timing, apportionment, avoidance, and so on is hoped to have the effect of ensuring that each rule of a new regime is placed in its proper context. The statute’s parts and subparts will in effect act as guidelines for future drafters, and it will not be necessary to rely on institutional memory. Segregating rules should ensure that inadvertent looseness of drafting will not cause rules to have unintended effects, because, for example, an apportionment rule will find itself in the apportionment part of the Act, and taxpayers will not be able to argue that the rule gives them, say, a timing advantage.

2.134 Elsewhere, the committee’s report comments on this ‘local context’ canon of statutory construction that officials advise is part of the prescribed drafting policy⁴⁶. If it is to be effective, it needs to be made explicit. There is also the desirability of subjecting this and other changes to existing statutory interpretation practices to the rigours of the generic tax policy process.⁴⁷

2.135 A second benefit is that when drafters add, say, an anti-avoidance provision to the Act they will be able to check on the Act’s other anti-avoidance provisions, conveniently gathered in one place, to ensure that the language and approach of the new provision are consistent with what already exists.

2.136 The committee is not persuaded that the help that the Act’s organisation is expected to afford to future drafters justifies employing a functional scheme rather than a scheme that is based on substance. Similar guidelines for identifying and segregating rules according to function could operate within regimes, with subparts of regimes dedicated to particular functions. The same idea of having subparts within regimes dedicated to rules of particular kinds could be the basis of an interpretation principle that attempts to confine rules to their own contexts.

Ease of use of the Act

2.137 The most notable feature of the reasons that are advanced to justify a functional rather than regime-based scheme for the Income Tax Act is that all the reasons relate more to the processes of policy-making and of drafting than to the question of ease of comprehension by the user. This feature is particularly true of the last reason.

2.138 One suggestion from officials was that concern about ease of comprehension and about questions of users being sure that they could find all rules relevant to a particular regime that interests them is misplaced, considering people’s increasing use of electronic forms of the legislation that are machine-searchable.

2.139 The committee is uneasy about giving much weight to this last suggestion. For a start, the suggestion in a sense confirms the committee’s impression that the functional scheme is not friendly to readers, and needs repackaging before it can be used easily. Secondly, while it is true that increasing numbers of tax professionals use electronic versions of the Act, many general practitioners who refer to the Act from time to time do not. Thirdly, the committee has the impression that even those who do use electronic versions of the Act tend to do so for references to particular, short passages, but that they turn to paper-based versions to get, for example, an overall understanding of a regime, or to read passages longer than a page or so. Finally, the committee notes that it is currently policy to draft a paper-based statute, not an electronic database.

2.140 The committee understands and sympathises with the concerns of the government as to the policy making and drafting process and understands the perceived benefits that are thought to flow from a functional scheme. However, to put the matter at its lowest, and referring to its terms of reference, the committee is unable to conclude that a functional statutory scheme is likely to make ‘tax laws more coherent and understandable’ than the more intuitively understandable regime-based alternative.

2.141 The logic of the committee’s position is to recommend a change to a regime-based structure. At the present stage of the rewrite that change would be significant shift of direction in terms of design. The committee notes however that the implementation of the original design, in terms of actual redrafting, still has a great distance to go, with drafters still working on the first exposure draft of parts C, D and E at the time of this report. The committee has not enjoyed the time or the resources to examine the Act or the progress of the rewrite process in enough detail to be confident in recommending such a major change. There needs to be an assessment of the value of the benefits to be obtained from continuing on the present course together with an assessment of the work involved in reorganising the statute on a regime by regime basis. The committee recommends that the government consider having those assessments done, with a view to deciding whether to persist with the functional organisation of the Act. The committee would be concerned if this recommendation would cause the project to be significantly deferred. An alternative recommendation would be for the government to bear the committee’s comments and recommendations in mind, and to accommodate them as much as possible.

2.142 In making its recommendation, the committee bears in mind that officials advise that the whole rewrite process remains to some degree experimental even at this late stage. It is not clear just which drafting design principles remain experimental, but if the functional structure is one of those principles the committee urges that it should be abandoned.

Ordering of sections

2.143 When the former legislation was split up and sorted into the functional classification that the rewrite follows, sections were often put into appropriate parts and subparts without much concern for logical order within subparts. Subpart CD is a good example. This approach was undertaken wittingly, in order to make progress, and in the knowledge that there would be an opportunity to improve the order later in the rewrite process. In some subparts, logic was further eroded when part B became the more formal structure that it is today, and the substantive rules of the original core provisions were moved to other parts of the Act. The plan is that ordering of sections into logical sequences should occur part by part as rewriting goes on.

2.144 As the committee prepares this part of our report in November 1998 a good deal of the Act remains ordered in a haphazard manner. The committee does not criticise the present ordering, because it appreciates the reasons that have led to the current situation. However, one result is that in evaluating the rewrite the committee cannot comment on the ordering of sections because that exercise is still to be done, except for part B.

2.145 The committee notes with approval, however, that, ordinarily, subparts within parts, and sections within subparts, will start with the important or the general and proceed to the less important or the particular.⁴⁸

2.146 The committee notes that part B, which has been ordered, does not always follow the pattern of more important or general before less important or particular. For example, section BC 2 (non-filing taxpayers) precedes section BC 3 (taxpayer with schedular gross income) which in turn precedes section BC 4 (taxpayers with annual gross income). No doubt the reason was to clear non-filing taxpayers and schedular gross income out of the way before proceeding straight from the annual gross income in sections BC 4 to BC 5 (deductions), BC 6 (net income) and BC 7 (taxable income). The drafters’ ordering is appropriate.

2.147 The committee understands that the rewrite and drafting teams agree that, ordinarily, the general should precede the particular and the important the less important, and that the teams already approach their task from this point of view. The committee mentions the ordering question from an abundance of caution, because it is aware of criticisms of the present sequencing. These criticisms fail to take account of the fact that the present order is a temporary parking order, awaiting the next stage of the rewrite.

Principles of drafting

2.148 Legislative drafting should follow a number of reasonably commonsense principles. For example, generally speaking drafters should express the essence of a provision first, separately from limitations or expansions, which follow.

2.149 The committee has not evaluated the rewrite for compliance with this kind of principle. The reason is that so far only the core provisions have been released, and they are unlikely to be typical of the drafting of the Act as a whole. Nevertheless, the Inland Revenue Department has engaged competent staff, one with very long legislative drafting experience, to compose the rewritten statute. The committee has spoken to several members of the drafting team, and is confident that the drafting process is in good hands.

The general income provision

2.150 It is a sensible precaution for drafters to include in income tax legislation an omnibus provision that captures simply ‘income’ according to the ordinary meaning of the word. In Australia, this provision has historically been section 25 of the Income Tax Assessment Act 1936, which simply says that taxpayers’ assessable income includes their gross income, without defining the term. The Australian section 25 may be thought of as an umbrella provision: underneath the umbrella, and often extending outside its coverage, later sections capture many other kinds of receipt as assessable income. But section 25 ensures that nothing that is ‘income’ according to the ordinary meaning of the word escapes tax.

2.151 New Zealand has used the opposite structure: a safety net, rather than an umbrella. In the Income Tax Act 1976 section 65(2) there appeared a list lettered from (a) to (ka) of receipts that were deemed to be included in assessable income. The final item in the list was ‘(l) Income derived from any other source whatsoever.’⁴⁹ That is, if any receipt escaped all of paragraphs (a) to (ka), paragraph (l) would catch it if it was income according to the ordinary meaning of the word. In the rewritten statute, the former section 65(2)(l) is replaced by section CD 5. The committee comments on both the drafting and the position of section CD 5.

Drafting of section CD 5

2.152 Section CD 5 reads: ‘The gross income of a person includes any amount that is included in gross income under ordinary concepts.’ This locution appears to have its origin in a dictum of Jordan CJ in Scott v CT (NSW)⁵⁰, where the Chief Justice said: ‘The word ‘income’ is not a term of art, and what forms of receipts are comprehended within it must be determined in accordance with the ordinary concepts and usages of mankind ’ That is, Jordan CJ was explaining how ‘income’ is to be interpreted in a tax statute.

2.153 It is supererogatory for part of Jordan CJ’s explanation to be imported into section CD 5: the purpose of the section is better served by using the word ‘income’ unadorned. In fact, if the adornment has any effect, it must be to qualify rather than to amplify the meaning of ‘income’ when the term is used by itself. That is, logically, the addition of the words ‘under ordinary concepts’ mean that ‘income’ cannot extend to any meanings that it might bear over and above meanings that are ‘under ordinary concepts’.

2.154 A second problem is the word ‘under’. In the English language something can be ‘under’ a rule, but it cannot be ‘under’ a concept. No doubt, ‘under’ supplanted the more usual ‘according to’ by way of an exercise in plain language drafting. Curiously, the title to the section uses ‘according to’, as though the editor was not willing to follow the drafter into the uncharted territory of being under a concept. Good intentions have led the drafting astray.

2.155 For these reasons, the committee recommends that ‘under ordinary concepts’ should be eliminated, and section CD 5 should be rephrased using the term ‘income’ without qualification.

Position of section CD 5

2.156 In some senses, section CD 5 is the most important provision in the Act. It is, after all, the section that captures income in the most general sense of the term. It is for this reason that the committee has devoted a long explanation to its recommendation about the drafting of section CD 5.

2.157 For the position of section CD 5 in the statute, the committee favours the umbrella structure that is employed in Australia over the traditional New Zealand safety net formula. There are two reasons. First, it seems to the committee to be more intuitively reasonable to start with a general taxing provision and then to amplify it with specific rules, rather than to proceed from the particular to the general.

2.158 Secondly, giving section CD 5 primacy of place as the most prominent and most general charging rule should help to minimise the number of occasions when the Commissioner loses a case as a result of relying on the wrong charging rule and discovering the mistake too late to be able to correct it. VH Farnsworth Ltd v CIR⁵¹ is an example. If the Act’s charging provisions begin with a general umbrella rule the Commissioner’s usual practice should become to rely first on this general rule and additionally on any relevant specific rule. The chances of taxable profits escaping through being charged with an incorrect, narrowly focused rule should be minimised.

2.159 As it is currently placed in subpart CD, section CD 5 falls between being an umbrella and being a safety net. That is, some charging provisions precede it, and some (rather more) follow. The committee recommends that section CD 5 should be the first charging provision that places ‘income’ within ‘gross income’ and, as the calculations are worked through, ‘net income’ and ‘taxable income’. Another possibility would be to weave section CD 5 into section BC 4, where it could act as the core provision that initially captures gross income as annual gross income.

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Footnotes

⁴⁶ See para 2.36 Back
⁴⁷ For an outline of the generic tax policy process see appendix 2 Back
⁴⁸ Working Party on the Reorganisation of the Income Tax Act 1976, Second Report, Discussion Paper, September 1993, page 4; Parliamentary Counsel Office, Drafting Manual (Draft of 16 May 1997) 5.9; NZLC R35, Legislation Manual Structure and Style, May 1996, para 144 Back
⁴⁹ (l) is the alphabetical letter that follows the letter k, and not the arabic numeral 1. Back
⁵⁰ (1935) 35 SR (NSW) 215 at 219 Back
⁵¹ (1982) 5 TRNZ 754; 5 NZTC 61,259 Back