110.289 TAXATION SEMESTER TWO 2019
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EXAMINATION FOR
110.289 TAXATION
SEMESTER TWO 2019
QUESTION 1: GENERAL TAX CONCEPTS (MULTIPLE-CHOICE)
Required:
Select the best answers. Some questions have more than one correct answer. Each correct answer is worth 3 marks.
1) Taxation of trustee income in New Zealand could be described as:
a) regressive.
b) progressive.
c) proportionate (flat).
d) negative.
2) The tax rate that applies to the next dollar of income earned is referred to as the:
a) Average tax rate
b) Effective tax rate
c) Marginal tax rate
d) Progressive tax rate
3) Which of the following purchases will result in a GST input tax credit being available to the recipient (who is a registered person)?
a) Ran, a baker, purchases flour to make bread for sale.
b) Anthone, an investor, purchases shares in a company for his portfolio.
c) A company purchases a motor vehicle that is made available to Joy, an employee, for private use.
d) William purchases plumbing services for his property that he rents out to residential tenants.
4) Which of the following transactions will result in assessable income?
a) Carmen received $10,000 as an inheritance from her grandmother’s estate. Both Carmen and her grandmother live in New Zealand.
b) Violet is a high performance athlete who receives donations of $500 per week to help her with living costs while she trains for the Olympics.
c) Chris receives a scholarship of $5,000 from the Government to pursue his research interests at Massey University.
d) George, a former CEO, receives a ‘golden handshake’ of $3,000,000 from his former employer when he left his employment.
5) Which of the following expenses are not allowed as an income tax deduction?
a) Rachel pays $900 to a security company to protect her office premises while she works overseas for 8 months.
b) Kayla pays the interest on her business loan.
c) Dee, a music teacher who works for a secondary school as an employee, pays for travel and accommodation to attend a piano teachers’ conference in Italy.
d) Jenna, a Central Hawke’s Bay farmer, buys ski-racks for the top of her double-cab utility vehicle so she can go skiing on the weekend.
6) Which of the following scenarios will, independent of any other factors, result in a New Zealand income tax liability? You do not need to consider the impact of double tax treaties.
a) Pania has a home in New Zealand but is currently working overseas on a 9 month contract for her New Zealand employer.
b) Sue is not a New Zealander and she does not live here permanently. She works in cafes, pubs and fruit picking in New Zealand between September 2018 and 4 April 2019 while travelling.
c) Julie, an Australian, comes to New Zealand to work on a consulting project for 6 weeks for the Hastings District Council. She continues to be paid by her Australian employer.
d) Caoimhe, an Irish citizen who has never even been to New Zealand, owns a rental property in Brisbane, Australia.
[TOTAL: 30 MARKS]
QUESTION 2: PRIVATE USE OF BUSINESS ASSETS
1. A company files its FBT returns on a quarterly basis. It owns a motor vehicle that cost $35,000 (GST-inclusive). For the quarter ended 30 September 2019, it provides the motor vehicle to an employee, which is available for private use.
During the quarter, the motor vehicle is used for emergency calls on five days and was taken away on a business trip for seven days. There are 92 days in the quarter ending 30 September 2019.
The company uses the cost method and single rate method for calculating FBT on its motor vehicles.
Required:
Calculate the FBT liability of the motor vehicle for the quarter ended 30 September 2019. (5 marks)
2. There are three main ways a close company can account for the private use vehicles by shareholder-employees under New Zealand tax law.
Required:
Identify and briefly explain any two of these options.
[TOTAL:
of its motor
(5 marks)
10 MARKS]
QUESTION 3: NON-CORPORATE TAXPAYERS
1. Partnerships and look through companies
(a) Identify three tax or non-tax differences between a partnership and a look through
company. (6 marks)
(b) Where a partnership or look through company generates a tax loss in an income year,
explain what happens to that tax loss and how it might be utilised. (4 marks)
2. Trusts
Tom Jones is a New Zealand resident. He settles assets upon a trust for his three children, Sam, Jenny and Patricia. His wife, Georgina, brother Eric and lawyer, Robbie Williams, who are all residents of New Zealand, administer the trust. A family friend, Sheryl Crow, provides free accounting services to the trust. Thanks to Sheryl, the trust has always kept its tax payments and returns up to date and accurate. The tax return was filed on 7 July 2019 for the year to 31 March 2019. The youngest child, Patricia, turned 16 on 28 February 2019.
The beneficiaries received the following amounts from the beginning of the income year up until now:
Beneficiary |
Date of distribution |
Nature of distribution |
Amount |
Sam |
8 August 2018 |
Trust paid for a car for Sam |
$1,500 |
Jenny |
9 December 2018 |
Trust paid Jenny’s university fees |
$7,500 |
Sam, Jenny and Patricia |
31 March 2019 |
Automatic vesting of beneficiary income from trust’s profits |
$2,000 each |
Patricia |
6 April 2019 |
School fees |
$5,000 |
Jenny |
8 June 2019 |
Pay off overdraft |
$500 |
Jenny |
1 November 2019 |
Pay off overdraft |
$500 |
The trustee’s intention is that Sam’s new car, Jenny’s university fees and Patricia’s school fees are to be paid out of the trust’s accumulated assets. The rest of the distributions are to be paid out of current year income. The current year income of the trust is $37,800.
Required:
a) Identify the settlor or settlors of the trust. Give reasons. (4 marks)
b) Identify the trustees. (2 marks)
c) Identify the classification of the trust for tax purposes. (2 marks)
d) Calculate the beneficiary income for the year ended 31 March 2019. For clarity, all amounts paid out to beneficiaries are paid out of the trust’s current year income, unless identified otherwise in the facts. (5 marks)
e) Calculate trustee income for the year ended 31 March 2019. (2 marks)
f) Identify the distributions that are not beneficiary income. Give reasons. (5 marks)
[TOTAL: 30 MARKS]
QUESTION 4: CORPORATE TAX
PART I
Jenny Winn is a builder. Due to the inherent risks in building, Jenny opts to trade as a company, Jenny Winn Ltd, with herself as the sole shareholder and director.
Jenny Winn Limited’s statement of financial performance for the year to 31 March 2019 is as follows:
Jenny Winn Ltd Statement of Financial Performance for the year ended 31 March 2019 |
|
Income Sales Interest Total income
Expenses Cost of sales Depreciation Motor vehicle expenses FBT Christmas party Doubtful debts expense Donations Other expenses Total expenses
Profit for the year |
$ 370,000 1,650 (a) 371,650 |
215,100 22,500 (b) 5,300 (c) 2,800 (d) 450 (e) 8,800 (f) 500 (g) 26,200 281,650
90,000 |
Notes:
(a) Interest includes $462 of RWT
(b) This is accounting depreciation
(c) This includes all expenses relating to the motor vehicles as discussed below
(d) FBT is paid by the company on Jenny’s private use of the Lexus (in the fixed asset register below)
(e) The Christmas party was held at the local pub for Jenny and her two employees and their
spouses.
(f) This is a general provision in case some of the company’s accounts receivable become
uncollectible. No bad debts have been written off during the year.
(g) The donation was made for the printing costs of the local firefighter’s calendar.
As at 31 March 2019, Jenny Winn Ltd has following assets:
Asset |
Purchase date |
Cost (GST exclusive) |
Accumulated depreciation at 1.4.18 |
Depreciation rate (DV) |
Lexus car |
15 March 2018 |
$108,000 |
$2,700 |
30% |
Mazda BT-50 utility vehicle |
1 April 2016 |
$50,000 |
$18,000 |
20% |
Dropsaw |
15 June 2017 |
$2,200 |
$917 |
67% |
Laptop computer |
1 March 2018 |
$720 |
$496 |
50% |
Tools |
10 April 2016 |
6,000 |
1,766 |
67% |
The company is GST registered, and its financial year ends at 31 March.
All figures mentioned are GST exclusive, unless otherwise stated.
Required:
Calculate the taxable income for Jenny Winn Limited for the year ended 31 March 2019. Start by using the profit from the statement of financial performance and make any necessary adjustments
to get to the taxable income. (10 marks)
PART II
Additional information relating to Jenny Winn Limited’s 31 March 2019 income year:
Provisional tax of $22,000 was paid for the year to 31 March 2019 in three equal instalments on
28 August 2018, 15 January 2019 and 7 May 2019.
Provisional tax of $7,200 was paid on 7 May 2018 in relation to the year ended 31 March 2018.
Terminal tax of $2,675 was paid on 7 April 2018 in relation to the prior year’s income tax liability.
On 31 March 2019, Jenny Winn Ltd declared a dividend of $23,000 will be paid to Jenny, after
all taxes have been deducted. In other words, this is the cash amount Jenny is to receive.
Required:
(a) Calculate Jenny Winn Ltd’s residual income tax (RIT) and terminal tax for the year ended 31
March 2019. Show all your workings.
2022-10-25