110.289 TAXATION SEMESTER TWO 2018

QUESTION 1: GENERAL TAX CONCEPTS (MULTIPLE-CHOICE)

Required:

Answer all the questions in your blue answer book. Begin each answer with: “The best answer is …” For each question:

(i) Identify the most appropriate answer; and

(ii) Justify your choice by explaining why it is correct; and

(iii) Explain why the answers you have not selected are incorrect.

NB: there is only 1 (one) correct choice for each question.

Marks are allocated as follows:

One (1) mark for the correct choice and its justification; and

Three  (3)  marks  for  your  explanation  of  why the  answers you  have  not  selected  are

incorrect.

1)      Tax rates on an individual’s income in New Zealand are described as:

a)    regressive

b)    progressive

c)     proportionate

d)    negative

2)      Tax rates on an individual’s income in New Zealand could be described as an example of:

a)    Vertical equity

b)    Horizontal equity

c)     Efficiency

d)    Convenience

3)      Which of the following transactions will result in a GST input tax credit being available to the recipient of the supply (who is a registered person)?

a)    Charlotte employs Janet to do some cleaning at her business premises and pays her a wage of $50 per fortnight.

b)    Monty pays $60,000 compensation for damage caused through sale of a faulty product.

c)    Shylock has a spy agency based in Oamaru. He has just purchased $4,000 of second hand office furniture from an unregistered vendor.

d)    Falafel, a baker, employs an architect to design his home.  He pays her $48,000.

4)      Which of the following transactions is treated as assessable income?

a)    Lola received $10,000 as an inheritance from her grandmother’s estate. Both Lola and her grandmother were based in Oamaru.

b)    Dunny Cleaners Ltd sold a truck for $79,000 (excluding GST). It had been written down in the tax fixed asset register to $85,000 (cost $350,000, tax depreciation $265,000).

c)     Mike Trough receives a scholarship of $5,000 from the Government to pursue his research interests at Massey University.

d)    George, a television  broadcaster,  received a severance  payment  of $30,400 from  his former employer when he left his employment.

5)      Juilet is a writer and is conducting research on her latest novel, set in 18th century Japan. She usually works from  home  and  is self-employed.   Which of the following  expenses  is not allowed as an income tax deduction?

a)    Payment of $900 to a house sitter to look after the house and feed the cat while she is researching in Japan.

b)    A proportion of the interest on her home mortgage that relates to the office space.

c)    Travel and accommodation for her trip to Japan for research purposes.

d)    Payment of $2,500 to a friend for proof reading her draft novel.

6)      Which of the following scenarios will,  independent of any other factors,  result  in a  New Zealand income tax liability?

a)    Micky comes to New Zealand for a holiday for four months over summer.

b)    James, a New Zealand citizen, lives and works in Ireland.

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)    Jonty, an Irish citizen who has never even been to New Zealand, owns a rental property in Oamaru, New Zealand.

7)      Jonny, a former drummer in a successful rock band in the 1990’s, now derives all his income from an investment portfolio of New Zealand and foreign shares and bonds. Which of the following is not allowed as a tax credit against Jonny’s New Zealand income tax liability for the year ended 31 March 2018?

a)    RWT of $570 deducted during the 2018 tax year from interest receipts on his New Zealand bonds.

b)    NRWT of NZ$360 deducted during the 2018 tax year from interest receipts on bonds Jonny holds in US based investments.

c)     Provisional tax paid during 2017 for the 2018 income tax year.

d)    Terminal tax paid on 7 February 2018.

[TOTAL: 28 MARKS]

QUESTION 2: FRINGE BENEFIT TAX

Part 1

Required:

a) Give three reasons why fringe benefit tax was introduced in 1985. (3 marks)

b) Give two examples of an unclassified fringe benefit. (2 marks)

Part 2

Jackie works for  a  company where  she  earns  $85,000  a year  as  a  sales  representative  selling pharmaceutical products to farmers for their livestock.  Jackie is provided with a double cab utility vehicle (‘ute’) by her employer. The ute is essential for carrying pharmaceutical products and allows her to drive off-road around some of the rural properties she visits to see the farmers and their livestock. It also has prominent and permanent signwriting on the sides and rear of the vehicle.

Jackie is allowed to use the vehicle for private purposes whenever she wishes.

The ute was purchased by the employer in January 2017 at a cost of $59,000.

Required:

a) Briefly discuss whether an FBT liability exists in relation to Jackie’s use of the vehicle. Give reasons. (3 marks)

b)      Assuming FBT is payable in relation to Jackie’s use of the vehicle, calculate the amount of FBT due for the year to 31 March 2018. (2 marks)

[TOTAL: 10 MARKS]

QUESTION 3: NON-CORPORATE TAXPAYERS

1. Partnerships

a) Briefly describe what a partnership is. (2 marks)

b) Briefly discuss who is liable for the income tax of the partnership and to what extent their liability exists. (2 marks)

c)       Melania  Nose  and  Donald  Frump  have  established  a  business  together,  importing horsehair and manufacturing quality hair pieces. The partnership agreement states the two partners will share the profits of the partnership in the proportion in which they

contributed the start-up capital – that is, Melania 60% and Donald 40%.

The partnership has the following income and expenses for the year to 31 March 2018.

Additional information:

RWT of $61.25 has been deducted from the interest (RWT is included within interest

income in the income statement above).

NRWT of $1,500 was deducted from the dividend payment and paid to the Italian

Government. This amount is not included in the income statement above.

No employment agreements exist for the partnership.

Required:

Calculate the income tax liability for each of the two partners in respect of their income derived from the partnership. Assume the partnership income is their only sources of

income. (10 marks)

2. Trusts

The Addams Family Trust was created when Uncle Fester decided to give all his wealth to Cousin Itt (who was determined to be of sound mind). Cousin Itt was asked to hold these assets in trust for his niece and nephew, Wednesday and Pugsley. Cousin Itt was requested to use the assets wisely and in a way that would only benefit Wednesday and Pugsley. Cousin Itt was requested to please give all the assets to Wednesday and Pugsley (in half shares), when the younger sibling, Pugsley, turned 35 – an age that Uncle Fester considered the two children would have developed sensibilities. Uncle Fester intends to go away and find true love – which is  why  he  has  decided  to  get  his  financial  affairs  sorted  before  he  leaves.    Currently, Wednesday is  12 and  Pugsley is  10 years old.   All members of the Addams  Family live in Oamaru, New Zealand. The trust assets include a property that is rented out and derives rental income. There is also an investment portfolio from which interest and dividends were derived during the tax year to 31 March 2018. Details of the income are below:

RWT = resident withholding tax

ICs = imputation credits

Required:

a)       With respect to the Addams Family Trust relationship, and given the only relevant information is given above, state who is:

i.  The settlor/s;

ii.  The trustee/s;

iii.  The beneficiary/ies. (1 mark)

b) Calculate the following for the trust for the year ended 31 March 2018:

i.  taxable income;

ii.  income tax liability;

iii.  total tax credits;

iv.  residual income tax. (2 marks)

c)       The income tax return for the year ended 31 March 2017 was filed on 16 January 2018 (under the tax agent’s extension of time arrangement).

State the latest date that Cousin Itt could treat a distribution of the trust’s annual

income to beneficiaries as beneficiary income for income tax purposes. (1 mark)

d) State:

i.  the tax rate that will apply to any beneficiary income (over $1,000 per beneficiary); and

ii.  who will be liable to pay the tax on beneficiary income. (1 mark)

e) Now assume Wednesday and Pugsley are 18 and 20 years old, respectively. Cousin Itt decides to distribute all the dividend income to the beneficiaries in equal proportion in order to assist with their boarding school fees.

i. Briefly discuss whether the income tax liability of the beneficiaries will change, in respect to their beneficiary income.

ii.  Assuming the income from the trust is the only income of the two beneficiaries, calculate the residual income tax of each beneficiary. (5 marks)

f)        Unfortunately, in the year to 31 March 2019, Cousin Itt makes a bad decision and invests all the wealth of the trust into Bitcoin. Bitcoin reduces in value significantly and the trust makes a substantial loss.

Briefly discuss whether Cousin Itt can distribute these losses to the beneficiaries of the trust to offset against their other income and reduce their tax liabilities.(2 marks)

[TOTAL: 26 MARKS]

QUESTION 4: CORPORATE TAX

Jonny Leak is a plumber. Due to the inherent risks of the plumbing business, Jonny opts to trade as a company, Jonny Leak Ltd, with himself as the sole shareholder and director.

As at 31 March 2017, Jonny Leak Ltd has following assets:

The company is GST registered, and its financial year ends at 31 March.

Financial statements for the year ended 31 March 2018 have been prepared for the company. As a tax consultant, you have been asked to advise on taxation matters to assist with the income tax return preparation for the company.

All figures mentioned are GST exclusive, unless otherwise stated.

Other information:

a)      No tax depreciation has been calculated . The tax depreciation policy for all assets is to use the diminishing value basis.

On 15 June 2017, Jonny Leak Ltd purchased a new Ford Ranger utility vehicle, costing $78,000, to replace the Mazda BT-50 utility vehicle, which was sold at the same date for $29,000.

On  1  March 2018, Jonny  Leak  Ltd  purchased a new Tesla car, costing $108,000, for  both business use and Jonny’s private use.

b)      During the year ended 31 March 2018, motor vehicle expenses were $5,000 for the utility vehicles, and $300 for the Tesla car. The total expenses of $5,300 are included in the financial statements.

c)      Jonny Leak Ltd has paid FBT on Jonny’s private use of the Tesla car. The company has included the FBT within the expenses in the financial statements.

d)      Jonny Leak Ltd employs Jonny and a couple of apprentice plumbers.  The company paid $450 for a Christmas party at a restaurant for the plumbers and their spouses. The cost of the Christmas party is included within the expenses in the financial statements.

e)      In  February  2018,  one  of Jonny  Leak  Ltd’s  clients  went  into  receivership. They  owe the company $8,800. Jonny is  not sure whether Jonny  Leak  Ltd will  receive this amount. The company has recorded it as a doubtful debt expense in the financial statements.

f)       Jonny Leak Ltd sponsors the local firefighter calendar production costs by making a donation of $500 in the year to 31 March 2018.

g)      Provisional tax of $22,000 was paid for the year to 31 March 2018 in three equal instalments on 28 August 2017, 15 January 2018 and 7 May 2018. This is shown as a debtor in the financial statements at present.

h)      Provisional tax of $7,200 was paid on 7 May 2017 in relation to the year ended 31 March 2017. Terminal tax of $2,675 was paid on 7 April 2017 in relation to the prior year’s income tax liability.

i)       During the year ended 31 March 2018, Jonny Leak Ltd received interest from the balance in the bank account. The amount of the interest is $1,188 (net of RWT of $462).

j)       On 31 March 2018, Jonny Leak Ltd declared a dividend of $23,000 will be paid to Jonny, after all taxes have been deducted. In other words, this is the cash amount Jonny is to receive.