Rewriting the Income Tax Act
New Zealand has been making steady progress on rewriting its income tax legislation in plain language. A milestone was reached this year when the Governor-General gave assent to the Income Tax Act 2004 (ITA 2004), which rewrites about a third of the Income Tax Act 1994 (ITA 1994).
This article explains why the rewrite is being done, how it has progressed, and what distinguishes the rewritten text assented to on 7 May 2004 from traditionally drafted tax law.
Why is the rewrite being done?
New Zealand’s income tax legislation, like that of many other countries, was for a long time an unwieldy structure held together by an impenetrable thicket of words. During the 1990s, various countries considered rewriting their tax legislation in plain language. In New Zealand, this step was recommended by several official reports, including the 1994 report of the Organisational Review of the Inland Revenue Department. The organisational review report also recommended that the drafting of tax bills should be moved from the Parliamentary Counsel Office to a drafting section to be established within the Inland Revenue Department.
The Government accepted both recommendations. It acknowledged that it was time for income tax legislation to be made more comprehensible and it accepted that the responsibility for doing that job, and for drafting all tax bills, should lie with specialist law drafters in the Inland Revenue Department. In 1995, it established a drafting unit within the Inland Revenue Department and gave it the tasks of maintaining existing tax legislation and rewriting the ITA 1994.
The Government was clear that the ITA 1994 was just to be rewritten. The effect of the Act was to remain the same. The only policy changes allowed were those that had been the subject of consultation and a decision by the Government to make a change.
How has the rewrite progressed?
The first stage of the project, which was done by the Parliamentary Counsel Office, involved reordering and renumbering the existing income tax legislation, i.e., the Income Tax Act 1976 (ITA 1976). It was completed with the enactment of the ITA 1994. Reordering meant putting provisions that were similar to one another into the same group—for example, the provisions that stated core income tax rules, which were scattered throughout the ITA 1976, were gathered together and put into Part B (Core Provisions). Renumbering meant using a single letter identifier for Parts, a double letter identifier for subparts, and a double letter and number identifier for sections—for example, section BC1 is the first section (“1”) in the third subpart (“C”) in the second Part (“B”).
The second stage involved rewriting Part B (Core Provisions). It was completed with the enactment of the Taxation (Core Provisions) Act 1996.
The third stage involved rewriting Parts A to E and Y and re-enacting Parts F to O and the schedules. It was completed with the enactment of the ITA 2004. Parts A to E and Y are discussed below. Parts F to O and the schedules have been updated in minor consequential ways, but are otherwise the same as they are in the ITA 1994. The numbering sequence is also the same—for example, section OB 3A is followed by section OB 6 because the ITA 1994 no longer has a section OB 4 or a section OB 5.
The final stage involves rewriting Parts F to O and the schedules. It will be completed in either l or 2 amendments to the ITA 2004 that take out and replace Parts F to O and the schedules. The ITA 2004 will also be the subject of “business as usual” amendments to implement policy changes. For resource reasons, the style of the rewritten Parts A to E and Y will not be maintained in all these amendments.
What distinguishes the rewritten text assented to on 7 May 2004 from traditionally drafted tax law?
Consistency, orderliness, and precision inform the drafting of the rewritten Parts. These qualities are achieved by drafting features described below.
Clear structure
Parts A to E of the ITA 2004 do essentially the same jobs as they do in the ITA 1994—Part A states the purpose of the Act; Part B contains the core provisions on income, deductions, and timing; and Parts C, D, and E provide the detail on income, deductions, and timing respectively. The ITA 2004 differs from the ITA 1994, however, in making explicit the relationships between the Parts and, in Part D, within the Part.
Section BD1 and subpart CA state the connection between Parts B and C. Section BD 2 and subpart DA do the same for Parts B and D. Sections BD 3 and BD 4 relate Part B to Part E.
Subpart DA states the connection between Parts B and D by setting out the rules on when deductions are allowed or denied. The relationships within Part D are explained in the sections that allow or deny deductions; they end with a subsection, headed Link with subpart DA, that shows how the section relates to the rules.
Orderly groupings
The ITA 2004 continues the task, begun in the ITA 1994, of organising material in a considered fashion, using subparts to group provisions addressing similar or related rules.
The process of putting provisions into a more logical sequence revealed misplaced provisions. These have been shifted to a suitable location—for example, apportionment rules have been moved to Part F, which deals with apportionment and recharacterised transactions.
The subparts are arranged in 2 distinct groups. In Part C, the subparts run from CA to CH and then from CQ to CX; in Part D, from DA to DF and then from DN to DX; and in Part E, from EA to EJ and then from EW to EY. In all 3 Parts, the first group of subparts applies broadly to all taxpayers and the second group applies to specific instances of activity. The purpose of the gap in the numbering is to facilitate the addition of subparts. A subpart of broad application can be added at the end of the first group and a subpart of specific application can be added at the start of the second group.
Redundancies removed
Some provisions of the ITA 1994 were redundant because their content was already covered elsewhere—for example, 6 different provisions expressed the idea that, if a person is allowed a deduction for a loss and then recovers the amount of the loss, the amount recovered is income up to the amount of the deduction. The ITA 2004 says it in a single provision, section CG 4 (Recovered expenditure or loss).
Other provisions were redundant because they no longer had effect. Provisions of this kind were omitted and their omission noted in schedule 23, which contains comparative tables of the provisions of the ITA 1994 and the ITA 2004.
Numerous signposts
The rewritten Parts contain many signposts.
Tables of contents. A table of contents appears at the start of the Act and at the start of each subpart.
Outline provisions. Various kinds of outline provisions are used. The definition of a key term provides an outline in the subpart on dividends— section CD 2 (Meaning of dividend) says ”Sections CD 3 to CD 13 define what is a dividend”. The subpart on life insurance has a section EY 2 headed Matters to which this subpart relates. In some subparts, the first section is headed What this subpart does—for example, in subpart EE (Depreciation).
Two levels of cross-heading. A centred, italic, bold heading introduces a group of sections with a common theme and a centred, italic, roman heading introduces a collection of sections within the group—for example, within subpart CX (Excluded income), the heading Fringe benefits is followed by the heading Introductory provisions.
Subsection headings. Subsections whose subject matter is the same have the same heading throughout the rewritten sections—for example, each subsection on the timing of income is headed Timing of income and each subsection containing an exclusion is headed Exclusion.
Directions to related sections. Sections identify other sections that affect them in a subsection headed Relationship with section….
Descriptions of sections. A cross-reference to a section in another subpart is followed by the section’s heading in brackets—for example, section CD 8(2) says “The amount of the dividend is calculated under section ME 33 (Notional distribution deemed to be dividend).” To avoid cumbersome cross-referencing, a series of cross-references to sections in other subparts is followed by “(which relate to …)”.
Slimmed-down sections
The messages of the sections of the ITA 1994 have been carved out of its dense blocks of text. The ITA 2004 conveys the messages in sections that have been kept as short as their subject matter allows, while using as many subsections as needed to cover different aspects of the message.
Sections are written in the active voice; they have clear structures made plain through subsections, paragraphs, and subparagraphs; and they use internal cross-referencing only to prevent confusion. Great care has been taken to ensure that words are used consistently throughout all the sections in the rewritten Parts.
Sections covering the same types of situations are arranged in parallel patterns. For example, many sections in Parts C and D start with a subsection headed When this section applies. In Part C, a subsection saying that an amount is income is headed Income. In Part D, a subsection allowing or denying a deduction is headed, as appropriate, Deduction, No deduction, or No deduction (with exception).
Ordinary language
The rewritten Parts take a modern approach to language. Examples are—
• “acquire” and “dispose” replace expressions such as ”acquires or becomes possessed of”, “acquired or created”, “purchase or creation”, “sale or other disposition”, “sale or other transfer”, and “alienation or transfer”
• “expand on”, “modify”, “override”, and “qualify” replace “subject to”
• “mainly” replaces “primarily”, “principally”, ”primarily and principally”, and “principally and primarily”
• “treat” replaces “deem” when it is essential to make the point that a thing is legally something other than it is factually
• “any”, “every”, “that”, and “those” are used with care to avoid over-emphasis
• “This section is about”, “The fact that”, “gets a negative result”, and other colloquial expressions, are used.
Newly formatted formulas
The rewritten Parts improve the format of formulas by discontinuing the approach of writing formulas in 1 long sentence.
Formulas appear in a subsection of their own, usually headed Formula, with their items expressed in words, not letters. The formula is followed by a subsection headed Definition of items in formula. The subsection contains paragraphs defining the items, if the definitions are short, or a statement that the items are defined in subsequent subsections, if the definitions are long.
Familiar cross-referencing
There are 2 helpful changes in cross-referencing. The first is that cross-references are written colloquially—for example, “subpart CA” instead of “Part CA” and “column 1” instead of “First Column”. The second is that cross-references are simpler because the numbering in Parts F to O has been standardised. In the ITA 1994, the first inserted subpart, section, paragraph, or subparagraph is labelled “A” in some cases and “B” in others. The ITA 2004 uses “A” consistently as the identifier for the first insertion—for example, the subpart after subpart NB is now numbered subpart NBA instead of subpart NBB and the section after section ME 1 is now numbered section ME 1A instead of section ME IB.
Easy-to-find definitions
While Part O (Definitions and related matters) is not rewritten, the ITA 2004 updates section OB 1 (Definitions). The section is now a comprehensive collection of defined terms, containing either the content of the definition or a reference to the section or subsection in which the content can be found. The section has been reformatted to give each definition a regular legislative shape.
In the rewritten Parts, the definition of a term in a section or subsection is identified by the heading “Meaning of [term]”. Subsections that define terms are placed at the end of their sections whenever possible.
Each section in a rewritten Part is followed by a list with the lead-in words “Defined in this Act”. The list contains the terms used in the section that have an entry in section OB 1.
Fewer initial capitals
Compared with other New Zealand statutes, the ITA 2004 gives fewer words initial capital letters. This is because of the alphanumeric numbering system. Section numbers and cross-references must appear clearly on the page, without the distraction of unnecessary capital letters. The ITA 2004 does not capitalise most of its technical drafting terms, i.e., “paragraph”, “schedule”, “schedule 1, part A”, “section”, “subpart”, and “subsection” have initial lower case letters but “Act” and “Part” are always capitalised because a lower case letter could change their meanings. For other words, a lower case initial is preferred whenever possible—for example, “department or ministry”, “government”, and “institute” (referring to a Crown Research Institute).
Repeal revisited
The ITA 1994 is unclear in its approach to its predecessor. Section A1 (Short title, commencement, etc.) says that the ITA 1994 applies to tax on income derived in the 1995-96 year, which indicates that the ITA 1976 continues to exist. However, section YB 3 repeals it. Sections YB 4 and YB 5 then provide savings and transitional rules that deem it not to be repealed for the purpose of dealing with tax on income derived before the 1995-96 year.
The ITA 2004 is clear in its approach. Section YA 1(1) (Repeals) repeals the ITA 1994, but section YA 1(2) specifically states that the repeal applies only to the tax on income derived in the 2005-06 year and later years. The ITA 1994 continues to exist and can be amended in the same way as any other existing statute.
Practical drafting matters raised in Clarity
The 2003 and 2004 issues of Clarity discuss a number of practical drafting matters. This is what the rewritten Parts do about them:
• as specifically requested by users, they use and “; and” or “; or” at the end of paragraphs and subparagraphs and reserve colons for use at the end of paragraphs or subparagraphs defining items in formulas
• as required by standard New Zealand legislative punctuation, they use a comma after the second-to-last item in a list of words or cross-references and after a modifying phrase introducing a series of paragraphs or subparagraphs
• they use paragraphs and subparagraphs carefully so as not to make sandwiches of them or shred the text
• they use numerals instead of words (except to start a sentence, paragraph, or subparagraph)
• they use “that” as the introductory word to relative clauses
• they use “they” and “their” as singular pronouns
•they do not use “provided”.
IRD’s punctuation passion
Most readers of this Journal are, probably, unaware that New Zealand’s tax law is drafted in the IRD’s Tax Drafting Unit. This situation came about with the making of the Inland Revenue Department (Drafting) Order 1995 (SR 1995/286).
More significantly, possibly no readers are aware that one of the unit’s passions is the punctuation of paragraphs. This note describes the unit’s obsession with punctuation, considers whether it is healthy, and prescribes the remedy.
HOW THE OBSESSION MANIFESTS ITSELF
In February 2005, the Tax Information Bulletin (2005) 17 TIB 89, 90 told readers how the punctuation at the ends of paragraphs in IRD legislation was to be interpreted. The TIB said：
“If items in a list of paragraphs are linked conjunctively, they are separated by “; and”. The use of “; and” is thus equivalent to introducing the list of paragraphs with the words “all of the following: …”.
If items in a list of paragraphs are linked disjunctively, they are separated by “；or”. The use of “；or” is thus equivalent to introducing the list of paragraphs with the words “one, but not more than one, of the following: …”.
A colon is used to separate items in a list of paragraphs if the items in the paragraphs are not linked conjunctively or disjunctively. The use of the colon may thus be equivalent to introducing the list with the words “one or more of the following:…”.
These were not idle words. The unit had already changed the punctuation of the paragraphs in the rewritten Parts of the Income Tax Act 2004 (ITA 2004). Barely before the ink was dry on the new Act, and certainly before it had come into force, the punctuation of the paragraphs had been changed. The Taxation (Venture Capital and Miscellaneous Provisions) Act 2004 has a 10-page schedule dedicated to changing “；and” and “；or” to “:” throughout Parts A to E of the ITA 2004.
This zeal has continued.
• s 46 of the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 takes “；or” out of s DE 2(l)(a) and puts “:” in.
• s 25(1), (2), (4), (5), and (7) of the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006 amend s DN 6(1) by replacing “:” with “；and”.
• s 104(1) of the same Act replaces “:” with “；or” in the definition of “IWP or CTC” in s KD 2(2).
Given all this activity, a user of tax Acts can justifiably conclude that, when IRD punctuates the ends of paragraphs, it means the punctuation to be taken seriously.
IS THE OBSESSION HEALTHY?
Three examples show why this obsession is a cause for concern.
The first example is s DN 6(1) of the ITA 2004. Section DN 6(1) says when a taxpayer has a FIF loss. From a taxpayer’s viewpoint, a FIF loss is a good thing to have because it can reduce taxable income. Taxpayers would like there to be lots of circumstances in which they can have FIF losses. The IRD’s viewpoint is different, of course; it would like there to be one, narrowly described, circumstance in which taxpayers can have FIF losses.
When the ITA 2004 was passed, s DN 6(1) reflected the IRD’s viewpoint. It said that taxpayers had FIF losses if they met paras (a) and (b) and (c) and (d) and (e) and (f). However, the schedule to the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004 changed the “; and” between the paragraphs to “:”. According to the rule in the TIB, the use of the colon is equivalent to introducing the list with the words “one or more of the following:”. The result was that, as long as a taxpayer satisfied one of the paragraphs in s DN 6(1), the taxpayer had a FIF loss. Good for taxpayers：bad for the IRD! The IRD belatedly realised this, and that is why s 25(1), (2), (4), (5), and (7) of the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006 amend the paragraphs in s DN 6(1) by replacing “:” with “；and”. Section 25(1), (2), (4), (5), and (7) are treated as coming into force on 1 February 2004 (s 2(10)).
This example gives cause for concern in several ways. If the IRD had not realised its mistake in making the original punctuation change, many taxpayers might have had a deduction created not by Parliament’s intention but by a colon.
In fact, they may still have the deduction. The latest change to the punctuation in s DN 6(1) puts the punctuation back to what it was on … well, what date? That is not clear. The amendments to s DN 6(1) in s 25 are treated as coming into force on 1 February 2004, but s DN 6(1) did not exist then. Section DN 6(1) did not exist until 7 May 2004, the date of royal assent to the ITA 2004. Has s DN 6(1) in fact been amended? Perhaps its generous deduction provisions still exist. Be that as it may, this user must ask whether all this fiddling about with colons has really been a proper use of the country’s resources.
The situation is even more ridiculous because the language of the paragraphs in s DN 6(1) (or at least its original six paragraphs) makes it quite clear that the paragraphs were intended to be read cumulatively. The only reason for not reading them cumulatively 一 the only reason that taxpayers might still have a good deduction —is IRD’s declaration in the TIB that a colon cannot be read as “and”.
Pick and mix amendments?
The second example is s 25(1) of the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004. This example was chosen at random but the same practice is found in all taxation Acts after the ITA 2004. Section 25(1) says:
(1) In section ES 3(1) 一
(a) paragraph (a)(i) is replaced by the following:
“(i) allowable deductions, including any allowable deduction under subsection (3) or section HG 16；and”：
(b) in paragraph (a)(ii), “and losses” is omitted:
(c) paragraph (b)(i) is replaced by the following:
“(i) allowable deductions, including any allowable deduction under subsection (3) or section HG 16; and”：
(d) in paragraph (b)(ii), “and losses” is omitted.
The subsection lists four amendments to s ES 3(1) of the ITA. The amendments are separated by “:” not “；and”. According to the rules in the TIB, the use of the colon is equivalent to introducing the list with the words “one or more of the following” while the use of “; and” is equivalent to introducing the list with the words “all of the following”. The conclusion to be drawn from the punctuation of the paragraphs in s 25(1) is that only three of its four amendments are intended to be made. If all four amendments were supposed to be made, the paragraphs in s 25(1) would be separated by “；and”.
This example, too, raises concerns. For the last three years, taxpayers interpreting a provision that contains several amendments set out in paragraphs separated by colons should not have been applying all the amendments; they should instead have been choosing only some of them. Taxpayers who have applied all the amendments may even have been taking an unacceptable or abusive tax position for the purposes of the Tax Administration Act 1994. Presumably, taxpayers who have interpreted the provisions correctly and chosen only some amendments have not taken an unacceptable or abusive tax position — if they happen to have chosen only amendments that benefit them, who can say they were wrong to do so?
The practice of separating amending paragraphs by colons puts a considerable burden on publishers of consolidated Inland Revenue Acts. Perhaps none of them knows this, but they should be made aware of the situation. They should either be choosing which amendments they use in the consolidated sections or they should be advising users to make their own choice (but see the next example for an added complication).
And/or/both
The third example is clause 58 of the Taxation (KiwiSaver and Company Tax Rate Amendments) Bill. Clause 58 amends the KiwiSaver Act 2006 by substituting a new definition of “Crown contribution”. The definition is:
Crown contribution means —
(a) the contribution made by the Crown under section 226:
(b) the amount of tax credit under section KJ 1 of the Income Tax Act 2004 that is treated as a Crown contribution for a member under section KJ 5(2) of that Act.
The KiwiSaver Act 2006 is jointly administered by the IRD and the Ministry of Economic Development. The meaning of the colon between paragraphs (a) and (b) in the definition becomes critical. Should the colon be given the IRD’s interpretation 一 in which case it means that a Crown contribution is either (a) or (b) but not both — or should it be given the interpretation that the Parliamentary Counsel Office would probably give it — that a Crown contribution is both (a) and (b)?
This example raises the concern that users of an Act must know whether the IRD or the PCO drafted it in order to interpret the punctuation used in its paragraphs.
Implications
Taxation Acts require particular care. The taxation Acts passed since the publication of the TIB item have amended several enactments. Some of the enactments are Inland Revenue Acts, as defined in the Tax Administration Act 1994, and some are not. Not all the amendments are drafted by the IRD. The Inland Revenue Department (Drafting) Order 1995 prohibits the IRD from drafting amendments to the Child Support Act 1991, the Student Loan Scheme Act 1992, any Act not administered by the IRD, and regulations of any kind. A taxation Act will thus contain amendments drafted by the IRD and amendments drafted by the PCO. Just because an Act is an Inland Revenue Act does not mean that the IRD has drafted the amendments to it or its regulations. A user should not assume that the punctuation at the end of the paragraphs can be interpreted in the same way throughout the Act.
The 1995 order is silent on the matter of Acts jointly administered by the IRD and another department, so amendments to the KiwiSaver Act 2006 must be interpreted with great caution. Nothing should be concluded from the punctuation of the paragraphs until the user has checked where the amendments were drafted. Currently, this check is required in relation to clauses 58 to 69 of the Taxation (KiwiSaver and Company Tax Rate Amendments) Bill and clauses 201 to 237 of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill.
WHAT IS THE REMEDY?
This writer considers it ludicrous that there is material for an article on this topic. The IRD drafters should not have created these problems. They should not have tried to communicate legal concepts through the minutiae of punctuation.
IRD drafters should be doing their key role of producing plain English drafts that are legally correct and give effect to government policy. They should study s 5 of the Interpretation Act 1999 and take its message on board. They should concentrate on communicating clearly through the language and structure of the law they write. They should spend their time drafting amendments that are comprehensible; for example, the time spent fiddling unsuccessfully with the punctuation in s DN 6(1) should have been spent on rescuing s EX 45B from obfuscation (and, incidentally, on learning the alphabet).
The remedy prescribed by this writer is that the IRD publish an item in the TIB stating that the item headed “Legislative Drafting Issues” on pp 89 to 90 of volume 17, no 1，of the TIB is withdrawn with effect from 1 February 2005.
The purpose of the next 4 articles
The next 4 articles are about the Rewrite Advisory Panel (RAP). After the Income Tax Act 2004 was passed, RAP became the arbiter on possible unintended legislative changes from the Income Tax Act 1994.
When I read the RAP’s decisions, I was concerned that the RAP was not meticulous enough about identifying genuine unintended legislative changes. I felt that this approach stemmed from a bias in favour of the language of the Income Tax Act 1994. I did not like this because I considered that the RAP’s approach risked giving rewrites a bad name. If any rewrites were proposed in future – for example, of the incomprehensible Resource Management Act 1986 – RAP’s reaction to the ITA rewrite might be used as a reason for not doing them. Since nobody else was holding the RAP to account, I tried to do it.
How to confuse associated persons
[This article appears as I wrote it, rather than as it was published.]
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill 2008 amends the definitions of ”associated person” in the Income Tax Act 2007 (ITA 07). Taxation Acts in 2003 and 2006 also dealt with the concept of “associated persons”. This article describes the confusion created by the 2003 and 2006 legislation, with a view to alerting readers of the 2008 amendment to scan it with a critical eye.
Relevant documents
All the documents referred to are available at http://www.taxpolicy.ird.govt.nz and information on the Rewrite Advisory Panel (RAP) is available at http://www.rewriteadvisory.govt.nz.
The 2003 amendment
The Taxation (Annual Rates, Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Bill was introduced in May 2002 and passed in 2003 (“the 2003 amendment”).
Clause 9(1) inserted these provisions into section EG 17 (Transfer of depreciable property between associated persons) of the Income Tax Act 1994 (ITA 94)-
“(3A) Unless subsection (3) applies, subsection (1) applies if a taxpayer has acquired property from an associated person as part of an amalgamation that is not a qualifying amalgamation.
(3B) If subsection (3A) applies, the cost of the property to the taxpayer, in subsection (1)(d)(ii) and (1)(e)(ii), is determined in accordance with section FE 5.”
Clause 14(2) added this provision to section FE 5 (Transfer of property … deemed to be at market value) of the ITA 94-
“(2) For the purpose of section EG 17, the amalgamating company is treated as existing at the time the amalgamated company is treated as acquiring the property…”.
IRD’s commentary May 2002, pages 65,66
The IRD’s commentary on the bill gave these explanations for the proposed new provisions-
“Sections EG 17 and FE 5 of the Income Tax Act 1994 are being amended to make it clear that the rules in section FE 5 for determining the cost of assets acquired in non-qualifying amalgamations are subject to the anti-avoidance rule in section EG 17. That rule limits the cost base of a depreciable asset acquired from an associate to the original cost of the asset to the associate.”
“An amendment is also made to section FE 5 to counter an argument that section EG 17 cannot apply on a non-qualifying amalgamation because there is no acquisition from an associate, the amalgamating company having ceased to exist at the time the acquisition is deemed to occur under section FE 5.”
The references to an “associate” in these passages meant an “associated person” as defined in section OD 7 of the ITA 94 (Defining when 2 persons are associated persons).
Officials‘ report to Finance and Expenditure select committee (FEC) November 2002, pages 133,134
The officials’ report on the bill to the FEC made the following comment on the proposed new provisions-
“It is true that section FE 5(2), as drafted, could apply when two previously non-associated companies amalgamate, but we disagree that this is a flaw. On the contrary, it is necessary to achieve the policy intention of preventing an uplift in the cost base of depreciable property without a real change in the property’s ownership.
The draft section FE 5(2) would apply the test of association by comparing the ownership of the continuing, amalgamated company as it exists immediately after amalgamation, with the ownership of the discontinued, amalgamated companies as if they continued to exist.”
“The formulation of section FE 5(2), as drafted, will ensure that where the ultimate ownership of assets changes more than 50 percent, the anti-avoidance rule will not apply. But where the original majority owners continue to own at least half of the assets transferred, then the anti-avoidance rule will apply to prevent an uplift in base cost.
If… all previously unassociated companies were excluded, it would be easy for base cost to be uplifted without any change in ownership at all…”.
FEC’s decisions
The select committee implemented the officials’ thinking by changing this-
“(3A) Unless subsection (3) applies, subsection (1) applies if a taxpayer has acquired property from an associated person as part of an amalgamation that is not a qualifying amalgamation.
(3B) If subsection (3A) applies, the cost of the property to the taxpayer, in subsection (1)(d)(ii) and (1)(e)(ii), is determined in accordance with section FE 5.”
to this-
“(3B) Unless subsection (3) applies, subsection (1) applies to a taxpayer who acquires property from an amalgamating company as part of an amalgamation that is not a qualifying amalgamation as if the cost of the property to the taxpayer for the purposes of subsection (l)(d)(ii) and (l)(e)(ii) were the value given by section FE 5.”
FEC’s commentary December 2002, page 17
The FEC’s commentary on the bill said-
“We heard concerns from a submitter that section EG 17 can apply when two companies, which were previously not associated with each other, amalgamate into a single company. This could mean that a company with no ability to influence tax outcomes prior to amalgamation might be unable to revalue the asset at market value. However, we consider it is necessary that these provisions cover two previously non-associated companies. The test of association will be applied by comparing the ownership of the company that remains after amalgamation with the ownership of the amalgamating company that transferred the asset. The anti-avoidance rule will not apply if the ownership of the assets changes by more than 50 percent.”
The select committee did not change the proposed new section FE 5(2), which continued to read-
“(2) For the purpose of section EG 17, the amalgamating company is treated as existing at the time the amalgamated company is treated as acquiring the property…”.
Income Tax Act 2004
The Income Tax Act 2004 (ITA 04) rewrote Parts A to D, most of Part E, and Part Y of the ITA 94. The rewrite involved expressing the sections in the Parts in plain language without changing their policy. Some sections in Part E, and Parts F to O, were deliberately not rewritten and were re-enacted in their original obscure language. The ITA 04 was enacted in May 2004 and commenced on 1 April 2005.
Section EE 33(1) and (2) of the ITA 04 translated section EG 17(3B) of the ITA 94 into these words-
“When this section applies
(1) This section applies when, on or after 14 May 2002, a person acquires, directly or indirectly, an item of property from an amalgamating company as part of an amalgamation that is not a qualifying amalgamation.
Cost of item to person
(2) For the purposes of determining the amount of depreciation loss that the person has, the cost of the item to them is treated as 1 of the following:
(a) if section EE 49 applies for the amalgamating company and the item, the lesser of-
(i) the value given by section FE 5(Transfer of property … deemed to be at market value); and
(ii) the item’s market value at the time at which a person was first allowed a deduction for it after the amalgamating company acquired it; or
(b) if section EE 49 does not apply for the amalgamating company and the item, the lesser of-
(i) the value given by section FE 5(Transfer of property … deemed to be at market value); and
(ii) the cost of the item to the amalgamating company.”
The cross reference in section FE 5(2) was updated so that the section read-
“(2) For the purpose of section EE 33, the amalgamating company is treated as existing at the time the amalgamated company is treated as acquiring the property…”.
The 2006 amendment
The Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill 2006 was introduced in May 2006 and passed in December 2006 (“the 2006 amendment”).
Clause 34 replaced section EE 33 of the ITA 04 and renumbered it section EE 34. The new section EE 34(1) and (2) read-
“When this section applies
“(1) This section applies when, on or after 14 May 2002, an amalgamated company acquires, directly or indirectly, an item of property from an amalgamating company, and—
(a) the amalgamated company‘s acquiring of the item is part of an amalgamation that is not a qualifying amalgamation; and
(b) the amalgamating company is an associated person of the amalgamated company, treating the amalgamating company as existing at the time that the amalgamated company is treated under section FE 5(l)(b) (Transfer of property … deemed to be at market value) as having acquired the property from the amalgamating company; and
(c) 1 of the paragraphs in section EE 33(2) applies to the amalgamating company, as an associated person of the amalgamated company, when the amalgamated company is treated as person A under that section.
Cost of item to person
(2) For the purposes of determining the amount of depreciation loss that the amalgamated company has, the cost of the item to it is treated as 1 of the following:
(a) if section EE 49 applies for the amalgamating company and the item, the lesser of-
(i) the value given by section FE 5; and
(ii) the item’s market value when, after the amalgamating company acquired it, a person was first allowed a deduction for it; or
(b) if section EE 49 does not apply for the amalgamating company and the item, the lesser of-
(i) the value given by section FE 5; and
(ii) the cost of the item to the amalgamating company.”
Clause 78 replaced the section FE 5(2) inserted by the 2003 amendment with a new section FE 5(2), reading-
“(2) This section is overridden by section EE 34(2) for the purposes of determining the cost of an item to an amalgamated company under that section, unless the context requires otherwise.”
Clause 7(2) backdated the commencement of the proposed new provisions to 1 April 2005.
IRD’s commentary May 2006, page 79
The IRD’s commentary on the bill gave this explanation for the proposed new provisions-
“Section EE 33 of the 2004 Act is the rewrite of the combined effect of section EG 17 and FE 5(2) of the 1994 Act. The purpose of the rule is to ensure that associated companies cannot have an uplift in the depreciable value of the asset base for depreciable property transferred in a non-qualifying amalgamation. However, section EE 33 inadvertently omitted a reference to the test of association…
This amendment restores the test of association …
The amendment restores the effect of the law to that existing in the 1994 Act. Section FE 5(2) is also being amended to provide a clear relationship with the new section EE 34.”
Officials’ report to FEC December 2006, page 97
The officials’ report on the bill to the Finance and Expenditure select committee said-
“Sections EE 33 and EE 34 are being amended on the recommendation of the Rewrite Advisory Panel (RAP). The Panel concluded that section EE 33 contains an unintended change in law in that it is not restricted to transfers of property between associated persons, as was the case under the Income Tax Act 1994.
Clause 34 corrects this unintended change…”
Confusion reigns
These documents reveal a considerable amount of muddled thinking.
The confusion begins with the 2003 amendment and the meaning of ”associated person” when applied to amalgamating companies in a non-qualifying amalgamation.
The definition of “associated person” in the ITA 94 described the association of one company with another by stating an amount of common control above which the 2 companies were treated as associated. The 2003 amendment as introduced dealt with the situation when “a taxpayer has acquired property from an associated person as part of an amalgamation”. The amendment did not alter the meaning of “associated person”. When the amendment said “associated person”, it was talking about company A acquiring property from company B when companies A and B were associated persons because of the amount of common control.
However, things changed at the select committee. The officials’ report proposed a “test of association” for amalgamating companies that involved looking at “the ultimate ownership” to see if “the original majority owners continue to own at least half of the assets transferred”. The report did not say whether this was intended to be the universal test of association for amalgamating companies, whatever the situation, or was to apply only in the situation at hand, ie, deciding whether amalgamating companies were associated for the purpose of determining whether an asset moving for one amalgamating company to another was to be depreciated from its original cost to the company whence it moved or from its market value at the time of the amalgamation. It is a reasonable guess, though, that the officials intended to apply only in the situation at hand. The officials were, therefore, proposing that the traditional test be altered in 2 ways for that situation, ie, whether an amalgamation was between associated companies was to be decided:
•first, after the amalgamation (no longer before);
•second, by how much the ownership of assets changed as a result of the amalgamation (no longer by the amount of common control).
The select committee accepted the “test of association” proposed by officials. It showed that it had done so both by the unequivocal statement in its commentary and by the amendment it made to proposed new section EG 17(3A). The committee amended the description of the situation being dealt with from that when “a taxpayer has acquired property from an associated person as part of an amalgamation” to that when “a taxpayer [who] acquires property from an amalgamating company as part of an amalgamation”. The words “from an associated person” were dropped; acquisition from an associated person was no longer the point since it would not be known until after the amalgamation whether the companies were associated or not.
So far so good. However, confusion arises because the select committee, having specifically accommodated the first alteration to the associated person test, did not go on to specifically accommodate the second.
The committee left proposed section FE 5(2) exactly as it had been introduced. Officials said of section FE 5(2) “The formulation of section FE 5(2), as drafted, will ensure that where the ultimate ownership of assets changes more than 50 percent, the anti-avoidance rule will not apply”. In other words, officials’ advice was that section FE 5(2) already meant that an asset acquired by amalgamating company A from another amalgamating company B was to be depreciated from its original cost to company B if the ownership of the asset changed by 50 percent or less as a result of the amalgamation and was to be depreciated from market value if the ownership of the asset changed by more than 50 percent as a result of the amalgamation.
It is hard for an ordinary reader to see that the words of section FE 5(2) – “For the purpose of section EG 17, the amalgamating company is treated as existing at the time the amalgamated company is treated as acquiring the property” – actually said all that. From an ordinary person’s point of view, it would have been better if officials had advised the committee to amend section EG 17 to say it specifically.
The upshot of the 2003 amendment was that the anti-avoidance rule in section EG 17 applied when an amalgamating company in a non-qualifying amalgamation acquired an asset from any other company, not just from an associated company in the traditional sense (because the new test of association meant that whether the companies were associated would not be known until after the amalgamation and until the ownership of acquired assets was examined).
However, section EG 17 did not state the consequence of the new test for deciding from what price acquired assets were to be depreciated (the consequence should have been that a depreciable asset was depreciated from its original cost if its ownership changed by 50 percent or less as a result of the amalgamation and from market value if its ownership changed by more than 50 percent as a result of the amalgamation). Section FE 5(2) apparently conveyed this consequence, but did not contain any words actually doing so.
The ITA 2004 had to translate the section EG 17 bit of this muddle into plain language without changing the policy and had to re-enact section FE 5(2) in its existing language with only necessary cross-referencing updates. As shown by the extracts set out above, that is exactly what the ITA 2004 did. Section EG 17 became section EE 33 and section FE 5(2) stayed in exactly the same language except for a changed cross-reference in section EE 33.
Again, so far so good. More confusion arises, however, when the 2006 amendment happens along. The 2006 amendment amended both sections EE 33 and FE 5(2).
The reason given for the amendment to section EE 33 was that the RAP had concluded that section EE 33 contained “an unintended change in law in that it is not restricted to transfers of property between associated persons, as was the case under the Income Tax Act 1994”. The RAP’s conclusion was patently wrong. Section EG 17(3B) of the ITA 94 was quite clearly not restricted to transfers of property between associated persons – in fact, the select committee made sure of that by omitting the words “from an associated person”. If the ITA 2004 had restricted section EE 33 to transfers of property between associated persons, it would have changed the policy of the section. That was not allowed.
The reason given for the amendment to section FE 5(2) amendment was that it was “being amended to provide a clear relationship” with section EE 33 (renumbered section EE 34). The amendment took the form of replacing section FE 5(2) with a new version containing a completely different approach from the original. The original approach of tweaking the effect of section FE 5(1) for the purposes of section EE 33/34 was changed to an approach of giving section EE 33/34 overriding priority “unless the context requires otherwise” .
The reason for the new approach – a clear relationship between sections EE 33/34 and FE 5 – is not confusing and the new approach is not confusing in itself (except for the words “unless the context requires otherwise” – what are they referring to?). What is confusing is that the 2006 amendment backdated the amendment to section FE 5 to 1 April 2005. The backdating is a statement that the ITA 2004 should have used the new approach in its section FE 5(2). That is clearly not right. If the ITA 2004 had amended section FE 5(2) by using the new approach, it would have changed both the policy and the language of the section. Neither was allowed.
The 2006 amendment also did another mysterious thing. It included section EE 34(1)(c) in its replacement version of the ITA 2004’s section EE 33. The new paragraph (c) appeared without explanation and just as mysteriously disappeared. It was in section EE 33/34, which took effect on 1 April 2005, and it was not in section EE 33/41, which took effect on 1 April 2008 (section EE 4 1 is the ITA 2007’s version of section EE 33). What did paragraph (c) do? Who knows? Who cares? Well, companies amalgamated in non-qualifying amalgamations between 1 April 2005 and 1 April 2008 might be interested, since the paragraph applies to them. If they are interested, though, they will have to work out for themselves why it arrived, why it went, and what it meant; the taxpolicy website and the RAP’s website are keeping their own counsel.
Conclusion
Associated persons have given tax legislation a lot of trouble since 2003. Readers of the 2008 amendment should bear this in mind and bring their sharpest analytical skills to their study of the proposed new section YB 1 to YB 15 – headed “Associated persons” – in clause 414.
RAP-ing with the ITAs
[This article appears as I wrote it, rather than as it was published.]
The Rewrite Advisory Panel (RAP) was established to advise the rewriters of the Income Tax Act 1994 (ITA 94). The Income Tax Act 2004 (ITA 04) saw RAP becoming the arbiter on possible unintended legislative changes and the Income Tax Act 2007 (ITA 07) saw it becoming the overseer of the clarity of that Act (see rewriteadvisory.govt.nz).
Continuing the theme of How to confuse associated persons (NZLawyer 96 (2008) 24), this article analyses more RAP decisions.
Subsections DB 36(3) and (4) of ITA 04
Background
Sections DJ 22(1) and (2) of ITA 94 say (emphasis added)-
“(1) This section applies if a person corruptly gives a bribe to another person with intent to influence a public official to act, or fail to act, in his or her official capacity….
(2) This section applies even if the bribe was given outside New Zealand and it was, at the time it was given, an offence under the laws of the foreign country in which the principal office of the person, organisation or other body for whom the foreign public official is employed or otherwise provides services, is situated.”
Section DJ 22(2) became sections DB 36(3) and (4) of the ITA 04.
In 2005, RAP received a submission that subsections DB 36(3) and (4) made an unintended legislative change by applying the section to foreign officials outside, not inside, New Zealand. RAP agreed.
Discussion
RAP’s decision is incorrect. Only if section DJ 22(2) is ignored can section DJ 22 apply to foreign officials in New Zealand. Section DJ 22(2) can be accommodated, however, by reading it as providing that section DJ 22 applies to foreign officials if they are outside New Zealand and their countries criminalise bribery. The language “even if” reinforces this reading, because it emphasises that an act outside New Zealand is covered, as does “the foreign public official”, because “the” pinpoints the official encompassed in section DJ 22(1)’s “a public official”.
RAP’s decision is about what section DJ 22 should have said, not what it did in fact say. The resultant amendment means section DJ 22(2) is not reflected in the ITA 04 and ITA 07.
Subsection DU 12(3)(b) of ITA 04
Background
The Land and Income Tax Amendment Act (No 2) 1958 inserted this-
“the amount deductible … in any year … shall not exceed the smaller of the following…
(b) … the prescribed proportion of the… expenditure … at the end of that year” (section 153A(4)(b)).
In 1971, it became-
“(b) … the prescribed proportion of the aggregate amount theretofore incurred … in … expenditure at the end of that year” (section 153I(4)(b)).
In 1994, it became-
“(b ) The prescribed proportion of the aggregate amount incurred … in … expenditure before the end of that year“ (section DN 3(3)(b)).
In 2004, it became-
“(b) the prescribed proportion of all the … expenditure incurred …in the tax year” (section DU 12(3)(b)).
In 2008, RAP received a submission that subsection DU 12(3)(b) makes an unintended legislative change by saying “in”, not “before the end of”, the year. RAP agreed.
Discussion
RAP’s decision is correct. However, the amendment should not simply substitute “before the end of’”.
The history of amendments to section NG 1(2) of the ITA 04 is instructive. In 2005, RAP recommended restoring section NG 1(2)’s 1994 language. So the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 put “assessable income” into the subsection. But the concept of “assessable income” is not used in ITA 04. So the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006 took the words out again.
The history of amendments to section DU 12(3)(b) shows that relying on a preposition – whether “at”, “before”, or “in” – has not been satisfactory. Plain drafting requires that the proposed amendment use more words, for example, “whether in the tax year in which the amount is written off or in any previous tax year,”.
Section EE 21 of ITA 04 and ITA 07
Background
Section EG 11(1), item d, of the ITA 94 provides that the number of months relevant to the calculation of the depreciation loss of a pool of assets is the number of months in the taxpayer’s income year.
The Income Tax Bill exposure draft published by the Policy Advice Division of the Inland Revenue Department proposed this replacement for item d-
“the number of whole or part calendar months in the income year in which—
(a) the person owns the item; and
(b) the person uses the item or has it available for use for any purpose”
and explained “The use of calendar months in current section EG 11(1) can produce a year with 13 months if the taxpayer has a balance date that is not at the end of the month. The definition of ‘months’ [as above] removes this possibility” (Rewriting the Income Tax Act 1994: Exposure draft, Volume 2, Parts A to E, September 2001, Wellington, pages 491 to 492.)
Section EG 11(1), item d, rewritten as proposed, became sections EE 21(7) and (8) of ITA 04.
In 2008, RAP received a submission that the definition of ‘months’ in sections EE 21(7) and (8) made an unintended legislative change. RAP agreed.
Discussion
RAP’s decision is incorrect; the change was clearly intended (just not listed in schedule 22A of ITA 04). However, it appears RAP was not concerned about the problem of a 13-month year, but, rather, about the requirement to consider the use of each item in the pool.
RAP’s concern about considering individual items did not extend to section EE 22 of ITA 04 and ITA 07, although that section also deals with the effects of individual items on the pool. The proposed amendment, if done thoroughly, would make sections EE 21(7) and (8) and EE 22 into provisions about the whole pool without at the same time resuscitating the 13-month year possibility.
Section OB 1 of ITA 04 and section YA 1 of ITA 07
Background
The Income Tax Amendment Act (No 2) 1992 (ITAA 92) substituted a definition of “shares of the same class” punctuated like this-
“‘Shares of the same class’, in relation to shares of a company, means any 2 or more shares of the company where—
(a) …一
(iv)The appointment …; and
(b) …—
(iv) Distributions; and
(c) In the case of any shares of the company (in this paragraph referred to as the ”nominated shares”) …”
The Income Tax Amendment Act 1994 repealed paragraph (b)(ii) to (iv) and substituted one subparagraph, punctuated like this-
“(ii) Distributions …:”.
So paragraphs (a) and (b) were joined by “; and” and paragraphs (b) and (c) were joined by “:”. Mixed punctuation like this is a drafting error. The ITA 94 re-enacted the definition without correcting its punctuation. The ITA 04 did not rewrite the definitions in ITA 94 but did correct drafting errors.
The choice of punctuation for “shares of the same class” was determined by the definition in ITAA 92. That definition can be read as saying that any 2 or more shares of the company have to satisfy paragraphs (a) and (b) and (c). However, that reading cannot be right because paragraph (c) deals with a special category of shares. As paragraph (c) is a distinct category of shares, the logical interpretation is that each of paragraphs (a) and (b) is also a distinct category of shares. The explanation for the “; and” at the end of the paragraphs is that it qualifies the word “means”, ie, shares of the same class means (a) and means (b) and means (c).
Thus, the 1992 version provided for 3 categories of “shares of the same class”.
Normal legislative drafting links different meanings in a definition by “; and” or by “:”. The ITA 04, which was drafted normally, chose “:”, as follows-
“shares of the same class means—
(a) …一
(iv) the appointment…:
(b) …—
(ii) distributions …:
(c) any 2 or more shares of a company (nominated shares)…”.
In 2005, RAP received this submission:
“An unintended change arises in respect of the definition of ‘shares of the same class’ in section OB1 of the Income Tax Act 2004.
The key difference between the two definitions [ITA 94 and ITA 04] is that the 2004 Act omits “; and” which links paragraphs (a) and (b) of the definition (at the end of subparagraph (a)(iv)), replacing it with a colon.
This has the effect of treating paragraphs (a) and (b) as alternatives, given that a colon is intended to be interpreted as meaning neither ‘and’ nor ‘or’, and is used to indicate that either alternative, or both, may apply (see Tax Information Bulletin Vol.17, No. 1 (February 2005) at page 89, and the report of the Finance and Expenditure Committee on the Taxation (Annual Rates, Venture Capital and Miscellaneous Provisions) Bill at pages 21-22).
Treating paragraphs (a) and (b) as alternatives has the effect of treating all shares with the same voting rights as ‘shares of the same class’. This would mean that, for example, different classes of non-voting preference shares which carry differing entitlements to distributions would now be treated as ‘shares of the same class’. This would have consequences for the operation of the conduit tax relief rules (section NH 7) and the exclusions to the definition of ‘dividends’ (section CD 14), among other parts of the Act. This is clearly an unintended departure from both the wording of and the policy and practice under the 1994 Act.”
RAP agreed. The Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 amended the definition by substituting 2 paragraphs joined by “:”. Thus the 2006 version made the 3 categories of the 1992/2004 versions into 2 categories.
The ITA 07 produced a new definition that has three paragraphs joined by “; and”. This makes the 2 categories of the 2006 version into one category.
In 2008, RAP received this submission:
“Incorrect use of drafting convention in the definition of shares of the same class.
Submitters interpretation under the new Act 2007: Two or more shares are ‘shares of the same class’ where paragraphs (a), (b) and (c) of that definition are met. This is indicated through the paragraphs being separated by “; and”.
Submitters interpretation under the Act 2004: Two or more shares are ‘shares of the same class’ where either paragraph (a) (being the equivalent of paragraphs (a) and (b) of the 2007 Act) or paragraph (b) (being the equivalent of paragraph (c) of the 2007 Act) is met. The two are alternatives, as indicated by the use of a colon to separate the paragraphs”.
RAP did not agree.
Discussion
It is a mystery how RAP managed to conclude in 2005 that an unintended legislative change had occurred and in 2008 that an unintended legislative change had not occurred. The issue was exactly the same in both submissions, ie, applying Inland Revenue’s (IRD) punctuation rules produces an unexpected result. IRD’s punctuation rules are, admittedly, unhelpful (see Alan Walker, “IRD’s punctuation passion” [2007] NZLJ 331). However, RAP’s approach of applying them sometimes and not others exacerbates the situation.
RAP’s focus on IRD’s punctuation rules has obscured the real issue: should there be 1, 2, or 3 categories in the definition of ‘shares of the same class’? The answer to that question must determine how the definition is amended.
Section YD 1(7) of ITA 07
Background
Part O of ITA 04 was not rewritten. Subsections OE 1 (1), (2), and (5) say-
“(1) Notwithstanding any other provision of this section, a person … is resident in New Zealand … if that person has a permanent place of abode in New Zealand, whether or not that person also has a permanent place of abode outside New Zealand.
(2) Where a person … is personally present in New Zealand…, that person shall be deemed to be resident in New Zealand…
(5) Notwithstanding any other provision of this section, a person … who is personally absent from New Zealand in the service … of the Government of New Zealand is deemed to be resident in New Zealand during that absence”.
Section OE 1 became section YD 1 of ITA 07. The relevant subsections read-
“(2) Despite anything else in this section, a person is a New Zealand resident if they have a permanent place of abode in New Zealand, even if they also have a permanent place of abode elsewhere.
(3) A person is a New Zealand resident if they are personally present in New Zealand …
(5) A person treated as a New Zealand resident only under subsection (3) stops being a New Zealand resident if they are personally absent from New Zealand …
(7) Despite subsection (5), a person who is personally absent from New Zealand in the service … of the New Zealand Government is treated as a New Zealand resident during the absence”.
In 2008, RAP received this submission-
“The circumstances where a Government servant not physically in NZ will be deemed to be physically in NZ for purposes of the presence test in the residence definition seems to have been narrowed”.
RAP did not agree.
Discussion
RAP’ decision is correct. However, RAP did not notice that subsection OE 1(7) narrows the permanent place of abode test for government servants overseas.
Sections OE 1(1) and (5), infelicitously, both start with ”Notwithstanding any other provision of this section”. Their message, though, is clear – government servants whose status as New Zealand residents arises from either the presence test or the permanent place of abode test remain New Zealand residents while serving overseas.
Section YD1(7) does not start with “Despite anything else in this section” but with “Despite subsection (5)”. Subsection (5) starts “A person treated as a New Zealand resident only under subsection (3)”. Subsection (3) is the presence test. The message is clear – government servants overseas are New Zealand residents only if their status arises from the presence test. Admittedly, the permanent place of abode test in section YD 1(2) begins “Despite anything else in this section” but, given the clear opening words of section YD 1(5) and (7), the section YD 1(2) language can mean only that the permanent place of abode test stands apart from the presence test.
Section YD 1 is harder to understand than section OE 1. RAP should monitor the clarity of ITA 07 more assiduously.
Fiddling with tax
The NZLawyer recently published two articles on income tax law: “How to confuse associated persons” (NZLawyer, Issue 96, 5 September 2008) and “RAP-ing with the ITAs” (NZLawyer, Issue 104, 23 January 2009). The articles introduced readers to the Rewrite Advisory Panel (the RAP)and raised questions about the adequacy of that body’s legal analysis. A further trawl through the RAP’s decisions has produced more decisions that raise doubts about the competence of this obscure group. However, there is also one decision that points the way ahead for the RAP.
Fiddling without effect
In 2006, the RAP received a submission that an unintended legislative change had been made in the definition of “land” in s OB 1 of the Income Tax Act 2004 (the 2004 Act). The RAP agreed with the submission. The officials’ report to the Finance and Expenditure select committee on the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, 17 September 2007, explained the issue in this way:
“In rewriting s CD 1(10) of the Income lax Act 1994, the placement of this rule in paragraph (a)(i) of the ‘land’ definition in s OB 1 of the Income Tax Act 2004 has the effect of unintentionally widening the ambit of amounts that are included as income under the land sale rules in ss CB 5 to CB 21. Section CB 5 should be amended retrospectively to ensure that the effect of s CD 1(10) of the [Income] Tax Act 1994 be restored to apply to the land sales provisions in ss CB 5 to CB 21 ….
The Panel considers that the rewrite of s CD 1(10) as paragraph (a)(i) of the definition of land in s OB 1 of the Income Tax Act 2004 has led to an uncertain result as the operative words of s CD 1(10) of the ITA 1994 are now incorporated into the definition of ‘land'”(pp 103, 104).”
This explanation says that defining the term “land” for the purposes of the sections in which it is used creates an uncertain result. The explanation is nonsense.
Section CD 1 of the Income Tax Act 1994 (the 1994 Act) dealt with profits or gains from land transactions. Section CD 1(10) read:
“(10) This section shall apply where the land sold or otherwise disposed of constitutes the whole or part of any land to which this section applies or the whole or part of any such land together with any other land.”
Section CD 1 became sections CB 5 to CB 21 of the 2004 Act, except for section CD 1(10), (12), and (13). Section CD 1(12) and (13) went into the definition of “dispose” in section OB 1 and section CD 1(10) went into the definition of “land” in section OB 1. Paragraph (a)(i) of the definition of “land” read:
“land,-
(a) in sections CB 5 to CB 21 (which relate to the disposal of land), … –
(i) means some or all of any land to which those sections apply or some or all of that land together with any other land.”
This makes perfect sense. The definition reflects the content of s CD 1(10) but says it once instead of saying it in each of sections CB 5 to CB 21. Clearly, there was no unintended legislative change.
However, the RAP had agreed with the submission that there had been an unintended legislative change so the definition of “land” could not stay as it was. Paragraph (a)(i) was removed and this section inserted in the 2004 Act:
“CB 5A. Land partially sold or sold with other land— Sections CB 5 to CB 21 apply to amounts derived from the disposal of land if the land—
(a) is part of the land to which the relevant section applies:
(b) is the whole of the land to which the relevant section applies:
(c) is disposed of together with other land.”
Section CB 5A(c) creates an uncertain result. It does not say whether it covers the disposal of part or the whole of the land together with other land. (Interestingly, the punctuation of the paragraphs is no help at all. The interest lies in the fact that the Inland Revenue Department (the IRD) is passionate about the punctuation of paragraphs, as explained in [2007] NZLJ 331.)
The IRD must have had a vague feeling that all was not well with section CB 5A because, when the Income Tax Act 2007 (the 2007 Act) was passed, two provisions were included:
“CB 6. Disposal: land acquired for purpose or with intention of disposal …
Land partially sold or sold with other land
(3) This section and sections CB 7 to CB 23 apply whether the land disposed of—
(a) is part only of the land to which the relevant section applies:
(b) is the whole of the land to which the relevant section applies:
(c) is the whole of the land to which the relevant section applies, together with other land.
CB 23B. Land partially sold or sold with other land 一 Sections CB 6 to CB 23 apply to amounts derived from the disposal of land if the land is—
(a) part of the land to which the relevant section applies:
(b) the whole of the land to which the relevant section applies:
(c) disposed of together with other land.”
Among several problems with these two provisions, it is noteworthy that sections CB 6(3)(c) and CB 23B(c), read together, create a very uncertain result.
The RAP’s achievement? A simple and workable definition has been replaced with two provisions, neither of which does the job properly or reflects the 1994 Act.
Second movement
In 2007, the RAP received a submission that an unintended legislative change had been made in the definition of “petroleum mining operations” in section OB 1 of the 2004 Act. The RAP agreed with the submission. The commentary on the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, dated May 2007, explained the issue in this way:
“The Rewrite Advisory Panel has identified that the 2004 Act, as originally enacted, contains an unintended change in legislative outcome when compared with corresponding provisions in the Income Tax Act 1994. The change identified is that the petroleum mining provisions do not apply to prospecting and exploration activities undertaken outside New Zealand by a petroleum miner.
The provisions affected are those that rely on the meaning of the defined term “petroleum mining operations”, which include ss CT 5, DT 15 (DK 2-1994 Act), DT 20, DZ 4 (seal and abandonment – 1994 Act), DZ 5, DZ 7, EJ 16, EZ 3(2), GC 12(3), IH 3(2), OB 1 – definition of “removal or restoration operations”, and OB 1 – definition of “seal and abandonment” (p 95).
This explanation says that certain provisions of the 1994 Act applied to prospecting and exploration activities undertaken outside New Zealand by a petroleum miner because the provisions used the term “petroleum mining operations”. The explanation is nonsense.
The provisions applied to prospecting and exploration activities undertaken outside New Zealand by a petroleum miner because section DM 7(1) of the 1994 Act said they did (unlike section DK 2 of the 1994 Act which did not deal with petroleum miners but with persons associated with petroleum miners), not because they used the term “petroleum mining operations”. The subsection read:
“DM 7. Petroleum mining operations carried on outside New Zealand — (1) Sections CJ 3 to CJ 7, DM 1 to DM 10, IH 3, and GC 12 of this Act, and sections 65 and 91 of the Tax Administration Act 1994, shall apply with any necessary modifications in the case of any petroleum miner carrying on outside New Zealand through a branch, or through a controlled foreign company, petroleum mining operations of substantially the same nature as the activities governed by those sections.”
Section DM 7(1) of the 1994 Act was carried through into the 2004 Act in sections CT 5, DT 20, and EJ 16, all of which were headed “Petroleum mining operations outside New Zealand”. In accordance with the scheme of the 2004 Act, section CT 5 dealt with the income, section DT 20 dealt with the deduction, and section EJ 16 dealt with the timing of the deduction. The three sections clearly show that the 2004 Act did not make an unintended legislative change.
However, the RAP had agreed with the submission that there had been an unintended legislative change so the definition of “petroleum mining operations” could not stay as it was. This is what the law was:
“CT 6. Meaning of petroleum miner
Meaning
(1) Petroleum miner means a person who undertakes an activity described in subsection (3) in a permit area for which the person has a petroleum permit.
…
Activities: inclusions
(3) The activities are those carried out in connection with-
(a) prospecting or exploring for petroleum:
(b) developing a permit area for producing petroleum:
(c) producing petroleum…,
OB 1. Definitions
petroleum mining operations—
(a) means any of the following activities:
(i) developing a permit area for producing petroleum：
(ii) producing petroleum …”.
This was changed to：
“CT 6. Meaning of petroleum miner
Meaning
⑴ Petroleum miner, for a permit area, means a person who undertakes petroleum mining operations in the permit area.
….
CT 6B. Meaning of petroleum mining operations
Meaning
(1) Petroleum mining operations means an activity included in the activities described in subsection (2)….
Activities: inclusions
(2) The activities are those carried out in connection with-
(a) prospecting or exploring for petroleum:
(b) developing a permit area for producing petroleum:
(c) producing petroleum….
OB 1. Definitions
petroleum mining operations is defined in section CT 6B (Meaning of petroleum mining operations)”.
Three points need to be made about these amendments.
First, all they achieve is the movement of the idea of “activities carried out in connection with prospecting or exploring for petroleum” from the definition of “petroleum miner” into the definition of “petroleum mining operations”. They are elaborate amendments to achieve such a tiny result.
Second, they mean that the 2004 Act no longer reflects the 1994 Act. The 1994 Act was completely clear that the idea of “activities carried out in connection with prospecting or exploring for petroleum” belonged in the definition of “petroleum miner”. Its definition of “petroleum mining operations” provided:
“(b) In the definition[s] of … “petroleum miner”,… means all activities carried out in connection with prospecting or exploring for petroleum”.
Third, they effect no legal change. Every provision of the 2004 Act that uses the term “petroleum mining operations” also uses the term “petroleum miner” (in s DZ 5(4), the link to a petroleum miner is made through the definition of “farm- out arrangement”) so it is immaterial whether the idea of “activities carried out in connection with prospecting or exploring for petroleum” is in one defined term or the other.
The RAP’s achievement? A lot of tinkering that had no effect except to stop the 2004 Act from continuing to reflect the 1994 Act.
Coda
In 2007, the RAP received a submission saying that:
“Section CW 35 of the 2004 Act and s CB 4(l)(e) of the 1994 Act result in a different tax treatment for charitable trusts, societies or organisations that carry on business. For business income to be exempt, the 2004 Act requires that the trust carries out its charitable purposes in New Zealand, whereas the 1994 Act requires only that the income of the business is for charitable purposes in New Zealand”.
The RAP could not decide whether there had been an unintended legislative change or not. Its decision was “Referred to PAD [the Policy Advice Division of the IRD] for remedial legislation to ensure consistency”.
It was clear that no remedial legislation was necessary. Section CB 4(l)(e), first proviso, of the 1994 Act exempted from income tax the income of a business carried out by a society established exclusively for charitable purposes to the extent to which the purposes were carried out in New Zealand. The proviso was rewritten as section CW 35(l)(a) of the 2004 Act. Since no remedial legislation was necessary, none has been passed; section CW 35(l)(a) of the 2004 Act is now section CW 42(l)(a) of the 2007 Act.
This decision points the way forward for the RAP: don’t decide anything.
RAP on RAP: marching to a different beat?
The Rewrite Advisory Panel (RAP) was established to advise the 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 http://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 the 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 Act 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 them but subsequently the market for that particular product collapses and the product becomes valueless.
Under the 1994 Act definition, a property is a 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 is 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 section DB 17 of the 2004 Act or section DB 23 of the 2007 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 these committees could have amended the definition of revenue account property in the manner recommended by the RAP if the IRD had recommended that it do 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 GD 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? Somehow, I doubt it.
The sequel
As noted above, 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” and its decision was that the “Income Tax Act 2004 and Income Tax Act 2007 be amended retrospectively”.
The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 amended the definition. If an unintended legislative change had arisen, the amendment should have been a return of the language of the definition of “revenue account property” to that in the 1994 Act. However, that is not what was done. Instead, a completely new approach was taken.
That brings to 3 the number of definitions of “revenue account property” that have been tried since 1994, ie,-
“property in respect of which any amount derived on disposition would be gross income of the person” (ITA 1994)
“property that would produce income for the person if they disposed of it” (original ITAs 2004 and 2007)
“[property that] if disposed of for valuable consideration, would produce income for the person (current ITAs 2004 and 2007).
Each of them has exactly the same effect and none of them deals with what, it turns out, was bothering the RAP.
According to the IRD’s commentary on the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill, the latest language clarifies the definition “to ensure that that if ‘revenue account property’ becomes valueless, it does not cease to be revenue account property. This amendment ensures that the cost of revenue account property that becomes valueless may still be deductible under the general permission and allocated to the appropriate income year under section EA 1 (Trading stock) or section EA 2 (Other revenue account property)”.
Also according to the commentary, the RAP “considered the drafting of the definition of ‘revenue account property’ in the 2004 and 2007 Acts could be read as requiring … that property that becomes valueless, despite initially coming within the meaning of ‘revenue account property’, would no longer be ‘revenue account property’. The Panel was concerned that the cost of the property might then not be deductible as a result of the property’s loss in value.”
Each of the 3 sets of language says, in essence, “it’s revenue account property if you’ll get money for it when you sell it”. The RAP was presumably happy with the opposite being true, ie,”it’s not revenue account property if you won’t get money for it when you sell it”. What was bothering it was “it’s no longer revenue account property because now you won’t get money for it when you sell it”.
This must be an issue that runs throughout the ITA: a definition brings some things in, which means that other things are out. If the “out” things change, the change might make the things into “in” things. The “revenue account property” definition is just one example of this process. The ITA cannot deal with each example separately – it needs a rule that applies across the board.
Fortunately, there is such a rule. It is called the general permission for deductions and it is in section DA 1(1). It reads “A person is allowed a deduction for an amount of expenditure … to the extent to which the expenditure … is … incurred by them in deriving their assessable income”. In other words, “if you spend money to get property and you get money when you sell the property, you get a deduction for the part of its cost that got you the money; if you spend money to get property and you don’t get money when you sell the property, you don’t get a deduction for the part of its cost that did not get you money”.
The IRD needs to stop fiddling with the “revenue account property” definition and to look first to the ITA’s basic rules to solve issues.
Even though the 2009 amendment did not restore the ITA 1994’s language, thus signalling that there had not been an unintended legislative change, the amendment was applied from the beginning of the 2005-06 years exactly as if there had been one. This is such a blatant illogicality that nothing can be said about it.
The Wills Act 2007: The First Year
The Wills Act 2007 commenced on 1 November 2007, replacing the Wills Act 1837 (UK). The High Court Amendment (Wills Act 2007) Rules 2007 (the 2007 rules) updated the wills rules and forms in the High Court Rules (HCR). The 2007 rules were necessary because convention prevents HCR amendments being included in bills. A legislative package cannot consist of Act amendments and the necessary consequential HCR amendments. For wills matters at least, this approach should be revisited.
Plain language
The Wills Act 2007 (the 2007 Act) and the new rules and forms use plain language. Plain language does not always please practitioners; the word “overrides” in section 8(6), for example, greatly puzzled one senior partner. However, Dobbie’s Probate and Administration Practice (LexisNexis, Fifth edition, 2008) welcomes the language, saying, “Non-lawyers, presented with an [old form] affidavit in convoluted and archaic language, could be excused for wondering whether they had stepped through a time portal back to a time before the 1914-18 War (The First World War). It is surely not too much for clients to expect to be able to read and understand important documents such as affidavits given to them for signing.”
Section 11(3)
Section 11(3) of the 2007 Act reads:
“(3) The will-maker must –
(a) sign the document; or
(b) acknowledge that a person directed by the will-maker signed the document in the will-maker’s presence.”
Critics say section 9 of the Wills Act 1837 (UK) (the 1837 Act) allows the will-maker to acknowledge a signature already on the will as the will-maker’s, but section 11(3) does not. Analysis of the former statutory language, in section 9 and old Form 62, and the common law produces different answers to the question of what was allowed.
Section 9 says a will “shall be signed at the foot or end thereof by the testator, or by some other person in his presence and by his direction; and such signature shall be made or acknowledged by the testator in the presence of [two] or more witnesses”.
The words “shall be signed at the foot or end thereof by the testator, or by some other person in his presence and by his direction” show that the section concerns two situations: where the will-maker signs the will, or another person signs the will as directed by the will-maker. The words “such signature shall be made … by the testator” mean that the will-maker may sign the will. The words “such signature shall be … acknowledged by the testator” mean that the will-maker may acknowledge the other person’s signature. But must the words also mean that the will-maker may acknowledge the will-maker’s own signature?
To interpret the words that way turns the two situations of the will-maker signing the will or another person signing the will into three situations: the will-maker signing the will, the will-maker acknowledging the other person’s signature, and the will-maker acknowledging the will-maker’s own signature. A more obvious interpretation is that the two situations of the first part of the sentence stay two situations in the second part, allowing the will-maker only to sign the will or to acknowledge the other person’s signature.
The language of old Form 62 (the affidavit of due execution) recognises only one means of proper execution, ie the will-maker signing the will. It does not recognise the will-maker acknowledging another person’s signature or the will-maker acknowledging the will-maker’s own signature.
English common law established that a will is properly executed if a will-maker acknowledges a signature already on the will as the will-maker’s. New Zealand common law followed (Re Campbell (1895) 13 NZLR 340). The cases show that the situation of a will- maker acknowledging an existing signature arises in a great variety of circumstances.
On the question of whether a will is properly executed by the will-maker acknowledging a signature already on the will as the will-maker’s, the former statutory language does not give a clear answer; the common law says “yes”, and section 11(3) of the 2007 Act says “no”. Is it such a bad thing that section 11(3) says no? There are reasons for saying that the subsection is fine as it is.
First, most people in New Zealand are literate enough now to understand an instruction not to sign a will until they are in the presence of their witnesses.
Second, the risks of coercion and fraud are greatly reduced if proper execution does not include a will-maker acknowledging a signature already on a will as his or hers. Our burgeoning population of elderly people living in retirement villages or alone in their own homes deserves as much protection as possible from these risks.
Finally, section 14 of the 2007 Act gives the High Court a new power to declare a will valid even if it was not properly executed. The great variety of circumstances for which the common law developed the rule that proper execution includes a will-maker acknowledging a signature already on the will as the will-maker’s can now be considered under section 14.
If these reasons are ignored and section 11(3) is amended, old Form 62 and new Form 62 (Affidavit of valid execution) will need amendment also (preferably in the amending bill).
Section 11(4)(b)
Section 11(4)(b) reads –
“(4) At least 2 witnesses must – …
(b) each state on the document, in the will-maker’s presence, that the witness was present when the will-maker complied with subsection (3)…”
Critics say section 9 of the 1837 Act does not require the witnesses to state on the document, in the will-maker’s presence, that they were present when the will-maker signed the will or acknowledged a signature on the will. Again, the statutory language and the common law have diverged.
Section 9 says the witnesses “shall attest and shall subscribe the will in the presence of the testator, but no form of attestation shall be necessary”.
Section 9 says the witnesses must bear witness to (“attest”), and sign (“subscribe”), the will in the will-maker’s presence. The section then says “no form of attestation shall be necessary”. Since the witnesses must in fact attest the will, the words mean that the attestation does not have to take a particular form.
The common law has interpreted section 9 as saying that a will is valid even if no statement about the witnesses’ attestation appears on the document.
Is it such a bad thing if section 11(4)(b) explicitly requires a will’s witnesses to state on the document, in the will-maker’s presence, that they were present when the will-maker signed the will or acknowledged a signature on the will? Section 11(4)(b) does not require that the statement take a particular form, but a model is available in Practice Note (1969) NZLR 1075. For the cases in which section 11(4)(b) is not observed, section 14 is available.
Section 13
Section 13 concerns witnesses affected by dispositions made to them.
The Law Commission recommended in its 2002 report, Some Problems in the Law of Trusts, that “we should stop pretending that charging provisions in wills are legacies” (NZLCR 79, 2002, paragraph 19). The New Zealand Law Society made the same point in its submission on clause 13 of the Wills Bill.
The Select Committee did not recommend a change to the bill, and the Supplementary Order Paper on the bill did not include the change. Instead, the Trustee Amendment Bill introduced in September 2007 amended section 13. The Trustee Amendment Bill had not been passed when Parliament was dissolved in October 2008.
This noncontroversial change to the law could have been made while the Wills Bill was before Parliament. It is to be hoped that it will be made eventually.
Section 15
The language of section 21 of the 1837 Act does not allow changes to a will to be made in a document separate from the will itself.
Section 15 rewrites section 21. Because section 21 does not allow changes to a will to be made in a separate document, section 15 does not either. However, the old forms were applied as if section 21 did allow changes to a will to be made in a separate document. This came about because of the reference to codicils in old Form 51 (Affidavit to lead grant of probate) and old Form 52 (Affidavit to lead grant of letters of administration with will annexed). A codicil means a document that supplements a will. Supplementary documents that changed wills were accepted as making valid changes.
Section 15 does not reflect a practice that the old forms recognised. The only way to deal with this situation in the new forms was to ignore section 15 and recognise the practice. Accordingly, new Forms 51 and 52 say, “There is a separate document associated with the will. I/We* believe the document dated [date] and marked ‘[specify]’ now produced and shown to me/us* is the separate document.”
Section 15 should be amended to give a statutory basis for the paragraph in the forms by the insertion of the following paragraph:
“(ba) the change is described in a document –
(i) associated with the will; and
(ii) signed and witnessed as described in section 11(3) and (4)…”.
It is to be hoped that this straightforward amendment will be made. At the same time, the word “codicil” should be removed from the 2007 Act to avoid any further confusion. The reference in section 8(3)(e) can be replaced by “a document that supplements a will” and the reference in section 17(1)(b) can be replaced by “writes a document”.
Section 18(2)(a)
Section 18(2) lists the provisions that override or qualify the rule that a will is revoked by a subsequent marriage or civil union. The subsection is sensible in itself, but it is odd that section 18(2)(a) has to refer back to section 10 (persons under 18 who agree to marry or enter civil union). Section 10 is about both the capacity to make a will and the effect on a will of entering a marriage or civil union. It should be split up, with the capacity elements being included in section 9 and the effect elements being included in section 18. All three paragraphs of section 18(2) could then refer forward. It is to be hoped that this simple drafting amendment will be made.
Section 32
Section 32 is new. It allows the Court to use external evidence to interpret words in a will that make the will or part of it meaningless, ambiguous, or uncertain. The section was applied in Glass v Anthony (9 July 2008, High Court, Christchurch CIV 2008-409-000455, Justice Fogarty). Counsel submitted that the section “possibly extends the case law”. The decision contains no information on the way in which the section may extend the case law. In any event, the Court had no difficulty in applying the section to the facts of the case.
Section 33
Section 33 defines a military or seagoing person as –
“(a) a member of the Armed Forces –
(i) on operational service; or
(ii) at sea; or
(b) a seafarer at sea…”.
Section 4(b) of the Wills Amendment Act 1955 describes the equivalent persons as:
“(i) A member of any emergency force; or
(ii) A member of any part of the New Zealand armed forces, or of any Commonwealth or Allied armed force, who is serving in operations against an enemy; or
(iii) A member of any armed force who is in actual military service or who is so circumstanced that if he were a soldier he would be in actual military service; or
(iv) A mariner or seaman who is at sea…”.
The law permits these persons to make wills that are acceptable even though they do not comply with the statutory formalities.
Section 4(b) allows two groups to make informal wills. One group – subparagraphs (i) to (iii) – is armed forces personnel when war or other military operations are imminent, and the other group – subparagraph (iv) – is naval forces, the merchant service, and civilians employed at sea (Nevill”s Laws of Trusts, Wills and Administration, ninth edition, 2004, page 316). The 2007 Act extends the first group. Members of the Army or Air Force for whom no war or other military operations are imminent but who are travelling by sea may now make informal wills.
While this extension does no harm, it does raise questions. If Army or Air Force personnel can make informal wills just because they are at sea, what about customs, fisheries, immigration, and police officers who spend periods at sea in the course of their duties – should they not also be allowed to make informal wills? Where should the line be drawn?
Conclusion
The 2007 Act, with some minor amendments, should last until developments in communications technology force some rethinking about the formalities of will-making.
Sequel
In fact, none of the minor amendments recommended in this article were made. Instead, in 2012, the completely unnecessary amendments described in the next article were made. And, in 2013, this amendment was made to the section 40A inserted in 2012-
“Section 40A amended (Application of Wills (Validity) Amendment Act 2012)
In the heading to section 40A, delete ‘(Validity)
‘.”
(Wills Amendment Act 2013 No 138).
Since the drafter of the 2012 amendments could not get right the name of the bill he was drafting, one has to question the quality of the amendments to the Wills Act 2007 that he drafted.
One such amendment was the replacement of section 11(4)(b) with section 11(5) and (6). Section 11(4)(b) read-
“(4) At least 2 witnesses must – …
(b) each state on the document, in the will-maker’s presence, that the witness was present when the will-maker complied with subsection (3)…”.
Section 11(5) and (6) read-
“As evidence of compliance with subsection (4), at least 2 witnesses may each state on the document, in the will-maker’s presence, the following:
(a) that he or she was present with the other witnesses when the will-maker—
(i) signed the document; or
(ii) acknowledged that he or she signed the document earlier and that the signature on the document is his or her own; or
(iii) directed another person whose signature appears on the document to sign the document on his or her behalf in his or her presence; or
(iv) acknowledged that another person directed by him or her signed the document earlier on his or her behalf in his or her presence; and
(b) that he or she signed the document in the will-maker’s presence.
(6) No particular form of words is required for the purposes of subsection (5)”.
Section 11(5) and (6) were included because of the squawks of practising and academic lawyers who were outraged that section 11(4)(b) carried forward the requirement in section 9 of the Wills Act 1837 that a will must be attested. However, instead of simply removing the requirement for a will to be attested, the drafter included 2 pointless subsections of non-law. Subsection (5) tells people that the may do what they like and subsection (6) tells people that, when they are doing what they like, they can use any words to do it.
These 2 pieces of information have no place in a statute. All they achieve is confusion. Eight years after the Wills Amendment Act 2012, a case before the High Court involved applicants who went to court because they thought that “may” in section 11(5) might mean “must” (Estate of Andrew William Day (Lowe v Day) [2020] NZHC 2101 [19 August 2020]. One has to wonder if the squawkers are proud of getting confusing non-law onto the statute book.
Statutes Amendment Bill hides gold-digger’s charter
The Statutes Amendment Bill (SAB) that is currently before the Government Administration select committee amends section 11 of the Wills Act 2007 by replacing this –
“(3) The will-maker must –
(a) sign the document; or
(b) acknowledge that a person directed by the will-maker signed the document in the will-maker’s presence.
(4) At least 2 witnesses must –
(a) be together in the will-maker’s presence when the will-maker complies with subsection (3); and
(b) each state on the document, in the will-maker’s presence, that the witness was present when the will-maker complied with subsection (3); and
(c) each sign the document in the will-maker’s presence.”
(existing section 11)
with this –
“(3) The will-maker must –
(a) sign the document; or
(b) direct another person to sign the document on his or her behalf in his or her presence.
(4) At least 2 witnesses must –
(a) be together in the will-maker’s presence when the will-maker –
(i) complies with subsection (3); or
(ii) acknowledges that –
(A) he or she signed the document earlier and that the signature on the document in his or her own; or
(B) another person directed by him or her signed the document earlier on his or her behalf in his or her presence; and
(b) each sign the document in the will-maker’s presence.”
(proposed section 11).
The amendment is in clause 196(1), which is in Part 47 of the SAB.
There are objections to this amendment that the select committee will not be told about. This article records the objections.
Background
The Wills Act 2007 (2007 Act) came into force on 1 November 2007. It replaced the statute that previously governed will-making in New Zealand, the UK Wills Act 1837 (1837 Act).
The High Court Rules (HCR) on wills were also amended. The amendments applied to persons who died on or after 1 November 2007. The un-amended rules continued to apply to persons who died before 1 November 2007. The HCR were completely replaced on 1 February 2009, which means that the new rules on wills have different numbers. In this article, the HCR on wills are referred to as the “old rules” (rules as on 31 October 2007), the “new rules” (rules as on and after 1 November 2007), and the “2009 rules” (rules as on and after 1 February 2009).
Purpose of section 11
The purpose of section 11 of the 2007 Act is to repeat the elements of section 9 of the 1837 Act. Section 9 reads –
“No will shall be valid unless it shall be in writing, and executed in manner hereinafter mentioned; (that is to say), it shall be signed at the foot or end thereof by the testator, or by some other person in his presence and by his direction; and such signature shall be made or acknowledged by the testator in the presence of 2 or more witnesses present at the same time, and such witnesses shall attest and shall subscribe the will in the presence of the testator, but no form of attestation shall be necessary.”
Proposed section 11(4)(a)(ii)(A)
Proposed section 11(4)(a)(ii)(A) is not found in section 9.
Section 9 deals first with signing a will. It says that the will “shall be signed…by the testator, or by some other person in his presence and by his direction”. These words establish that the section concerns 2 situations – the will-maker signs the will or another person signs the will as directed by the will-maker. The section goes on to deal with witnessing. It says “such signature shall be made … by the testator in the presence of …witnesses”, referring to the will- maker signing the will, and “such signature shall be … acknowledged by the testator in the presence of … witnesses”, referring to the will-maker acknowledging the other person’s signature in the presence of witnesses.
However, English judges decided in the nineteenth century that section 9 allowed a will- maker to acknowledge in the presence of witnesses a signature already on the will as his or hers. The judges turned the 2 situations in the first part of the sentence – the will-maker signing or directing signature – into 3 situations in the second part of the sentence – the will- maker signing, the will-maker acknowledging the directed signature, and the will-maker acknowledging a signature as his or hers.
Nineteenth century New Zealand courts followed the English ones (In the will of Campbell (1895) 13 NZLR 340).
The New Zealand government signalled in 1909 that the proper interpretation of section 9 was that the will-maker must, in the presence of witnesses, sign the will either personally or by acknowledging another person’s signing on the will-maker’s behalf. It did this by way of an amendment to the Code of Civil Procedure in the Judicature Act 1908. The 1908 Code contained form 34, Affidavits before the Granting of Probate, which did not require the deponent to swear anything about how the will-maker signed the will. Form 34 was replaced in 1909. The new form 34 required the deponent to swear “That the testator executed the said will … by signing his name at the foot or end thereof in the presence of me and of … the other subscribed witness thereto, both of us being present at the same time, and we thereupon attested and subscribed the said will … in the presence of the said testator” (Gazette, 1909, p.647). Form 34 was eventually slightly modified to become form 62 of the old rules.
Proposed section 11(4)(a)(ii)(A) ignores the New Zealand government’s amendment in the twentieth century in favour of the approach of English judges in the nineteenth century. Reverting to the nineteenth century is a bad idea for twenty first century New Zealand.
It is bad because New Zealand currently has a burgeoning population of elderly people. Many of them live in retirement villages or alone in their own homes, under the influence – perhaps at the mercy – of caregivers and relatives. If a caregiver says “This is your signature, isn’t it, dear?”, some elderly people will automatically say “Yes”. Two other caregivers standing nearby can sign as witnesses – and the will is validly executed. Who is to know whether or not the caregiver put the signature there?
The will could be challenged on the ground that the elderly person did not have will-making capacity, but not enough is known about the mental abilities of the elderly to make it safe to rely on challenges to wills based on what the person understood at a particular point in time. The mental responsiveness of elderly people can vary from day-to-day and at different times of the day. Physical ailments that are common in elderly people, such as urinary tract infections and kidney failure, can affect their mental state.
The idea is just as bad for younger people. There is no need for them to be able to acknowledge a signature already on their will as theirs. Literacy levels are high enough in New Zealand in the twenty first century for will-makers to understand a written instruction that they must sign their wills in the presence of witnesses.
Finally, it is a bad idea to make incorrect judicial statutory interpretation into statute law. Legislation should restore Parliament’s original intention, if the common law has not corrected the misinterpretation in later cases.
Proposed section 11(4)(a)(ii)(B)
Proposed section 11(4)(a)(ii)(B) resolves an ambiguity in section 9 that is preserved in existing section 11. The ambiguity is whether a person signing at the direction of the will- maker must do so in the presence of the witnesses or may do so in the presence only of the will-maker.
One way to resolve the ambiguity is to require the will-maker to both direct the person to sign and acknowledge the signature in the presence of witnesses. This is the tenor of the changes to form 34 made in 1909.
The other way is to recognise, as a valid method of executing a will, a will-maker acknowledging in the presence of witnesses a signature on a will put there earlier by some other person. This is the way adopted by proposed section 11(4)(a)(ii)(B).
The way chosen to resolve the ambiguity makes life even easier for the caregivers and relatives of elderly people. They can simply say “You got me to sign this for you this morning, didn’t you, dear?” and, with the addition of a couple of signatures from bystanders who see the elderly person blink in reply, the person’s will is validly executed.
Existing section 11(4)(b)
Section 9 says that the witnesses must bear witness to (“attest”), and sign (“subscribe”), the will in the will-maker’s presence. The section then says that “no form of attestation shall be necessary”.
The English courts decided in the nineteenth century that section 9 meant that a will is valid even if no statement about the witnesses’ attestation appears on the document. Again, the New Zealand courts followed the English ones.
However, to reach this interpretation, the courts had to ignore the fact that the section says that the witnesses must attest the will; consequently, “no form of attestation shall be necessary” could only be a legislative instruction that the attestation did not have to take a particular form.
The 2007 Act restores Parliament’s intention by expressing the attestation requirement in section 114(4)(b).
Proposed section 11 drops the attestation requirement. Dropping the requirement ignores the interpretation that New Zealand courts in the twenty-first century have given to subsection (4)(b). In In the estate of Kenneth Stevenson, His Honour Justice MacKenzie said –
“…on applying s 11(4)(b), the Court should adopt a liberal approach to the requirement to state on the document the fact of presence. No particular form of words should be required. That approach is consistent with other decisions of this Court to which I have been referred. Particular forms of attestation clause were held to comply with s 11(4)(b), by Asher J in R Lincoln High Court AK CIV-2009-404-003402 17 July 2009 and by Allan J in Re Fry High Court NEL CIV-2009-442-298 21 September 2009. Both of these decisions reflect an approach which does not place emphasis on technicalities as to the wording of the attestation clause.” (HC NP CIV-2009-443-432 22 October 2009, paragraph 11).
Effect on HCR
Proposed section 11 is deemed to have come into force on 1 November 2007 (clause 169(2)). However, the new rules and the 2009 rules implement existing section 11 and the old rules implement section 9 as it is stated in existing section 11. Until the old rules, the new rules, and the 2009 rules are aligned retrospectively with proposed section 11, the rules and the section will be inconsistent.
The changes required are as follows –
632 (new)/27.2 (2009)
The language “signed … as described in section 11(3)” in the definition of “executed” will need amendment. This is because the only way there can be evidence that the will-maker actually signed the will or actually directed some other person to sign it is if the witnesses were present when either of these actions was done. There can be no evidence that the will-maker actually signed the will or actually directed some other person to sign it if the only thing the witnesses see or her is the will-maker acknowledging that he or she signed the will earlier or directed some other person to sign the will earlier.
647 (new) /27.17 (2009)
The language “evidence given under rule 646 satisfying the Court that the will complies with section 11(3)” will need amendment. The only persons who can give evidence under the rule are an attesting witness or a person present when the will was executed (664 (old)/646(2)(new)/27.16(2) (2009)). If the will was executed by the will-maker acknowledging that he or she signed the will earlier or directed some other person to sign the will earlier, the attesting witness or a person present cannot give evidence that the will-maker actually signed the will earlier or actually directed some other person to sign the will earlier.
Form 62 (old)/Form 62(new)/Form PR 12 (2009)
Paragraph 1 – the language “I am one of the witnesses to/I was present at the signing of” will need amendment. If the will is executed by the will-maker acknowledging that he or she signed the will earlier or directed some other person to sign the will earlier, the fact that a person was present at the signing is not relevant. The person has to be present when the will-maker acknowledges to other people that he or she signed the will earlier or directed some other person to sign the will earlier.
Paragraph 2 – new statements BA, BB, E, and F will be needed to cover the situations of the will-maker acknowledging that he or she signed the will earlier or directed some other person to sign the will earlier.
Paragraph 3 – the lead-in words will need to be amended to refer to the new statements in paragraphs 2 and 3.
New statements will be needed to cover the situations of the witnesses being present not at “The signing” but at “The acknowledging”.
The amendment that is needed
Proposed section 11(4)(a)(ii)(A) and (B) favour a statutory interpretation made by English judges in the nineteenth century over a decision made by the New Zealand government in the twentieth century. They expose elderly people to fraud or coercion, ignore the fact that New Zealand is a literate country, necessitate amendments to the HCR, and create inconsistency until the amendments are made.
The dropping of existing section 11(4)(b) favours a statutory interpretation made by nineteenth century English judges over decisions made by twenty first century New Zealand judges.
All this is undesirable and unnecessary. Our own High Court judges have told us that the amendment needed to the 2007 Act is to extend section 14 to wills made before 1 November 2007.
Section 14 reads-
14 High Court may declare will valid
(1) This section applies to a document that –
(a) appears to be a will; and
(b) does not comply with section 11; and
(c) came into existence in or out of New Zealand.
(2) The High Court may make an order declaring the document valid, if it is satisfied that
the document expresses the deceased person’s testamentary intentions.
(3) The Court may consider –
(a) the document; and
(b) evidence on the signing and witnessing of the document; and
(c) evidence on the deceased person’s testamentary intentions; and
(d) evidence of statements made by the deceased person.
The section was new in the 2007 Act. If the nineteenth century English judges had had a power like that in section 14 available to them, perhaps they would not have had to interpret section 9 of the 1837 Act in ways that do not accord with its language.
The problem with section 14 is that it does not apply to wills made before 1 November 2007. This is because section 40(2)(k) of the 2007 Act says it does not.
[Section 40(2)(k) should not have been in the Act as passed. However, Ministry of Justice officials SL and PK refused to take the law drafter’s advice to remove it. The drafter told SL that the Supplementary Order Paper on the Wills Bill should omit clause 40(2)(k). Her reply was “PK says no” and so the paragraph stayed. This example of officials’ intransigence is sufficient to illustrate why legislation is sometimes not fit for purpose.]
Section 40(2)(k) should be repealed, which is, in fact, what twenty-first century New Zealand judges have asked for. In In the estate of Kenneth Stevenson, His Honour Justice MacKenzie said –
“I note that both Asher J in Re Lincoln and Allan J in Re Fry have drawn attention to the inability of the Court to declare valid a will executed prior to November 2007, to which I have also referred. Both have expressed the view that there is an apparently unintended gap which requires legislative attention. I join with them in that expression of view.” (paragraph 16)
Sequel
The suggested amendments to the High Court Rules were not made. In September 2020, I sent the following email to the Ministry of Justice-
I wish to make 2 points about Form PR 12, Affidavit of valid execution, of the High Court Rules 2016 (LI 2016/225).
My first point concerns the words “I am one of the witnesses to/I was present at the signing of* the last will” in paragraph 1.
These words do not cover the position of a person who was neither a witness nor present at the signing but was present at the acknowledging referred to in paragraph 2, Statements C and D, and paragraph 3, Statement C.
With the statements set out side by side, as below, and the relevant words bolded, it is clear that a person who was neither a witness nor present at the signing is supposed to be able to make an affidavit of valid execution.
| Paragraph 2 | Paragraph 3 |
| Statement C On [date], the deceased acknowledged that he/she* had earlier signed the will by signing his/her* name as it now appears on the will, intending the signing to be a valid signing of the will. | Statement C The acknowledging referred to in paragraph 2 was completed in my presence and in the presence of [full name, place of residence, and occupation of other witness, or both witnesses if you are not a witness] and both of us/they* then signed the will as witnesses in the presence of the deceased. |
| Statement D On [date], the deceased acknowledged that he/she* had earlier directed another person to sign the will on his/her* behalf in his/her* presence, intending the signing of that person’s name as it now appears on the will to be a valid signing of the will. | Statement C The acknowledging referred to in paragraph 2 was completed in my presence and in the presence of [full name, place of residence, and occupation of other witness, or both witnesses if you are not a witness] and both of us/they* then signed the will as witnesses in the presence of the deceased. |
The relevant words in paragraph 1 should be amended to say “I am one of the witnesses to/I was present at the signing of/I was present at the acknowledging of a signature on* the last will”
My second point concerns the words “Before the deceased signed the will” in paragraph 5, a paragraph that is included only if it must be proved that the deceased knew the contents of the will.
The essence of the paragraph reads “Before the deceased signed the will …, I read … the will … to the deceased and the deceased seemed to understand it thoroughly/seemed to have full knowledge of its contents”.
The words “Before the deceased signed the will” do not cover the case of a deceased who did not sign the will. This occurs if the deceased directed another person to sign the will on his or her behalf.
While the words do cover the case of a deceased who signed a will and later acknowledged the signature, it seems to me that the reading in such a case should occur before the will-maker’s acknowledgement of the signature. Since anything could have happened when the will was signed – forgery, duress, the will-maker being asleep – the will-maker’s interests can be protected only when he or she acknowledges the signature. It is, therefore, vital that the affidavit focus on whether the will was read to the will-maker before he or she acknowledged a pre-existing signature.
The relevant words in paragraph 5 should be amended to say “Before the deceased signed the will/separate document*/Before the deceased directed another person to sign the will/separate document*/Before the deceased acknowledged a signature on the will/separate document*”.
Margaret's musings 