IRD has released Interpretation Statement IS 16/04 this week which considers how lump sum payments which are both capital and revenue in nature should be treated.

Most interesting in this statement is the Commissioner has set out that rather than following two Australian High Court decisions, a more reasonable approach will be adopted. In the decisions, McLaurin v FCT (1961) 12 ATD 273 and Allsop v FCT (1965) 14 ATD 62 provide that where a ‘single undissected’ settlement payment includes both capital and revenue amounts the whole amount is to be treated as capital. The Commissioner’s view is that this would not be followed in NZ, but where possible NZ courts would seek a reasonable basis for apportioning the lump sum.

As such the Commissioner provides the following guidance:

  • Whether a settlement payment is taxable depends on what it is paid for. This must be determined first before considering apportionment.
  • If a settlement payment is made up of both elements then an apportionment should be made on an objective basis, with the use of settlement agreements and any related documentation as a starting point.
  • The onus of proof is on the taxpayer to show the apportionment is appropriate.
  • If no apportionment can be made the whole amount should be treated the same. As such if some of the amount is clearly income under Part C of the Income Tax Act 2007, then unless the taxpayer can show which portion is capital, the full amount will be treated as income.

It is good to see that the Commissioner will take a more reasonable approach and recognising that NZ Courts favour apportionment where possible. However it is not always clear to define what the payment is actually for to enable apportionment and highlights where legal and other supporting documentation is important to determining the tax outcome.