LIST OF RECOMMENDATIONS

THE COMMITTEE RECOMMENDS that any proposals for change emerging from its report and listed below should proceed through the generic tax policy process. The summary recommendations set out here should be read in the context in which they appear in the report.

2 The rewrite project
Interpretation
The government should review section AA 3(1) as a whole (para 2.73). In considering this recommendation, the government should make ex-plicit that provisions that are intended to operate only in a particular manner or in a particular context should not apply in other contexts (para 2.41), and consider whether the reference to the core provisions in sec-tion AA 3(1) of the Income Tax Act 1994 should stay (para 2.58).

The government should review the way in which the interpretation pro-visions of the Income Tax Act 1994, together with the organisational scheme operate in relation to the 'local context' of a statutory rule (para 2.71). Alternatively, the government should consider whether section AA 3(1) should omit any reference to the way in which the Act is or-ganised, in order to avoid the possibility of perverse interpretations (para 2.74). If sections AA 1 and AA 3 are to remain in the statute, the Income Tax Act 1994 should state that its interpretation provisions do not oust any statutory generally-applicable rules of interpretation unless the for-mer are clearly inconsistent with the latter (para 2.76).

The government should undertake a thorough study of the courts' inter-pretation of income tax legislation with a view to determining whether Parliament should be satisfied with present practices and emphasis, or whether the rewrite should mandate a change (para 2.89).

In the rewriting process, when a rule is to provide that a particular re-ceipt is to be taxed, it is better to frame the provision as a rule, rather than to define the receipt as something that it is not, followed by another rule that taxes the item that is defined (para 2.99).

The uncertainty that has arisen over whether certain judge-made timing rules have survived the change to a 'gross income' approach of the re-write should be resolved (para 2.118). Organisation

There should be an assessment of the value of the benefits to be obtained from continuing on the present drafting course, that is, one based on functional organisation, together with an assessment of the work in-volved in reorganising the statute on a regime-by-regime basis. The gov-ernment should consider having those assessments done, with a view to deciding whether to persist with the functional organisation of the In-come Tax Act (para 2.141). If the government determines to adhere to a formalistic organisational structure, it should consider allocating a spe-cific part or subpart to rules about valuation, which at present are not gathered together in the manner that is standard for the rewritten Act (para 2.188).

The phrase 'under ordinary concepts' in section CD 5 should be elimi-nated, and the provision should be rephrased using the term 'income' without qualification (para 2.155). 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'. Alternatively, section CD 5 could be woven into section BC 4, where it could act as the core provision that initially captures gross income as an-nual gross income (para 2.159).

The government should give some priority in the rewrite programme to the following topics: apportionment, movement of assets in and out of the tax base, accounting for long-term contracts and tax avoidance provi-sions (para 2.171).

Drafting policies
Statute-wide drafting policies should not be adopted as a matter of prin-ciple without reasonably rigorous practical testing (para 2.183).

Some advantage may be had in splitting the Income Tax Act 1994 into two separate Acts, one for provisions of general application, removing some relatively complex groups of provisions, that concern only a lim-ited number of taxpayers, into a second Act. The government should di-rect officials to evaluate whether such an approach should be taken (para 2.184).

Schedule 23 should be kept under continuous review and updated when-ever there is renumbering. The ambulatory nature of the rewrite process has some advantages, but regular changes make the statute difficult for users to follow (para 2.185). The government should also consider in-cluding in the Act a schedule of the monetary thresholds that are scat-tered throughout the Income Tax Act (para 2.186).

The Inland Revenue Department should establish a special 'repairs and maintenance' unit to address promptly any queries raised as to the effect on established principles of the rewritten Income Tax Act, to deal with any unintended outcomes identified, and to provide an administrative mechanism to ensure both that the general body of taxpayers and tax ad-visers are informed of issues as they arise, and that remedial legislation is developed and introduced at the first opportunity (para 2.187). The department should redraft the existing qualified accruals rules de-terminations in an endeavour to publish fresh drafts at the same time as the proposed exposure draft of part E of the Act is published. When pos-sible, each determination should follow one of a limited number of stan-dard templates. The procedure for issuing determinations should take on the basic features of the generic tax policy process (para 2.196).

Additional matters
New Zealand should return to formal annual taxing Acts (para 2.200).

The rewrite should include a provision to state the law on the relation-ship between the Income Tax Act and fraud, so that there can be no doubt that even though taxpayers may have strictly complied with the requirements of the Income Tax Act, or believe that they have done so, when the facts of the case require it they can still be described as dishon-est, and be guilty of fraud (para 2.201).

Legislation that affects the operation of the Income Tax Act should be listed in a schedule, which should begin with a statement to the effect that the omission of any legislation does not mean that the omitted Act does not affect the operation of either that Act or the Income Tax Act (paras 2.203, 2.205). An additional schedule could list sections of the Crimes Act 1961 that are potentially relevant to income tax fraud (paras 2.204, 2.205).

3 Aspects of the capital-revenue boundary
The government should consider legislation to ensure that payments for restrictive covenants involving services (para 3.22), inducement pay-ments (para 3.32), certain capital contribution payments, and other simi-lar payments should be taxable (para 3.42). The submissions by the In-vestment Savings and Insurance Association of New Zealand to the committee on investment gains of collective investment vehicles should be evaluated with a view to introducing legislation to remedy the prob-lems that the Association has identified (para 3.4).

4 Charities and other tax-exempt entities
The government should review the law and practice relating to the in-come tax exemption in section CB 4(1)(h) for amateur sports bodies (para 4.9), and also the threshold in section DJ 17 to ascertain whether it is sufficiently high enough to meet its objective of reducing compliance costs (para 4.11). The income tax exemption in section CB 5(1)(i) for trustees of sick, accident and death benefit funds should be repealed (paras 4.15, 4.25). The net income derived by charities and other tax-exempt entities from commercial activities unrelated to their exempt purpose should be taxable (para 4.17). The exemption from fringe bene-fit tax in section CI 1(m) for benefits provided by charitable organisa-tions to their employees should be repealed (para 4.22). Superannuation schemes for the benefit of employees of charitable organisations should not be eligible for charitable tax exemptions (para 4.24).

5 Some specific concerns
Tax treatment of expenditure on motor vehicles
The government should develop a universal approach to the tax treat-ment of motor vehicles (para 5.7).

Fringe benefit tax
There should be no change in the present formula for calculating the value of the fringe benefit of a motor vehicle (para 5.16), but the Inland Revenue Department should publish in the Tax Information Bulletin a full and informative explanation of the rationale underlying the use of the factor of 24 per cent of the original GST-inclusive cost price as a method for determining the base fringe benefit value of a motor vehicle (para 5.17).

GST on fringe benefits should be returned on the FBT return rather than the GST return (para 5.18).

Use of money interest
The question of charging use of money interest to those paying FBT an-nually should be pursued in the context of the review of obligations of business taxpayers. If this review should not result in any simplification for small taxpayers paying FBT, the government should consider the re-moval of the use of money interest charge from fringe benefit taxpayers who pay annually (para 5.25).

Provisional tax
The government should monitor the use by taxpayers of the election to estimate income to prevent divergent outcomes relating to use of money interest (para 5.31).

Payment and refunds
The government should publish a discussion document that sets out the debate on amalgamating payment dates to allow informed public consid-eration of the issues and to provide for public submissions. The discus-sion document should clearly distinguish the needs and concerns of the small, small to medium, and large businesses (para 5.47).

The government should also consider implementing, at the first practical opportunity, a universal rule that when the due date for the payment of tax falls on a non-business day, the due date moves to the next working day (paras 5.53, 5.54). The routine practice of applying refunds to meet outstanding debts should be modified to allow discretion in its application (paras 5.57, 5.59). Taxpayers should be able to request a refund of an amount of tax not subject to a dispute provided certain criteria are met. For income tax, the refund would be subject to the Commissioner's discretion as to the calculation of the appropriate amount of refund (para 5.65).

Depreciation
There should be no increase in the $200 threshold for the low value write-off (para 5.72). When assets are purchased at the same time from the same supplier, the threshold should be increased to allow up to $500 in assets purchased at the same time from the same supplier to be imme-diately deductible, providing no asset exceeds $200 in value (para 5.78). Consideration should also be given to either an increase in, or the re-moval of, the ceiling that limits the application of the pooling approach to depreciation (para 5.88).

Goods and services tax
A registered person who is no longer eligible to use the payments basis of accounting should be able to continue accounting in that way for a further year before being required to adopt the invoice basis of account-ing. The government should also consider an increase in the threshold to account for inflation (para 5.94).

The Inland Revenue Department should publish a statement about its operational policy on GST tax invoices, identifying the errors that are considered significant and the errors that are not (para 5.99). There should be no increase in the $50 threshold for tax invoices (para 5.103).

GST secondary use adjustments for private or exempt use should be moved to the period in which the annual income tax return is filed, ex-cept when the adjustment involves the procedures available for acquisi-tions of items under $10,000 (para 5.108).

Financial arrangements
As part of the rewrite process, the government should consider a year-end valuation approach as an alternative to the current rules for valuing financial arrangements (para 5.118). Rewriting the accrual rules deter-minations should be given a high priority (para 5.120).

Readability of statements
The redesign of statements of account should be given priority (para 5.124).

Education
The Inland Revenue Department should publish booklets for specific industry groups, advising taxpayers of their tax obligations and the tax treatment of specific transactions (para 5.128).

6 Tax mitigation, avoidance and evasion
Anti-avoidance rule
The government should continue to restrict the conditions that make tax avoidance possible by continuing its broad-base, low-rate policy (para 6.37).

The general anti-avoidance rule in sections BG 1 and GB 1 of the In-come Tax Act 1994 should not affect the application of any principles of common law. This position should be made completely clear in order to ensure that the courts are not precluded from applying common law anti-avoidance rules like the fiscal nullity doctrine (paras 6.42, 6.53).

The application of the anti-avoidance rule is automatic. This feature should be made absolutely clear in the legislation (paras 6.44, 6.53). An amendment should be made to clarify that any reconstruction under sec-tion GB 1 applies from the date of the original avoidance arrangement (paras 6.46, 6.53).

The department should review existing interpretation statements, inter-pretation guidelines and public rulings that depend on high-level legal analysis to determine whether these statements should be revised. The department should immediately withdraw any statements found to be deficient without waiting until replacement drafts are available. In par-ticular, the department should immediately withdraw the 1990 policy statement on section 99 of the Income Tax Act 1976. The department should obtain external expert input into interpretation guidelines and in-terpretation statements before they are released for consultation, espe-cially for issues involving complex reasoning. Particular care should be taken when including generic examples in statements. The department should also reconsider and refine its apparent view on how the form/substance and sham/genuine analysis should be approached (para 6.101).

Loss attributing qualifying companies
The government should examine loss attributing qualifying companies to determine whether the use of loss attributing qualifying companies as tax avoidance vehicles is a threat to the tax base, whether the use of loss at-tributing qualifying companies is consistent with the government's tax policy in relation to forestry, and whether the provisions as to loss attrib-uting qualifying companies should be amended or repealed (para 6.114).

7 Tax evasion and the hidden economy
The goal of the Inland Revenue Department in improving the taxation of the hidden economy should be a sustained accretion of improvements that steadily whittle away at the amount of tax that is evaded and that enable the department to respond quickly to new business techniques or to new systems of concealment that offer opportunities for new methods of evasion (para 7.40). The targeting of audits should not be based solely on the amount of tax being evaded by a particular taxpayer, but should also be directed to types of tax evasion that involve many taxpayers evading tax on small amounts of income (para 7.42) The Inland Revenue Department should continually identify opportuni-ties for tax evasion by taxpayers and new opportunities to use withhold-ing tax methodologies. The department should also develop a strong community awareness of the cost to the community of tax evasion and review the law relating to non-cash transactions (para 7.45).

The department should work closely with community groups, tax practi-tioners and particularly specialists in public awareness campaigns to de-velop industry profiles and more effective compliance at all levels. The focus of the community awareness programme should be on the costs of the cash economy to the community, the fact that there is no excuse for the non-declaration of income, education through school curricula, the seriousness of the consequences of detection, the details of the depart-ment's initiatives on the cash economy, and the publication of instances of evasion that have been identified, and where appropriate, the actions taken (para 7.51).

The law relating to non-cash transactions should be clarified so that such transactions do give rise to taxable income even when they cannot be converted into cash (para 7.55). The department should effectively communicate a suitable explanation of the tax law relating to barter transactions to those sectors of the community where barter transactions are prevalent (para 7.56).

8 Disclosure
Section 15B(e) of the Tax Administration Act 1994, which states that taxpayers must disclose to the Commissioner in a timely and useful way all information required to be disclosed under the tax laws, should be amended to identify the different categories of required disclosure: in-formation specifically required by statute, information required by the department in a prescribed form, and information requested by the de-partment from specific taxpayers (para 8.4).

The department should consider a review of each of the purposes of the tax return to decide if the return is the most appropriate vehicle for these functions (para 8.19).

An examination should be made of the application of technology to the government's disclosure requirements (para 8.20). The government should consider a review of the records that a taxpayer must keep under self-assessment. The review should be undertaken at the same time as the review of return filing obligations (para 8.21).

The Inland Revenue Department should prepare and send out to taxpay-ers forms to guide them through their key annual income tax activities, and also to act as a record for audit purposes (para 8.25).

As part of the review of penalties to be conducted in 1999, there should be public discussion on disclosure (paras 8.27, 8.33).

9 The Commissioner's information-gathering powers
An amendment should be made to section 16 of the Tax Administration Act 1994 to give the Commissioner authority to remove books or docu-ments from premises for the purpose of making copies (paras 9.25, 9.35). The government should also clarify the ambit of section 16(2) to ensure that it applies to third parties (paras 9.30, 9.35).

The words 'necessary or relevant' in section 17 encourage taxpayers to raise spurious arguments and should be removed (paras 9.23, 9.35). Sec-tion 17 should also be amended to deem the records of an offshore entity controlled by a New Zealand resident to be under the control of that New Zealand resident (paras 9.18, 9.35). The section should be further amended to give the Commissioner the discretion to require that docu-ments requisitioned under that section should be sent to an Inland Reve-nue office (para 9.24, 9.35).

The government should await the outcome of the Law Commission's study of legal professional privilege before making any decisions on this matter in relation to tax (paras 9.59, 9.63). In the meantime, amendments should be made to section 20 first, to ensure the physical protection of documents once a claim for privilege is made, and secondly, to require the identification of documents for which privilege is being claimed as a condition of obtaining privilege (paras 9.60, 9.61, 9.63).

10 Assessments and disputes resolution
The time bar for amending assessments should be suspended for the pe-riod between one month after the issue of a section 17 notice in which the taxpayer is advised that non-compliance will result in such suspen-sion and the taxpayer's compliance with the notice. The statutory mini-mum periods for keeping records should be extended by the period for which the time bar is suspended (para 10.8).

The onus of proof in civil proceedings, except for civil penalties for eva-sion, should continue to lie with the taxpayer. The law should be clari-fied expressly to provide that if a taxpayer is able to prove on the balance of probabilities that the Commissioner's assessment is excessive by at least a certain amount, the court should be able to reduce the Commis-sioner's assessment by that amount (para 10.13).

11 Tax collection
Withholding payment regulations
The current withholding system should continue to apply if, and to the extent that, there is a risk that the business to which the withholding system applies may not be in a position to meet its income tax liability. Smaller businesses, irregular activities, or infrequent activities, such as sphagnum moss collection, game hunting and certain labour-only serv-ices which are activities specifically covered by the regulations are more likely to run this risk (para 11.16).

The definition of 'withholding payment' should be amended to exclude first, payments made to a GST registered person for the supply of serv-ices when the payer holds at the time a GST tax invoice disclosing the GST-inclusive value of that supply except in specific areas of revenue risk (paras 11.22, 11.28), and secondly, payments made by people in the household sector to the extent that the payments are of a private nature (paras 11.25, 11.28).

Interest on underpayments
Questions about relief from the use of money interest rules should be fully addressed as part of the review of the penalties provisions to be conducted by the Inland Revenue Department in 1999 (para 11.37).

The government should consider removing the application of the 5 per cent penalty to taxpayers who fail to pay on time, but who correct that error within a few days of the due date for payment. The government should also consider reducing the incremental late payment penalty of 2 per cent per month to 1 per cent per month (para 11.43).

Tax recovery
The requirement in section HK 11(1)(c)(ii), that the purpose of an ar-rangement must have the effect of avoiding tax, should be amended so that it is an alternative or disjunctive requirement only (para 11.52).

12 Penalties
There should be no major changes to the penalties provisions until they are subject to post-implementation review in 1999 (para 12.9). The gov-ernment should, however, specifically require the review team to report on whether the government's performance expectations of taxpayers are reasonable, whether, and to what extent, a past record of good behaviour should be taken into account in deciding to impose penalties or to esca-late enforcement, whether the fairness of the penalties provisions is ap-parent to all taxpayers, and whether taxpayers who comply can see that those who do not comply are adequately punished (para 12.7).

13 Applying the law
The government should ensure that the Inland Revenue Department re-views staff skill levels, and further, that the department ensures that re-cruitment, retention and continuing education policies are fully adequate to establish and maintain the staff skill levels that are necessary (paras 13.41, 13.121).

The Inland Revenue Department should remove from its internal prac-tices and procedures and from public statements any suggestions that section BG 1 should be read restrictively rather than liberally (paras 13.53, 13.121). The Inland Revenue Department should always be alert to the possibility of criminal fraud by taxpayers, and when fraudulent activity is detected, the department should ensure that its officers are aware that the Crimes Act 1961 is the appropriate vehicle for prosecution (paras 13.89, 13.121).

14 The tax implications of electronic commerce
The government should monitor and should continue to participate in the efforts of the OECD in developing tax policy on electronic commerce and should seriously consider any recommendations that are proposed (para 14.35).

15 Tax advisers
Whether or not they are members of professional bodies, officers of the Inland Revenue Department who encounter misconduct by tax advisers should be able to have it drawn to the attention of the appropriate body. Because of the secrecy requirements in section 81 of the Tax Admini-stration Act 1994, the first step should be internal to the department. Section 81 would need to be amended to allow the department then to report such misconduct. The government should consider such an amendment (para 15.11). The penalties provisions should be allowed to operate for some time to gauge their effect in practice, with a later re-view, if necessary, to consider the desirability of having penalties apply directly to tax advisers (para 15.14).

16 Relationship with taxpayers
Thorough surveys should take place to determine whether the depart-ment should continue to use the customer needs model and, if so, whether any measures are necessary to deal with the contradictions be-tween the roles of taxpayer and customer (para 16.23). The Inland Revenue Department should abandon the motto, 'It's our job to be fair'. If consideration is given to adopting a replacement motto, it should be tested carefully, not only by research to discover taxpayers' reactions, but also by measuring the motto against the legal and admin-istrative duties of the Inland Revenue Department (para 16.31). The department's decision to investigate the possibility of attitude-forming campaigns should be implemented more rapidly than is cur-rently proposed (para 16.36).

Section 81(1) of the Tax Administration Act 1994 should be amended to clarify that the administration exception in that provision permits the Commissioner to disclose taxpayer affairs for the purpose of responding to publicity about the department's activities when the Commissioner considers in good faith that such disclosure is necessary to safeguard the integrity of the tax system (para 16.41).

17 The rulings process
The department should consider the way in which product rulings are issued. Issuing product rulings should be discretionary, as is the case with public rulings. In exercising its discretion to issue public and prod-uct rulings, the department should take into account the policy implica-tions of such rulings (para 17.40).

18 The Inland Revenue Department's Budget
The government should encourage the Commissioner fully to utilise the scope for flexibility within the government's budget processes. The gov-ernment should also keep the whole issue of management flexibility in the context of budget issues under review (para 18.22).