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Semester 2 2021 

Taxation for Accounting Studies

ACCT604

Question 1

Source and Residence (Total:  5 marks)

Tevita Tuimoana is a Samoan citizen and a permanent resident of New Zealand (NZ). He has been living in NZ for the last four years. He is a qualified chartered accountant and works for a well-known accounting firm. He currently owns a house in Mount Roskill and his two children attend the local high school. His wife works as a teacher at a local school. Given his experiences, Tevita has recently been offered a high paying job in Samoa. He is keen to take up this new job which will require him to be away from New Zealand for over 325 days. However, his wife and children will remain in New Zealand so that his children can continue their studies here. He plans to deposit regular amounts of money from his salary in Samoa into a joint NZ bank account he holds with his wife and will visit them when he gets leave.

Required:

Tevita has come to you to seek advice on his tax residency status if he take up the new job in Samoa. Explain to him whether he will remain a tax resident of New Zealand if he takes up his new job and the tax implications.  Support your answer with references to ITA 2007 and appropriate case law.

Question 2

Depreciation (Total:  5 marks)

Serena Chen commenced a bakery business on 1 April 2020 and would like to claim maximum depreciation (as a business deduction) for the assets which she purchased for her new business shown below.

Asset	Date of acquisition	Cost ($)
Ovens	3 April 2020	40,000
Tin and trays	15 April 2020	4,800
Slicing Machines	6 May 2020	4,200

The applicable IRD Depreciation rates for the assets are shown in the table below

Asset	DV Depreciation rate	SL Depreciation rate
Ovens	10%	7%
Tin and trays	40%	30%
Slicing Machines	13%	8.5%

Required:

(a) Explain the rationale for using the pool method to calculate depreciation for assets that cost less than $5,000 or have ATV of $5,000 or less.   

(1 mark)

(b) Calculate the amount of depreciation loss for Serena’s business for the income tax year ended 31 March 2021.  Use the pool method where appropriate. Show any relevant workings                 

(4 marks)

Question 3

Fringe Benefit Tax (FBT) (Total:  5 marks)

(a) Jupiter Ltd provides a motor vehicle with an ATV of $30,000 (GST Exclusive) to one of its employees (Nathan) for private use. During the year, the vehicle was not available for Nathans’s use for 8 days while it was being repaired and serviced. Nathan used the car for company business on 15 days. He contributed $1,500 towards the running costs of the vehicle during the year.

Required:

Calculate the taxable value of the fringe benefit provided to Nathan by Jupiter Ltd for the year ended 31 March 2021. Show all workings.                                                                                      

(3 marks)

(b) Marie has been employed by a Wilson Limited for twenty years. To reward Marie for her long‐standing service, the company provides free flights and accommodation to her and her husband, Peter, for a holiday in Queenstown. Peter is not an employee of the company. Explain with references to ITA 2007, if the provision of the free flights and accommodation to Marie and Peter by Wilson Ltd gives rise to FBT.                   

(2 marks)

Question 4

Imputation Credits (IC) AND Look Through Companies (LTC’s) (Total:  5 marks)

Part A: Imputation Credits (IC)   (3 marks)

Farah Hakim owns 1,200 shares in Mercury Energy Ltd (MCY), a company listed on the New Zealand Stock Exchange (NZX). MCY keeps an imputation credit account as required under tax law. On 17 August 2021, MCY declared a fully imputed final dividend of 10.2 cents per share to be paid to shareholders on 6 November 2021.

(a) Explain how imputation credits attached to dividends paid to New Zealand tax residents prevents double taxation.            

(1 mark)  

(b) Calculate:

(i) The total imputation credits attached to the dividends Farah will receive.

(ii) The total RWT on the dividends.

(iii) The total net dividends Farah will be paid.

(iv) The total gross dividend.                     

(2 marks)

Part B:

Look Through Companies (LTC’s)   (2 marks)

Raymond and Lena Wong are planning to set up an LTC and have asked you for some advice.  They are in particular not sure about what a LTC is and the benefits of operating a business as a LTC.

Explain to Raymond and Lena how an LTC is different to an ordinary company in terms of tax.

(2 marks)

Question 5

Partnerships and Trusts (Total:  5 marks)

(a) Distinguish between a Partnership and a Limited Partnership in relation to debts of partners and taxation of partnership income.  

(2 marks)

(b) What is the role of a Trustee in a trust in relation to trust income?     

(1 mark) 

(c) Explain the tax treatment of beneficiary income from a complying trust.      

(2 marks)

Question 6

Business Tax Liability, Interest, and Penalties (Total:  5 marks)

Joshua Smith runs a business and his residual income tax (RIT) for the 2020-21 income year (31 March balance date) was $32,000. He filed for his 2020-21 income year return on 1 July 2021. Business has not been great this year due to the recent lock downs and Joshua is expecting to make much lower profit for this income year and hence expects to pay less tax for the 2021-22 income year. He seeks your advice on his provisional tax payments for the 2020-21 income tax year ending 31 March 2022. He has previously used the standard uplift method to calculate his provisional tax payments.

 

(a) Explain to Joshua the four different methods that can be used to calculate provisional tax and make a recommendation with reasons as to which method he should choose to calculate his provisional tax payments for the 2021-22 income tax year.             

(2 marks)

(b) Calculate Joshua’s provisional tax payments for the 2021-22 income year if he applies the standard uplift method?     

(1 mark)

(c) Joshua is concerned that he may end up underpaying his tax and is not sure of the consequences if this happens. Explain to Joshua what happens if a taxpayer is late paying their tax or underpays their tax?  

(2 marks)

Question 7

Goods and Services Tax (GST) (Total:  10 marks)

Rani Singh started a new business on 1 September 2021.  She decides to register for GST on a payment basis and has chosen to submit two-monthly GST returns. Rani’s first GST return is due on 28 November 2021. For the remainder of September and October, Rani had the following transactions:

· Personal funds invested in the business, $120,000

· Bought equipment for $20,000 and paid cash

· First months’ rent invoice received for $2,000, payment made on 20^th October.

· Cash banked from sales in September $12,500

· September Purchases $7,200. September purchase invoices were all paid by 15 October.

· Cash payments for September power and phone bills $540

· Wages paid for part-time staff, $1,920

· Rani’s drawings for personal expenses, $2,500.

· Cash banked from sales in October, $11,600.

· October Purchases $6,800. Purchases invoices outstanding on 30 October $3,500.

· Invoices for business expenses, $550, $240 and $150. Payment due on 1 November

(a) Complete Rani’s GST return for the two-month period ended 31 October 2021.        

(6 marks)

(b) Explain the three different methods that can be used to account for GST returns and why Rani may have chosen the payment option.      

(2 marks)

(c) Explain the three different time period options for submitting GST returns and why Rani may have chosen to submit two monthly GST returns.   

(2 marks)

Question 8

Individual Income Tax Liability (Total:  10 marks)

Wiremu Weepu, a New Zealand tax resident has been a client of yours for some years.  He supplies you with the following information regarding his tax affairs for the year ended 31 March 2021. All amounts are in New Zealand dollars.

i. Wiremu works for Auckland City Council as a building inspector.  His gross salary for the tax year ending 31 March 2021 was $120,000 from which PAYE of $30,520 was deducted.  

ii. He incurred travel costs of $2,400 for this period

iii. He paid income protection insurance premium of $800.

iv. He owns shares in Warehouse Group Limited and his bank statements showed that he had received $670 in dividends. The dividends were fully imputed and an appropriate amount of RWT was deducted.

v. His bank statement showed that Wiremu earned net interest from the ASB Bank amounting to $402.  The bank has his IRD number and RWT was deducted at 33%.  

vi. Wiremu has a bank account in Australia and earned gross interest of $600. Australian withholding tax rate is 10%.

vii. Wiremu received rental income of $28,600 from a rental property that he owns in Auckland. During the income year, he paid $3,800 in city rates and $580 for insurance for the rental property. He also incurred deductible interest expenditure on a mortgage over his rental property of $8,800.

viii. Wiremu is the beneficiary of a trust and received trust income of $6,000 

ix. He received a legacy of $10,000 from her great-uncle in June 2020.

x. To recognise 20 years of service Auckland City Council paid $2,000 for a holiday for Wiremu and his family.

xi. Wiremu paid you $400 for preparing his tax return.

Required:

For the year ended 31 March 2021, calculate Wiremu’s income tax liability and the terminal tax to be paid or tax refund. Show all workings in the form of an IR3 return. No statutory references are required.