Taxation New Zealand Exam Help Request

110.289 Taxation COURSE GUIDE Distance/ Internal Semester 2, 2022 i Massey Business School Te Kura Whai Pakihi ii iii Contents Course Staff .......................................................................................................................... 1 What is this course about? .................................................................................................... 3 Summary of the course ................................................................................................................. 3 Course student learning outcomes ................................................................................................ 3 Relationship to other courses........................................................................................................ 3 Overview of the topics covered ..................................................................................................... 4 How is this course assessed? ................................................................................................. 5 Formal Requirements to pass this course ...................................................................................... 5 The assessment at a glance ........................................................................................................... 5 Assessment 1: Quiz ....................................................................................................................... 6 Assessment 2: Exercises ................................................................................................................ 6 Assessment 3: Exam ..................................................................................................................... 6 For students wishing to submit assessments in Te Reo Māori and New Zealand Sign Language ....... 7 Assignment Extensions .................................................................................................................. 8 Student Submission of Assignments .............................................................................................. 8 Return of Assessments ................................................................................................................. 8 Academic Honesty and Plagiarism .................................................................................................. 8 How will we learn in this course? ......................................................................................... 10 Learning Resources ..................................................................................................................... 10 Communicating with each other .................................................................................................. 13 Timetable ........................................................................................................................... 15 THIS MATERIAL IS PROTECTED BY COPYRIGHT AND HAS BEEN COPIED BY AND SOLELY FOR THE EDUCATIONAL PURPOSES OF THE UNIVERSITY UNDER LICENCE. YOU MAY NOT SELL, ALTER OR FURTHER REPRODUCE OR DISTRIBUTE ANY PART OF THIS COURSE PACK/MATERIAL TO ANY OTHER PERSON. WHERE PROVIDED TO YOU IN ELECTRONIC FORMAT, YOU MAY ONLY PRINT FROM IT FOR YOUR OWN PRIVATE STUDY AND RESEARCH. FAILURE TO COMPLY WITH THE TERMS OF THIS WARNING MAY EXPOSE YOU TO LEGAL ACTION FOR COPYRIGHT INFRINGEMENT AND/OR DISCIPLINARY ACTION BY THE UNIVERSITY. 110.807 Course Guide 1 Course Staff Course Coordinator: Alison Pavlovich I am the Course Coordinator for 110.289 and Offering Coordinator for the Distance and Manawatu campus. I will be lecturing and running the workshops from Manawatu campus. Prior to working in the academic field, I was a tax advisor for around 20 years. I worked in practice for firms such as KPMG and WHK. I also worked in industry roles as an International Tax Advisor for Shell International and other large multi-nationals. Since embarking upon an academic career, I have been undertaking research in a variety of topics within the field of taxation law – including international tax law, taxation of trusts, and taxpayer rights. I hold a PhD in Law from University of Auckland. Contact Details  (06) 951 6939  a.pavlovich@massey.ac.nz  BSC2.17, Manawatu campus Office hour Wednesday 10 – 11 via zoom https://massey.zoom.us/j/744520063 https://massey.zoom.us/j/744520063 110.807 Course Guide 2 Offering Coordinator (Albany): Dr Victoria Plekhanova Hi everyone! Welcome to this course. I am Dr Victoria Plekhanova and the offering coordinator for the Auckland campus. I joined Massey University after completing a PhD on the tax challenges in the digital economy at the University of Auckland Law School. I have a legal background and many years of practical experience as a tax and legal advisor and a tax litigator, including working for a Big Four accounting firm. As a person who is passionate about researching contemporary tax issues, I am excited to be teaching this course. We will assist you to gain knowledge of tax and a better understanding of the structure and operation of the New Zealand tax system. Contact Details  (09) 213 6280  v.plekhanova@massey.ac.nz  MBS 1.11.A Albany Campus Office hour Monday 11 - 12 via zoom https://massey.zoom.us/j/85786432420 https://massey.zoom.us/j/85786432420 110.807 Course Guide 3 What is this course about? Summary of the course The aim of this paper is to introduce the basic principles of taxation, the elements of taxation and the concepts that govern tax practice. The paper will also provide an awareness of the economic implications of taxation at both local and global levels. Course student learning outcomes Students who successfully complete this paper should be able to: 1. Explain and discuss the various types of taxation and tax bases applicable in New Zealand and the potential implications for a New Zealand entity operating in the global environment. 2. Demonstrate an understanding of the tax concepts that govern the determination of tax obligations relating to various personal and business structures. 3. Demonstrate an understanding of tax as an instrument of fiscal policy. Relationship to other courses 110.289 Taxation is a compulsory course if you are enrolled on the BAcc or BBus (Acc) programmes. Both these programmes are accredited entry pathways for CPA and CA ANZ (see CPA accredited programmes and CA ANZ accredited programmes). A base level of tax knowledge is required for entry into both professional bodies. Before embarking upon taxation as a course of study, it is useful to have some basic knowledge of how accounting works. Tax is a study in law but day to day compliance activities rely heavily upon accounting systems. Hence, 115.112 Accounting for Business (or a suitable alternative) must be completed before enrolment in this course is allowed. We hope that, after completion of this course, you have developed an interest in tax (it happens more than you might expect!). Massey can offer further courses that build upon this interest. Advanced Taxation (110.389 Advanced Taxation 110389 - Massey University) looks at some of the more technical areas of New Zealand tax in greater depth. Estate and Tax Planning (110.380 Estate and Tax Planning 110380 - Massey University) combines the legal and tax issues surrounding trusts, property and assets, estates and succession planning. https://content.cpaaustralia.com.au/ManageApplications/AccreditedCourse.mvc/SearchResults?__RequestVerificationToken=yO%2Bca2AKh1G1bsO8HrAqGPRvEFqxmZqGtRIxQTEzKaHQ6hy420FtPEzWj1Ap8bGg5vc4YluPJl9oZNIG6pGN5CMHdV6wOJUvDyy6g6IYLn%2BUXFEZvi8uqZJr%2BlVMaKfzTIuICzYyiRksrwdfClRSUjwejvI%3D&CountryId=5e032522-c785-e011-bad3-005056b30007&selectedCountryGuid=5e032522-c785-e011-bad3-005056b30007&CommencementYear=2021&HigherEducationProvider=Massey+University&HigherEducationProviderAccountId=e930de3f-3588-e011-87e1-005056b30007&eduproviderid=e930de3f-3588-e011-87e1-005056b30007&CampusId=&CourseType=&PartnerInstitutionAccountId=&Search=Search https://www.charteredaccountantsanz.com/become-a-member/entry-requirements/chartered-accountant/recognised-qualifications https://www.massey.ac.nz/study/courses/advanced-taxation-110389/ https://www.massey.ac.nz/study/courses/estate-and-tax-planning-110380/ https://www.massey.ac.nz/study/courses/estate-and-tax-planning-110380/ 110.807 Course Guide 4 Overview of the topics covered GENERAL TAX TOPICS Topic 1 Tax fundamentals and principles INCOME TAX Topic 2 The Income Tax Act 2007 and income Topic 3 General deduction rules Topic 4 Specific deductions and depreciation SPECIFIC INCOME TAX RULES FOR DIFFERENT TYPES OF TAXPAYERS Topic 5 Partnerships, Look Through Companies, Companies Topic 6 Companies: Dividends and imputation Topic 7 Trusts OTHER TAXES Topic 8 Fringe Benefit Tax Topic 9 Goods and Services Tax TAX ADMINISTRATION Topic 10 Calculating and paying income tax Topic 11 Tax administration and the Tax Administration Act 1994 110.807 Course Guide 5 How is this course assessed? Formal Requirements to pass this course To be considered for a ‘pass’ in course 110.289, you must obtain a minimum score of 50% of the overall assessment for the course. The assessment at a glance Assessment Learning Outcomes Percentage Weighting Due Dates 2 x Quizzes 1 - 3 10% Refer to timetable below 4 x Exercises 1 - 3 20% Refer to timetable below Exam 1 - 3 70% TBA 110.807 Course Guide 6 Assessment 1: Quiz Format TWO multi-choice quizzes of 10 questions each. Each quiz is worth 5% each. You will have 15 minutes to complete each quiz. The quizzes will be open from Friday morning at 8am and will close the following Monday at midnight. The questions will come from a question bank, meaning every student will have a different set of questions. The answers and results will be published once the quiz closes on Monday at midnight. Assessment 2: Exercises Format FOUR online exercises will be offered during the semester, each worth 5 % each. These will be completed online through stream. You will be able to find instructions for each exercise on stream. The exercises are open throughout the semester until they are due and you can work on them at any time until submission. Assessment 3: Exam In this course your end-of-semester examination will be in the form of an Online Supervised Exam (an OSE). As OSE is a supervised exam that you access through Stream, starting at a set date and set time, to be completed within the set time limit. You must have access to reliable broadband, and a computer (not a phone, or a tablet) with a webcam, to complete the exam. Your webcam and software are activated to allow the exam to be supervised remotely. Further details are available on the ‘Final Exam – OSE’ section in your course Stream site, and you’ll find links to supporting information there, too. 110.807 Course Guide 7 For students wishing to submit assessments in Te Reo Māori and New Zealand Sign Language Massey University recognises the status of Te Reo Māori and New Zealand Sign Language (NZSL) as official languages of Aotearoa New Zealand, and particularly recognises the status of Te Reo Māori as a Taonga with respect to Te Tiriti o Waitangi.1 The Massey Business School supports the right and opportunity of any students who wish to submit assessments in Te Reo Māori and will seek to equitably support students who use NZSL.2 It is preferred that students wishing to submit an assessment in Te Reo Māori alert the relevant teaching staff ahead of time. While permission is not required, advance notice that an assessment will be submitted in Te Reo will be helpful in terms of identifying and accessing the specific expertise needed; this will help avoid delays in the marking process and provision of feedback. Teaching staff who have been advised a student assessment will be submitted in Te Reo or who have received a Te Reo assignment will work with the Associate Dean Māori in the first instance to discuss the next steps. 1 Relevant regulatory passages include these: https://www.massey.ac.nz/massey/about-massey/calendar/studying-at-massey-university/assessment-and- examination-regulations.cfm ASSIGNMENTS AND EXAMINATIONS IN TE REO MĀORI 14. The Māori language is an official language (he reo whai mana) of Aotearoa. The University endeavours to recognise this and support the revitalisation and retention of Te Reo Māori with respect to Te Tiriti o Waitangi. Students who are proficient in Te Reo Māori and have the necessary level of competency are encouraged to write assignments, tests, examinations, and text accompanying creative works, in Te Reo Māori, subject to approval and where the subject is considered to be appropriate. Students wishing to pursue this option should make application to the Assessment Manager, Student Administration, by 31 January for Semester One and Double Semester courses and by 16 June for Semester Two and Summer School courses; And: https://www.massey.ac.nz/massey/fms/PolicyGuide/Documents/m/Māori-language-policy.pdf “(d) In accordance with the Massey University Assessment and Examination Regulations all students enrolled at Massey University will be able to complete assignments, tests and examinations in te reo Māori, provided prior approval has been obtained and the subject area is considered to be appropriate.” 2 Please contact the Director of Teaching and Learning in matters related to NZSL. https://www.massey.ac.nz/massey/about-massey/calendar/studying-at-massey-university/assessment-and-examination-regulations.cfm https://www.massey.ac.nz/massey/about-massey/calendar/studying-at-massey-university/assessment-and-examination-regulations.cfm https://www.massey.ac.nz/massey/fms/PolicyGuide/Documents/m/maori-language-policy.pdf 110.807 Course Guide 8 Assignment Extensions An extension of time to complete an assignment may be granted at the discretion of the course coordinator in the case of unforeseen circumstances such as misadventure or illness. Applications for an extension of time should be made to the course co-ordinator by email. Please let your course or offering coordinator know as soon as possible if you need an extension. We want to assist, but we need to hear from you. Student Submission of Assignments Many of you are aware of the increasing difficulties educational institutions are having dealing with issues of plagiarism. This problem impacts on students as it disadvantages honest students, undermines the credibility of the qualification, and takes up huge staffing resources that could be better spent elsewhere. Massey uses Turnitin®, a text matching web application, as one of a variety of methods and technologies to detect and deal with the problem. The electronic version of the assignment you submit will be compared with material available on the world wide web including many electronic books, journals, newspapers, cheat sites (or paper mills), web pages and previously submitted assignments. Please go to https://www.massey.ac.nz/massey/learning/online-learning/guide/how- to/assignment.cfm for instructions on how to upload your assignments to the Stream course website. Return of Assessments We aim to mark assignments submitted on time within 15 working days from the official due date. Academic Honesty and Plagiarism For all course assignments it is acceptable (and helpful) to discuss the issues with other students. You may freely ask and answer questions that promote learning. However, it is NOT acceptable to: • Copy another student’s work, in part or in total, or an official/model answer from either the current class or from a previous class. • Allow other students to copy your work, in part or in total. • Copy your own work if it has already been submitted for assessment elsewhere. • Provide students in future years with copies of your assignments. • Copy and paste sections from internet sourced documents or pages. • Post assessment questions and request answers – or copy someone else’s answers – from any online ‘learning’ or ‘homework’ website (these are cheating sites) • Have another person prepare and/or write your assignment (or parts of your assignment) on your behalf. In short, if you submit work that you did not author and you claim credit for it, you are breaching academic integrity. https://www.massey.ac.nz/massey/learning/online-learning/guide/how-to/assignment.cfm https://www.massey.ac.nz/massey/learning/online-learning/guide/how-to/assignment.cfm 110.807 Course Guide 9 Plagiarism is defined by Massey University as: Presenting as one’s own work the work of another, including copying or paraphrasing of another’s work without acknowledging it as another person’s work through full and accurate referencing. It applies to material presented through written, spoken, electronic, broadcasting, visual, performance or other medium. Plagiarism can be avoided by correctly acknowledging the authorship of any material in your assignment that is not your own original work. Go to the Online Writing and Learning Link for guidance on correct referencing. Plagiarism in an assignment may result in your assignment not being awarded any marks. In serious cases, it can result in even more serious disciplinary action by the University. Plagiarism includes copying answers that someone else has provided to assignment or test questions, which includes answers posted online. Be aware that if you use such a service the answer you submit is not original, is available to multiple other students, and therefore you and every other student drawing on these answers is breaching academic integrity and risking disciplinary action including receiving a mark of 0. A link to the Student Guide to Academic Integrity at Massey University is here. Please make yourself familiar with the Code of Student Conduct available here https://owll.massey.ac.nz/ http://www.massey.ac.nz/massey/staffroom/teaching-and-learning/centres_tl/centrestl-students/our-resources/academic-integrity-student-guide/academic-integrity-student-guide_home.cfm https://www.massey.ac.nz/massey/about-massey/calendar/studying-at-massey-university/code-of-student-conduct.cfm 110.807 Course Guide 10 How will we learn in this course? Learning Resources There are five main learning resources for this course: 1. Lectures and workshops; 2. The study guide; 3. Zoom sessions; 4. Stream; and 5. The textbook. You need to buy the textbook yourself, but all other resources are provided by the university. Where possible, all resources are made available to all students, no matter whether you are studying internally or at a distance. It is up to you to work out what mix of materials works best for you. Lectures and workshops For our Auckland and Manawatu students, lectures will be on campus. The lecture on Manawatu campus will be livestreamed and recorded for our distance students. This means distance students can choose to “attend” lectures via zoom and can participate actively through voice and chat. The lectures will be recorded and put on stream for the distance students who are unable to attend live. Workshops are held at both the Auckland and Manawatu campuses and through zoom for distance students. Lectures Auckland students: Tuesday 1.00 – 2.50 pm SNW 100 Manawatu and distance students: Monday 9.00am – 10.50am AH3/zoom Workshops Auckland students: Thursday 11.00am – midday SNW 100 Manawatu students: Friday 9.00 - 10.00am SSLB3 Distance students: Friday 11.00am – 12 midday Zoom The zoom link for distance lectures and workshops is here. https://massey.zoom.us/j/744520063?pwd=dWNFekxlWFAzY092bXg4VXZoRnBCUT09 110.807 Course Guide 11 Study Guide There is a study guide covering the technical content of the course. This guide is the foundation document for the technical content of the course. Before attending lectures, you should have already reviewed the topic in the study guide and read the accompanying references in your textbook. In the study guide, you will find the learning objectives for each topic covered in the course. You will also find some discussion about the topic and references to further reading – especially the textbook. You will also find the workshop questions at the back of each topic chapter. Stream Stream is Massey’s version of Moodle that many of you will have encountered at school. This is our learning environment – it’s our virtual classroom. It is the main place the resources for this course are stored, and it is also where we talk with each other. The Stream site will be available two weeks before the teaching semester officially begins. That means you don’t have to wait to get going - you can start exploring the environment and even start reading in advance. All study materials for this course are being delivered via Stream, and assessments are completed through Stream. Lecture slides and workshop solutions will be posted on Stream each week. Note that workshop solutions will be posted in the week following each topic, after all students have completed their workshops. There are various news and discussion forums on Stream. You can subscribe to and unsubscribe from discussion forums at any time, but not from the news forums. All notices for this course will be sent out via the “News” forum on Stream. Please ensure that you keep your e-mail address for Massey current, as this is the way that messages will reach you. Textbook and Recommended Reading The prescribed textbook is: Barkoczy, S., Ammundsen, V., Bullot, A., Cheng, V., Cross, C., … Vial, P. (2022). Foundations of New Zealand Taxation Law. Auckland, New Zealand: Wolters Kluwer – CCH ISBN: 9781775474036 You can order your textbook online from Campus Books: https://campusbooks.nz/shop/ Alternatively, you can buy the textbook at either of the campus stores: https://campusbooks.nz/shop/ 110.807 Course Guide 12 Manawatu campus 1 Turitea Road Palmerston North 4414 New Zealand Monday to Friday – 8.30am to 5pm Phone - (06) 354 6020 Email: masseypn@campusbooks.nz Auckland campus Massey University Albany Campus Student Central, Gate 1 | Auckland, Auckland, 0632 Campus Books at Massey University Albany Student Central, Gate 1 East Precinct, Dairy Flat Highway (SH17) Albany, Auckland 0632 Store Hours: Monday to Thursday 8:30am-4:30pm Friday 8.30am to 4pm Phone - (09) 415 0348 Email: masseyal@campusbooks.nz Prior year editions of this textbook are acceptable but you will need to be responsible for any changes in the current edition. In other words, this course supports the current year edition only. The study material for 110.289 makes extensive references to chapters and sections in the textbook and draws on the review questions for workshops. To complete this course successfully, you will need to have ready access to the textbook. Another excellent resource for studying taxation is the online databases available on the Massey University library and learning services site. Explore the materials on the CCH New Zealand Online Library and Westlaw NZ. You may also wish to refer to other tax information resources. As usual, please consider reliability when using other resources. Some useful resources are: • Inland Revenue Tax Information Bulletins (TIB) and pamphlets, available on-line at www.ird.govt.nz • Government Consultative Documents and Working Papers on specific tax issues; http://www.taxpolicy.ird.govt.nz/ • Staples Tax Guide (Thomson Reuters) • New Zealand Master Tax Guide (Wolters Kluwer). NB: This list above is not exhaustive. mailto:masseypn@campusbooks.nz mailto:masseyal@campusbooks.nz http://www.ird.govt.nz/ http://www.taxpolicy.ird.govt.nz/ 110.807 Course Guide 13 Communicating with each other The primary means of communication, further to our interaction in the lectures and workshops, are the Stream forums. These can be found under the Communication Tools tab on Stream. Please use these forums to communicate with us, rather than contacting us via email. This is because messages from individual student email accounts are sometimes misidentified by Massey email systems as spam and filtered out – ensure we hear from you by communicating via the Stream forums. There are several forums, each with a different purpose. They include: News forum: This is a one-way forum from us to you. Look here for important updates about this course. Note that these announcements will automatically be sent to your registered email address. If you see an email with 110.289 in the subject line, PLEASE READ IT - it will be important! Student Discussion: Use this forum to chat with your classmates. This forum will not be monitored by staff. Personal Communication: Use this to confidentially communicate with course staff about private matters, such as ill health, personal issues, etc. Please do not use this for technical queries. All technical queries must be shared with other students in the forums. Course Information: (think of this as a “Student to Coordinator Public Questions forum”). Use this to post general course-related questions and receive answers that are visible to all participants. Other forums may include one or more Assessments Forum for queries about assessments. If you "subscribe" to a forum, new messages get emailed to you (this is automatic for the News Forum, but for the others, you need to subscribe yourself). Communication expectations We expect everyone in the Massey community to communicate courteously, appropriately, and constructively in all exchanges, as Massey's guidelines stipulate. In terms of specific messages, it’s important to be clear from the outset both what I expect of you and what you can expect of me. Here is what you can reasonably expect of me: ● responses to all discussion forum postings within 48 hours during the working week (Monday-Friday); ● responses to any personal communication within 48 hours during the working week. 110.807 Course Guide 14 Within reason, I also have a couple of expectations of you: ● use a meaningful subject line in your discussion postings; ● use the Stream discussion forums appropriately; ● support your colleagues in the course – that means encourage, help, and respect your fellow students. Course workload The credit value for this class (15 credits) offers a guideline not only concerning the number of credits you earn towards the degree or diploma for which you are enrolled, but also concerning the total amount of time you might reasonably expect to spend on this course in order to complete it. A 15-credit course is defined by the Tertiary Education Commission as 150 hours of student workload, so you can expect to allocate to this course about ten study hours outside of classes per week, although of course everyone works differently. Expect some weeks to be busier than others, especially when assignments are due, but you should be working on your coursework regularly, every week. You can find a great tool to help you plan your timeline for completing an assignment, here: https://owll.massey.ac.nz/academic-writing/assignment-planning-calculator.php https://owll.massey.ac.nz/academic-writing/assignment-planning-calculator.php 110.807 Course Guide 15 Timetable Date Distance/Manawatu Monday 9 – 10.50am AG3/zoom Friday 9 – 9.50 am SSLB 3 (Manawatu) Friday 11 – 11.50am zoom (Distance) Auckland Tuesday 1 – 2.50pm SNW100 Thursday 11 - 11.50am SNW100 Assessments due (due date/time in next section) 18 - 22 July Topic 1 – Tax fundamentals Topic 1 – Tax fundamentals 25 – 29 July Topic 2 - Income Topic 2 - Income 1 – 5 August Topic 3 – General deductions Topic 3 – General deductions Topic 1 exercise due Monday 1 Aug 11.59pm 8 – 12 August Topic 4 – Specific deductions Topic 4 – Specific deductions 15 – 19 August Topic 5 – Partnerships, LTCs. Companies I Topic 5 – Partnerships, LTCs. Companies I Topics 2 – 4 exercise due Monday 15 Aug 11.59pm 22 – 26 August Topic 6 – Companies II Topic 6 – Companies II 29 Aug – 9 Sept MID SEMESTER BREAK 12 – 16 Sept Topic 7 - Trusts Topic 7 - Trusts Topics 1 - 6 quiz due Wednesday 14 Sept 11.59pm 19 – 23 Sept Review/guest speaker Topic 8 - FBT 26 – 30 Sept Topic 8 - FBT Topic 9 - GST 3 – 7 Oct Topic 9 - GST Topic 10 – Calculating and paying tax Topic 8 exercise due Monday 3 Oct 11.59pm 10 – 14 Oct Topic 10 – Calculating and paying tax Topic 11- Tax administration Topic 9 exercise due Monday 10 Oct 11.59pm 17 – 21 Oct Topic 11- Tax administration Review 25 – 28 Oct STUDY WEEK Topics 7 – 11 quiz due Tuesday 25 Oct 11.59pm 31 Oct – 14 Nov Exams 110.289 TAX STUDY GUIDE Distance/Auckland/Manawatu Semester 2, 2022 i Copyright This material is protected by copyright and has been copied by and solely for the educational purpose of the University under license. You may not sell, alter or further reproduce or distribute any part of this course pack/material to any other person. Where provided to you in electronic format, you may only print from it for your own private study and research. Failure to comply with the terms of this warning may expose you to legal action for copyright infringement and/or disciplinary action by the University. ii Table of Contents TOPIC 1: TAX FUNDAMENTALS AND PRINCIPLES ................................................................................ 1 1.1 WHAT IS TAX? ................................................................................................................................ 2 1.2 THE TAX BASE AND INCIDENCE OF TAX .................................................................................................. 2 1.3 ECONOMIC CHARACTERISTICS OF TAX ................................................................................................... 3 1.4 THE PURPOSE OF TAX ....................................................................................................................... 3 1.5 THE PRINCIPLES OF GOOD TAXATION .................................................................................................... 5 1.6 THE LEGAL FRAMEWORK OF THE NEW ZEALAND TAX SYSTEM .................................................................... 7 1.7 WHAT DOES NEW ZEALAND TAX? ....................................................................................................... 8 1.8 WHO DOES NEW ZEALAND TAX? ........................................................................................................ 8 TOPIC 2: INCOME TAX ...................................................................................................................... 10 2.1 THE STRUCTURE OF THE INCOME TAX ACT 2007 ................................................................................. 11 2.2 WHAT IS INCOME? ........................................................................................................................ 11 2.3 WHAT ITEMS OF INCOME DO WE TAX? ............................................................................................... 14 2.4 WHAT ITEMS OF INCOME DON’T WE TAX? .......................................................................................... 17 2.5 WHO IS SUBJECT TO INCOME TAX (RESIDENCE)? .................................................................................. 17 2.6 WHAT INCOME IS TAXED HERE (SOURCE RULES)? ................................................................................. 19 2.7 DOUBLE TAX AGREEMENTS .............................................................................................................. 20 2.8 WHEN IS INCOME DERIVED? ............................................................................................................ 21 2.9 WHAT ARE THE PREVAILING INCOME TAX RATES? ................................................................................. 22 2.10 CAPITAL VS REVENUE (INCOME) ........................................................................................................ 23 TOPIC 3: INTRODUCTION TO DEDUCTIONS ...................................................................................... 25 3.1 INTRODUCTION TO DEDUCTIONS ....................................................................................................... 26 3.2 HOW DEDUCTIONS WORK................................................................................................................ 27 3.3 GENERAL PERMISSION .................................................................................................................... 28 3.4 GENERAL LIMITATIONS .................................................................................................................... 31 3.5 CAPITAL LIMITATION ...................................................................................................................... 32 3.6 PRIVATE LIMITATION ...................................................................................................................... 33 3.7 EMPLOYMENT LIMITATION .............................................................................................................. 33 3.8 LINK BETWEEN GENERAL AND SPECIFIC DEDUCTIONS ............................................................................. 34 TOPIC 4: SPECIFIC DEDUCTIONS AND DEPRECIATION ....................................................................... 35 4.1 SPECIFIC RULES FOR DEDUCTIONS ...................................................................................................... 36 4.2 RULES FOR SPECIFIC DEDUCTIONS ...................................................................................................... 36 4.3 WHAT IS TRADING STOCK? .............................................................................................................. 40 4.4 DEPRECIATION .............................................................................................................................. 41 4.5 CALCULATING DEPRECIATION ........................................................................................................... 42 4.6 DEPRECIATION ON DISPOSAL ............................................................................................................ 43 4.7 SPECIFIC ASSETS – BUILDINGS AND MOTOR VEHICLES ............................................................................ 44 TOPIC 5: PARTNERSHIPS, LOOK-THROUGH COMPANIES AND ORDINARY COMPANIES .................... 45 5.1 INCOME SPLITTING ......................................................................................................................... 46 5.2 WHAT ARE PARTNERSHIPS? ............................................................................................................. 46 5.3 HOW ARE PARTNERSHIPS TAXED? ..................................................................................................... 47 5.4 SPECIAL RULES FOR DEDUCTIONS (PARTNERSHIPS) ............................................................................... 48 5.5 LOOK THROUGH COMPANIES ........................................................................................................... 48 5.6 COMPANIES.................................................................................................................................. 49 5.7 WHAT IS A COMPANY? ................................................................................................................... 49 iii 5.8 INCOME AND EXPENDITURE FOR COMPANIES ....................................................................................... 50 5.9 CARRYING FORWARD COMPANY LOSSES ............................................................................................. 51 5.10 COMPANY GROUPING FOR LOSS OFFSETS ............................................................................................ 52 TOPIC 6: COMPANIES: DIVIDENDS AND IMPUTATION ...................................................................... 53 6.1 WHAT IS A DIVIDEND? .................................................................................................................... 54 6.2 HOW ARE DIVIDENDS TAXED? .......................................................................................................... 54 6.3 HOW DO COMPANIES ACCUMULATE IMPUTATION CREDITS? ................................................................... 56 6.4 HOW ARE IMPUTATION CREDITS USED? .............................................................................................. 57 6.5 HOW DO SHAREHOLDERS USE IMPUTATION CREDITS? ........................................................................... 58 6.6 WHAT ABOUT NON-RESIDENT SHAREHOLDERS? ................................................................................... 59 TOPIC 7: TRUSTS .............................................................................................................................. 60 7.1 WHAT ARE TRUSTS? ...................................................................................................................... 61 7.2 TAXING INCOME DERIVED BY THE TRUSTEE .......................................................................................... 62 7.3 MINOR BENEFICIARIES .................................................................................................................... 63 7.4 DIVIDENDS, LOSSES OR EXPENDITURE ................................................................................................. 63 7.5 DISTRIBUTIONS OF CAPITAL TO BENEFICIARIES...................................................................................... 63 7.6 CLASSIFICATION OF TRUSTS .............................................................................................................. 64 7.7 TRUSTS AND FOREIGN SOURCED INCOME ............................................................................................ 64 TOPIC 8: FRINGE BENEFIT TAX .......................................................................................................... 66 8.1 WHAT IS FRINGE BENEFIT TAX? ....................................................................................................... 67 8.2 WHY DO WE HAVE FBT?................................................................................................................. 67 8.3 HOW TO DESIGN A TAX ON EMPLOYEE BENEFITS ................................................................................... 68 8.4 BASIC FEATURES OF NEW ZEALAND’S FRINGE BENEFIT TAX .................................................................... 70 8.5 TYPES OF FRINGE BENEFITS AND TAXABLE VALUE .................................................................................. 70 8.6 EXCLUSIONS FROM FBT .................................................................................................................. 71 8.7 FBT ON MOTOR VEHICLES .............................................................................................................. 72 8.8 HOW DO THE FBT RATES AND THRESHOLDS RELATE TO INCOME TAX RATES AND THRESHOLDS? ..................... 73 8.9 FBT AND INCOME TAX ................................................................................................................... 75 8.10 FBT AND GST .............................................................................................................................. 75 8.11 FBT RETURNS AND RETURN PERIODS ................................................................................................. 75 TOPIC 9: GOODS AND SERVICES TAX (GST) ....................................................................................... 76 9.1 HOW DO VALUE ADDED TAXES WORK? ............................................................................................... 77 9.2 IMPOSITION OF GOODS AND SERVICES TAX .......................................................................................... 78 9.3 WHAT NOT TO TAX?....................................................................................................................... 81 9.4 VALUE OF SUPPLIES ........................................................................................................................ 83 9.5 TIME OF SUPPLY ............................................................................................................................ 84 9.6 OBLIGATIONS OF A REGISTERED PERSON ............................................................................................. 85 9.7 INPUT TAX .................................................................................................................................... 88 9.8 OTHER RULES ................................................................................................................................ 89 TOPIC 10: CALCULATING AND PAYING INCOME TAX ........................................................................ 91 10.1 HOW DOES THE NEW ZEALAND GOVERNMENT COLLECT INCOME TAX?..................................................... 92 10.2 TAX CREDITS ................................................................................................................................. 93 10.3 HOW MUCH TAX IS DUE? ................................................................................................................ 94 10.4 RESIDUAL INCOME TAX, PROVISIONAL TAX AND TERMINAL TAX ............................................................. 96 10.5 TAX LOSSES .................................................................................................................................. 97 TOPIC 11: TAX ADMINISTRATION ..................................................................................................... 98 11.1 INLAND REVENUE .......................................................................................................................... 99 11.2 TAX RETURNS ................................................................................................................................ 99 iv 11.3 ASSESSMENTS ............................................................................................................................. 101 11.4 BINDING RULINGS ........................................................................................................................ 102 11.5 TAX DISPUTES PROCESS ................................................................................................................. 102 11.6 TAX PENALTIES AND USE OF MONEY INTEREST .................................................................................... 103 11.7 TAX AVOIDANCE AND EVASION ....................................................................................................... 104 110.807 Tax Page 1 Topic 1: Tax Fundamentals and Principles Overview This topic sets the broad scene for your study of taxation. We introduce the nature of taxation, consider what a good tax might look like, and look at the overall structure of the New Zealand taxation system. Learning objectives After studying the material for this week, you should be able to: • Describe what tax is. • Explain the purpose of taxation. • Explain the alternatives to taxation. • Describe the sources of government revenue in New Zealand and explain where government revenue is spent. • Assess whether or not a tax is a “good” tax. • Use various technical terms for describing taxes and tax systems. • Describe the broad outline of the New Zealand tax system. • Describe the sources of law in the New Zealand tax system. You should be able to understand these terms: Taxation, tax burden, tax bases, progressive taxation, proportional taxation, regressive taxation, flat taxation, negative taxation, direct and indirect taxation, marginal tax rate, effective tax rate, tax bracket. Reading Barkoczy, Ammundsen et al. Foundations of New Zealand Taxation Law 2022. New Zealand: CCH New Zealand Ltd. In this Study Guide we will refer to this text as “Foundations”. Particular sections for reading are noted under each heading in this study guide. Inland Revenue Department, (2020). Briefing for the Incoming Minister of Revenue 2020. Wellington, New Zealand, in Readings for Topic 1 on stream. Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., … Poterba, J. (2011). Tax by design: The Mirrlees review. Oxford, England: Oxford University Press. pp. 21 – 45. You can find this online on the Stream site. 110.807 Tax Page 2 Tax Working Group. (2019). Future of Tax: Final Report Volume I. Wellington, New Zealand: New Zealand Government. pp23-28. Feel free to read more! 1.1 What is tax? Reading: Foundations 1.1, 1.2 “A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.” : Tax | Definition of Tax by Oxford Dictionary on Lexico.com also meaning of Tax “A compulsory contribution to the state’s funds. It is levied either directly on the taxpayer by means of income tax, capital gains tax, inheritance tax, and corporation tax; or indirectly through tax on purchases of goods and services and through various kinds of duty, e.g. road tax, stamp duties, and duties on betting and gaming.”: Jonathan Law (ed), A Dictionary of Law (9th ed, Oxford University Press, 2018) 1.2 The tax base and incidence of tax Reading: Foundations 1.5 The ‘thing’ being taxed is known as the tax base. So the tax base of income tax is, generally, income. Taxes may be based on almost anything. For example, in 1696 King William III introduced a window tax in England and Wales. Many property owners blocked up windows to avoid paying the tax. The number of windows was considered a broad approximation of wealth or ability to pay. It was easy to assess without entering the taxpayer’s private premises. Common tax bases are income, assets, and consumption. New Zealand’s main tax bases are income and consumption. When we consider the incidence of taxation, we think about who ultimately pays, or bears the burden of the tax. For example, the burden of a personal income tax is borne by the person who earns the income. Under New Zealand’s consumption tax (“goods and services tax” or “GST”), the incidence of taxation falls on the final consumer of a good or service. The burden of taxation can be shifted, by changes in the law, or by taxpayers using various tax planning mechanisms. For example, an individual taxpayer who is paying tax at the highest marginal rate may elect to try to shift some of her or his income to another person, such as a spouse, who does not earn as much income, and so is taxed at a lower rate. https://www.lexico.com/definition/tax https://www.lexico.com/definition/tax http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-1904 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-480 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-1952 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-893 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-893 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-3466 http://www.oxfordreference.com.ezproxy.massey.ac.nz/view/10.1093/acref/9780198802525.001.0001/acref-9780198802525-e-3751 110.807 Tax Page 3 1.3 Economic characteristics of tax Reading: Foundations 1.5 We use a variety of terms to describe taxes. Taxes may be progressive, proportional, regressive, flat, negative, direct, indirect (see NZT 1.3.1 and 1.3.3). We also talk about an individual’s average tax rate, marginal tax rate, and effective marginal tax rate (EMTR). In New Zealand, income derived by individuals is taxed at different rates in different bands or “brackets”. Taxable income Individual income tax rate $0 - $14,000 10.5% $14,001 - $48,000 17.5% $48,001 - $70,000 30% $70,001 - $180,000 33% $180,000 upward 39% (from 1 April 2021) An individual’s “average tax rate” is the proportion of her or his income that is paid as tax. Using the table above, an individual earning $60,000 has an average tax rate of 18.4%, and the individual earning $80,000 has an average tax rate of 21.6%. For businesses, the average tax rate is usually called the “effective tax rate” as the tax liability can be affected by deductions as well as income. An individual’s “marginal tax rate” is the rate of tax she or he pays on the last dollar of income earned. For example, under New Zealand’s tax scales, an individual earning $44,000 has a marginal tax rate of 17.5%. An individual earning $52,000 has a marginal tax rate of 30%. There are many other measurements that can be made (e.g., effective marginal tax rate, tax wedge) in the area of public finance economics and many permutations of how these amounts can be calculated. For the purpose of this course, we will use the terms described in the paragraphs above. 1.4 The purpose of tax Reading: Foundations 1.3 Governments impose taxes for three main reasons: • To provide revenue to finance government spending on public goods and services. • For redistribution of wealth. • To act as a part of monetary and fiscal policies to achieve economic and/or social goals. 110.807 Tax Page 4 Public goods and services provided by governments include health, welfare, and education, as well as infrastructure (for example, roads), as well as other services. The economy can be manipulated by increasing or decreasing tax rates, either on individuals’ incomes or on particular goods and services, and social goals can be achieved by adding extra taxes to particular products, such as the excise tax on cigarettes. Wealth can be redistributed by imposing higher tax rates on some individuals and lower rates on others, or by giving some people tax credits. Governments could achieve these goals in a number of ways, other than through taxation. For example, it can: • Commandeer resources i.e., take resources from individuals and put them to various government uses. • Create money i.e., by printing it and using it to purchase the resources it needs. • Borrow money i.e., borrow funds from the public or from international lenders to finance spending. • Charge for services i.e., charge individuals for the use of government goods and services. If governments had to choose just one method of raising revenue, then taxation seems most efficient. In general, it can be more equitable, and less disruptive to the economy, and it can give government more effective control over the total demand (public and private) for goods and services. That is, taxation can raise the required revenue for government and achieve many social and economic objectives more effectively and smoothly than the alternatives above. However, taxation can also introduce inefficiencies and inequities into the economy. Part of the role of government lies in determining the best, or least bad, mix of policies, and governments may allow or tolerate inefficiency in one area because it enables other goals to be achieved. In practice, governments rarely rely on just one source of revenue. The New Zealand government no longer creates money by printing it, nor does it commandeer resources without compensation anymore. However, it both borrows money and charges for services. The most significant source of revenue remains taxation. The government raises revenue to finance its expenditures. The government spends money on social security and welfare, health, education, core government services, law and order, transport and communication, and so on. The largest chunk of government spending is on social security and welfare. 110.807 Tax Page 5 1.5 The principles of good taxation Reading: Foundations 1.6 - 1.7 Mirrlees, J., Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., … Poterba, J. (2011). Tax by design: the Mirrlees review. Oxford, England: Oxford University Press, in Readings, pp. 21 – 45 Policy makers use frameworks to determine the tax settings that provide the best outcomes for a state. The great economic and political theorist Adam Smith developed four criteria for the design of a tax system in his book, An Inquiry into the Nature and Causes of the Wealth of Nations. These four criteria are still applied today, although they have been further developed since Adam Smith’s time. Adam Smith’s four criteria are equity, certainty, convenience and efficiency. Equity “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” That is, the tax payable by a person should be consistent with their ability to pay the tax. “Equity” is often discussed in terms of horizontal equity, and vertical equity. • Horizontal equity – people who are in similar situations should be treated similarly with respect to taxation. For example, a businessperson who earns $100,000 per annum should pay the same amount of tax as an accountant in a big company who receives a salary of $100,000 per annum. • Vertical equity – people who are in different situations should be treated differently with respect to taxation. For example, a person who earns $100,000 per annum should pay more tax than a person who earns $25,000 per annum. Certainty “The tax which each individual is bound to pay, ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.” That is, taxpayers ought to be able to work out the tax effect of transactions and business deals and so on, in advance, and with certainty. There should not be any 110.807 Tax Page 6 ambiguity, and it should not be possible for tax collectors to arbitrarily change the amount of tax a person is required to pay. In New Zealand, generally we take certainty for granted given the highly codified nature of our tax system. However, there are always areas that are unclear, such as when tax avoidance may occur. Convenience “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. That is, it should be easy for people to pay their taxes. They shouldn’t have to make extraordinary arrangements in order to comply with the tax law. One way that we assess the “convenience” of a tax is through compliance costs. How much time and effort and money does it take for a person, usually a businessperson, to pay her or his taxes? If the compliance costs are too high, then we might think that the tax does not meet the standard of being convenient. Tax compliance is never particularly convenient but modern technology has made the complexity of our tax system much easier to comply with. Efficiency “Every tax ought to be so contrived, as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. In other words, it should cost as little as possible to collect the taxes. As with “convenience”, if the compliance costs of collecting a tax are too high, then we might not regard the tax as being efficient. Likewise, even if taxpayers’ compliance costs were low, but it took a great deal of government time and effort to collect a tax, we might regard it as being inefficient. On a cost-benefit basis, we should try to collect the maximum amount of tax at a minimum cost. From 2018, policy makers working for the New Zealand government are required to make policy with the objective of ‘intergenerational wellbeing’ in mind. This is set out in the Living Standards Framework.1 Previously, there was no articulated objective. The Living Standards Framework and Te Ao Māori were taken into consideration by the 2019 Tax Working Group in their recommendations to the Government. 1 The Treasury “The Living Standards Framework” (2017) <https://treasury.govt.nz/information-and- services/nz-economy/living-standards/our-living-standards-framework> 110.807 Tax Page 7 1.6 The legal framework of the New Zealand tax system Reading: Foundations 2.1 – 2.3 New Zealand is governed under a constitutional monarchy. That is, while the Head of State is Queen Elizabeth II, she sits mainly as a figurehead while the job of governing New Zealand is undertaken by a democratically elected House of Representatives. There are three branches of New Zealand’s government: the parliament, the judiciary and the executive. Parliament makes the law such as the legislation that we will study throughout this course. The judiciary interprets law and makes decisions on the law where parties are in dispute. There is a body of case law decided within the judicial system that assists with the interpretation of the tax laws. Importantly, underlying the Minister of Revenue (the executive arm of government responsible for tax matters), is an army of tax officials employed by the Inland Revenue Department (“IRD”) to manage and administer the tax system. We will look at this more closely when we get to the tax Administration part of the course. There are three major components in the legal framework of the New Zealand tax system. 1. Tax legislation, including the Income Tax Act 2007, the Goods and Services Tax Act 1985 and the Tax Administration Act 1994. These acts can all be found on-line at http://legislation.govt.nz 2. Regulations and Orders-in-Council made under the Income Tax Act 2007. 3. The Courts, and their interpretation of tax legislation embodied in case law. New Zealand has a hierarchical court system. That means higher courts have more authority or jurisdiction and can overturn the decisions made by lower courts in hierarchy. The New Zealand courts in a hierarchical order include: • The Supreme Court of New Zealand; • The New Zealand Court of Appeal; • The High Court; and • The District Courts. In addition to above courts, the Taxation Review Authority (TRA) is a specialised tribunal for hearing tax matters. The TRA is independent and completely separate from IRD. Within the IRD, there is an ‘arbitration’ facility to hear tax disputes before going to court. Arbitration is intended to be independent of other areas of the IRD. If an arbitration decision is made in favour of a taxpayer, the IRD are bound by their own internal policy from pursuing the matter through the court system. 110.807 Tax Page 8 Hint: How to read law Reading law can be difficult and confusing. The language used can be highly technical, and sometimes the way that it is phrased seems to be very convoluted. The difficulty of the language is usually because the legal drafters have to try to get a particular concept exactly right. Try these techniques to help with understanding legal language. • Slow your reading speed down. • Read out loud. • Mark critical words with a pencil. • Draw diagrams showing how different ideas fit together. 1.7 What does New Zealand tax? Reading: Foundations 1.8, 4.1 – 4.5 The major taxes in New Zealand are income tax and goods and services tax (GST). Individuals, companies, and trusts are all subject to income tax, and all consumers in New Zealand pay GST on what they consume. New Zealand also has various other taxes, such as Fringe Benefit Tax (FBT). In general, the smaller taxes are imposed in order to support the major taxes by blocking loopholes. The collection of income tax on income as it is earned is achieved by the creation of mechanisms such as Pay-As- You-Earn (PAYE), Resident Withholding Tax (RWT) and Provisional Tax. New Zealand’s tax system is remarkably coherent by international standards. 1.8 Who does New Zealand tax? Reading: Foundations 10.1 Think for a moment about who the New Zealand government claims jurisdiction over, not just with respect to tax, but with respect to any of the laws it promulgates. It turns out that there are two groups of people that it claims jurisdiction over, people who are New Zealand citizens or residents, and people who are physically in New Zealand. A large part of these two groups overlap: most people who are in New Zealand are also citizens or residents. All of the members of these groups are people that the government is able to exercise power over. Think, for example, of who the police are able to prosecute for crimes. Even if a person is not physically present in New Zealand, if she or he has assets or other connections here, then the police can legally exercise power over her or him. 110.807 Tax Page 9 The same thing happens with tax. The plain words of section BB 1 Income Tax Act 2007 impose tax on income, earned by anyone anywhere in the world. However, it is highly unlikely that the New Zealand government could find a way to collect tax from everyone in the world. The sections following BB 1 limit its power to make it clear that the New Zealand government intends to collect tax from two groups of persons, those who are resident in New Zealand, and those who earn income that is derived from New Zealand, even if they are not resident in New Zealand. These two concepts are referred to as residence and source. New Zealand’s tax base may be shown as follows: Resident Non-resident NZ source of income Foreign source of income = subject to New Zealand income tax = not subject to New Zealand income tax The imposition of goods and services tax on a supply, according to section 8 Goods and Services Tax Act 1985 applies to supplies made by residents. The definition of “resident” for GST purposes is different to that for income tax. In effect, the GST rules operate in a way that the cost of GST will be imposed upon those present in New Zealand and will be zero-rated for those outside New Zealand. 110.807 Tax Page 10 Topic 2: Income Tax Overview The Income Tax Act 2007 taxes income. This topic covers the framework for income tax in New Zealand. We first look at the overall structure of the Income Tax Act 2007 and discuss the concept of income. We then look at who is subject to income tax and discuss the source and residence rules. Next, we look at the basic forms of income, and consider why some income is taxed and some is not. We also discuss the distinction between capital and revenue, and whether or not capital gains should be taxed. Learning Objectives After studying the material for this week, you should be able to: • Describe the structure of the Income Tax Act 2007. • Describe the concept of income. • Identify common types of income for taxpayers. • Describe the differences between exempt income and excluded income and show how they affect tax payable. • Apply the source and residency rules for income tax purposes. • List the prevailing tax rates in New Zealand. • Understand the distinction between capital and income receipts. You should be able to understand these terms: Core provisions, resident, non-resident, income, capital, revenue, capital gain, capital receipts, schedular payments, exempt income, excluded income. Reading Barkoczy, Ammundsen et al. Foundations of New Zealand Taxation Law 2022. New Zealand: CCH New Zealand Ltd. Particular sections for reading are noted under each heading in this study guide. Useful resources Income Tax Act: http://legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html or go to http://legislation.govt.nz/ and search on “income tax act” Inland Revenue Interpretation Statement 16/03: go to Publications (ird.govt.nz) and scroll down to download a copy of IS 16/03. http://legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html http://legislation.govt.nz/ https://www.taxtechnical.ird.govt.nz/publications#sort=%40irscttissuedatetime%20descending&numberOfResults=25&f:@irscttissueyear=[2016]&f:@irscttpublicationtypes=[Interpretation%20statements] 110.807 Tax Page 11 2.1 The structure of the Income Tax Act 2007 Reading: Foundations 9.1 - 9.2 The structure of the New Zealand Income Tax Act 2007 mirrors the way that we account for income and calculate and pay tax on it. It is divided into parts. Part A sets out the purpose of the Act, and how it is to be interpreted. Part B contains the “core provisions”, which do the work of imposing tax, setting out the basic procedures for calculating and paying tax, and “generally set up the scheme of the Act and the main links between its Parts.” [ITA 2007 s BA 1 (d)] The next parts are set out the rules for calculating tax. Table 13.16 in NZT shows how the rules for calculating tax are set out in a basic tax equation. Part Y of the Act sets out definitions of various terms that are used. The Income Tax Act 2007 includes various flow charts that help to show how the parts of the Act fit together. They are intended as aids to understanding, and if a flowchart and a written provision of the Act are in conflict, then the written provision prevails [ITA 2007, s AA 2 (1)]. The Income Tax Act 2007 is available on-line at: http://legislation.govt.nz/. 2.2 What is income? Reading: Foundations 11.1 - 11.2 In the core provisions, section BB1 of the Income Tax Act 2007 imposes income tax on taxable income. BB1 Imposition of income tax Income tax is imposed on taxable income, at the rate or rates of tax fixed by an annual taxing Act and is payable to the Crown under this Act and the Tax Administration Act 1994. Defined in this Act: annual taxing Act, income tax, pay, tax, taxable income Income Tax Act 2007 Available on-line at http://legislation.govt.nz The purpose of topics 2 to 4 is to determine taxable income. This is one of the main purposes of the Income Tax Act 2007. The following diagram forms part of the legislation and assists us with understanding how we arrive at taxable income. http://legislation.govt.nz/ 110.807 Tax Page 12 It is worth spending some time studying this flowchart. The essence of it is that a taxpayer needs to find their annual gross income, deduct from this their annual total deductions, and then offset any losses they have available from prior years to get to their taxable income. We will discuss deductions in topics 3 and 4, and losses will be addressed across the course. Topic 2 is concerned with finding a taxpayer’s annual gross income. There is no need to overcomplicate this – annual gross income is simply the total amount of income allocated to the income year for which the tax liability is being calculated. Allocation to tax years is discussed below at 2.7. For now, let’s just consider what is income. Turning to section BD 1 (1), you will find that it says that: “An amount is income of a person if it is their income under a provision in Part C (Income).” This is simple but important. Income must be identified in Part C of the Income Tax Act or it is not income. On turning to Part C, the first provision says: http://preview.legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1512389 110.807 Tax Page 13 CA 1 Amounts that are income Amounts specifically identified (1) An amount is income of a person if it is their income under a provision in this Part. Ordinary meaning (2) An amount is also income of a person if it is their income under ordinary concepts. Defined in this Act: amount, income, Income Tax Act 2007 Available on-line at http://legislation.govt.nz So breaking this down, section CA 1(1) tells us that if an item of income is specifically identified in Part C, it must be included in taxable income. We will look at some of these specific inclusions such as employment income, business income and rental income below. Most income will fall under one of these specific provisions and so it is clear it is taxable. Section CA 1 (2) is effectively a “catch-all” provision for all other income which is not listed. This catch-all provision is called upon where income is derived by a taxpayer but not included in a specific provision in Part C. For example, if you sell your old car on trademe in order to replace it with a new one, the proceeds from the sale are not specifically included in Part C so you would ask whether it is still “income under ordinary concepts?” Income under ordinary concepts is discussed in NZT with reference to the many cases which have informed the interpretation of this term. Frequently the question boils down to a capital/revenue distinction. This is considered below at 2.9. Various features are considered when determining if income arises under the “ordinary concepts” definition. These include: • It comes in. • It is a gain in money or money’s worth. • It is periodic, recurring or regular. • The person receiving it perceives it as income (that is, its quality in the hands of the recipient is income). Note that a particular receipt doesn‘t require all these characteristics to be regarded as income. In the example above of selling your old car, this would not be regarded as income under ordinary concepts as although it does ‘come in’, it is one-off and it does not have the characteristic of income as it is capital in its nature. The recipient is not selling the vehicle to create an income stream as they have liquidated an asset that they can no longer use. http://preview.legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1520676 http://preview.legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521634 110.807 Tax Page 14 2.3 What items of income do we tax? Reading: Foundations 11.3 - 11.4 Section CA 1 (see above) says, “An amount is income of a person if it is their income under a provision in this Part.” In effect, Part C of the Act is a list of items that are regarded as income, and so should be included in a person’s income tax return, together with the rules for working out how much income to include, and rules for various exceptions. Amounts that are to be counted as income include: • Business income including income as a contractor (s CB 1 ITA). • Rent from land (s CC 1 ITA). • Interest from lending money (s CC 3 ITA). • Dividends from investing in companies (s CD 1 ITA). • Employment income (salary and wages) (s CE 1 ITA). • Income from the government (for example, benefits, ACC payments and so on – see NZT 7.4.1 – 7.4.3). In theory, all of these types of payments would be caught by the second part of section CA 1, where income is defined as anything that would be income under ordinary concepts. However, rather than relying on the courts to work it all out, the Income Tax Act 2007 defines all these amounts as income. This reduces uncertainty for both taxpayers and government, and it reduces the amount of work that must be done to determine whether or not something is income. Thus, it increases certainty and efficiency. Business Income Reading: Foundations 11.5 - 11.6, s CB 1 ITA. Business income is assessable income, under section CB 1 of the Income Tax Act 2007. CB 1 Amounts derived from business Income (1) An amount that a person derives from a business is income of the person. Exclusion (2) Subsection (1) does not apply to an amount that is of a capital nature. Determining whether a business exists for tax purposes can mean the difference between income being assessable, or not. If a person sells jam at a farmer’s market, whether the proceeds are taxed or not will hinge on the question of whether a business is being undertaken. 110.807 Tax Page 15 What is a business? The Income Tax Act 2007 attempts to define “business” in the definitions section of the Act, s YA 1. It includes any “profession, trade, or undertaking carried on for profit” but fails to narrow the meaning of the term down any further. However, case law has provided more guidance on the meaning of the term. The most significant case in New Zealand tax law is Grieve v. Commissioner of Inland Revenue, in which the judge listed a number of factors that should be considered in deciding if a business exists. In particular, the nature of the activities needs to be examined, and whether an intention exists to carry on a business for profit. The case is discussed in NZT 4.2.1. Perhaps counterintuitively, the taxpayers in this case claimed their farming activities constituted a business while the Commissioner of Inland Revenue claimed that the activities were a hobby only. This is often the case as the taxpayers are seeking to claim losses. The Court of Appeal in the Grieve case found that there was a business, meaning the taxpayers, the Grieves, won the case. This meant the taxpayers were able to use their losses from the early years of development of the farm. The Grieve case highlights an important point. You don’t have to make a profit in order to be regarded as being in business. You may have bad luck or make bad business decisions, and still be regarded as being in business. The test for assessability of income, and deductibility of expenses, is not whether you run a profitable business. It is whether the nature of the activities constitute a business and whether there is a genuine intention to make a profit – not the same as a reasonable prospect of making a profit. There are various other cases about whether or not a business exists (see NZT 4.2.1 – 4.2.10). The test for assessability of income and deductibility of expenses depends on the existence of a business. Income earned before a business has started, or after it has ended, can’t be regarded as part of business income. Similarly, expenses incurred in order to set a business up or after it has ceased operating cannot be deducted. Rental Income Reading: s CC 1 ITA When income is derived from land and buildings, this income is always included within taxable income. The circumstances upon which the land is leased or rented out are not relevant to whether the income is subject to tax. 110.807 Tax Page 16 Interest Income Reading: s CC 4 ITA Like rental income, interest income is always included in taxable income due to the specific inclusion found in section CC 3 ITA. Often the tax liability on interest income has already been paid by the time it is received. This is because payers of interest are often required to deduct the income tax on behalf of the recipient and pay it to the IRD. This is why when you receive interest on a positive bank account balance, you will see a corresponding debit for RWT (resident withholding tax). We will consider RWT again in topic 10. Dividend Income Reading: s CD 1 ITA Dividends are (almost) always income to the recipient. The only exceptions are when a New Zealand company receives a dividend from overseas and where a New Zealand company receives a dividend from another wholly owned group company. In these two situations, the dividends are exempt income (ss CW 9 and 10). The rule that dividends are always income is simple in itself. However, determining what a dividend is can be more challenging. We will look at this in topic 6. Like interest, by the time a dividend is received by a shareholder, some tax has already been accounted for on the shareholder’s behalf. The company paying the dividend will have an RWT (resident withholding tax) liability and the dividend may be accompanied by imputation credits. This is considered further in topics 6 and 10. Employment Income Reading: s CE 1 ITA. Section CE 1 states that all income from employment is taxable income. Over the decades, the items included under the umbrella of employment income have expanded. Some types of income that have been considered “capital” in nature by the courts (see 2.9 below), have subsequently been specifically included within the legislation – namely income from restraints of trade (s CE 9 ITA). Also specifically included within the definition of income is the market value of accommodation provided to an employee (to the extent this exceeds any amount paid by the employee). This is unusual as generally non-cash benefits made available to employees are covered by the FBT regime which we will cover in topic 8. The inclusion of accommodation within an employee’s income is historic and likely relates to farming practices in past decades. 110.807 Tax Page 17 Like interest and dividends, when an employee receives their income, the income tax liability will already be paid through the PAYE (pay as you earn) deduction system. That is, the employer will deduct the employee’s tax from the salary or wages and pay this directly to the tax authority. The employee receives the net amount. 2.4 What items of income don’t we tax? Reading: Foundations 15.1 - 15.3, 15.6. The main exclusion from tax is income derived from disposal of a capital asset – we will consider this below in 2.9. There are two other major groups of items which look like income but are not taxed as income under the Income Tax Act 2007. They are exempt income and excluded income. “Exempt income” is income which taken out of the tax net altogether, either because it would be inappropriate to tax the amount, or because of specific government policy, or for another reason. For example, maintenance payments to a spouse for child support are exempt income, because they are payments from one parent’s income to the other parent, in order to support a child or children. Income received by registered tax charities is not taxed, as a matter of government policy. Allowances and reimbursement payments are excluded because an allowance is an amount of money allowed to an employee to cover an expense that would ordinarily be covered by the employer (NZT 6.4). NZT 3.4.2 lists the various types of exempt income. “Excluded income” is income that would ordinarily be taxed under the income provisions of the Income Tax Act 2007, but it is taxed elsewhere instead. Fringe benefits are excluded from the income tax mechanism because they are taxed under the fringe benefits tax mechanism. Amounts received as GST are excluded income, because they are handled through the Goods and Services Tax Act 1985 instead. See NZT 3.5. 2.5 Who is subject to income tax (residence)? Reading: Foundations 10.2, 10.4, s YD 1 ITA Optional reading: Inland Revenue Interpretation Statement: Tax Residence IS 16/03, on stream The rules for tax residency are set out in the definitions part of the Income Tax Act, part Y. To find the rules for tax residency, go to subpart YD. The rules for the residence of natural persons are set out in section YD 1. The rules for a company are in s YD 2. http://legislation.govt.nz/act/public/2007/0097/latest/DLM1523134.html http://legislation.govt.nz/act/public/2007/0097/latest/DLM1523134.html 110.807 Tax Page 18 The first thing to note is that the rules for tax residency are NOT the same as the rules for New Zealand residency. It is possible to be tax resident in New Zealand, but not to have residency or permanent residency for immigration purposes and vice versa. There are two ways that a person can become a tax resident of New Zealand. • A person is resident if she or he has a ‘permanent place of abode’ here. • A person is resident if she or he has been here for more than 183 days in any 12-month period. A person need fulfill only one of these conditions to be a tax resident. Of course, many people fulfill both conditions, but you need only fulfill one to be counted as a tax resident. The permanent place of abode test (PPoA) is the primary test. Regardless of how many days someone in present in New Zealand, if they have a PPoA, they are tax resident. The law does not specify what a PPoA is. In 2016, the Commissioner of Inland Revenue issued an interpretation statement on tax residence (IS 16/03, listed in “Useful resources” above). Interpretation statements set out the Inland Revenue Department’s view on how the law should be interpreted and applied. This can be useful to see what the Commissioner’s interpretation is. The Commissioner’s view was issued as a response to a legal case Commissioner of Inland Revenue v Diamond [2015] NZCA 613; (2015) 27 NZTC 22-035, that challenged the meaning of PPoA. You can read more about the facts of this case and the arguments made by both sides of the dispute in NZT 3.3.3. The Court of Appeal found in favour of the taxpayer and in coming to their decision, one of the primary features of the PPoA is that the taxpayer should have somewhere available to them to live in New Zealand. Other factors will contribute to the overall assessment of whether someone has a PPoA as well. However, the existence of a place to live is key. A more recent case considering a similar set of facts to the Diamond case is Van Uden v Commissioner of Inland Revenue [2018] NZCA 487; (2018) 28 NZTC 23-081. In this case, the Commissioner won and Mr Van Uden was regarded as a tax resident of New Zealand. Arguably, the Commissioner pursued a better line of reasoning in this case, despite the similarities with Diamond, to secure a win. The PPoA test means that even if someone spend very little time in New Zealand, they can still be a tax resident by reason of having a dwelling available to them. An example of this could be someone who mainly resides overseas but has a holiday home in New Zealand that they use for a couple of months each year. The second test for tax residence is the ‘day-count- test. Like a ‘brightline’ test, this states someone has tax residence by reason of the simple fact that they have been present in New Zealand for 183-days in any 12 month period. The 12-month period for the 183-days rule starts on the day a person arrives in New Zealand. 110.807 Tax Page 19 Example: Lee arrives in New Zealand from Malaysia on 23 March 20X1. She stays here for 128 days, leaving on 28 July 20X1. Lee comes back to New Zealand on 15 January 20X2. By 23 March 20X2, 12 months since her first arrival in New Zealand, she has spent a total of 196 days here, so she becomes a tax resident under the 183-days rule. Both the day of arrival and the day of departure count towards the 183 days. This means that in some cases, a person will only become aware of having qualified as a tax resident in hindsight. Once you are a tax resident in New Zealand, then any income you earn, whether it is sourced from New Zealand or from overseas, is subject to New Zealand income tax. There are exceptions to this when a person qualifies as a “transitional resident”. Transitional residency is effectively a tax holiday for passive income (interest, dividend, rents etc.) from foreign sources where the recipient is a new migrant (see s HR 8 ITA for more on this). To become a non-resident of New Zealand, you must be absent for more than 325 days in any 12-month period. However, if you retain a permanent place of abode here, you will still be counted as a tax resident, even if you have been away for more than 325 days. In effect, the rules for being counted as a resident outweigh the rule for being counted as a non-resident. 2.6 What income is taxed here (source rules)? Reading: Foundations 10.3, s YD 4 ITA All income derived from New Zealand is taxed in New Zealand, whether or not it is earned by New Zealand tax residents. “Derived” means obtained from and we refer to the place where the income is derived from as its “source”. Thus, any income sourced from New Zealand is subject to tax in New Zealand. For example, imagine a person who has moved to Australia, and has ceased to be a tax resident of New Zealand, but who owns a rental property here. That person is required to pay New Zealand tax on any income earned on the rental property. The Australian government will also tax the income, but the person would get a credit for any tax she has paid in New Zealand. There are detailed rules for managing cross-border transactions, and for the taxing of income which is subject to taxation twice: once in the country of source, and then again in the taxpayer’s country of residence. Many of these rules are set out in double tax agreements between New Zealand and other countries. In effect, these are tax treaties between New Zealand and other countries. We will consider this again in topic 12. 110.807 Tax Page 20 Section YD 4 ITA sets out what income is sourced in New Zealand. It is worth looking at this list so you are familiar with the circumstances in which income is sourced in New Zealand or elsewhere. Just as an introduction, the 5 specific types of income listed above are highlighted here: Business income is sourced in New Zealand where the business is carried on in New Zealand (s YD 4(2) ITA). Rent is sourced in New Zealand where the land is in New Zealand (s YD 4(7) ITA). Interest is sourced in New Zealand where the money is lent in New Zealand or lent outside New Zealand but to a New Zealand resident (s YD 4(11) ITA). Dividends are sourced in New Zealand where the company paying it is a New Zealand resident (s YD 4(10) ITA). Employment income is sourced in New Zealand where the income is earned in New Zealand (s YD 4(4) ITA). The rules here can be a little vague but where services are performed in New Zealand, the income is definitely sourced in New Zealand. 2.7 Double tax agreements There are two provisions in the Income Tax Act 2007 that override the other provisions in the Act. The first is s BG 1 which deals with tax avoidance arrangements. These are considered in the topic on Tax Administration. The second is s BH 1 which states that Double Tax Agreements have an overriding effect on everything in the Act. Double Tax Agreements are agreements made between the New Zealand government and the government of another taxing jurisdiction. The primary goals of these agreements are to eliminate double taxation of the same income and to determine taxing rights over the income. As some taxpayers may fall within the residency rules of more than one territory, a DTA will determine which of the jurisdictions will treat the taxpayer as a resident. The DTA will also determine which jurisdiction has the first (or only) right to tax particular sources of income. 110.807 Tax Page 21 For the purposes of this paper, we do not examine every DTA in detail. In practice, however, it is necessary to read and apply the specific DTA when dealing with international transactions, as DTAs differ between countries. 2.8 When is income derived? Income must be assigned to a particular income year (see tax years below in topic 6). In some cases, the Income Tax Act 2007 specifies particular rules around timing of income and deductions, but in general, the recognition of income is governed by section BD 3. Income is considered to arise when the income is derived. Very roughly, s BD 3 tells us to allocate income to income years based on case law and accepted accounting rules, except in instances where there are some specific rules. Case law has generally determined that business income should be recognised on an accrual basis. In other words, for most of the time, you can rely on your knowledge of accounting rules in order to get the allocation of income right for tax purposes. For example, if you make a sale in March and deliver the goods or services to the customer, this income has been derived. They may not pay until April but the income is still regarded as derived or earned in March as you have fulfilled your obligations and any monies due have become a legally enforceable debt. The principles set out in Example: Janice has a holiday home on the Coromandel Peninsula in New Zealand. She stays there for three months every summer. The rest of the year, Janice lives in Melbourne where she works. While Janice is in Melbourne, she rents the holiday home out from time to time. Under New Zealand’s domestic law, Janice is a tax resident as she has a permanent place of abode in New Zealand. This means Janice is taxable on her worldwide income in New Zealand (including the salary from her job in Melbourne and the rent from her holiday home). Janice is also a tax resident of Australia meaning her worldwide income is also taxable in Australia. The DTA between New Zealand and Australia includes a ‘tie-breaker’ test in Article 4 that can be used to determine which country treats Janice as a tax resident for the purpose of applying the DTA. In this instance, Janice is likely to ‘tie-break’ toward Australia – meaning she will be treated as resident in Australia and not New Zealand for the purposes of applying the DTA. Under article 6, the income Janice derives from renting out her holiday home will first be taxable in New Zealand, with Australia also including the income within her tax return but with a credit for the income tax paid in New Zealand. Under Article 14, the income Janice earns from her employment in Melbourne will only be taxable in Australia and not in New Zealand. This is an example of how the DTA will override New Zealand domestic provisions. 110.807 Tax Page 22 IFRS 15 Revenue from Contracts with Customers are useful for determining when income may be considered to be derived. By contrast, employment income and interest and dividends received by individuals are usually taxed on a cash received basis. 2.9 What are the prevailing income tax rates? Reading: Foundations 9.5, schedule 1 ITA In this course, you are expected to have a general knowledge of prevailing tax rates. Please note that in the final exam, you will be given a table showing the basic tax rates. In reading the textbook, please focus on the tax rates for the tax year ending 31 March 2022. Sometimes, employees earn income over a period of say, two weeks which cover the end of the tax year. In that case, the employee’s income is NOT apportioned between two tax years. Instead, the prevailing rates at the time at which the employee receives the income are applied. Ordinarily, this rule does not make much difference to the amount of tax that an employee pays. However, if tax rates or tax thresholds change, then it can make a difference. Imagine, for example, that an employee is due to receive her or his fortnightly wages on 30 March, but tax rates are due to decrease on 1 April. By delaying the payment of wages by two days, to 1 April, the employee could pay less tax. The personal income tax rates and thresholds for the year ending 31 March 2022 are: Income tax thresholds Tax rate Tax payable Cumulative tax payable $0 - $14,000 10.5% $1,470 $1,470 $14,001 - $48,000 17.5% $5,950 $7,420 $48,001 - $70,000 30% $6,600 $14,020 $70,001 - $180,000 33% $36,300 $50,320 $180,000 upward 39% $50,320 plus 39% of any income over $180,000 The company income tax rate for the year ending 31 March 2022 is 28%. The trustee income tax rate for the year ending 31 March 2022 is 33%. 110.807 Tax Page 23 2.10 Capital vs revenue (income) Reading: Foundations 13.2 New Zealand does not have a comprehensive capital gains tax (CGT) but taxes some capital gains under the Income Tax Act 2007. Some gains are assessable and others are not, and some expenses are deductible and some are not. This leads to boundary issues between whether gains are income, and therefore assessable (or expenses related to income, and therefore deductible), or capital, and therefore not assessable (except in some circumstances defined by legislation), and any related losses not deductible. Generally, we describe some items as being “on capital account” (capital items), and others as being “on revenue account” (items where we expect to tax incomings and deduct outgoings). Gains / Income Losses / Expenses Revenue Taxable Deductible Capital Not taxable (except in some circumstances defined by legislation) Not deductible (except in some circumstances defined by legislation) As you can see, working out whether an item is held, or an expense incurred, on capital or revenue account becomes very important. Like income, ‘capital’ is not defined in the ITA 2007, so working out what counts as capital is a matter of interpretation. Unfortunately, this is not easy. Templeman J. had this to say with respect to the capital / revenue distinction. [It is] an intellectual minefield in which the principles are elusive …; analogies are treacherous …; precedents appear to be vague signposts pointing in different directions …; and the direction finder is said to be 'judicial common sense' … The practice of judicial common sense is difficult in revenue cases. Tucker v Granada Motorway Services Ltd [1977] 1 WLR 1411 Again, as a professional accountant, this is an area where you will need to exercise judgement. An example of income that has been regarded as capital by a court in New Zealand is Commissioner of Inland Revenue v Fraser (1996) 17 NZTC 12,607 (CA). Ian Fraser was a well-known television current affairs presenter who left his employment to take on a role promoting the Bank of New Zealand in various advertisements. Within his remuneration package was an amount inducing him to leave his previous role and further amounts to restrain him from undertaking any other media work during the period he was contracted to BNZ. The Commissioner argued these amounts were 110.807 Tax Page 24 taxable income but the court agreed with the taxpayer that these receipts were to compensate Fraser for giving up his right to earn an income from elsewhere. In other words, the receipts were capital in nature as Fraser gave up his income-earning potential. A few years after the Commissioner lost this case, the law was altered to include inducement receipts within taxable income (now s CE 9 ITA). Another example of income that has been regarded as capital and therefore not subject to income tax is the case, Commissioner of Inland Revenue v Wattie & Lawrence [1999] 1 NZLR 529 (PC). In this case, the taxpayers, who were Coopers & Lybrand (now merged into PwC), received a $5m inducement to enter into a lease for an office block in Auckland. The Privy Council (previously the highest court of New Zealand but located in London) decided the receipt was capital in nature and therefore not subject to tax. Essentially the receipt formed part of the conditions for entering the lease which was considered a matter of capital. A few years after this case, the law was changed to include these receipts within taxable income (s CC 1B ITA). Should we tax capital gains? Reading: Tax Working Group “Future of Tax: Final Report” https://taxworkinggroup.govt.nz/resources/future-tax-final-report Capital can be used as a taxation base. There has been considerable discussion in New Zealand about using capital as a tax base over the past few decades. This discussion has increased during Tax Working Group consultations with the public held in 2018. It is worth reading the relevant extracts from the Tax Working Group’s reports to see the pros and cons of implementing a capital gains tax. We already tax some forms of capital gains in New Zealand, but we do not have a comprehensive capital gains tax. Examples of areas where capital gains are taxed include some land sales (ss CB 6A to 15 ITA); holding shares in foreign companies (FIF rules); holding debt instruments (financial arrangement rules). https://taxworkinggroup.govt.nz/resources/future-tax-final-report 110.807 Tax Page 25 Topic 3: Introduction to deductions Overview Expenses may be deducted from income to reach a net income figure, provided that they are incurred in order to earn revenue. This topic discusses the general and rules for deductions and reviews the legislative authority for deductions. Learning objectives After studying the material for this week, you should be able to: • Explain the tax effect of deduction. • Demonstrate an understanding of how the Income Tax Act 2007 allows deductions. • Discuss and apply the general permission. • Discuss and apply the general limitations. You should be able to understand these terms: deduction, general permission, general limitation, override, supplement. Reading Barkoczy, Ammundsen et al. Foundations of New Zealand Taxation Law 2022. New Zealand: CCH New Zealand Ltd. Particular sections for reading are noted under each heading in this study guide. Useful resources IRD website: http://www.ird.govt.nz/business-income-tax/ http://www.ird.govt.nz/business-income-tax/ 110.807 Tax Page 26 3.1 Introduction to deductions In the introduction to topic 2, the following excerpt from the Income Tax Act was reproduced. Here it is again as a reminder that the goal of the ITA is to calculate the income tax liability of the taxpayer. However, in this topic, we are concerned with deductions – those expenditures that are able to be offset against income. Like Part C is for income, Part D is for deductions. If a deduction is not granted in Part D, then you cannot claim it. Part D has a number of subparts. Subpart DA sets out the general rules, including the general permission and the general limitations. These rules are examined in this topic. The rest of the subparts deal with specific rules relating to specific types of expenditure or taxpayers. These rules will be examined in topic 4. 110.807 Tax Page 27 3.2 How deductions work Reading: Foundations 12.1 - 12.3 In general, taxpayers are able to deduct expenses from income if they incur those expenses in the process of earning that income. This is the same principle that applies to calculating net profit for a business: if an expense relates to the business, then it should be deducted in order to arrive at a net profit figure, but if it is personal expenditure, then it isn’t deducted. The critical issue for deductibility is whether or not the expense is incurred in order to earn income. The Income Tax Act 2007 expresses this principle in a series of provisions, which follow the same basic structure as the provisions about income. NB: Each of the relevant sections is printed below, together with an explanation or gloss on the section. You should read all the explanations, and if you can, read the sections too. If you become a tax specialist, or a general business practitioner, you will need to be familiar with the law, and have some experience in reading it. Even if you do not intend to work in tax or in general business, it will still be useful to be able to read law. Section BC 3 of the Income Tax Act 2007 specifies what a person’s annual total deduction is, and section BC 4 of the Income Tax Act 2007 enables a person to deduct that annual total deduction from their annual gross income, to calculate net income, or if their expenses exceed their income, the excess will be their net loss. Having established that in general, expenses incurred in the derivation of income are deductible, the very next section provides some limits on that. There are various categories of expenditure for which you can’t get deductions. As a broad rule, these are areas of expenditure where any associated income is not assessable. The exception to this is the employment limitation. The general limitations are listed in the section below. You should read through the section, taking note of the name of each limitation. DA 2 General limitations Capital limitation (1) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature. This rule is called the capital limitation. Private limitation (2) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature. This rule is called the private limitation. Exempt income limitation (3) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving exempt income. This rule is called the exempt income limitation. Employment limitation 110.807 Tax Page 28 (4) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation. Withholding tax limitation (5) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving non-resident passive income of the kind referred to in section RF 2(3) (Non-resident passive income). This rule is called the withholding tax limitation. Non-residents’ foreign-sourced income limitation (6) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving non-residents’ foreign-sourced income. This rule is called the non-residents’ foreign-sourced income limitation. Relationship of general limitations to general permission (7) Each of the general limitations in this section overrides the general permission. Defined in this Act: amount, capital limitation, deduction, employment limitation, exempt income, exempt income limitation, general limitation, general permission, income from employment, loss, non-residents’ foreign-sourced income, non- residents’ foreign-sourced income limitation, private limitation, withholding tax limitation, Having first of all allowed deductions through the general permission, then ruled some out through the general limitations, some of the expenses covered by the general limitations are effectively allowed back in again, through special rules. The most notable instance of this is in respect of the capital limitation. Businesses can’t claim expenses of a capital nature [see section DA 2(1) of the Income Tax Act 2007], but the special rules for depreciation of some assets allow some capital expenses back in. 3.3 General permission Reading: Foundations 12.3 The first section in Part D sets up what is known as the general permission. It gives a broad general permission for people to deduct expenses from their income. It reads as follows: DA 1 General permission Nexus with income (1) A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is— (a) incurred by them in deriving— (i) their assessable income; or (ii) their excluded income; or (iii) a combination of their assessable income and excluded income; or (b) incurred by them in the course of carrying on a business for the purpose of deriving— (i) their assessable income; or (ii) their excluded income; or (iii) a combination of their assessable income and excluded income. http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1520312 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1520676 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1520847 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521083 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521219 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521269 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521271 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521514 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521516 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521638 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1521817 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522049 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522051 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522051 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522339 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522964 http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1522964 110.807 Tax Page 29 General permission (2) Subsection (1) is called the general permission. Avoidance arrangements (3) Section GB 33 (Arrangements involving depreciation loss) may apply to override the general permission in relation to an amount of depreciation loss. In other words, in general, if you incur an expense in the process of earning your income, or running your business, then you may treat that expense as a deduction. The ‘nexus with income’ is critically important. If the expense is not connected with earning income, then it is not deductible. An expense must also be ‘incurred’ in order to be deductible. The business must be committed to the expense before the deduction can be claimed. Note that a deduction can still be allowed when the income being earned is excluded income, but not exempt income. In the previous topic, the distinction between excluded and exempt income was examined. Herein lies one of the most important reasons why these two types of income are distinguished from each other. Neither are included within a taxpayer’s taxable income so it would be easy to assume they have the same effect. However, the ability to claim deductions that relate to excluded income may have a significant tax outcome. An example of this is where a dividend is derived from a foreign investment fund. This is excluded income (s CX 57B ITA). However, any expenditure incurred in deriving the dividend income may still be deductible under the general permission. On the other hand, a charity may derive exempt income (s CW 41 ITA). Any expenditure incurred in deriving this income does not meet the general permission – so expenditure of charities is not deductible. As discussed above, in order to claim a deduction, there must be a link, or nexus, with income and the expenditure must actually have been incurred. Expenditure is incurred only once there is an obligation to pay. For example, if a business orders some stationery supplies, the expenditure is only incurred once the supplies have been received – then a debt arises to pay for the supplies. If the business has placed an order but the supplies have not been sent, the obligation hasn’t yet arisen – the supply may never be fulfilled or it may be cancelled. Another example is making a provision for a project planned for the future. A business might make a provision for a potential restructuring. This would not be deductible for tax purposes until the costs have been incurred – that is, an unconditional liability has arisen. Deductions must be apportioned if they are incurred for more than one purpose – this is indicated in the words in the general permission, “to the extent”. For example, if a small business owner hired a cleaner for both the business premises, and her private accommodation, then the cleaner’s bills would have to be apportioned, with only the portion relating to the business being eligible for a deduction. Other general principles include: • Expenditure does not have to be paid in cash to be deductible, but there must be an obligation to pay the expense i.e. it must have been incurred • Expenditure does not have to occur in New Zealand http://legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1516992 110.807 Tax Page 30 • An expense can be deductible even if it is not assessable income in the recipient’s hands • Expenses incurred as a pre-requisite to earning income are not deductible (pre- commencement expenditure) • Expenses incurred after a business is terminated are not deductible • In general, the Courts apply “commercial accountancy” principles, unless there is a specific provision in the Income Tax Act 2007 that deals with the matter • Unwise or imprudent expenditure is still deductible – expenditure does not need to be necessary for business purposes, or business should not necessarily be profitable for the expenditure to be deducted Referring back to the general permission, you can see there are two parts under which a deduction may be claimed: (a) and (b). Part (a), formerly referred to as the first limb, provides the general rules for deductions for all income that is not business income. For example, if you have a rental property, you will seek deductions under part (a). Part (b), formerly known as the second limb, allows deductions for business income only. Part (b) encompasses a wider range of expenditure than (a). Part (a) requires a direct nexus between the expenditure and the income. Part (b), on the other hand, only requires the expenditure have a nexus with carrying on a business, not deriving income as such. This allows for deduction of some items that may not have a nexus with income but do form part of carrying on a business. Some examples include: writing off bad debts or writing off damaged or obsolescent stock. Another good example of this distinction is highlighted in the case Herald & Weekly Times Ltd v Commissioner of Taxation (1932) 48 CLR 113. In this case, the court allowed a deduction for a payment made by a newspaper to settle a defamation claim. This is a good example of expenditure that does not have a nexus with income but does have a nexus with carrying on a business. Note that also allowed under the general permission is an amount of depreciation loss. We will consider depreciation losses in topic 4. Generally meeting the general permission is easy. If you are an employee and you have young children, you could use the general permission to justify deduction of childcare costs. You cannot earn your employment income without childcare. The nexus test is met. However, the general permission is subject to the general limitations. 110.807 Tax Page 31 3.4 General limitations Reading: Foundations 12.4 The breadth of the general permission is restricted by the general limitations found in s DA 2 ITA. Like the general permission, these are so fundamental to deductions that this section is set out here: DA 2 General limitations Capital limitation (1) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a capital nature. This rule is called the capital limitation. Private limitation (2) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature. This rule is called the private limitation. Exempt income limitation (3) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving exempt income. This rule is called the exempt income limitation. Employment limitation (4) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation. Withholding tax limitation (5) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving non-resident passive income of the kind referred to in section RF 2(3) (Non-resident passive income). This rule is called the withholding tax limitation. Non-residents’ foreign-sourced income limitation (6) A person is denied a deduction for an amount of expenditure or loss to the extent to which it is incurred in deriving non-residents’ foreign-sourced income. This rule is called the non-residents’ foreign-sourced income limitation. Relationship of general limitations to general permission (7) Each of the general limitations in this section overrides the general permission. There are six general limitations and, as stated in subsection 7, they all override the general permission. When determining if an amount of expenditure is an allowable deduction, the process is important. First you must establish if it meets the general permission, and then you determine if the expenditure is denied by the general limitation. Looking at the general limitations, there are three that will be highlighted in this course: the capital limitation, the private limitation, and the employment limitation. https://www.legislation.govt.nz/act/public/2007/0097/latest/link.aspx?id=DLM1520312#DLM1520312 110.807 Tax Page 32 3.5 Capital limitation Reading: Foundations 13.5; 12.5 Like income, one of the big questions in the topic of deductions is whether the expenditure being considered is capital in its nature. Generally, unless allowed by a specific provision in Part D (such as the deduction for depreciation loss), capital expenditure is denied by the capital limitation. This has been a question that has arisen in the courts on many occasions, even recently. One of the more useful decisions that has been adopted in New Zealand courts, is the BP Australia v FCT (1965) HCA 35 case which set out seven principles we can use as guidance in determining if an item of expenditure is capital or revenue. The principles are: • Whether the expenditure is recurrent (the “once and for all” test) • Whether the expenditure creates an enduring benefit • Whether the expenditure is on the profit-making structure or the profit- making process • The need for the expenditure • Whether the expenditure creates an identifiable asset • Whether the payment is made from fixed or circulating capital • How the expenditure is treated under commercial or accounting principles Often the question at issue will be whether a deduction is available up front for the expenditure as repairs and maintenance, or whether the deduction is initially denied but may be allowable as a depreciation expense over the life of the asset. Depreciation is considered under the next topic. However, sometimes expenditure is incurred which is capital in nature for which no deduction is allowable at all – effectively black hole expenditure. One such case was Fuller Bay of Islands Ltd v CIR (2006) 22 NZTC 19,716. In this case, the taxpayer sought to deduct costs relating to its tender to operate a ferry service in the Bay of Islands. The court denied the costs on the grounds that it was expenditure on the profit- making structure of the business. The taxpayer was hoping to secure a new ferry service and, in the court’s view, a new ongoing source of revenue. Repairs and maintenance Reading: Foundations 13.6 Deductions for repairs and maintenance are allowed under the general permission. However, if the repairs and maintenance are in fact more like alterations and improvements, then they are capital expenditure which must be capitalised and depreciated. In other words, whether repairs and maintenance are deductible in the year it is expended depends upon the age-old distinction between capital and revenue expenditure. There is no guidance in the ITA so to what is “repairs and maintenance” 110.807 Tax Page 33 and what is “alterations and improvements” so we rely on case law. Case law tells us to consider these questions: • Does the project involve the creation of a new asset? • Has there been a physical change to the size of the asset? • Has there been a physical change in the layout of the asset? • Has there been a physical change in the functions of the asset? • What type of material was used? The answers to these questions will give guidance about whether the cost is repairs and maintenance, or alterations and improvements. Notice that over time, even if a taxpayer can claim the full amount of the cost whether or not it is claimed as repairs and maintenance, or capitalised and depreciated. However, the time value of money tells us that it is better to claim the cost earlier. The incentive is for taxpayers to claim the cost as repairs and maintenance, rather than capitalise and depreciate them. This is contrary to the motivation for accounting purposes where an asset will usually be preferred over up -front expenditure. 3.6 Private Limitation Reading: Foundations 12.4 The private limitation is also known as the domestic limitation. This is reason why childcare costs, work clothes, and lunches cannot be claimed. If you are self-employed and need to pay for childcare costs, it would be easy to mount an argument that this cost meets the general permission. After all, the expenditure is clearly linked with deriving assessable income. Being able to work is conditional upon not having a toddler around! The private limitation denies a deduction for any expenditure that is private or domestic. Note that the private limitation typically doesn’t apply to a company. A company is a commercial vehicle and most businesses will operate through a company rather than partnership or sole trader. A company is a separate person and does not have a private or domestic life. If, as in the example above, a company paid for the childcare costs of an employee, this would be fully deductible as the private limitation would not apply. However, the benefit would be subject to fringe benefit tax (“FBT”) which we cover in topic 8. 3.7 Employment Limitation Reading: Foundations 12.4 The employment limitation denies ALL expenditure incurred in producing employment income. The only exception is a deduction for fees paid to someone to 110.807 Tax Page 34 complete your tax return is allowable under s DB 3. This is because this specific provision is stated to override the employment limitation. 3.8 Link between general and specific deductions Reading: Section DA 3 ITA The following is a matter of statutory interpretation. Each specific deduction section of the ITA (subparts DB to DZ) has a provision describing how the specific rule links to the general rules. For example, does the general permission have to be met as well as the specific provision? Or does the specific provision override the capital limitation? When reading a specific provision in the deduction section, determining the link with the general rules forms part of the application of the section. Examples include: Section DB 7 ITA allows (most) companies to deduct interest. This allowance ‘supplements’ the general permission. In other words, a company can deduct interest even if the general permission is not met. Also, this allowance overrides the capital limitation. In other words, interest is deductible even if it is for a capital purpose. 110.807 Tax Page 35 Topic 4: Specific Deductions and Depreciation Overview Expenditure may be deducted from income to reach a net income figure, provided that they meet the general permission and are not denied by the general limitations. However, sometimes specific rules in Part D supplement or override the general rules. This topic discusses some of these more specific rules. It also covers the rules for claiming depreciation expenses. Learning objectives After studying the material for this week, you should be able to: • Analyse deductions allowed when calculating net income or business-related expenditure, particularly with respect to common practical issues, including: o Financing costs o Research and Development o Entertainment o Motor vehicle expenses o Use of the home for deriving income o Legal costs o Payments to a spouse o Farming/forestry expenditure • Discuss the general principles for trading stock deductions. • Discuss the general allowance for depreciation • Apply the rules for calculating the depreciation loss available to a business. You should be able to understand these terms in relation to deductions: depreciation, depreciation loss. Reading Barkoczy, Ammundsen et al. Foundations of New Zealand Taxation Law 2022. New Zealand: CCH New Zealand Ltd. Particular sections for reading are noted under each heading in this study guide. Useful resources IRD website: http://www.ird.govt.nz/business-income-tax/expenses/ IRD website: http://www.ird.govt.nz/business-income-tax/depreciation/ http://www.ird.govt.nz/business-income-tax/expenses/ http://www.ird.govt.nz/business-income-tax/depreciation/ 110.807 Tax Page 36 4.1 Specific rules for deductions Reading: Foundations 16.1 Topic 4 discusses the general rules for deduction of expenditure set out in subpart DA ITA. Subparts DB to DG introduce some specific rules that may supplement or override the general rules. At the end of each provision in these subparts is an explanation of how that provision interacts with the general rules. For example, if you look at s DB 7 ITA, you will see that a company can deduct interest costs without meeting the general permission and regardless of the capital limitation. Section DB 7(8) ITA says: Link with subpart DA (8) This section supplements the general permission and overrides the capital limitation, the exempt income limitation, and the withholding tax limitation. The other general limitations still apply. 4.2 Rules for specific deductions There are special rules for various deductions. The more important special rules discussed in this section are: o Financing costs o Research and Development o Entertainment o Motor vehicle expenses o Home office expenses o Legal costs o Payments to a spouse o Farming/forestry expenditure 4.2.1 Financing Costs Reading: Foundations 16.3, s DB 7 ITA. Interest costs are generally deductible where there is a nexus with income, overriding the capital limitation. If an individual borrows money to buy shares, the interest costs are deductible. There is a special rule for companies. They do not need to prove a nexus with income. This allows a company with no income (such as a holding company), a deduction for interest costs. The reading in Foundations is several pages long. You do not need to learn all of this but it is useful to have an overview of interest deductions as this topic is important in many areas of practice. 110.807 Tax Page 37 4.2.2 Bad Debts Reading: Foundations 16.4, s DB 31 ITA. Bad debts are subject to stringent requirements before a deduction is allowed. A bad debt can only be deducted if it is a trade debtor AND the debt has been specifically written out of the debtors’ ledger by the end of the income year. 4.2.3 Research and Development Reading: s DB 34 ITA. Research and development costs sometimes tend to straddle the capital/revenue divide. Section DB 34 ITA is a little unusual in that it allows taxpayers to just follow their accounting treatment per NZ IAS 38: Intangible Assets. There is also a concession for taxpayers with total research and development costs of $10,000 or less for the year – these can be written off completely in the year. 4.2.4 Entertainment expenditure Reading: Foundations 16.8, s DD 2 ITA. Some entertainment expenditure incurred by a business is subject to a limitation on deduction of 50% of the total expense. So if a business has a staff Christmas party at a cost of $1,000, only $500 can be claimed as a deduction for income tax purposes (s DD 2 ITA 2007). The reason for only allowing a partial deduction for entertainment expenses is that a private use element is assumed. The problem is not that the business person is having fun. There are no laws against taking your clients and staff out for an expensive meal at the end of the year. However, a private benefit component is deemed to be included. Recall that any allowable deduction reduces a business’ tax bill. If a business person takes his or her staff out for dinner, costing say $1,000, the actual cost to the business person is reduced by the amount of the tax benefit. The types of expenditure covered by the deduction limitation are listed in s DD2 ITA. These include food and drink, corporate boxes, holiday homes and yachts. Travel expenditure is specifically carved out, unless an element of entertainment is included in the travel, such as taking a client out for dinner. Also carved out are morning teas. 110.807 Tax Page 38 4.2.5 Motor vehicle expenses Reading: Foundations 16.9, s DE 1 ITA. Subpart DE ITA provides rules on apportioning motor vehicle costs where the vehicle is used by the business ‘owner’ for business and other purposes. This subpart applies to all taxpayers except companies, other than close companies where the private use is enjoyed by a shareholder/employee. A close company is defined in s YA 1 ITA as a company where 5 or fewer shareholders control the company. To put this in perspective, a small family business can use the apportionment rules for motor vehicle costs found in subpart DE, but a large corporate enterprise such as Air New Zealand or Fonterra cannot. These rules highlight the importance of being clear who the taxpayer is when analysing a tax problem. A company is not the same person as a shareholder. Note that these rules are not applicable when an employer provides an employee with a motor vehicle. In this case, the FBT rules will apply. Subpart DE operates to provide prescriptive methods for quantification of the apportionment of motor vehicle expenses that can be claimed as deductible against business income. You do not need to know these methods for the purpose of this course. It is more important that you understand the principle of when this applies. 4.2.6 Home office expenses Reading: Foundations 12.8, s DB 18AA. Taxpayers who use a portion of their home to earn an income, or to run a business which derives income, can claim a portion of house related expenses, such as rates, maintenance, electricity, and so on. There must be an area which is set aside permanently for business, such as a home office. The amount that can be claimed is based on the area of the house which is used for income earning activities. This claim is made under the general permission (s DA 1). Alternatively, taxpayers can choose to use the apportionment rules in s DB 18AA ITA 2007 that provide a square metre rate for home office expenses excluding interest. 50% of home telephone line rentals can be claimed as a business or income earning expense. Business related toll calls are deductible, but private toll calls are not. This is not embedded in legislation but has arisen out of CIR practice. 110.807 Tax Page 39 4.2.7 Legal costs Reading: Foundations 16.10, s DB 62. In general, legal fees are deductible under the general permission, unless they are fees associated with one of the items listed in the general limitations. For example, the legal fees associated with the purcha 2022 Exam Briefing 110289 Taxation Summary Exam is online so you do not need to attend a venue Monday 31 Oct 9.30am in your local time zone 3 hours allowed Closed book Calculators permitted 2 blank pieces of paper permitted for writing notes Remember to have your student ID Exam is worth 70% of your final course mark OSE Online supervised exam You need a laptop/computer with an operational camera and microphone Go to the “S2 2022 Final Exam – OSE” tab on the course stream site for instructions Ensure you have tested your ability to download RPNow before the exam From 30 mins before the start of the exam, you will need to download RPNow RPNow disables everything on your computer except stream, your camera and microphone. Its only operates while you sit the exam. Write down the contact details for assessment services in case you have a technical problem during the exam. If you do, don’t panic – they will attend to you when they can. If you have an unstable internet connection, see if you can find a stable connection elsewhere. It is against the exam rules to contact me during or after the exam. Lots of students get concerned that they haven’t pushed submit of something like that – it automatically saves your work. Remember that no one wants you to fail because of technical issue. We are here to assess your tax knowledge only. The system is the tool only, not a test in itself. Marking allocation Exam consists of 100 marks Allocation of marks as follows: Part A – Tax calculation 30 marks Prepare a statement of taxable income Part B – Companies 30 marks 7 short answer questions, including computations Part C - Trusts 20 marks 7 short answer questions Part D – Tax Administration 20 marks 4 short answer questions Part A – tax calculation (30 marks) This question is a single computational question requiring you to look at a statement of financial performance and make adjustments to reach the taxable income – similar to the exercise we did in class with Jenny Winn Ltd. Practice the process but make sure you know your material on income and deductions, including depreciation. Part B – companies (30 marks) 7 short answer questions Think… FBT, RWT, dividends, losses, imputation credits…. all things relating to companies. Part C – trusts (20 marks) 7 short answer questions Think distributions of income and capital Only complying trust situation examined Part D – tax administration (20 marks) 4 short answer questions Think…. tax avoidance, tax evasion, penalties, interest, disputes…. Best of luck! We hope you have enjoyed the course and, most importantly, gained valuable knowledge you can use in the future. Alison and Victoria