The Valabh Committee, named after its Chair Arthur Valabh, was a New Zealand

New Zealand

New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...

 government appointed committee tasked with reviewing various aspects of the income tax system in the late 1980s and early 1990s.

Although originally convened to review proposals for a capital gains tax

Capital gains tax

A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...

 the Committee ended up making a number of recommendations for fundamental reform of the scheme and structure of the New Zealand tax legislation, most of which were implemented.

The Committee had a lasting impact on the direction of tax reform, the style and drafting of the income tax legislation as well as numerous specific recommendations for the tax treatment of, for example, depreciation and partnerships.

Committee members

The formal name of the Valabh Committee was the “Consultative Committee on the Taxation of Income from Capital” . The Committee comprised:

• Arthur Valabh, OBE
  Order of the British Empire
  The Most Excellent Order of the British Empire is an order of chivalry established on 4 June 1917 by George V of the United Kingdom. The Order comprises five classes in civil and military divisions...
  
   (Chair)
• Dr Robin Congreve
• Lindsay McKay
• Rob McLeod
• Tim Robinson

It was supported by a secretary (Greg Cole) as well as by officials from both the Inland Revenue Department

Inland Revenue Department (New Zealand)

Inland Revenue , previously known as the Inland Revenue Department, is the New Zealand government department responsible for the collection of over 80% of the Crown's revenue in New Zealand. It also collects and disburses social support programme payments and provides the government with policy...

 and the Treasury

New Zealand Treasury

The New Zealand Treasury is a public sector organisation and the Government’s lead advisor on economic and financial policy. Its role is to help the Government improve economic performance and manage scarce resources...

.

Background

The 1980s were a period of considerable economic and tax reform in New Zealand. New Zealand had never had a formal capital gains tax system (unlike virtually every other OECD nation. The government was considering implementing a capital gains tax and issued a consultative document as part of the (then) process of tax reform .

The Committee appointed to review submissions in response to the Consultative Document instead reported to government that it did not consider the state of the tax system at that time sufficiently robust to support additional reform of this nature. The government accepted this recommendation and re-tasked the Committee to advise it on the structural reforms required.

Key proposals

The Committee subsequently published 5 discussion papers :

• The Core Provisions of the Income Tax Act 1976 (Core Provisions Paper)
• The Taxation of Distributions from Companies (Company Distribution Paper)
• Tax Accounting Issues
• Key Reforms to the Scheme of Tax Legislation (Key Reforms Paper)
• Operational Aspects of the Accrual Rules

In addition the Committee separately reported to government on the reform of the tax depreciation rules .

Core provisions and scheme

The thrust of the Core Provisions and Key Reforms Papers was to ensure that the income tax legislation was appropriately structured and ordered to facilitate the understanding of the rules as well as to allow for further reform to be implemented effectively.

This work lead directly to the Working Party on the Reorganisation of the Income Tax Act 1976

Working Party on the Reorganisation of the Income Tax Act 1976

The Working Party on the Reorganisation of the Income Tax Act 1976 was a committee appointed by the New Zealand government to advise on the appropriate reorganisation of the income tax legislation. The Working Party was set up in 1993 as a result of recommendations made by the Valabh Committee set...

 and the complete rewrite of the legislation .

Company taxation and dividends

The proposals made in the Company Distribution Paper led to a revised definition of what constituted a dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

under New Zealand tax law as well as the introduction of a small company taxation regime (“qualifying company” regime) .

Depreciation

The Committee’s recommendations resulted in a new tax depreciation regime introduced in 1993 .

Interest deductibility

The government accepted the Committee’s recommendation for a significantly more liberal regime for the deduction of interest for tax purposes .

Partnerships

Recommendations for the reform of the tax treatment of partnerships was finally implemented by government in 2007