Taxation - Accounting and Finance Assignment Help

Assignment Task

Learning outcomes

• Calculate taxable income and tax payable for sole traders, partnerships, companies and trusts.

Question 1: Core provisions

a. Explain the ‘general rules’ for allocating income and deduction to particular income years. Provide relevant statutory references. 

b. Explain what is meant by the expression ‘terminal tax’. Provide a relevant statutory reference.

c. Vanessa is an Australian resident who derives interest from a New Zealand resident finance company.

Section RF 7 of the Income Tax Act 2007 requires that non-resident withholding tax (NRWT) be deducted from interest paid to non-residents at the rate of 15%.

However, article 11 of the double tax agreement between New Zealand and

Australia states that tax is to be deducted from interest paid to a resident of the other country at a maximum rate of 10%.

Explain how this apparent contradiction is resolved under the core provisions. Provide a relevant statutory reference.

Question 2: Residence

Residence of Companies

a. The top-level management of Koru Venture Capital Ltd are based at the company’s head office, situated in Melbourne, Australia. The Managing Director and two other directors are Australian residents, but two of the five directors are New Zealand residents. Usually, the New Zealand based directors would fly to Melbourne for monthly board of director meetings. However, during COVID-19 travel restrictions meant these meetings were replaced by videoconference with the two directors in New Zealand connected with the three directors located in Australia. Since travel restrictions were lifted this practice has continued for most board meetings. The practice is now to restrict the number of in-person board meetings to three times a year. Only 30% of the shareholders are New Zealand residents. Koru Venture Capital Ltd was incorporated in New Zealand in 1998, but in 2007 it was decided to base operations in Melbourne because that was where most of the company’s business arose.

Task

Is Koru Venture Capital Ltd resident in New Zealand for tax purposes? Explain your answer, commenting on each criterion and provide relevant statutory references.

Note: You do not need to consider the possible effects of the NZ/Australia Double Tax Agreement.

Residence of individuals

b. Simon is an engineer. In late 2019 Simon decided to move to Australia to further his career there. He obtained a job with a structural engineering firm through a recruitment agency, and on 11 March 2020 he flew to Sydney to start his new job.

Simon was uncertain about when (and if) he would return to New Zealand, but he did intend to work in Australia for at least three years. He decided to keep his house in Christchurch and rent it out as holiday accommodation through Airbnb. This arrangement suited him because he could arrange to use his house if he needed to when he was in Aotearoa New Zealand, more easily than if he rented to tenants.

He had lived in the house since purchasing it in 2013 and had spent a lot of time modernising and renovating it. His parents agreed to letting him store his surplus furniture in their garage. They also agreed to assist in managing the Airbnb rental arrangement for him.

Before he left Aotearoa New Zealand, he sold his car, and transferred all his bank account balances and credit card to Australia. However, he kept his Aotearoa New Zealand bank account open to collect the revenue from the property and pay any expenses required. Simon had not joined KiwiSaver.

Simon had planned to return to Aotearoa New Zealand at least once a year for three to four weeks to visit family and friends. However, Simon was unable to arrange a return to Aotearoa New Zealand until 14 April 2022 due to COVID-19 travel restrictions.

During his return he decided to sell his house in Christchurch, to assist him with finances for the purchase of a townhouse in Sydney. At the same time, he arranged to sell his furniture in storage. The house was sold, with settlement completed on 31 May 2022.

Task

Does Simon cease to be a New Zealand tax resident? If so, when did Simon become a non-resident? Provide reasons to support your answer. Exact dates and statutory references are required.

Note: You do not need to consider the possible effects of the New Zealand/Australia Double Tax Agreement.

Question 3: Income

For each of the twelve situations below (a - l):

• Specify whether the amount received is assessable income, exempt income, excluded income or non-income receipt.
• Provide a statutory reference (for all items other than non-income receipts).
• If an amount is assessable income, calculate how much is assessable.
• Provide brief reasons for your answer.

a. When Manuel’s grandmother died, she left Manuel investments worth $36,500 in her will.

b. During the year, Bob extracts schist stones from a quarry on his farm (60% of the stones) and a neighbouring farm property (the remaining 40%). The schist stones are sold to a landscaping material supplier for $72,450.

c. Jayne is paid $525 a month in child support by her ex-partner. Jayne also receives sole parent support of $445.98 (gross) per week from WINZ.

d. Wiremu is retired and receives $817.32 (gross) per fortnight in New Zealand Superannuation. He also receives a pension of $575 (gross) per fortnight from a former employer.

e. Sustainable Forestry Investments (No 6) Ltd (SFI6) issued a license to Western Southland Logging Ltd (WSL). This license granted WSL the right to cut down and sell mature pine trees on 100 hectares of land owned by SFI6. WSL paid SFI6 $1.75 million for the license.

f. Natasha is 16 years old and attends high school. She has a job mowing the lawns for two of her neighbours. They each pay her $20 a week. There is no tax deducted from the payments.

g. Manu bought a car on Trade Me for $5,450. He knew it was an excellent bargain and that he would be able to sell the car for considerably more. He gave the car a thorough clean and polish, removed some rust and did some minor repairs and then sold it for $9,275.

h. Ahmed received weekly compensation of $865 (gross) per week from Accident Compensation Corporation (ACC) as the result of a motorcycle accident that prevented him from working for 12 weeks.

i. Boris, a New Zealand resident, received a distribution of $5,625 from a multi-rate PIE.

j. As part of her employment package, Aroha is provided with an apartment in Tauranga. The market value of the apartment is $560 per week. Aroha pays $375 per week towards the cost of the apartment.

k. Mario, a New Zealand resident, has money invested in BNP Paribas (a French bank) in Rome, Italy. The money he earns on this investment is not remitted back to New Zealand but is deposited into her overseas bank account. The amount of interest credited is € 1,620 (converts at 1.60 to NZ $2,592).

l. Bowel Cancer Foundation Trust, a charity registered as a charitable entity under the Charities Act 2005 receives interest of $3,682 from a New Zealand bank term deposit.

Question 4: Financial arrangements and land sales

Financial arrangements

a. Kevin has a small money-lending business. He lends money between 7% and 9% per annum depending on the risk.

He funds the loans partly from his own capital and partly by borrowing funds from investors at 5% per annum.

During the year ended 31 March 2022, Kevin received interest income of $56,774 from his borrowers and paid interest of $22,436 to his investors.

The highest total amount that Kevin had out on loan on any day during the year was $709,675, and the highest total amount owing to investors on any day in the year was $448,720.

Kevin was not a party to any other loans.

You have calculated the following figures for Kevin for the year ended 31 March 2022:

Accrual income $72,315

Cash basis income $56,774

Cash basis expenditure $22,436

Accrual expenditure $21,447

Task

Explain whether Kevin is a cash basis person. Support your answer with relevant statutory references and calculations.

b. Jason has been operating his own property development business (as a sole trader) for the last 15 years.

In October 2015, Jason purchased a section of land (2,023 square metres) with the intention of using it for a property development project. The land cost $418,000.

In 2017, Jason changed his mind about using the land for business purposes and had a house built on it. The house cost $645,000 to build.

Jason and his family moved into the house in January 2018, where they lived until Jason sold it in July 2021 for $1,750,000.

The only other time that Jason had bought land, built a house on it, and then sold it after having lived in it was between 2007 and 2009.

Task

Explain whether the proceeds from selling the property in July 2021 will be subject to income tax. Support your answer with relevant statutory references.

Question 5: Deductions and prepayments

a. For each of the following items of expenditure or loss:

• calculate and state the amount that is deductible (if any)
• provide relevant statutory references to support your answer
• briefly discuss your answer.

Assume that all the businesses have a 31 March balance date, and the amounts are exclusive of GST unless stated otherwise.

3. Cecilia is a self-employed landscaper. She purchased 600 native plants at a cost of $6 each. She used 550 of them for jobs she did for customers and donated the other 50 to a local charity for use in a community project.
4. Barry is a self-employed painter. He incurred motor vehicle expenses of $12,680 for his business van. The mileage logbook showed that total travel in the van for the year ended 31 March 2022 was 5,860 km, of which 3,809 km was business related.
5. Maggie set up a small florist shop as a sole trader in April 2021. She is not yet registered for GST as her turnover for the year ended 31 March 2022 was under $60,000. During the year Maggie paid a total of $5,324 GST on her deductible expenses.
6. Nathan is a senior teacher in mathematics and physics employed at Wellington High School. During the year ended 31 March 2022 he personally paid a total of $2,860 for the following items to help him do his job better:

• training course teaching science to remote learners ($730)
• stationery items used in class and for presentations ($237)
• new laptop for on-line presentations ($1,893).
• Owen is a website designer and runs his business from an office in his apartment. The total area of the apartment is 130 square metres, and the area of the office is 19.5 square metres. During the year ended 31 March 2022 the total household expenses for the year were as follows:
• rates ($2,850)
• mortgage principal ($8,904)
• mortgage interest ($4,147)
• groceries ($15,600)
• Sky TV ($855)
• repairs to the apartment ($2,362)
• electricity ($3,486)
• house and contents insurance ($1,648).

Owen does not want to use the square metre method.

6. Sylvia, a senior manager at Vodafone, received an assessment from Inland Revenue that she strongly disagreed with, so she paid a tax agent $650 to prepare a challenge to the assessment.

7.  Kowhai Furniture Manufacturing Ltd (KFM) incurred total interest of $48,625 on a loan that it took out to finance the purchase of a new warehouse and distribution centre. KFM is not a qualifying company

8.  KFM wrote off bad debts of $85,750 and made a provision for doubtful debts of $125,000.

9.  KFM spent a total of $13,912 on legal fees in relation to the new building as follows:

   • Financing $5,648

   • Purchasing the building $8,264 

10.  KFM spent $4,636 in relation to holding its annual meeting with shareholders and a further $2,649 to hold a special meeting to alter the company’s constitution.

11.  KFM paid amounts to Inland Revenue for provisional tax ($210,350) and PAYE ($115,260).

12.  KFM incurred total expenditure of $162,480 on consumable aids. On 31 March 2022 the company had unused consumable aids of $36,225 on hand.

13.  KFM spent $67,447 on entertainment as follows:

    • subsidising the staff cafeteria, which is open to all employees ($12,462)

    • food and drink consumed by employees while outside New Zealand ($6,421)

    • food and drink purchased to entertain potential customers ($48,564).

b. KFM had accrued annual leave payable to staff of $179,542 on 31 March 2022. Of this amount, KFM paid out: