Microsoft Word - Act 10-2007 Income Tax Act 2007.doc
Act 10 of 2007
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INCOME TAX ACT 2007
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INCOME TAX ACT 2007
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Section
PART 1 - PRELIMINARY 7
1 Short title and commencement......................................................................... 7
2 Interpretation .................................................................................................... 7
3 Fair market value ........................................................................................... 12
4 Residents and Non-residents .......................................................................... 13
PART 2 - IMPOSITION OF INCOME TAX 14
5 Tax on chargeable income ............................................................................. 14
6 Tax on certain payments to non-residents...................................................... 14
7 Tax on shipping and air transport income of a non-resident person .............. 15
9 General provisions relating to income taxes imposed under sections 6,
7, and 8 ........................................................................................................... 15
PART 3 - COMPUTATION OF CHARGEABLE INCOME 16
DIVISION 1 - CHARGEABLE INCOME ........................................................... 16
10 Chargeable income......................................................................................... 16
DIVISION 2 - GROSS INCOME....................................................................... 16
11 Gross income.................................................................................................. 16
12 Business income............................................................................................. 16
13 Employment income ...................................................................................... 17
14 Property income ............................................................................................. 18
DIVISION 3 - EXEMPT INCOME..................................................................... 18
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15 Exempt income of King..................................................................................18
16 Exemptions provided for in other legislation .................................................18
17 Exemptions under international agreements ..................................................18
18 Exempt income of non-profit organisations ...................................................18
19 Exempt pensions.............................................................................................19
20 Exempt retirement and death gratuities ..........................................................19
21 Exempt Dividends ..........................................................................................19
22 Exempt income of retirement funds and life insurance companies................19
23 Exempt scholarships .......................................................................................20
24 Exempt maintenance payments ......................................................................20
DIVISION 4 - DEDUCTIONS ........................................................................... 20
25 General principles of deductibility .................................................................20
26 Deductions not allowed ..................................................................................20
27 General principles of depreciation..................................................................21
28 Straight-line depreciation ...............................................................................22
29 Diminishing value depreciation......................................................................22
30 Amortisation of intangibles ............................................................................22
31 Written down value of depreciable assets and intangibles .............................24
32 Disposal of a depreciable asset or intangible .................................................24
33 Amortisation of preliminary expenditure .......................................................24
34 Interest ............................................................................................................25
35 Contribution to approved retirement fund......................................................25
36 Bad debts ........................................................................................................25
37 Carry forward of business losses ....................................................................25
DIVISION 5 - INCOME TAX ACCOUNTING ................................................... 26
38 Method of accounting for income tax ............................................................26
39 Cash-basis accounting ....................................................................................26
40 Accrual-basis accounting................................................................................27
41 Trading stock ..................................................................................................27
42 Long-term contracts........................................................................................29
43 Financial leases...............................................................................................30
DIVISION 6 - ASSETS..................................................................................... 31
44 Disposal and acquisition of assets ..................................................................31
45 Cost.................................................................................................................32
46 Determination of cost in special cases............................................................33
47 Consideration received ...................................................................................33
48 Non-arm’s length transaction .........................................................................33
49 Gain or loss not recognised ............................................................................34
DIVISION 7 - MISCELLANEOUS PROVISIONS RELATING TO INCOME
AND DEDUCTIONS......................................................................................... 35
50 Income of joint owners ...................................................................................35
51 Apportionment of deductions .........................................................................35
52 Recovered expenditure ...................................................................................35
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53 Cessation of source of income ....................................................................... 35
54 Currency translation ....................................................................................... 36
PART 4 - APPLICATION OF INCOME TAX TO PERSONS 36
DIVISION 1 - INDIVIDUALS ............................................................................ 36
55 Taxation of individuals .................................................................................. 36
DIVISION 2 - ENTITIES................................................................................... 36
56 Taxation of trusts ........................................................................................... 36
57 Taxation of companies ................................................................................... 37
58 Change in control of entity............................................................................. 38
PART 5 - APPLICATION OF INCOME TAX TO SPECIAL
INDUSTRIES 38
59 Short-term insurance business ....................................................................... 38
PART 6 - APPLICATION OF INCOME TAX TO INTERNATIONAL
TRANSACTIONS 39
DIVISION 1 - GEOGRAPHIC SOURCE OF INCOME ..................................... 39
60 Geographic source of income ........................................................................ 39
DIVISION 2 - TAXATION OF FOREIGN-SOURCE INCOME OF
RESIDENT PERSONS .................................................................................... 41
61 Foreign-source employment income of resident individuals ......................... 41
62 Foreign tax credit ........................................................................................... 41
63 Foreign losses................................................................................................. 42
DIVISION 3 - TAXATION OF NON-RESIDENT PERSONS ............................ 43
64 Taxation of non-residents with Tongan permanent establishments............... 43
65 Foreign-source income of non-resident persons ............................................ 43
PART 7 - ANTI-AVOIDANCE 44
66 Transactions between associates .................................................................... 44
67 Tax avoidance schemes.................................................................................. 44
PART 8 - INCOME TAX PROCEDURE 44
DIVISION 1 - INCOME TAX RETURNS .......................................................... 44
68 Furnishing of income tax returns ................................................................... 44
69 Income tax return not required....................................................................... 45
DIVISION 2 - INCOME TAX ASSESSMENTS................................................. 45
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70 Income Tax assessments.................................................................................45
71 Amendment of assessments............................................................................46
DIVISION 3 - PAYMENT OF INCOME TAX .................................................... 47
72 Due date for payment of income tax ..............................................................47
73 Collection of tax from non-resident ship owners or charterers ......................47
74 Collection of tax from non-resident aircraft owners or charterers .................48
75 Security...........................................................................................................49
DIVISION 4 - WITHHOLDING TAX ................................................................. 49
76 Withholding of tax from employment income ...............................................49
77 Withholding of tax from interest ....................................................................49
78 Withholding of tax from income from land ...................................................49
79 Withholding of tax from payments to non-resident persons ..........................49
80 No withholding from exempt income.............................................................50
81 Time of withholding .......................................................................................50
82 Payment of tax withheld.................................................................................50
83 Failure to pay tax withheld .............................................................................50
84 Recovery of withholding tax ..........................................................................50
85 Tax withholding certificate.............................................................................51
86 Withholding tax statements ............................................................................51
87 Priority of tax withheld...................................................................................51
88 Indemnity........................................................................................................52
89 Credit for tax withheld....................................................................................52
90 Withholding tax as a final tax.........................................................................52
DIVISION 5 - INSTALMENTS OF INCOME TAX ............................................ 53
91 Instalments of income tax...............................................................................53
PART 9 - REFUNDS 54
92 Refunds...........................................................................................................54
PART 10 - MISCELLANEOUS 54
93 Regulations .....................................................................................................54
94 Repeal and Transitional ..................................................................................55
FIRST SCHEDULE 57
VALUATION OF EMPLOYMENT BENEFITS.................................................. 57
SECOND SCHEDULE 59
DEPRECIATION RATES................................................................................. 59
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INCOME TAX ACT 2007
Act 10 of 2007
AN ACT TO CONSOLIDATE AND MAKE PROVISION FOR INCOME
TAX
I assent,
King George Tupou V
14 August 2007
PART 1 - PRELIMINARY
1 Short title and commencement
(1) This Act may be cited as the Income Tax Act 2007.
(2) This Act shall come into force on a day to be proclaimed by His Majesty
in Council and shall apply to fiscal years as set out in the proclamation.
2 Interpretation
In this Act, unless the context requires otherwise —
“amount” includes an amount-in-kind;
“approved retirement fund” means a retirement fund approved by the
Chief Commissioner in accordance with the regulations;
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“associate”, in relation to a person, means any other person who acts or
may act in accordance with the directions, requests, suggestions, or wishes
of the first-mentioned person, and the second-mentioned person shall be
an associate of the first-mentioned person;
“business” includes any profession, trade, manufacture, or undertaking
(including an undertaking in the nature of trade) conducted for pecuniary
profit, but shall not include employment;
“business asset” means any asset, whether of a revenue or capital nature,
used or held ready for use in a business, including goodwill, trading stock,
a depreciable asset, or an intangible;
“business income” has the meaning in section 12;
“chargeable income” has the meaning in section 10;
“Chief Commissioner” shall have the same meaning ascribed to it in the
Revenue Services Administration Act 2002;
“Commissioner” shall have the same meaning ascribed to it in the
Revenue Services Administration Act 2002;
“company” means —
(a) a body or association of persons corporate or unincorporate whether
incorporated, created, or formed in Tonga or elsewhere;
(b) a foreign association of persons that the Chief Commissioner has
declared to be a company for the purposes of this Act; or
(c) a partnership,
but does not include a trust;
“consideration received”, in relation to the disposal of an asset, has the
meaning in section 47;
“consumption tax” means the consumption tax imposed under the
Consumption Tax Act 2003;
“cost”, in relation to an asset, has the meaning in sections 45 and 46;
“debt” means an amount owing, including accounts payable and amounts
owing under a promissory note, bill of exchange, debenture, security,
bond, or similar financial instrument;
“depreciable asset” has the meaning in section 27;
“dividend” means —
(a) any distribution of profits by a company to a shareholder or a
partnership to a partner;
(b) any amount returned to a shareholder in respect of a share on a
partial reduction in capital to the extent that the amount returned
exceeds the amount by which the nominal value of the share was
reduced; or
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(c) any amount distributed to a shareholder on redemption or
cancellation of a share (including in liquidation) to the extent the
amount distributed exceeds the nominal value of the share;
“employee” means an individual engaged in employment;
“employer” means a person who engages or remunerates an employee;
“employment” includes —
(a) a directorship or other office in the management of a company;
(b) a position entitling the holder to a fixed or ascertainable
remuneration; or
(c) the holding or acting in any public office;
“employment income” has the meaning in section 13;
“exempt income” means income described as exempt income in this Act
and as a consequence not included in gross income;
“fair market value” has the meaning in section 3;
“fiscal year” means —
(a) in the case of a company, the period of twelve months ending on
the date of the annual balance of its accounts; or
(b) in any other case, the period of twelve months ending on 30th June;
“gross income” means amounts defined as gross income in section 11 and
other amounts included in gross income under this Act;
“income tax” means any tax imposed under this Act;
“insurance premium” includes a premium in relation to reinsurance;
“intangible” means —
(a) any patent, invention, design or model, secret formula or process,
trademark, copyright, or other like property or right;
(b) contractual rights with a benefit for a period of more than one year;
or
(c) any expenditure that provides an advantage or benefit for a period
of more than one year, other than expenditure incurred to acquire
any tangible movable or immovable property;
“interest” means —
(a) an amount, described as interest, discount, premium, or otherwise,
whether periodical or a lump sum, as consideration for the use of
money or being given time to pay;
(b) an amount that is functionally equivalent to an amount referred to in
paragraph (a);
(c) any amount treated as interest under section 43; or
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(d) a commitment, guarantee, service, or similar fee payable in respect
of a debt or other instrument or agreement giving rise to interest
under paragraphs (a), (b), or (c);
“liaison office”, in relation to a person, means an office of the person the
sole activity of which is representation;
“member”, in relation to a company, means a shareholder, partner in a
partnership, or any other person with a membership interest in the
company;
“membership interest”, in relation to a company, means a share, an
interest of a partner in a partnership, and any other ownership interest in
the company;
“natural resource amount” means —
(a) an amount (including a premium or like amount) as consideration
for the right to take minerals or a living or non-living resource from
land or sea; or
(b) an amount calculated in whole or part by reference to the quantity
or value of minerals or a living or non-living resource taken from
land or sea;
“non-resident person” has the meaning in section 4(2);
“partnership” means two or more persons carrying on business jointly
for common profit;
“permanent establishment” means a fixed place of business through
which the business of a person is wholly or partly carried on, and
includes —
(a) a place of management, branch, office, factory, warehouse, or
workshop, other than a liaison office;
(b) a mine, oil or gas well, quarry, or other place of extraction of
natural resources;
(c) a building site, or a construction, assembly or installation project, or
supervisory activities connected with such site or project, but only
if the site, project or activities continue for more than 90 days;
(d) the furnishing of services, including consultancy services, by any
person through employees or other personnel engaged by the person
for such purpose, but only if activities of that nature continue for
the same or a connected project within Tonga for a period or
periods aggregating more than ninety days within any twelve-
month period;
(e) a person (referred to as an “agent”) acting in Tonga on behalf of
another person, if the agent —
(i) has and habitually exercises an authority to conclude
contracts on behalf of the other person; or
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(ii) habitually maintains a stock of goods or other merchandise
from which the agent regularly delivers goods or
merchandise on behalf of the other person; or
(f) any substantial equipment used by a person;
“person” means an individual, trust, company, government, or public
international organisation;
“presumptive income taxpayer” means a person liable for income tax
under section 8;
“property income” has the meaning in section 14;
“quarter” means a period of three months ending on September 30,
December 31, March 31, or June 30;
“received”, in relation to a person, includes —
(a) applied on behalf of the person either at the instruction of the
person or under any law;
(b) reinvested, accumulated, or capitalised;
(c) credited to an account, or carried to any reserve, sinking, or
insurance fund; or
(d) made available to the person;
“rent” means any consideration for the use or occupation of, or the right
to use or occupy any land or building, including any premium, fine, or like
amount;
“resident company” has the meaning in section 4(6);
“resident individual” has the meaning in section 4(3) to (5);
“resident person” has meaning in section 4(1);
“resident trust” has the meaning in section 4(7);
“royalty” means an amount, however described, whether periodical or a
lump sum, as consideration for —
(a) the use of, or right to use any patent, invention, design or model,
secret formula or process, trademark, or other like property or right;
(b) the use of, or right to use any copyright of a literary, artistic, or
scientific work (including films or video tapes for use in connection
with television or tapes in connection with radio broadcasting);
(c) the receipt of, or right to receive, any visual images or sounds, or
both, transmitted by satellite, cable, optic fibre, or similar
technology in connection with television, radio, or internet
broadcasting;
(d) the supply of any technical, industrial, commercial, or scientific
knowledge, experience, or skill;
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(e) the use of or right to use any industrial, commercial, or scientific
equipment;
(f) the supply of any assistance that is ancillary and subsidiary to, and
is furnished as a means of enabling the application or enjoyment of,
any property or right referred to in paragraphs (a) through (e); or
(g) the disposal of any property or right referred to in paragraphs (a)
through (e);
“taxable business income” means business income included in gross
income;
“taxpayer” means a person liable for income tax under this Act and
includes a person who has a business loss for a fiscal year;
“technical services fee” means an amount, however described, whether
periodical or lump sum, as consideration for the rendering of any
managerial, technical, or consultancy services, including the services of
technical or other personnel, but does not include employment income;
“trading stock” means anything produced, manufactured, purchased, or
otherwise acquired for manufacture, sale, or exchange for the purposes of
producing taxable business income, and includes any materials or supplies
to be consumed in the production or manufacturing process, and livestock;
“trust” means a trust established under statutory law or the laws of equity
and includes a testamentary estate;
“trustee” includes the executor of a testamentary estate; and
“turnover”, in relation to a person for a fiscal year, means the gross
revenue (including the gross proceeds from the disposal of a business
asset) derived by the person during the year, but not including —
(a) exempt income;
(b) an amount subject to separate taxation under section 6 or 7; or
(c) an amount for which withholding tax under section 90 is a final tax.
3 Fair market value
(1) For the purposes of this Act, the fair market value of any asset, service, or
benefit at a particular time shall be the ordinary open market value of the
asset, service, or benefit at that time.
(2) If the fair market value of any asset, service, or benefit cannot be
determined under subsection (1), the fair market value shall be the amount
determined by the Chief Commissioner.
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4 Residents and Non-residents
(1) A person shall be a resident person at a particular time if, at that time, the
person is a resident individual, resident company, resident trust, or the
Government.
(2) A person who is not a resident person at a particular time shall be a non-
resident person at that time.
(3) Subject to subsections (4) and (5), an individual shall be a resident
individual for a fiscal year if the individual —
(a) has his home in Tonga at any time during the year;
(b) is present in Tonga for a period of, or periods amounting in
aggregate to, one hundred eighty-three days in any twelve month
period that commences or ends during the year; or
(c) is an employee of the Government posted abroad at any time
during the year.
(4) An individual who is a resident individual under subsection (3) for a fiscal
year, in this section referred to as the “current fiscal year”, but who was
not a resident individual for the preceding fiscal year shall be treated as a
resident individual in the current fiscal year only for the period
commencing on the day on which the individual was first present in
Tonga.
(5) An individual who is a resident individual for the current fiscal year but
who is not a resident individual for the following fiscal year shall be
treated as a resident individual in the current fiscal year only for the
period ending on the last day on which the individual was present in
Tonga.
(6) A company shall be a resident company for a fiscal year if the
company —
(a) is incorporated, created, or formed in Tonga;
(b) has the centre of its administrative management in Tonga at any
time during the fiscal year; or
(c) is a partnership with a partner who is a resident person at any time
during the year.
(7) A trust shall be a resident trust for a fiscal year if —
(a) the trust was settled or established in Tonga; or
(b) a trustee of the trust is a resident person at any time during the year.
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PART 2 - IMPOSITION OF INCOME TAX
5 Tax on chargeable income
(1) The Chief Commissioner shall, with the approval of Privy Council by
Order and in accordance with clause 19(b) of the Constitution impose,
revoke, suspend, reduce or increase income tax for each fiscal year on a
person who has chargeable income for the year.
(2) The income tax imposed under subsection (1) for a fiscal year shall be
computed by applying the rate or rates of tax applicable to the person
under the Order to the chargeable income of the person for the year, and
any tax credits allowed to the person for the year are subtracted from the
resulting amount.
(3) If a person is allowed more than one tax credit for a fiscal year, the credits
are applied in the following order —
(a) the foreign tax credit allowed under section 62; then
(b) the tax credits allowed under sections 90 and 92.
(4) In lieu of taxation under subsection (1), certain classes of income
(including the income of certain classes of persons) may be subject to —
(a) income tax as provided in section 6, 7, or 8; or
(b) withholding of tax as a final tax as provided in section 91.
6 Tax on certain payments to non-residents
(1) The Chief Commissioner shall, with the approval of Privy Council by
Order and in accordance with clause 19(b) of the Constitution impose,
revoke, suspend, reduce or increase income tax on a non-resident person
who has received Tongan-source —
(a) interest income;
(b) royalties;
(c) technical services fees;
(d) dividends; or
(e) insurance premiums.
(2) This section does not apply to —
(a) any interest if the debt claim or other instrument or agreement
giving rise to the interest is effectively connected with a permanent
establishment in Tonga of the non-resident person;
(b) any royalty if the property, right, or supply giving rise to the royalty
is effectively connected with a permanent establishment in Tonga
of the non-resident person;
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(c) any technical services fee or insurance premium if the services
giving rise to the fee or premium are rendered through a permanent
establishment in Tonga of the non-resident person; or
(d) any interest, royalty, technical services fee, dividend, or insurance
premium that is exempt income of the non-resident person.
(3) Any interest, royalty, technical services fee, or insurance premium
described in subsection (3)(a), (b), or (c) shall be treated as income
attributable to the permanent establishment and shall be taxable under
section 5.
(4) The tax payable under this section is discharged if the tax has been
withheld from the payment of the income under section 80.
7 Tax on shipping and air transport income of a non-resident person
(1) The Chief Commissioner shall, with the approval of Privy Council by
Order and in accordance with clause 19(b) of the Constitution impose,
revoke, suspend, reduce or increase income tax on a non-resident person
operating a ship or aircraft.
(2) This section does not apply to any amount that is exempt income.
(3) The tax payable under this section is discharged if the tax has been paid in
accordance with section 73 or 74.
8 [Section 8 omitted by Legislative Assembly]
9 General provisions relating to income taxes imposed under
sections 6, 7, and 8
Subject to this Act, the tax imposed under sections 6, 7, and 8 on a person shall
be a final tax on the income in respect of which it is imposed and —
(a) the income shall not be included in —
(i) gross income in computing the chargeable income of the
person for any fiscal year; or
(ii) turnover in computing the minimum income tax liability of
the person for any fiscal year;
(b) no deduction shall be allowable under this Act for any expenditure
incurred in deriving the income;
(c) the amount on which tax is imposed under section 6(2), 7(2), or
8(2) shall not be reduced by any loss; and
(d) the tax payable by the person under section 6, 7, or 8 shall not be
reduced by any tax credits allowed under this Act.
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PART 3 - COMPUTATION OF CHARGEABLE INCOME
DIVISION 1 - CHARGEABLE INCOME
10 Chargeable income
The chargeable income of a person for a fiscal year shall be the gross income of
the person for the year reduced by the total amount of deductions allowed to the
person for the year.
DIVISION 2 - GROSS INCOME
11 Gross income
(1) Subject to this Act, the gross income of a person for a fiscal year shall be
the total amount of —
(a) business income;
(b) employment income;
(c) property income; and
(d) any other income,
derived by the person during the year, other than exempt income.
(2) For the purposes of subsection (1) —
(a) the gross income of a resident person includes income derived from
all sources within and outside Tonga; and
(b) the gross income of a non-resident person includes only Tongan-
source income.
(3) Unless the Act provides otherwise, the rules in Division V of this Part
apply in determining when an amount is derived for the purposes of
this Act.
12 Business income
Business income means —
(a) the gross receipts, whether of a revenue or capital nature, arising
from the conduct of business, including the gross proceeds from the
disposal of trading stock and any consideration for accepting a
restriction on the capacity to carry on business, but not including
any amount taken into account in the computation of business
income under paragraph (b) or (c);
(b) any balancing charge under section 32; and
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(c) any gain arising on the disposal of a business asset, other than an
asset dealt with under paragraph (a) or (b), computed as the
consideration received on disposal less the cost of the asset at the
time of disposal.
13 Employment income
(1) Employment income means any amount, whether of a revenue or capital
nature, arising from employment, including —
(a) any salary, wages, or other remuneration provided to an employee,
including leave pay, payment in lieu of leave, overtime pay, bonus,
commission, fees, gratuity, or work condition supplements;
(b) the value of any benefit-in-kind, whether convertible to money or
not, as determined under the First Schedule;
(c) the amount of any allowance provided by an employer to an
employee, including a cost of living, subsistence, rent, utilities,
education, entertainment, meeting, or travel allowance, but not
including any allowance solely expended in the performance of the
employee’s duties of employment;
(d) the amount of any expenditure incurred by an employee that is paid
or reimbursed by the employer, other than expenditure incurred on
behalf of the employer in the performance of the employee’s duties
of employment;
(e) any amount as consideration for the agreement by a person to —
(i) enter into employment;
(ii) any conditions of employment or any changes to the
employee’s conditions of employment; or
(iii) a restrictive covenant in respect of any past, present, or
prospective employment;
(f) any amount received on termination of employment, whether paid
voluntarily or under an agreement, including any compensation for
redundancy or loss of employment and golden handshake
payments; or
(g) any pension, annuity, or supplement to a pension or annuity
received in relation to employment.
(2) For the purposes of this Act, an amount shall be treated as arising from the
employment of an employee regardless of whether it is paid or
provided by —
(a) the employer of the employee, an associate of the employer, or by a
third party under an arrangement with the employer or an associate
of the employer; or
(b) a past employer or a prospective employer.
Section 14 Income Tax Act 2007
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14 Property income
Property income means —
(a) any dividend, interest, royalty, rent, natural resource amount, or
other amount arising from the provision, use, or exploitation of
property; or
(b) any pension, charge, or annuity, or any supplement to a pension,
charge, or annuity,
but does not include an amount that is business or employment income.
DIVISION 3 - EXEMPT INCOME
15 Exempt income of King
The income derived by His Majesty the King shall be exempt income.
16 Exemptions provided for in other legislation
(1) The income derived by an individual entitled to privileges under the
Diplomatic Privileges Act (Cap.161) or the Consular Relations Act
(Cap.159) shall be exempt income to the extent provided in that Act.
(2) The income derived by a public international organisation shall be exempt
income to the extent provided in the Diplomatic Privileges Act (Cap.161).
(3) The income derived by an individual entitled to privileges under the
Diplomatic Privileges Act (Cap.161) or the Consular Relations Act
(Cap.159) shall be exempt income to the extent provided in that Act.
(4) The income derived by the National Reserve Bank of Tonga shall be
exempt income to the extent provided in the National Reserve Bank of
Tonga Act (Cap. 102).
(5) No provision in any other law providing an exemption from any income
tax imposed under this Act shall have legal effect unless also provided for
in this Act.
17 Exemptions under international agreements
Any employment income derived by an individual shall be exempt income to the
extent provided for in an agreement between the Government and a foreign
government or public international organisation for the provision of financial,
technical, or administrative assistance to the Government.
18 Exempt income of non-profit organisations
(1) In this section —
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“charitable purposes” includes the relief of poverty, advancement of
education or religion, or any other purpose beneficial to the
community; and
“non-profit organisation” means an institution, body, or trust of a public
character that the Chief Commissioner has certified as conducting
activities exclusively for charitable purposes.
(2) The income (other than business income) of a non-profit organisation
shall be exempt income.
19 Exempt pensions
(1) A pension shall be exempt income if granted to —
(a) a member of the Tonga Defence Force for a disability suffered
during any war; or
(b) a dependent relative of an individual referred to in paragraph (a) if
the individual was killed or suffered a disability during any war.
(2) A pension or gratuity shall be exempt income if paid to an individual
under the Pensions Act, Retirement Fund Act, or Legislative Assembly
Act, or any other pension scheme approved by His Majesty in Council.
20 Exempt retirement and death gratuities
Any amount derived as a retiring or death gratuity, or as consolidated
compensation for death or injuries shall be exempt income.
21 Exempt Dividends
A dividend paid by a resident company to a member who is a resident person
shall be exempt income.
22 Exempt income of retirement funds and life insurance companies
(1) The income derived by an approved retirement fund shall be exempt
income.
(2) An amount contributed by an employer to a retirement fund for the benefit
of an employee of the employer shall be exempt income of the employee.
(3) Any premium derived by a life insurance company in respect of a life
insurance policy shall be exempt income.
Section 23 Income Tax Act 2007
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23 Exempt scholarships
Any scholarship granted to an individual to meet the cost of the individual’s
education shall be exempt income, other than if the scholarship is paid directly
or indirectly by an associate.
24 Exempt maintenance payments
Any amount received as maintenance shall be exempt income.
DIVISION 4 - DEDUCTIONS
25 General principles of deductibility
(1) Subject to this Act, a person shall be allowed a deduction for —
(a) any expenditure to the extent incurred in deriving gross income;
(b) any balancing allowance under section 32;
(c) the cost of trading stock sold as determined under section 41; and
(d) any loss on disposal of a business asset, other than an asset or
intangible dealt with under paragraph (b) or (c), computed as the
cost of the asset at the time of disposal reduced by the consideration
received on disposal.
(2) Subject to this Act, if the expenditure referred to in subsection (1) —
(a) is incurred in acquiring a depreciable asset or an intangible; or
(b) is preliminary expenditure,
the expenditure shall be deducted in accordance with section 27, 28, 29,
30 or 33.
(3) Unless the Act provides otherwise, the rules in Division 5 of this Part shall
apply in determining when an amount is incurred for the purposes of
this Act.
26 Deductions not allowed
(1) No deduction shall be allowed for any —
(a) expenditure or loss to the extent to which it is of a domestic or
private nature;
(b) expenditure or loss to the extent incurred in deriving employment
income;
(c) capital withdrawn, or sum employed or intended to be employed
as capital;
(d) expenditure or loss of a capital nature except as provided in this
Division;
Income Tax Act 2007 Section 27
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(e) amount carried to a reserve fund or capitalised in any way;
(f) expenditure or loss to the extent recoverable under a policy of
insurance or contract of indemnity;
(g) income tax payable in Tonga or elsewhere, including any penalty,
additional tax, or interest payable in respect of income tax due;
(h) fine or penalty imposed for violation of any law, rule, or
regulation; or
(i) bribe, kickback, or similar amount.
(2) A person required to withhold tax under section 80 in respect of an
amount paid to a non-resident person shall not be allowed a deduction for
the amount paid until the tax has been paid to the Chief Commissioner.
27 General principles of depreciation
(1) In this section —
“depreciable asset” means any tangible movable property or structural
improvement to immovable property, owned by a person that —
(a) has a useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or
obsolescence; and
(c) is used wholly or partly by the person in deriving taxable business
income; and
“structural improvement”, in relation to immovable property, includes
any building, road, driveway, car park, pipeline, bridge, tunnel, airport
runway, canal, dock, wharf, retaining wall, fence, power lines, water or
sewerage pipes, drainage, landscaping, or dam.
(2) A person shall be allowed a deduction (referred to as a “depreciation
deduction”) for the amount by which the value of the person’s depreciable
assets has declined during a fiscal year by reason of wear and tear from
use in deriving taxable business income.
(3) Subject to subsection (4), a person may elect for the depreciation
deduction allowed under subsection (2) to be computed according to the
straight-line method under section 28 or the diminishing value method
under section 29 and an election so made shall apply to all depreciable
assets owned by the person.
(4) The straight-line method only shall apply to a depreciable asset that is a
structural improvement to immovable property.
(5) The cost of a structural improvement to immovable property does not
include the cost of the land.
Section 28 Income Tax Act 2007
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(6) A person may apply, in writing, to the Chief Commissioner for a change
in the method of depreciation and the Chief Commissioner may, by notice
in writing to the applicant, approve the application subject to such
conditions as the Chief Commissioner may specify in the notice.
(7) If a depreciable asset is used in a fiscal year partly in deriving taxable
business income and partly for another use, the depreciation deduction for
that year shall be the fair proportional part of the amount that would be
allowed if the asset were wholly used to derive taxable business income.
(8) If a depreciable asset is not used for the whole of the fiscal year in
deriving taxable business income, the depreciation deduction for the year
shall be computed according to the following formula —
A x B/C
where —
A is the depreciation deduction computed under section 28 or
29 after taking into account subsection (7);
B is the number of days in the fiscal year the asset is used or
available for use in deriving taxable business income; and
C is the number of days in the fiscal year.
28 Straight-line depreciation
(1) The depreciation deduction allowed to a person for a fiscal year in respect
of a depreciable asset under the straight-line method shall be computed by
applying the rate specified in the Second Schedule against the cost of
the asset.
(2) The total deductions allowed, or that would be allowed but for section
27(7), to a person under this section in respect of a depreciable asset for
the current fiscal year and all previous fiscal years shall not exceed the
cost of the asset.
29 Diminishing value depreciation
The depreciation deduction allowed to a person for a fiscal year in respect of a
depreciable asset under the diminishing value method shall be computed by
applying the rate specified in the Second Schedule against the written down
value of the asset at the beginning of the year.
30 Amortisation of intangibles
(1) In this section, “cost” means —
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(a) in relation to an intangible referred to in paragraph (a) or (b) of the
definition of “intangible” in section 2, the total expenditure incurred
in acquiring, creating, improving, or renewing the intangible; or
(b) in relation to an intangible referred to in paragraph (c) of the
definition of “intangible” in section 2, the amount of the
expenditure.
(2) A person shall be allowed a deduction (referred to as an “amortisation
deduction”) computed in accordance with this section for the cost of an
intangible wholly or partly used by the person in a fiscal year in deriving
taxable business income.
(3) Subject to this section, the amortisation deduction of a person for a fiscal
year shall be computed according to the following formula —
A
—
B
where —
A is the cost of the intangible; and
B is the useful life of the intangible in whole years.
(4) An intangible —
(a) with a useful life of more than ten years; or
(b) that does not have an ascertainable useful life,
shall be treated as having a useful life of ten years.
(5) If an intangible is used in a fiscal year partly in deriving taxable business
income and partly for another use, the amortisation deduction for that year
shall be the fair proportional part of the amount that would be allowed if
the intangible were wholly used to derive taxable business income.
(6) If an intangible is not used for the whole of a fiscal year in deriving
taxable business income, the amortisation deduction for the year shall be
computed according to the following formula —
A x B/C
where —
A is the amortisation deduction computed under subsection (3)
or (5), as the case may be;
B is the number of days in the fiscal year the intangible is used
or available for use in deriving taxable business income; and
C is the number of days in the fiscal year.
(7) The total amortisation deductions allowed, or that would be allowed but
for subsection (5), to a person under this section in the current fiscal year
and all previous fiscal years in respect of an intangible shall not exceed
the cost of the intangible.
Section 31 Income Tax Act 2007
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31 Written down value of depreciable assets and intangibles
(1) Subject to subsection (2), the written down value of a depreciable asset or
intangible of a person at the beginning of a fiscal year shall be —
(a) if the asset or intangible was acquired during the year, the cost of
the asset; or
(b) in any other case, the cost of the asset or intangible as reduced by
the total depreciation or amortisation deductions allowed to the
person in respect of the asset or intangible in previous fiscal years.
(2) If section 27(7) applies to a depreciable asset or section 30(5) applies to
an intangible for a fiscal year, the written down value of the asset or
intangible shall be computed on the basis that the asset has been used
solely to derive taxable business income.
32 Disposal of a depreciable asset or intangible
If a person disposes of a depreciable asset or an intangible in a fiscal year, there
shall be no depreciation or amortisation deduction for that year and —
(a) if the consideration received exceeds the written down value of the
asset or intangible at the beginning of the year, the excess (referred
to as a “balancing charge”) shall be business income included in the
gross income of the person for that year; or
(b) if the consideration received is less than the written down value of
the asset or intangible at the beginning of the year, the difference
(referred to as a “balancing allowance”) shall be allowed as a
deduction in computing the chargeable income of the person for
that year.
33 Amortisation of preliminary expenditure
(1) In this section, “preliminary expenditure” means any expenditure incurred
before the commencement of a business if the income to be derived by the
business will be wholly and exclusively included in gross income, other
than expenditure incurred in acquiring land, a depreciable asset or an
intangible.
(2) A person shall be allowed a deduction for preliminary expenditure in the
fiscal year in which the expenditure is incurred and in the following three
fiscal years.
(3) The amount of the deduction allowed in each fiscal year shall be 25% of
the expenditure.
Income Tax Act 2007 Section 34
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34 Interest
A person shall be allowed a deduction for any interest incurred by the person in
a fiscal year to the extent to which the person has used the proceeds or benefit of
the debt or other instrument or agreement giving rise to the interest to derive
income included in gross income.
35 Contribution to approved retirement fund
(1) Subject to subsection (2), an employer shall be allowed a deduction for a
contribution made in a fiscal year to a retirement fund only if —
(a) the fund is an approved retirement fund; and
(b) the contribution is made in respect of an employee who is a resident
individual.
(2) The amount of the deduction allowed under subsection (1) shall not
exceed 20% of the employment income paid by the employer to the
employee for the year.
36 Bad debts
(1) A person shall be allowed a deduction for a bad debt written off in a fiscal
year if the following conditions are satisfied —
(a) the amount of the debt —
(i) was previously included in the gross income of the person; or
(ii) is money lent by the person in the normal course of business
for the purposes of deriving taxable business income;
(b) the debt or part of the debt is written off in the accounts of the
person in the fiscal year; and
(c) there are reasonable grounds for believing that the debt is
irrecoverable.
(2) The amount of the deduction allowed under this section for a fiscal year
shall not exceed the amount of the debt written off in the accounts of the
person for that year.
37 Carry forward of business losses
(1) If a person has a business loss for a fiscal year, the amount of the loss
shall be carried forward to the following fiscal year and allowed as a
deduction in computing the chargeable income of the person for that
following year.
(2) If a business loss is not wholly deducted under subsection (1), the excess
shall be carried forward to the next following fiscal year and deducted as
Section 38 Income Tax Act 2007
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specified in subsection (1) in that year, and so on until the loss is fully
deducted.
(3) A person has a business loss for a fiscal year if the total amount of
deductions allowed to the person in deriving taxable business income for
the year (other than the deduction allowed under this section) exceeds the
total amount of that income, and the amount of the excess shall be the
amount of the business loss.
DIVISION 5 - INCOME TAX ACCOUNTING
38 Method of accounting for income tax
(1) Subject to subsection (2), a person shall —
(a) account for business income and expenditures —
(i) in the case of a company, on an accrual basis; or
(ii) in any other case, on a cash or accrual basis, provided the
same basis is used for both business income and
expenditures; and
(b) account for any other income and expenditures on a cash basis.
(2) The Chief Commissioner may specify that any class of persons shall
account for income tax purposes on a cash or accrual basis.
(3) Subject to this Act, a person shall use generally accepted accounting
principles in accounting for income tax.
(4) A person may apply, in writing, for a change in the person’s method of
accounting and the Chief Commissioner may, by notice in writing,
approve the application but only if satisfied that the change is necessary to
properly compute the chargeable income of the person.
(5) Subject to subsection (6), if a person’s method of accounting changes, the
person shall make adjustments in the fiscal year of change to items of
income, deduction, or credit, or to any other items affected by the change
so that no item is omitted and no item is taken into account more than
once.
(6) If an amount is added to the chargeable income of a person solely by
reason of the adjustments required under subsection (5), one-third of the
amount shall be included in the fiscal year in which the change occurs and
the balance shall be included equally in the following two fiscal years.
39 Cash-basis accounting
A person accounting for income tax purposes on a cash basis shall derive an
amount when it is received and shall incur an expenditure when it is paid.
Income Tax Act 2007 Section 40
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40 Accrual-basis accounting
(1) A person accounting for income tax purposes on an accrual basis shall
derive an amount when it is due to the person and shall incur an
expenditure when it is payable by the person.
(2) Subject to this Act, an amount is due to a person at the time the person
becomes entitled to receive it even if the time for discharge of the
entitlement is postponed or the amount is payable by instalments.
(3) Subject to this Act, an amount is payable by a person when all the events
that determine liability have occurred and the amount of the liability can
be determined with reasonable accuracy, but not before economic
performance occurs.
(4) For the purposes of subsection (3), economic performance shall occur —
(a) in the case of the acquisition of services or assets, at the time the
services are provided or assets delivered;
(b) in the case of the use of assets, at the time the assets are used; and
(c) in any other case, at the time payment is made in full satisfaction of
the liability.
(5) If —
(a) a person has been allowed a deduction for any expenditure incurred
in deriving gross income; and
(b) the person has not paid the liability or a part of the liability to which
the deduction relates within one year of the end of the fiscal year in
which the deduction was allowed,
the unpaid amount of the liability shall be included in the gross income of
the person for the first fiscal year following the end of the
one-year period.
(6) An amount to which subsection (5) applies has the same character as the
income to which the deduction relates.
(7) If the amount of an unpaid liability is included in gross income under
subsection (5) and the person subsequently pays the liability or a part of
the liability, the person shall be allowed a deduction for the amount paid
in the fiscal year in which the payment is made.
41 Trading stock
(1) In this section —
“absorption-cost method” means the generally accepted accounting
principle under which the cost of an item of trading stock is the sum of
direct material costs, direct labour costs, and factory overhead costs;
Section 41 Income Tax Act 2007
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“average-cost method” means the generally accepted accounting
principle under which the valuation of trading stock is based on a
weighted average cost of items of trading stock on hand;
“direct labour costs” means labour costs directly related to the
manufacture or production of trading stock;
“direct material costs” means the cost of materials that become an
integral part of the trading stock manufactured or produced, or which are
consumed in the manufacturing or production process;
“factory overhead costs” means the total costs of manufacturing or
producing trading stock, other than direct labour and direct material costs;
“first-in-first-out method” means the generally accepted accounting
principle under which the valuation of trading stock is based on the
assumption that trading stock is sold in the order of its acquisition;
“prime-cost method” means the generally accepted accounting principle
under which the cost of trading stock is the sum of direct material costs,
direct labour costs, and variable factory overhead costs; and
“variable factory overhead costs” means those factory overhead costs
that vary directly with changes in the volume of trading stock
manufactured or produced.
(2) A person shall be allowed a deduction for the cost of trading stock
disposed of by the person in a fiscal year.
(3) The cost of trading stock disposed of by a person in a fiscal year shall be
computed in accordance with the following formula —
(A + B)- C
where —
A is the opening value of the trading stock of the person for the
year;
B is the cost of trading stock acquired by the person in the year;
and
C is the closing value of trading stock for the year.
(4) The opening value of trading stock of a person for a fiscal year shall be —
(a) the closing value of the trading stock of the person for the previous
fiscal year; or
(b) if the person commenced business in the year, the value of any
trading stock acquired by the person prior to the commencement of
the business.
(5) The value referred to in subsection (4)(b) shall be the lesser of —
(a) cost of the trading stock; or
Income Tax Act 2007 Section 42
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(b) the fair market value of trading stock determined at the time the
trading stock is brought into the business.
(6) The closing value of the trading stock of a person for a fiscal year shall be
the lower of cost or fair market value of the trading stock of the person on
hand at the end of the year.
(7) A person accounting for income tax purposes on a cash basis may
compute the person’s cost of trading stock under the prime-cost method or
absorption-cost method, and a person accounting for income tax purposes
on an accrual basis shall compute the person’s cost of trading stock under
the absorption-cost method.
(8) If particular items of trading stock are not readily identifiable, a person
may account for that trading stock on the first-in-first-out method or the
average-cost method but, once chosen, a stock valuation method may be
changed only with the written permission of the Chief Commissioner and
in accordance with any conditions that the Chief Commissioner
may impose.
42 Long-term contracts
(1) In this section —
“long-term contract” means a contract for manufacture, installation, or
construction, or, in relation to each, the performance of related services,
which is not completed within the fiscal year in which work under the
contract commenced, other than a contract estimated to be completed
within six months of the date on which work under the contract
commenced; and
“percentage of completion method” means the generally accepted
accounting principle under which income and expenditures arising under a
long-term contract are recognised by reference to the stage of completion
of the contract, as modified by subsection (3).
(2) A person accounting for income tax purposes on an accrual basis shall
compute the income arising under a long-term contract under the
percentage of completion method.
(3) The percentage of completion of a long-term contract in a fiscal year shall
be determined by comparing the total costs allocated to the contract and
incurred before the end of the year with the estimated total contract costs
as determined at the commencement of the contract.
(4) Where, in the fiscal year in which a long-term contract is completed, there
is a final year loss, the Chief Commissioner may allow the loss to be
carried back to the preceding fiscal years and applied against the amount
included in business income in those years commencing with the year in
which the contract was completed.
Section 43 Income Tax Act 2007
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to
(5) A person has a final year loss under a long-term contract if both the
following conditions are satisfied —
(a) the total chargeable income estimated to be made under the contract
for the purposes of the percentage of completion method exceeds
the total actual chargeable income, if any, under the contract; and
(b) the amount of the excess under paragraph (a) exceeds the amount
otherwise included in gross income under subsection (2) for the
fiscal year in which the contract was completed,
and the amount of the excess under paragraph (b) shall be the amount of
the final year loss.
43 Financial leases
(1) In this section —
“blended loan” means a loan under which payments by the borrower
represent in part a payment of interest and in part a repayment of principal
where the interest part is calculated on the principal outstanding at the
time of each payment;
“financial lease” means —
(a) a hire purchase agreement; or
(b) any lease that is treated under international accounting standards as
a financial lease and is so accounted for by the lessor in its financial
accounts;
“hire purchase agreement” means an agreement for —
(a) hire of goods with an option to purchase; or
(b) the purchase of goods by instalments (whether stated as rent, hire or
otherwise), other than an agreement under which property in the
goods passes at the commencement of the lease;
“lease term” includes any additional period of the lease under an option
to renew;
“lessee” includes a hiree under a hire purchase agreement; and
“lessor” includes a hirer under a hire purchase agreement.
(2) This section applies to an asset that is leased or hired under a financial
lease.
(3) If this section applies, this Act shall apply on the basis that —
(a) the lessee is the owner of the asset;
(b) the lessee acquired the asset at the commencement of the lease,
except in cases where the lessee already was the owner of the asset;
and
Income Tax Act 2007 Section 44
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(c) the lessor has made a blended loan to the lessee at the
commencement of the lease and each lease payment is in part
repayment of principal and in part payment of interest under that
loan.
(4) The cost of the asset treated as owned by the lessee under subsection
(3)(a) shall be —
(a) if the lessor and lessee are not associates and an amount is stated as
the cost or value of the asset in the lease agreement, that amount; or
(b) if the lessor and lessor are associates, the fair market value of the
asset at the commencement of the lease.
(5) The amount of the loan referred to in subsection (3)(c) shall be the amount
determined under subsection (4) as the cost of the asset.
(6) The interest part of each payment made under the loan shall be computed
by reference to the interest rate implicit in the lease agreement.
DIVISION 6 - ASSETS
44 Disposal and acquisition of assets
(1) In this section, “personal asset” means an asset held wholly for personal
or domestic use.
(2) Except as otherwise provided in this Act, this section establishes when an
asset is disposed of or acquired for the purposes of this Act.
(3) A person shall be treated as having made a disposal of an asset at the time
the person parts with the ownership of the asset, including when the
asset is —
(a) sold, exchanged, transferred, or distributed; or
(b) cancelled, redeemed, relinquished, destroyed, lost, expired, or
surrendered.
(4) A disposal includes the disposal of a part of an asset.
(5) The transmission of an asset by succession or under a will shall be treated
as a disposal of the asset by the deceased at the time the asset
is transmitted.
(6) The application of a business asset to personal or domestic use shall be
treated as a disposal of the asset by the owner at the time the asset is
so applied.
(7) A person acquires an asset at the time the person begins to own the asset,
including at the time the person is granted any right.
(8) The application of a personal asset to business use shall be treated as an
acquisition of the asset by the owner at the time the asset is so used.
Section 45 Income Tax Act 2007
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to
45 Cost
(1) In this section, “hedging agreement” means an agreement entered into
for the purpose of eliminating or reducing the risk of adverse financial
consequences that may arise from a foreign currency exchange rate
fluctuation in relation to another agreement.
(2) Except as otherwise provided in this Act, this section establishes the cost
of an asset for the purposes of this Act.
(3) Subject to this section, the cost of an asset purchased by a person shall be
the sum of the following amounts —
(a) the total consideration given by the person for the asset, including
the fair market value of any consideration in kind determined at the
time the asset is acquired;
(b) any incidental expenditure incurred by the person in acquiring or
disposing of the asset; and
(c) any expenditure incurred by the person to alter or improve the asset.
(4) Subject to this section, the cost of an asset produced or constructed by a
person shall be the total of the costs incurred by the person in producing
or constructing the asset plus any expenditure referred to in subsection
(3)(b) and (c) incurred by the person.
(5) No amount shall be included in the cost of an asset under subsection
(3)(b) and (c) to the extent to which it has been allowed as a deduction
under this Act.
(6) If an asset has been acquired by a person and the price is denominated in a
foreign currency, any increase or decrease in the price of the asset as
expressed in Tongan pa’anga from the time of acquisition until the time at
which the purchase price is paid is added to or deducted from the cost of
the asset, as the case may be.
(7) In determining whether the liability of a person has increased or decreased
for the purposes of subsection (6), account shall be taken of the person’s
position under any hedging agreement relating to the purchase price or
the loan.
(8) If a person disposes of a part of an asset, the cost of the asset shall be
apportioned between the part of the asset retained and the part disposed of
in accordance with their respective fair market values determined at the
time the person acquired the asset.
(9) The cost of an asset does not include the amount of any grant, subsidy,
rebate, commission, or other assistance received or receivable by a person
in respect of the acquisition of the asset, except to the extent to which the
amount is included in the gross income of a person.
(10) The reference to “other assistance” in subsection (9) does not include a
loan repayable with or without interest.
Income Tax Act 2007 Section 46
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46 Determination of cost in special cases
(1) The cost of an asset treated as acquired under section 44(8) shall be the
fair market value of the asset determined at the date it is applied to
business use.
(2) If the acquisition of an asset by a person is the derivation of an amount
included in gross income, the cost of the asset shall be the amount
included plus any amount paid by the person for the asset.
(3) If the acquisition of an asset by a person is the derivation of exempt
income, the cost of the asset shall be the exempt amount plus any amount
paid by the person for the asset.
47 Consideration received
(1) Except as otherwise provided in this Act, this section establishes the
amount of consideration received on disposal of an asset for the purposes
of this Act.
(2) The consideration received by a person on disposal of an asset shall be the
total amount received by the person for the asset, including the fair market
value of any consideration received in kind determined at the time of
disposal.
(3) If an asset has been lost or destroyed by a person, the consideration
received for the asset includes any compensation, indemnity, or damages
received by the person as a result of the loss or destruction, including
amounts received as a consequence of —
(a) an insurance policy, indemnity, or other agreement;
(b) a settlement; or
(c) a judicial decision.
(4) The consideration received for an asset treated as disposed of under
section 44(6) shall be the fair market value of the asset determined at the
time it is applied to personal or domestic use.
(5) If two or more assets are disposed of by a person in a single transaction
and the consideration received for each asset is not specified, the total
consideration received by the person shall be apportioned among the
assets disposed of in proportion to their respective fair market values
determined at the time of the transaction.
48 Non-arm!s length transaction
For the purposes of this Act, if an asset is disposed of in a non-arm’s length
transaction —
Section 49 Income Tax Act 2007
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to
(a) the person disposing of the asset shall be treated as having received
consideration equal to the fair market value of the asset determined
at the time the asset is disposed of; and
(b) the person acquiring the asset shall be treated as having a cost equal
to the amount determined under paragraph (a).
49 Gain or loss not recognised
(1) For the purposes of this Act and subject to subsection (2), no gain or loss
shall be taken to arise on the disposal of an asset —
(a) between spouses as part of a divorce settlement or under an
agreement to live apart;
(b) by reason of the transmission of the asset on the death of a person
to an executor or beneficiary; or
(c) by reason of the compulsory acquisition of the asset under any law
if the consideration received for the disposal is reinvested by the
recipient in an asset of a like kind (referred to as a “replacement
asset”) within one year of the disposal.
(2) Subsection (1) does not apply if the person acquiring the asset (including a
replacement asset) is a non-resident person at the time of the acquisition.
(3) If subsection (1)(a) or (b) applies, the person acquiring the asset shall be
treated as acquiring an asset of the same character as the person disposing
of the asset and —
(a) in the case of a depreciable asset or intangible, acquiring the asset
or intangible for a cost equal to the written down value of the asset
at the time of the disposal as determined under section 31; and
(b) in any other case, acquiring the asset for a cost equal to the cost of
the asset for the person disposing of the asset at the time of the
disposal.
(4) A person’s cost of a replacement asset or intangible referred to in
subsection (1)(c) shall be —
(a) if the asset compulsorily acquired is a depreciable asset or
intangible, the written down value of the asset or intangible at the
time it is compulsorily acquired; or
(b) in any other case, the cost of the asset or intangible at the time it is
compulsorily acquired,
plus the amount by which any consideration given by the person for the
replacement asset exceeds the consideration received by the person for the
asset or intangible compulsorily acquired.
Income Tax Act 2007 Section 50
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DIVISION 7 - MISCELLANEOUS PROVISIONS RELATING TO
INCOME AND DEDUCTIONS
50 Income of joint owners
(1) For the purposes of this Act, if property is jointly owned by two or more
persons, any income or expenditures relating to the property are
apportioned among the owners according to their respective interests in
the property.
(2) If the interests of the owners of jointly owned property cannot be
ascertained, the owners of the property are treated as having an equal
interest in the property.
51 Apportionment of deductions
(1) Subject to this Act, expenditure relating to —
(a) the derivation of more than one class of income; or
(b) the derivation of a class of income and to some other purpose,
shall be apportioned on any reasonable basis taking account of the relative
nature and size of the activities or purposes to which it relates.
(2) The following are treated as a “class of income” —
(a) taxable business income;
(b) any other income included in gross income; and
(c) exempt income.
52 Recovered expenditure
If a person has been allowed a deduction for any expenditure or loss incurred, or
bad debt written off, in a fiscal year in the computation of the chargeable income
of the person for the year and, subsequently, the person has received, in cash or
in kind, any amount as a reimbursement or recovery of, or an indemnity for the
expenditure, loss, or debt, the amount received shall be —
(a) included in the gross income of the person in the fiscal year in
which it is received; and
(b) treated as income of the same character as the income to which the
deduction related.
53 Cessation of source of income
If —
Section 54 Income Tax Act 2007
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to
(a) any amount is derived by a person in a fiscal year from any
business, activity, investment, or other source that had ceased
before the amount was derived; and
(b) had the amount been derived before the business, activity,
investment, or other source ceased it would have been included in
the gross income of the person,
this Act shall apply to the amount on the basis that the business, activity,
investment, or other source had not ceased at the time the amount
was derived.
54 Currency translation
(1) An amount taken into account under this Act shall be expressed in Tongan
pa’anga.
(2) If an amount is in a currency other than Tongan pa’anga, the amount shall
be translated to Tongan pa’anga at the National Reserve Bank of Tonga
mid-exchange rate applying between the foreign currency and Tongan
pa’anga on the date the amount is taken into account for the purposes of
this Act.
PART 4 - APPLICATION OF INCOME TAX TO PERSONS
DIVISION 1 - INDIVIDUALS
55 Taxation of individuals
The chargeable income of each individual shall be computed separately.
DIVISION 2 - ENTITIES
56 Taxation of trusts
(1) In this section, “chargeable trust income”, in relation to a fiscal year,
means —
(a) in the case of a resident trust, the gross income of the trust for the
year reduced by the sum of the following —
(i) any part of that amount to which subsection (3) applies for
the year; and
(ii) the total deductions allowed to the trust for the year under
this Act, other than amounts to which subsection (4) applies;
or
Income Tax Act 2007 Section 57
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(b) in the case of a non-resident trust, the total amount of Tongan-
source income derived by the trust for the year included in gross
income reduced by the sum of the following —
(i) any part of that amount to which subsection (3) applies for
the year and in respect of which the beneficiary has paid tax;
and
(ii) the total deductions allowed to the trust for the year under
this Act that relate to the derivation of such income, other
than amounts to which subsection (4) applies.
(2) Income derived by the trustee of a trust during a fiscal year shall be taxed,
in that year, either to the trustee or the beneficiary of the trust in
accordance with this section.
(3) An amount derived by a trustee of a trust shall be treated as derived by a
beneficiary of the trust (other than a beneficiary under a legal disability) if
the beneficiary has a vested right to the income.
(4) A beneficiary shall be allowed a deduction in accordance with this Act for
any expenditure or loss incurred by the trustee in deriving income referred
to in subsection (3) that is included in the gross income of the beneficiary.
(5) Income to which subsection (3) applies —
(a) retains its character and geographic source in the hands of the
beneficiary; and
(b) is treated as derived by the beneficiary at the time the amount was
derived by the trustee.
(6) The trustee of a trust shall be liable for tax for a fiscal year on the
chargeable trust income of the trust for the year.
(7) The gross income of a resident beneficiary includes a distribution received
by the beneficiary to the extent to which the distribution is foreign-source
income not dealt with under subsection (3).
57 Taxation of companies
(1) A company shall be liable for tax separately from its members.
(2) A social club, trade association, mutual insurance company, or other
similar membership organisation shall be liable for tax under this Act in
respect of its dealings with members.
(3) The total deductions allowed to a company referred to in subsection (2)
for a fiscal year in respect of the supply of goods or services to members
shall not exceed the gross income derived from the members (including
membership contributions) for the year.
(4) If any expenditure is not deducted in a fiscal year as a result of subsection
(3), the expenditure shall be carried forward and treated as incurred in the
Section 58 Income Tax Act 2007
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following year and deducted in accordance with this section in that year,
and so on until the expenditure is fully deducted.
58 Change in control of entity
(1) In this section, —
“carry forward loss” means an interest deduction carried forward under
section 34, a business loss carried forward under section 37 or 57(4), or a
foreign business loss carried forward under section 63;
“entity” means a trust or company;
“ownership interest” means an interest of a beneficiary in a trust or
membership interest in a company; and
“underlying ownership” in relation to an entity, means an ownership
interest in the entity held, directly or indirectly through an interposed
entity or entities, by an individual or by a person not ultimately owned by
individuals.
(2) If there is a change of 50% or more in the underlying ownership of an
entity, any carry forward loss incurred for a fiscal year before the change
shall not be allowed as a deduction in a fiscal year after the change, unless
the entity —
(a) carries on the same business after the change as it carried on before
the change until the loss has been fully deducted; and
(b) does not, until the loss has been fully deducted, engage in any new
business or investment after the change if the principal purpose of
the entity or the owners of the entity is to utilise the loss so as to
reduce the income tax payable on the income arising from the new
business or investment.
PART 5 - APPLICATION OF INCOME TAX TO SPECIAL
INDUSTRIES
59 Short-term insurance business
The chargeable income of a company carrying on a short-term insurance
business shall be computed in accordance with the Regulations.
Income Tax Act 2007 Section 60
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PART 6 - APPLICATION OF INCOME TAX TO
INTERNATIONAL TRANSACTIONS
DIVISION 1 - GEOGRAPHIC SOURCE OF INCOME
60 Geographic source of income
(1) Employment income shall be Tongan-source income to the extent to
which the income —
(a) is received from employment exercised in Tonga, wherever paid; or
(b) is paid by, or on behalf of, the Government, wherever the
employment is exercised.
(2) Business income derived by a resident person shall be Tongan-source
income to the extent to which the income is derived from any business
carried on in Tonga.
(3) Business income derived by a non-resident person shall be Tongan-source
income to the extent to which it is directly or indirectly attributable to —
(a) a permanent establishment of the non-resident person in Tonga;
(b) sales in Tonga of goods or merchandise of the same or similar kind
as those sold by the person through a permanent establishment in
Tonga; or
(c) any other business activity carried on in Tonga of the same or
similar kind as that carried on by the person through a permanent
establishment in Tonga.
(4) If the business of a non-resident person comprises the rendering of
independent services, the Tongan-source business income of the person
shall include, in addition to any amounts treated as Tongan-source income
under subsection (3), any remuneration —
(a) paid by a resident person, except remuneration for services utilised
in a business carried on by the resident person outside Tonga
through a permanent establishment; or
(b) that is deductible expenditure of a permanent establishment in
Tonga of a non-resident person.
(5) Any gain from the disposal of an asset shall be Tongan-source income to
the extent that the asset has been used in deriving business income that is
treated as Tongan-source income under this section.
(6) A dividend shall be Tongan-source income if it is paid by a resident
company.
(7) Interest shall be Tongan-source income if it is —
Section 60 Income Tax Act 2007
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(a) paid by a resident person, except when the debt or other instrument
or agreement giving rise to the interest is utilised in a business
carried on by the person outside Tonga through a permanent
establishment; or
(b) deductible expenditure of a permanent establishment in Tonga of a
non-resident person.
(8) A royalty shall be Tongan-source income if it is —
(a) paid by a resident person, except when the right, property, or supply
giving rise to the royalty is utilised in a business carried on by the
person outside Tonga through a permanent establishment; or
(b) deductible expenditure of a permanent establishment in Tonga of a
non-resident person.
(9) Rent shall be Tongan-source income if it is derived from —
(a) the lease of land in Tonga; or
(b) the lease of a building or other structural improvement to land in
Tonga.
(10) A pension, charge, annuity, management fee, or insurance premium shall
be Tongan-source income if it is paid by a resident person or is deductible
expenditure of a permanent establishment in Tonga of a non-resident
person.
(11) A natural resource amount shall be Tongan-source income if it relates to
the taking of minerals or a living or non-living resource from land in, or
territorial waters of, Tonga.
(12) An amount of any kind not mentioned in the preceding subsections shall
be Tongan-source income if it is paid by a resident person or is deductible
expenditure of a permanent establishment in Tonga of a non-resident
person.
(13) If an amount may come within subsection (2) or (3) and another
subsection, other than subsection (12), this section shall apply —
(a) by first determining whether the amount is Tongan-source income
under that other subsection; and
(b) if the amount is not Tongan-source income under that other
subsection, then determining whether it is Tongan-source income
under subsection (2) or (3).
(14) An amount shall be foreign-source income to the extent it is not Tongan-
source income.
Income Tax Act 2007 Section 61
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DIVISION 2 - TAXATION OF FOREIGN-SOURCE INCOME OF
RESIDENT PERSONS
61 Foreign-source employment income of resident individuals
(1) Any foreign-source employment income that is received by a resident
individual shall be exempt income if the individual has paid foreign
income tax in respect of the income.
(2) A resident individual shall be treated as having paid foreign income tax in
respect of foreign-source employment income if tax has been withheld
from the income by the individual’s employer.
62 Foreign tax credit
(1) In this section —
“average rate of Tongan income tax” in relation to a resident person for
a fiscal year, means the percentage that the income tax payable by the
person under this Act (before the allowance of any tax credit under this
Act) is of the chargeable income of the person for the year;
“foreign income tax” includes a foreign withholding tax, but does not
include any penalty, additional tax, or interest payable in respect of any
foreign income tax;
“net foreign-source income” in relation to a resident person for a fiscal
year, means the total taxable foreign-source income of the person for the
year, as reduced by any deductions allowed to the person under this Act
for the year that —
(a) relate exclusively to the derivation of the foreign-source income;
and
(b) are apportioned to the derivation of foreign-source income in
accordance with section 51 on the basis that foreign-source income
is a separate class of income; and
“taxable foreign-source income” means foreign source income included
in gross income.
(2) If a resident person derives taxable foreign-source income in respect of
which the person has paid foreign income tax, the person shall be allowed
a tax credit (referred to as a “foreign tax credit”) of an amount equal to the
lesser of —
(a) the foreign income tax paid; or
(b) the Tongan income tax payable in respect of the income.
(3) For the purposes of subsection (2)(b), the Tongan income tax payable in
respect of taxable foreign-source income derived by a resident person in a
Section 63 Income Tax Act 2007
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fiscal year shall be computed by applying the average rate of Tongan
income tax applicable to the person for the year against the net foreign-
source income of the person for the year.
(4) The foreign tax credit of a resident person for a fiscal year shall be
computed separately for foreign-source business income and the other
foreign-source income of the person.
(5) Where subsection (4) applies, deductions shall be apportioned for the
purposes of paragraph (b) of the definition of “net foreign-source income”
in accordance with section 51 on the basis that foreign-source business
income and other foreign-source income are separate classes of income.
(6) A foreign tax credit shall be allowed under this section only if the foreign
income tax is paid within two years after the end of the fiscal year in
which the foreign-source income to which the tax relates was derived by
the resident person.
(7) A foreign tax credit allowed under this section shall be applied in
accordance with section 5(3).
(8) Any foreign tax credit or part of a foreign tax credit allowed under this
section for a fiscal year that is not credited under section 5(3) shall not be
refunded, carried back to the preceding fiscal year, or carried forward to
the following fiscal year.
63 Foreign losses
(1) In this section,
“foreign business loss”, for a fiscal year, is the excess of deductions
allowed to the person in deriving taxable foreign-source business income
for the year over the amount of that foreign-source business income;
“taxable foreign-source business income”, in relation to a resident
person, means foreign-source business income included in the gross
income of the person; and
“taxable foreign-source non-business income”, in relation to a resident
person, means foreign-source income (other than foreign-source business
income) included in the gross income of the person.
(2) Any amount that a resident person is allowed as a deduction under this
Act in deriving taxable foreign-source business income shall be deductible
only against that income.
(3) If a resident person has a foreign business loss for a fiscal year, the
amount of the loss shall be carried forward to the following fiscal year and
allowed as a deduction against the person’s foreign-source business
income derived in that following year.
Income Tax Act 2007 Section 64
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(4) If a foreign business loss is not wholly deducted in a fiscal year under
subsection (3), the undeducted amount shall be carried forward to the next
following fiscal year and applied as specified in subsection (3) in that
year, and so on until the loss is fully deducted.
(5) Any amount that a resident person is allowed as a deduction under this
Act in deriving taxable foreign-source non-business income shall be
deductible only against that income.
(6) If the total amount of deductions referred to in subsection (5) for a fiscal
year exceeds the person’s taxable foreign-source non-business income for
the year, the amount of the excess shall not be carried forward to the
following fiscal year.
DIVISION 3 - TAXATION OF NON-RESIDENT PERSONS
64 Taxation of non-residents with Tongan permanent establishments
(1) Subject to this section, this Act applies to a non-resident person with a
permanent establishment in Tonga on the basis that the permanent
establishment is a separate person engaged in the same or similar
activities under the same or similar conditions and dealing independently
with that non-resident person.
(2) The gross income of a permanent establishment in Tonga of a non-
resident person for a fiscal year is the total Tongan-source income of the
person for the year as determined under section 60.
(3) Subject to subsection (4), no deduction is allowed for amounts paid or
payable by the permanent establishment to its head office or to another
permanent establishment of the non-resident person as —
(a) royalties, fees, or other similar payments for the use of any tangible
or intangible asset;
(b) compensation for any services, including management services,
performed for the permanent establishment; or
(c) interest on moneys lent to the permanent establishment, except in
connection with a banking business.
(4) Nothing in subsection (3) prevents a deduction for an amount paid or
payable by a permanent establishment as a reimbursement of actual
expenditures incurred by the non-resident person to third parties if the
reimbursement is otherwise deductible under this Act.
65 Foreign-source income of non-resident persons
The foreign-source income of a non-resident person shall be exempt income.
Section 66 Income Tax Act 2007
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PART 7 - ANTI-AVOIDANCE
66 Transactions between associates
(1) The Chief Commissioner may, in respect of any transaction between
persons who are associates, distribute, apportion, or allocate income,
deductions, or tax credits between the persons as is necessary to reflect the
income that the persons would have realised in an arm’s length
transaction.
(2) In making any adjustment under subsection (1), the Chief Commissioner
may determine the geographic source of income and the nature of any
income, payment, or loss as revenue, capital, or otherwise.
67 Tax avoidance schemes
(1) In this section, “tax avoidance scheme” means any transaction if one of
the main purposes of a person in entering into the transaction is the
avoidance or reduction of any person’s liability to tax under this Act.
(2) For the purposes of determining the liability to tax under this Act of any
person, the Chief Commissioner may —
(a) determine the character of a transaction or an element of a
transaction that was entered into as part of a tax avoidance scheme;
(b) disregard a transaction that does not have substantial economic
effect; or
(c) determine the character of a transaction if the form of the
transaction does not reflect the substance.
PART 8 - INCOME TAX PROCEDURE
DIVISION 1 - INCOME TAX RETURNS
68 Furnishing of income tax returns
(1) Subject to section 69, a taxpayer, other than a presumptive income
taxpayer, shall lodge an income tax return for each fiscal year within two
months after the end of the year.
(2) An income tax return shall be lodged in the form and manner prescribed
in the Regulations.
Income Tax Act 2007 Section 69
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(3) The Chief Commissioner may, by notice in writing, require a taxpayer or
the taxpayer’s representative to lodge an income tax return by the date
specified in the notice for a period of less than twelve months, if —
(a) the taxpayer has died;
(b) the taxpayer has become bankrupt or gone into liquidation;
(c) the taxpayer is about to leave Tonga permanently;
(d) the taxpayer is otherwise about to cease carrying on business in
Tonga; or
(e) the Chief Commissioner otherwise considers it appropriate to
require such a return to be lodged.
69 Income tax return not required
A taxpayer shall not be required to lodge an income tax return under section 68
for a fiscal year if the only income derived by the taxpayer during the year is —
(a) employment income from which tax has been withheld under
section 76;
(b) interest income from which tax has been withheld under section 77;
(c) employment and interest income referred to in paragraphs (a) and
(b); or
(d) income to which section 6 or 7 applies.
DIVISION 2 - INCOME TAX ASSESSMENTS
70 Income Tax assessments
(1) If a taxpayer lodges an income tax return under section 68 for a fiscal
year, the Chief Commissioner shall be treated as having made an
assessment of the taxpayer’s chargeable income and income tax payable
thereon, or business loss for the year equal to those respective amounts as
specified in the return.
(2) An income tax return lodged under section 68 shall be treated for all
purposes of the Act and the Revenue Services Administration Act 2002 as
a notice of the assessment served on the taxpayer by the Chief
Commissioner on the day the return was lodged by the taxpayer.
(3) If a taxpayer fails to lodge an income tax return under section 68 for a
fiscal year, the Chief Commissioner may, based on any available
information and according to the Chief Commissioner’s best judgement,
make an assessment of the taxpayer’s chargeable income and income tax
payable thereon, or business loss, for the year.
Section 71 Income Tax Act 2007
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to
(4) As soon as possible after making an assessment under subsection (3), the
Chief Commissioner shall serve the taxpayer with a notice of the
assessment stating —
(a) the amount of chargeable income or business loss of the taxpayer;
(b) the amount of any income tax and minimum income tax, if
any, due;
(c) the amount of tax paid, if any;
(d) the amount of any penalty and interest payable in respect of the tax
due; and
(e) the time, place, and manner of objecting to the assessment.
71 Amendment of assessments
(1) Subject to this section, the Chief Commissioner may amend an assessment
made or treated as made under section 70 by making such alterations or
additions to the assessment as the Chief Commissioner considers
necessary to ensure that a taxpayer is liable for the correct amount of
income tax for the fiscal year to which the assessment relates.
(2) The amendment of an assessment under subsection (1) may be made —
(a) in the case of fraud or wilful neglect by or on behalf of the
taxpayer, at any time; or
(b) in any other case, within five years of the date the Chief
Commissioner served or is treated as having served notice of the
assessment on the taxpayer.
(3) The Chief Commissioner may require a taxpayer to lodge a revised return
in accordance with section 3(2) of the Revenue Services Administration
Act 2002.
(4) A notice under section 3(2) of the Revenue Services Administration Act
2002 requiring a taxpayer to lodge a revised return may be made —
(a) in the case of fraud or wilful neglect by or on behalf of the
taxpayer, at any time; or
(b) in any other case, within five years from the date the taxpayer
lodged the return.
(5) A taxpayer may, on the taxpayer’s own motion, amend an assessment
treated as made under section 70(1) by lodging a revised income tax
return within five years of the date the original return was lodged.
(6) If a taxpayer lodges a revised return in accordance with subsection (3) or
(5), the Chief Commissioner shall be treated as having made an amended
assessment of the taxpayer’s chargeable income and tax payable thereon,
or business loss, as set out in the revised return.
Income Tax Act 2007 Section 72
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(7) The taxpayer’s revised return shall be treated for all purposes of this Act
and the Revenue Services Administration Act 2002 as notice of the
amended assessment served on the taxpayer by the Chief Commissioner
on the day the revised return was lodged by the taxpayer.
(8) If a notice of assessment (hereinafter referred to as the “original
assessment”) has been amended under subsection (1) or (6), the Chief
Commissioner may further amend the original assessment within the
later of —
(a) five years after the Chief Commissioner has served or is treated as
having served notice of the original assessment on the taxpayer; or
(b) one year after the Chief Commissioner has served or is treated as
having served notice of the amended assessment on the taxpayer.
(9) As soon as possible after making an amended assessment under this
section, the Chief Commissioner shall serve the taxpayer with notice of
the amended assessment stating —
(a) the amended chargeable income or business loss of the taxpayer;
(b) the amended amount of income tax or minimum income tax due;
(c) the amount of income tax paid, if any;
(d) the amount of any penalty and interest payable in respect of the
income tax due; and
(e) the time, place, and manner of objecting to the amended
assessment.
(10) An amended income tax assessment shall be treated in all respects as an
income tax assessment for the purposes of this Act and the Revenue
Services Administration Act 2002, other than subsection (1).
DIVISION 3 - PAYMENT OF INCOME TAX
72 Due date for payment of income tax
Subject to this Act, the income tax payable by a taxpayer for a fiscal year shall
be due by the due date for lodging the taxpayer’s income tax return for the year.
73 Collection of tax from non-resident ship owners or charterers
(1) Subject to subsection (3), before the departure of a ship owned or
chartered by a non-resident person from a port in Tonga —
(a) the master of the ship shall lodge with the Chief Commissioner a
return showing the gross amount specified in section 7(2) in respect
of the ship; and
Section 74 Income Tax Act 2007
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to
(b) the Chief Commissioner shall determine the amount of income tax
due under section 7 in respect of the ship and, as soon as possible,
notify the master, in writing, of the amount due.
(2) The master of a ship shall be liable for the tax notified under subsection
(1)(b) and the provisions of this Act and the Revenue Services
Administration Act 2002 apply to such tax as if it were income tax due
under an assessment.
(3) If the Chief Commissioner is satisfied that the master of a ship which is
owned or chartered by a non-resident person is unable to lodge the return
required under subsection (1) before the departure of the ship from Tonga,
the Chief Commissioner may allow the return to be lodged within 30 days
after departure of the ship provided that the master of the ship has made
satisfactory arrangements for the payment of the tax due under section 7
in respect of the ship.
(4) The Commissioner shall not grant a port clearance for a ship owned or
chartered by a non-resident person until satisfied that any tax due under
section 7 in respect of the ship has been paid or that arrangements for its
payment have been made to the satisfaction of the Chief Commissioner.
(5) This section does not relieve the owner or charterer of the ship who is a
non-resident person from liability to pay any amount due under this
section that is not paid by the master of the ship.
74 Collection of tax from non-resident aircraft owners or charterers
(1) An owner or charterer of an aircraft liable for tax under section 7 shall
lodge a return with the Chief Commissioner for each calendar month
within 28 days after end of each month.
(2) The return shall be in the prescribed form and lodged in the
prescribed manner.
(3) Where a taxpayer lodges a return under subsection (1), the Chief
Commissioner is treated as having made an assessment of the gross
amount specified in section 7(2) for the month and the tax payable
thereon, and to have served notice of the assessment on the day the return
was lodged.
(4) The tax payable by the non-resident person under section 7 shall be
collected monthly and shall be due on the due date for furnishing the
return for each month.
(5) Sections 70(3) and (4), and 71 apply for the purposes of this section.
(6) If the tax referred to in subsection (4) is not paid within three months of
the due date, the Chief Commissioner may issue to the Ministry of Civil
Aviation a certificate specifying the name of the non-resident person and
the amount of tax due, and the Ministry of Civil Aviation shall refuse
Income Tax Act 2007 Section 75
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clearance from any airport in Tonga to any aircraft owned or chartered by
the person until the tax due has been paid.
75 Security
The Chief Commissioner may, for the purposes of securing payment of any tax
that is or may become due under this Act, require a person to give security in
such amount and in such manner as the Chief Commissioner thinks fit.
DIVISION 4 - WITHHOLDING TAX
76 Withholding of tax from employment income
(1) An employer shall withhold tax from a payment of employment income to
an employee as prescribed in the Regulations.
(2) The obligation of an employer to withhold tax under subsection (1) —
(a) shall not be reduced or extinguished because the employer has a
right, or is otherwise obliged, to withhold any other amount from a
payment of employment income; and
(b) shall apply notwithstanding any law that provides that the
employment income of an employee is not to be reduced or subject
to attachment.
77 Withholding of tax from interest
A resident company or permanent establishment in Tonga of a non-resident
company paying interest to a resident person, other than a financial institution,
shall withhold tax from the gross amount of the interest paid at the rate of 10%.
78 Withholding of tax from income from land
If rent has been paid to the Minister of Lands in accordance with the Land Act
for the lease of land, the Minister shall withhold tax from the gross amount paid
at the rate of 3%.
79 Withholding of tax from payments to non-resident persons
(1) In this section, “rent” does not include an amount to which section 78
applies.
(2) A person paying a Tongan-source royalty, interest, technical services fee,
dividend, natural resource amount, rent, management fee, or insurance
premium to a non-resident person shall withhold tax from the gross
amount paid at the rate of —
Section 80 Income Tax Act 2007
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to
(a) in the case of an insurance premium, 5%;
(b) in the case of rent, 7.5%; or
(c) in any other case, 15%.
(3) A person paying an amount of Tongan-source business income to a non-
resident person rendering independent services shall withhold tax from the
gross amount paid at the rate of 10%.
80 No withholding from exempt income
A person shall not withhold tax from an amount that is exempt income of
the recipient.
81 Time of withholding
A person required to withhold tax under this Division from an amount paid by
the person shall withhold the tax at the earlier of —
(a) the time the amount is credited to the account of the recipient; or
(b) the time the amount is actually paid.
82 Payment of tax withheld
Tax required to be withheld by a person under this Division shall be paid to the
Chief Commissioner within 28 days after the end of the month in which the
person was required to withhold the tax.
83 Failure to pay tax withheld
(1) If a person —
(a) fails to withhold tax as required under this Division; or
(b) having withheld tax fails to pay the tax to the Chief Commissioner
as required under section 82,
the person shall be personally liable to pay the amount of tax to the Chief
Commissioner.
(2) A person personally liable for an amount of tax under subsection (1) as a
result of failing to withhold the tax shall be entitled to recover the tax
from the recipient of the payment.
84 Recovery of withholding tax
(1) If a person fails to withhold tax as required under this Division, the Chief
Commissioner may recover the tax from the recipient of the payment
Income Tax Act 2007 Section 85
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provided the total amount recovered does not exceed the tax that should
have been withheld.
(2) Notwithstanding the recovery of any tax under subsection (1), the person
who failed to withhold the tax shall continue to be liable for —
(a) any other legal action in relation to the failure;
(b) the imposition of interest and penalty for the failure; and
(c) the disallowing of a deduction for the expenditure to which the
failure relates under section 26(2).
85 Tax withholding certificate
(1) A person withholding tax under this Division shall give to the recipient of
the payment a tax withholding certificate as prescribed in the Regulations.
(2) A person required to lodge an income tax return for a fiscal year shall
attach to the return any tax withholding certificate as prescribed in the
Regulations.
86 Withholding tax statements
(1) In this section, “fiscal year” means the period of twelve months ending on
30th June.
(2) A person withholding tax under this Division shall, within two months
after the end of the fiscal year or within such further time as the Chief
Commissioner may allow by notice in writing, lodge with the Chief
Commissioner a withholding tax statement as prescribed in the
Regulations.
(3) In addition to the annual withholding tax statement required to be lodged
under subsection (1), a person withholding tax may be required to furnish
statements on a monthly, quarterly, or six monthly basis as may be
prescribed in the Regulations.
87 Priority of tax withheld
(1) Tax withheld from a payment under this Division —
(a) shall be held by the person in trust for the Government; and
(b) shall not be subject to attachment in respect of any debt or liability
of the person.
(2) In the event of the liquidation or bankruptcy of a person who has withheld
tax under this Division, any amount withheld shall not form part of the
estate of the person in liquidation or bankruptcy and the Chief
Section 88 Income Tax Act 2007
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Commissioner has first claim for that amount before any distribution of
property is made.
(3) An amount that a person is required to withhold from a payment under
this Division shall be —
(a) a first charge on the payment; and
(b) deducted prior to any other amount that the person may be required
to deduct from the payment by virtue of an order of any Court or
under any other law.
88 Indemnity
A person who has withheld tax from a payment under this Division and remitted
the tax to the Chief Commissioner shall be indemnified against any claim by the
recipient for payment of the withheld amount.
89 Credit for tax withheld
(1) For the purposes of this Act, if tax has been withheld under this Division
from income derived by a person, the amount of income included in the
gross income of that person shall be the amount derived before the
withholding of the tax.
(2) Subject to subsections (3) and (4), if tax has been withheld under this
Division from income derived by a person, the person shall be allowed a
tax credit for that tax against the tax due by the person on the chargeable
income of the person for the fiscal year in which the tax was withheld.
(3) No tax credit shall be allowed if the tax withheld is a final tax on the
income under section 9 or 90.
(4) A tax credit allowed under this section shall be applied in accordance with
section 5(3).
(5) A tax credit or part of a tax credit allowed under this section for a fiscal
year that is not credited under section 5(3) for the year shall be treated as
overpaid tax and dealt with in accordance with section 92.
90 Withholding tax as a final tax
(1) This section applies to tax withheld under —
(a) section 76 if section 69 applies;
(b) section 77 if the interest is paid by a financial institution and is
derived by an individual; or
(c) section 78 if the amount is derived by a non-resident.
Income Tax Act 2007 Section 91
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(2) If this section applies, the tax withheld shall be a final tax on the income
in respect of which the tax has been withheld and —
(a) the income shall not be included in —
(i) gross income in computing the chargeable income of the
person who derives it for any fiscal year; or
(ii) turnover in computing the minimum income tax liability of
the person who derived it for any fiscal year;
(b) no deduction shall be allowable under this Act for any expenditure
incurred in deriving the income;
(c) the income shall not be reduced by any loss;
(d) the tax withheld shall not be reduced by any tax credits allowed
under this Act; and
(e) there shall be no refund of the tax withheld.
DIVISION 5 - INSTALMENTS OF INCOME TAX
91 Instalments of income tax
(1) A taxpayer shall pay instalments of income tax for a fiscal year.
(2) Instalments shall be payable for the period of three calendar months
ending on last day of the third, sixth, ninth and twelfth months of the
fiscal year of a taxpayer.
(3) Instalments of income tax shall be due on the 28th day after the end of the
period to which they relate.
(4) Instalments of income tax paid by a taxpayer in a fiscal year shall be —
(a) credited against the taxpayer’s income tax liability on chargeable
income for that year in accordance with section 5(3);
(b) any excess shall be credited against the taxpayer’s minimum
income tax liability for that year; and
(c) any further excess shall be treated as overpaid tax and dealt with in
accordance with section 92.
(5) The Chief Commissioner may make regulations for the collection of
Income Tax by instalment.
Section 92 Income Tax Act 2007
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PART 9 - REFUNDS
92 Refunds
(1) Subject to this Act, a taxpayer who has paid tax in excess of the amount
for which the taxpayer is properly chargeable under this Act may apply to
the Chief Commissioner for a refund of the excess.
(2) An application for a refund under subsection (1) shall be lodged in the
form and manner prescribed in the Regulations within 5 years of the date
on which the tax was paid.
(3) If the Chief Commissioner is satisfied that tax has been overpaid, the
Chief Commissioner shall -
(a) apply the amount overpaid in reduction of any other tax due,
including an instalment of tax due, by the taxpayer under this
Act; and
(b) refund the remainder, if any, to the taxpayer.
(4) The Chief Commissioner shall serve the taxpayer with notice, in writing,
of the decision on the application for a refund within 45 days of the
application being lodged with the Chief Commissioner.
PART 10 - MISCELLANEOUS
93 Regulations
(1) The Chief Commissioner may, with the consent of Cabinet, make
regulations for —
(a) matters prescribed to be made by regulation under this Act; or
(b) the application and administration of this Act.
(2) Without limiting the general effect of subsection (1), regulations made
under that subsection may —
(a) contain provisions of a saving or transitional nature consequent
upon the making of this Act; or
(b) prescribe penalties for the contravention of the regulations.
(3) Transitional regulations made within 6 months after the commencement
of this Act may provide that they take effect from the date on which the
Act comes into force but only if this is to the benefit of taxpayers.
Income Tax Act 2007 Section 94
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94 Repeal and Transitional
(1) The Income Tax Act (Cap. 68) is hereby repealed.
(2) Notwithstanding subsection (1) and subject to the Revenue Services
Administration Act 2002, the Income Tax Act (Cap. 68) shall continue to
apply to any fiscal year of a taxpayer ending before the commencement of
the taxpayer’s first fiscal year under this Act.
(3) Subject to subsection (4), sections 27 to 29, 31 and 32 shall apply to a
depreciable asset acquired by a taxpayer before commencement of the
taxpayer’s first fiscal year under the Act on the basis that the written down
value of the asset at the beginning of that year shall be the cost of the asset
less the total deductions allowed under section 6(2)(a) of the Income Tax
Act (Cap. 68).
(4) If section 27(7) applies to a depreciable asset referred to in subsection (3),
the written down value of the asset at the commencement of the
taxpayer’s first fiscal year under the Act shall be computed on the basis
that the asset was used solely to derive income subject to tax under section
4(a) of the Income Tax Act (Cap. 68).
(5) Section 30 shall not apply to an intangible acquired by a taxpayer before
the commencement of the taxpayer’s first fiscal year under the Act.
(6) Section 33 shall not apply to preliminary expenditure incurred by a
taxpayer before the commencement of the taxpayer’s first fiscal year
under the Act.
(7) Section 34 shall apply in respect of a debt or other instrument or
agreement giving rise to interest whenever incurred by a taxpayer.
(8) Where a debt —
(a) is written off by a taxpayer as a bad debt in a fiscal year; and
(b) the debt arose before the commencement of the taxpayer’s first
fiscal year under the Act, the reference in section 36(1)(a) to the
amount of the debt being previously included in the gross income of
a taxpayer shall include an amount included in assessable income
under section 4 of the Income Tax Act (Cap. 68).
(9) If, at the commencement of a taxpayer’s first fiscal year under the Act, the
taxpayer has a business loss carried forward under section 41(3) of the
Income Tax Act (Cap. 68) the amount of the loss shall be allowed as a
deduction under section 37.
(10) Section 43 shall not apply to a financial lease entered into before the
commencement of this Act.
(11) A reference in section 52 to a deduction allowed for any expenditure or
loss incurred, or bad debt written off in a fiscal year shall include any
expenditure, loss, or bad debt deducted under the Income Tax Act
(Cap. 68).
Section 94 Income Tax Act 2007
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(12) Income that would be exempt income under section 11(p) of the Income
Tax Act (Cap. 68) shall continue to be exempt if it is derived before
1 July 2007.
(13) Self-assessment under section 70 shall not apply to a taxpayer whose
annual turnover is less than $100,000, unless the Chief Commissioner has
specified by notice in the Gazette that the section shall apply to such
taxpayer.
(14) Where self-assessment does not apply to a taxpayer by virtue of
subsection (13), the Chief Commissioner shall, based on the taxpayer’s
income tax return for a fiscal year and on any other information available,
make an assessment of the chargeable income or the business loss of a
taxpayer and any tax payable thereon for the year.
Passed in the Legislative Assembly this 18th day of June 2007.
Income Tax Act 2007 FIRST SCHEDULE
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FIRST SCHEDULE
(Section 13)
VALUATION OF EMPLOYMENT BENEFITS
1. In this Schedule —
“benchmark rate” means the National Reserve Bank of Tonga rediscount
rate at the commencement of the fiscal year; and
“services” includes the making available of any facility.
2. The value of any benefit-in-kind included in the employment income of
an employee under section 13(1)(b) shall be determined in accordance
with this Schedule.
3. This Schedule shall not apply to any allowance or reimbursement referred
to in section 13(1)(c) or (d).
4. If, in a fiscal year, a motor vehicle is provided by an employer to an
employee wholly for the private use of the employee, the value of the
benefit for the year shall be the amount computed in accordance with the
following formula —
(20% of A ) - B
where —
A is the cost to the employer of acquiring the motor vehicle or,
if the vehicle is leased by the employer, the fair market value
of the vehicle at the commencement of the lease; and
B is any payment made by the employee for the use of the
motor vehicle or for its running costs.
5. If, in a fiscal year, a motor vehicle is provided to an employee partly for
private use and partly for use in employment, the value of the benefit for
the year shall be the amount computed in accordance with the formula in
paragraph (4) reduced by the proportion of that amount representing use
in employment.
6. If a motor vehicle referred to in paragraph 4 or 5 is not provided for the
whole of the year, the value of the benefit computed under those
paragraphs, as the case may be, shall be based on the proportion of the
year that the vehicle was provided.
7. If, in a fiscal year, the services of a housekeeper, driver, gardener or other
domestic assistant is provided by an employer to an employee, the value
of the benefit for the year shall be the total employment income paid to
FIRST SCHEDULE Income Tax Act 2007
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to
the domestic assistant in that year for services rendered to the employee,
as reduced by any payment made by the employee for such services.
8. If, in a fiscal year, a loan is made by an employer to an employee, the
value of the benefit for the year shall be the difference between the
interest paid by the employee on the loan for the year, if any, and the
interest which would have been paid by the employee on the loan for the
year if the loan had been made at the benchmark rate for that year.
9. For the purposes of this Act other than paragraph 8, if the employee uses a
loan referred to in paragraph 8 wholly or partly for the acquisition of
property producing amounts included in gross income, the employee shall
be treated as having paid an amount as interest equal to the benchmark
rate on the loan or that part of the loan used to acquire the property.
10. If, in a fiscal year, an obligation of an employee to pay or repay an
amount owing by the employee to the employer is waived by the
employer, the value of the benefit shall be the amount so waived.
11. If, in a fiscal year, an obligation of an employee to repay an amount owed
by the employee to another person is paid by the employer, the value of
the benefit shall be the amount so paid.
12. If, in a fiscal year, property is transferred or services are provided by an
employer to an employee, the value of the benefit shall be the fair market
value of the property or services determined at the time the property is
transferred or the services are provided, as reduced by any payment made
by the employee for the property or services.
13. If, in a fiscal year, accommodation or housing is provided by an employer
to an employee, the value of the benefit shall be —
(a) when the employer or an associate owns the accommodation or
housing, the fair market rent of the accommodation or housing; or
(b) in any other case, the rent paid by the employer for the
accommodation or housing,
as reduced by any payment made by the employee for the accommodation
or housing.
14. If, in a fiscal year, an employer has provided an employee with a benefit
not covered by paragraphs (4) to (13), the value of the benefit shall be the
fair market value of the benefit determined at the time it is provided, as
reduced by any payment made by the employee for the benefit.
Income Tax Act 2007 SECOND SCHEDULE
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SECOND SCHEDULE
(section 28, and 29)
DEPRECIATION RATES
The depreciation rates specified for the purposes of section 28 and 29 shall be —
Depreciation Rate
Asset
Diminishing
value
Straight-line
Motor vehicles; buses and minibuses
with a seating capacity of less than 30
passengers; goods vehicles with a load
capacity of less than 7 tonnes; computers
and data handling equipment; and
construction equipment and earthmoving
equipment
40% 25%
Buses with a seating capacity of 30 or
more passengers; goods vehicles
designed to carry or pull loads of more
than 7 or more tonnes; specialised
trucks; tractors; trailers and trailer-
mounted containers; and plant and
machinery used in manufacturing,
mining, or farming operations
30% 20%
Vessels, barges, tugs, and similar water
transportation equipment; aircraft;
specialised public utility plant,
equipment, and machinery; office
furniture, fixtures, and equipment; and
any depreciable asset not included in
another category
20% 12.5%
Buildings 5%