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Income Tax Bill (Consistent) (Sections 14, 19) [2006] NZBORARp 48 (25 October 2006)
Last Updated: 13 January 2019
Income Tax Bill 25 October 2006 Attorney-General
LEGAL ADVICE
CONSISTENCY WITH THE NEW ZEALAND BILL OF RIGHTS ACT
1990: INCOME TAX BILL
- We
have considered the Income Tax Bill ('the Bill') for consistency with the New
Zealand Bill of Rights Act 1990 ('the Bill of Rights
Act'). We understand that
the Bill is to be considered by the Cabinet Legislation Committee at its meeting
on Thursday, 26 October
2006.
- We
have concluded that the Bill appears to be consistent with the rights and
freedoms affirmed in the Bill of Rights Act. In reaching
this conclusion we have
considered possible inconsistencies with sections 19 (freedom from
discrimination) and 14 (freedom of expression)
of the Bill of Rights Act.
PURPOSE OF THE BILL
- The
Bill repeals and replaces the Income Tax Act 2004 which provides the overarching
framework for the collection of income tax in
New Zealand. It sets out rules for
calculating tax obligations and for satisfying the obligations imposed. The
Income Tax Act 2004
involved a rewrite of Parts A to E and Y with the remaining
Parts of that Act being a consolidation of the Income Tax Act 1994. The
Bill
consolidates Parts A to E and Y of the Income Tax Act 2004 and rewrites the
remaining Parts.
SUMMARY OF ADVICE
- We
have considered the Bill for consistency with section 19(1) of the Bill of
Rights Act because of possible discrimination on the
basis of marital status,
family status, employment status and age.
- The
Bill provides exceptions to ensure that people in a relationship are not
penalised because of their financial dependence on each
other, as well as
restrictions preventing them from gaining an inequitable tax advantage. For the
same reason, the Bill applies various
restrictions to financial arrangements
with close relatives in some cases. We have examined whether these measures give
rise to an
issue of discrimination on the basis of family status. It is arguable
whether any disadvantage is created but, if so, it appears
to be justifiable
under section 5 of the Bill of Rights Act because it is necessary to create a
fair and equitable tax regime.
- We
have considered whether the family assistance scheme set out in Part M of the
Bill discriminates against people who do not have
responsibility for caring for
children or who have responsibility for caring for other kinds of dependents.
The objective of the
family assistance scheme is to address this disparity and
also improve the living standards of families. People without dependent
children
may be eligible for other kinds of assistance.
We therefore consider
that the family assistance scheme is unlikely to give rise to disadvantage and
that, if there was disadvantage,
it would be a justifiable limit on the
right.
- Clause
MC6(b)(i) of the Bill excludes a person on an income-tested benefit from
receiving a family assistance credit. Families receiving
an income-tested
benefit are treated differently from those receiving family assistance credits
in that they receive a different
form of government assistance. Nevertheless, in
most cases, the level of assistance received by families on an income-tested
benefit
is greater than the amount they would receive through a family
assistance credit. For this reason, it can be argued that clause MC6
does not
create any disadvantage. If disadvantage did arise, this would be justified as
the purpose of the provision is to provide
assistance to families that do not
already receive substantial government assistance. The non-payment of family
assistance credits
to families that already receive substantial government
assistance reflects the economic constraints on government.
- The
Bill draws some distinctions between individuals on the basis of age. In
particular, clause LC3 of the Bill exempts from income
tax the earnings of some
children to a maximum of
$2,340 a year. These allowances are
intended to offer modest support to children who have either left school or who
are about to leave
school. Also, clause GB24(2) sets out when a contract between
relatives may be treated as genuine for the purposes of clause GB23
(which deals
with excessive remuneration). Clause GB24(2)(c) includes as one of the criteria
that each party to the contract is 20
years or older. The purpose of section
GB24(2)(c) is to ensure that a person under 20 is not used to stream excessive
remuneration
out of an entity in order to gain a tax advantage. Young people
could be more easily persuaded by a family member to participate
in an income
streaming tax avoidance scheme and are also most likely to be targeted because
of their lower incomes. For these reason
we have concluded that the age limits
in clauses LC3 and GB24(2) can be justified under section 5 of the Bill of
Rights Act.
- For
completeness, we have also considered whether provisions of the Bill requiring
parties to supply information to the Commissioner
of Inland Revenue infringe
upon the freedom of expression affirmed in section 14 of the Bill of Rights Act.
It is arguable whether
such information is truly "expressive" and, in any case,
such a provision is clearly justifiable as it is necessary for the proper
administration of the tax system.
SECTION 19(1) OF THE BILL OF RIGHTS ACT
- Section
19(1) of the Bill of Rights Act states:
Everyone has the right to freedom from discrimination on the grounds of
discrimination in the Human Rights Act 1993.
- The
key questions in assessing whether discrimination under section 19 exists
are:
- does
the legislation draw a distinction based on one of the prohibited grounds of
discrimination; and
- does
the distinction involve disadvantage to one or more classes of individuals?
- If
these questions are answered in the affirmative, we regard the legislation as
giving rise to a prima facie issue of "discrimination" under section 19
of the Bill of Rights Act. Where a provision is found to be prima facie
inconsistent with
a particular right or freedom, it
may
nevertheless be consistent with the Bill of Rights Act
if it can be considered reasonable and can be justified under section 5 of
that
Act.[1] A limitation on a right might be
justifiable where:
- the
provision serves an important and significant objective; and
- there
is a rational and proportionate connection between the provision and that
objective.
APPLICATION OF SECTION 19(1) TO THE INCOME TAX BILL
- We
have considered the Bill for consistency with section 19(1) of the Bill of
Rights Act on the following grounds of discrimination
set out in section 21 of
the Human Rights Act 1993:
- marital status
which includes being single, married, in a civil union, or in a de facto
relationship;
- family status,
which includes having, or not having, responsibility for the care of children or
other dependents, or being a relative
of a particular person;
- employment
status including being unemployed or a recipient of a benefit under the Social
Security Act 1964; and
- age, starting at
16 years old.
Discrimination on the Basis of Marital Status
- On
of the main features of the income tax regime is that people who are married, in
a civil union or a de facto relationship are,
to some degree, presumed to be
financially interdependent on one another.
- The
Bill sets out a number of exceptions to taxation rules and some tax credits to
ensure that people in a relationship are not penalised
by having income declared
taxable because of their financial dependence on each other. For example, clause
CB21(1) provides an exception
from the tax rules relating to income received
from disposal and division of land for farming or agricultural purposes where a
spouse
or partner occupied the land immediately prior to it being divided.
- The
income tax regime also uses "restrictions" to rules and exceptions to prevent a
taxpayer with a spouse or partner from gaining
an inequitable tax advantage. A
tax advantage might result where a couple is able to use their relationship to
create an "artificial"
impression of their financial situation to avoid, or
limit the impact of, a particular taxation rule. For example, clause CD6(1)
provides that a payment made by a company to a person is a dividend if that
person is a shareholder of that company. A payment is
also considered a dividend
if it is paid to a trustee where a beneficiary of the trust is a spouse, civil
union partner or de facto
partner of a shareholder.
- It
is arguable whether the exceptions and restrictions applied to couples create
any disadvantage. If any disadvantage is created,
it appears to be justifiable
for the purposes of section 5 of the Bill of Rights Act. This is because these
provisions are intended
to create a fair and equitable tax regime by recognising
the financial interdependence of people in a relationship and to prevent
people
in a relationship using that relationship to gain a tax
advantage.
Discrimination on the Basis of Family Status
Application to Relatives
- The
Bill also applies some restrictions to financial arrangements with relatives in
some cases and could give rise to discrimination
on the basis of family status.
For example, subpart FC3 deals with the transfer of property to close relatives
(defined as a person
within the second degree of relationship). Also, subpart GB
deals with tax avoidance including excessive remuneration to relatives.
- As
with people who are married or in a civil union or de facto relationship, the
purpose of these provisions is to prevent people
using their family relationship
to gain an unfair tax advantage by structuring their finances in order to avoid,
or limit the impact
of, a particular taxation rule. For the same reasons, it is
unlikely that disadvantage would be caused.
Family Assistance Scheme
- Part
M of the Bill deals with the family assistance scheme which provides tax
benefits for some families. Eligibility for the family
assistance scheme
depends, in part, on whether a person is the principal caregiver of one or more
dependent children aged less than
18 years old or aged 18 where the child is not
financially independent and is attending school or a tertiary educational
establishment.
- We
have considered whether the family assistance scheme discriminates against
people who do not have responsibility for caring for
children or whether it
discriminates against people who have responsibility for caring for other kinds
of dependents.
- The
family assistance scheme is designed to address a problem specific to working
parents. In 2002, the Ministry of Social Development
published New Zealand
Living Standards Survey 2000. The report showed that 28 per cent of families
with dependent children have either restricted or somewhat restricted standards
of
living compared to 17 per cent of families without dependent children. The
objective of the family assistance scheme is to address
this disparity and also
improve the living standards of this group. It is important to note that people
without dependent children
may be eligible for other kinds of assistance.
- We
therefore consider that the ineligibility of those without responsibility for
the care of dependent children for the family assistance
scheme is unlikely to
give rise to disadvantage for couples or single persons who have no child care
responsibilities. If disadvantage
were to arise from this distinction we
consider that the distinction is a reasonable limit on section 19(1) for the
reasons set out
above.
Discrimination on the Basis of Employment Status
- Clause
MC6(b)(i) of the Bill excludes a person on an income-tested benefit from
receiving a family assistance credit. This provision
is similar to section
KD2AAA(1)(e) of the Income Tax Act, which was inserted by the Taxation (Working
for Families) Act 2004 (divided
from the Future Directions (Working for
Families) Bill).
- In
our advice on the Future Directions (Working for Families) Bill, we concluded
that section KD2AAA(1)(e) raised an issue of discrimination
on the grounds of
employment status, but the provision was justified in terms of section 5 of the
Bill of Rights Act. While we consider
that clause MC6(b)(i) is also
consistent with the Bill of Rights Act, we have developed our thinking around
whether the provision
does differentiate on the grounds of employment status,
whether any disadvantage arises from the provision and the justifiability
of any
resulting discrimination.
- First,
clause MC6(b)(i) does not differentiate on the grounds of employment status as
defined in the Human Rights Act 1993. Not all
employed persons are eligible for
family assistance credits and not all unemployed persons are ineligible. Nor are
all persons receiving
a benefit under the Social Security Act 1963 or an
entitlement under the Injury Prevention, Rehabiliitation, and Compensation Act
2001 ineligible. Accordingly, employment status is not the operative ground of
differentiation between those who are eligible for
the assistance and those who
are not.
- Secondly,
even if MC6(b)(i) can be characterised as creating a distinction on the grounds
of employment status there is no disadvantage
arising from this different
treatment. While denying family assistance credits to those on an income-tested
benefit could be seen
as disadvantageous to such persons, in most cases the
amount of government assistance received by these persons is greater than that
provided by the family assistance credit. Accordingly, clause MC6 does not
create any disadvantage for people receiving an income-
tested benefit and,
consequently, does not give rise to discrimination for the purposes of section
19(1) of the Bill of Rights Act.
- In
saying this, we note the findings of the Living Standards Survey, which
identified that families with dependent children who were in receipt of an
income-tested benefit have a lower average living
standard than families who
receive market income.[2] In our advice on
the Future Directions (Working for Families) Bill, we observed that the extra
level of support provided only to
those in work appeared to exacerbate this
situation further and, therefore, an argument could be raised that this measure
disadvantaged
those on an income-tested benefit.
- We
consider, however, that such disadvantage would be justified under section 5 of
the Bill of Rights Act. The purpose of the provision
is to provide assistance to
families that do not already receive substantial government assistance as an
acknowledgment of the contribution
that such families make. The non-payment of
family assistance credits to families that already receive substantial
government assistance
reflects the economic constraints on government.
- We
also note that one objective of the policy is to provide parents with the
appropriate incentives to enter into and remain in the
paid workforce. This is
the most immediate means through which parents are able to improve living
standards for families with dependent
children.[3] The state has a legitimate interest in
ensuring that those on benefits are provided with the appropriate incentives to
assist themselves
in moving off state-provided social assistance.
Discrimination on the Basis of Age
- The
Bill draws some distinctions between individuals on the basis of age. In
particular, clause LC3 of the Bill exempts from income
tax the earnings of
children to a maximum of $2,340 a year. It applies where the child has left
school (15 years), is under 18 years
and still at school, and to a child who has
left school part way through their 18th year. Clause LC4 allows a transitional
allowance
for children engaged in full-time work and who are over the age of
15
years and younger than 18 years who have left school. Young
people generally have lower incomes and these allowances are intended
to offer
modest support to children who have either left school or who are about to leave
school. This appears to be significant
and important objective and is achieved
in a rational and proportionate way through a small tax exemption.
- Clause
GB24(2) also raises an issue of discrimination on the basis of age. This
provision sets out when a contract between relatives
may be treated as genuine
for the purposes of clause GB23 (which deals with excessive remuneration). One
criteria is that each party
to the contract must be 20 years or older (clause
GB24(2)(c)). This differs from the Minors' Contracts Act 1969, which sets the
age
of contract at 18 years old. Clause GB24(2)(c) could be seen as creating
disadvantage for people who are younger than 20 years old
because a particular
contract might be held to be genuine for a person who is 20 years old but not
for person less than 20 years
old.
- The
purpose of section GB24(2)(c) is to ensure that a person under 20 is not used to
stream excessive remuneration out of an entity
in order to gain a tax advantage.
Young people could be more easily persuaded by a family member to participate in
an income streaming
tax avoidance scheme. Young people are also most likely to
be targeted by people wanting to promote such avoidance arrangements.
For a tax
avoidance scheme involving income streaming to work optimally, the person
receiving the excessive remuneration has to be
on a low marginal tax rate. A
person under 20 is more likely to be on a low marginal tax rate.
- Preventing
tax avoidance through income streaming appears to be a significant and important
objective. Based on the reasons set out
above the use of age as one of the
criteria seems to be rationally connected to that purpose. Since the provision
does not relate
directly to the validity of the contract there is not
necessarily a correlation with the age of contract in the Minors' Contracts
Act.
It is also worth noting that the 20 year age limit is not the only policy
setting for the anti-streaming rule. It applies to
any contract involving
impermissible income streaming or excessive remuneration, regardless of age.
Before consideration is given
to the validity of a contract, the Commissioner of
Inland Revenue must have found that there has been excessive remuneration.
CONSISTENCY WITH OTHER RIGHTS AND FREEDOMS
- For
completeness, we have also considered whether provisions of the Bill requiring
parties to supply information to the Commissioner
of Inland Revenue infringe
upon the freedom of expression affirmed in section 14 of the Bill of Rights Act.
For example, clause IP6
requires a company to supply accounts in support of a
claim to carry forward losses. It is arguable whether such information is truly
"expressive" in nature so as to engage section 14. In any case such a provision
is clearly justifiable as it is necessary for the
proper administration of the
tax system.
CONCLUSION
- For
the reasons set out above, we have concluded that the Income Tax Bill appears to
be consistent with the rights and freedoms affirmed
in the Bill of Rights
Act.
Jeff Orr
Chief Legal Counsel Office of Legal Counsel
|
Margaret Dugdale
Policy Manager, Bill of Rights/Human Rights Public Law Group
|
Footnotes
- Moonen
v Film and Literature Board of Review [1999] NZCA 329; [2000] 2 NZLR 9
- Ministry
of Social Development New Zealand Living Standards Survey (2002),
111 3 New Zealand Living Standards
Survey
In addition to the general disclaimer for all documents on this website, please
note the following: This advice was prepared to assist
the Attorney-General to
determine whether a report should be made to Parliament under s 7 of the New
Zealand Bill of Rights Act 1990
in relation to the Income Tax Bill. It should
not be used or acted upon for any other purpose. The advice does no more than
assess
whether the Bill complies with the minimum guarantees contained in the
New Zealand Bill of Rights Act. The release of this advice
should not be taken
to indicate that the Attorney-General agrees with all aspects of it, nor does
its release constitute a general
waiver of legal professional privilege in
respect of this or any other matter. Whilst care has been taken to ensure that
this document
is an accurate reproduction of the advice provided to the
Attorney-General, neither the Ministry of Justice nor the Crown Law Office
accepts any liability for any errors or omissions.
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