SUPPORT MATERIALS

TAXNZ
TAXATION NEW ZEALAND

WORKSHOP 1

Activities
Questions and suggested solutions provided for learning purpose only
CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 1A (14 marks)

Unit Topic Unit Learning Objectives

1. Taxation fundamentals 1 1. Calculate the tax payable of a taxpayer.

2. Explain and calculate the assessable income of a taxpayer.
3. Explain and calculate the deductions available to a taxpayer.

Note: All amounts are in New Zealand dollars and GST-exclusive (where appropriate), unless otherwise stated.
Brayden Moore is a New Zealand tax resident and a sole trader. Brayden’s engineering
business employs seven staff. He is registered for GST on a two-monthly filing and accounts
for all business income and expenses on an accruals basis.
Brayden has provided the following information for the income year ended 31 March 2021.
1. Engineering fees invoiced for the year were $1,525,000. Of this amount, $325,000 had not
yet been received by the business at 31 March 2021. Brayden also performed engineering
services prior to 31 March 2021 to a value of $50,000, for which he has not yet billed his
clients. Brayden invoices his clients on a monthly basis for work performed, as stated in
the terms of his standard engagement letter.
2. The business incurred wages and overhead expenses of $464,000 during the income year.
At 31 March 2021, Brayden owed his employees $26,000 in annual leave. This amount is
not included in the wages expenditure amount. On 10 May 2021, one of his engineers
took five days annual leave to visit a sick relative and Brayden paid $1,000 for this leave
on 17 May 2021. No other payments were made for annual leave in the three months after
balance date.

3. Brayden filed and paid the GST return for the period ended 31 March 2020 late.
He incurred penalties of $300 and use-of-money interest of $50, which he paid to Inland
Revenue when he filed his return for the period ended September 2020.
4. Brayden uses his personal vehicle to visit clients and for various other business activities.
During the year, he spent $3,000 on petrol, registration and repairs on his vehicle. He did
not keep a logbook or any other records to account for his use of the vehicle; however, he
estimates his business percentage as 70%.
5. Brayden spent $7,000 on client entertainment during the year, and $2,000 on the staff
Christmas function. These expenditures were all incurred in New Zealand and were off
the business premises.
6. Brayden received net interest income of $14,000 from term deposits held in his personal
name. Resident withholding tax of $6,000 had been deducted by the bank.
In addition to the items above, Brayden paid provisional tax of $350,000 for the 2021 income year.

Required

Calculate Brayden’s terminal tax position for the year ended 31 March
2021, assuming he wants to minimise his income tax payable. Show all
workings and explain the treatment of each item
14 marks

End of Activity 1A

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Activity 1B (13 marks)

Unit Topic Unit Learning Objectives

1 Taxation fundamentals 1 2. Explain and calculate the assessable income of a taxpayer

3. Explain and calculate the deductions available to a taxpayer

All amounts are stated in New Zealand dollars and are exclusive of GST.
Mary Davies runs a gardening and landscaping business as a sole trader and commenced
trading on 1 October 2020. She is not registered for GST.

Mary prepared her own tax return for the income year ended 31 March 2021, with the
following calculation of assessable income from the business:

Income returned/deductions claimed Amount $ Further information

Income from landscaping clients 50,000 Included in this amount is $7,000 in non-refundable
deposits collected for work to be done in April 2021.
Not included is $4,000 in work completed in
February 2021 and not yet invoiced

Annual gross income 50,000

Purchase of a small block of land (80,000) Mary grows plants on the land for use in the
landscaping part of the business

Home office costs (4,000) Mary lives in a one-bedroom studio. She doesn’t have
a home office there, but she understands she can
claim 20% of the rent as a business expense as she
produces some of her invoices from the studio

Trading stock (8,000) Mary purchased $8,000 worth of potted plants for
use in the landscaping part of the business. Mary
does not hold any closing stock at the end of the year

Interest ($800) and principal (3,800) The bank loan was sought to assist with cash flow
($3,000) on a bank loan in the first 2 years of the business. A further $500 in
legal fees was incurred in establishing the loan

Potting mix and fertiliser (500) The potting mix and fertiliser were used for various
jobs and Mary did not have any on hand at year end

Training course (1,000 ) This was a marketing course completed in May 2020
to help Mary learn how to promote her new
landscaping business

Brochure printing costs (1,200 ) The brochures were used in a mail drop to
letterboxes in November 2020

Vehicle running expenses (3,500 ) Mary uses her private car in the business. She
estimates that the usage of the vehicle is around 50%
business and 50% personal. The $3,500 is based on
this estimate. No records have been kept to establish
accurate business use of the vehicle

Entertainment expenditure (1,200 ) This expenditure was for a cocktail function on

1 October 2020 to celebrate the opening of the
business. Mary invited people who had assisted her
in starting up the business. The expenditure was on
food and drink at a local bar

Annual total deductions (103,200)

Taxable income (loss) (53,200)

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Required

For each item included in the taxable income calculation above, identify
whether the amount included is correct or not.
Where incorrect, identify and explain the correct amount that should have
been recorded.
Calculate Mary’s correct taxable income for the year ended 31 March 2021.
13 marks

End of Activity 1B

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Activity 1C (12 marks)

Unit Topic Unit Learning Objective

1 Taxation fundamentals 1 2. Explain and calculate the assessable income of a tax entity

Charlotte Te Whare is a management consultant who was born, raised and educated in
Wellington. Charlotte lived and worked for several years in Wellington, but in 2019 decided
she wanted to live and work abroad.

In February 2019 Charlotte took up a role with a consulting firm in Hong Kong. Charlotte was
not intending to return to New Zealand, so she decided to sell her townhouse in Wellington.
The townhouse was sold in March 2019 and Charlotte left New Zealand for Hong Kong on
14 March 2019. Charlotte put the net proceeds from the sale of her property into a term deposit
with her New Zealand bank.

After 3 months Charlotte decided to purchase an apartment in Hong Kong. To make the
purchase, Charlotte transferred her savings from the term deposit and the interest earned.
With no funds in New Zealand and a mortgage in Hong Kong, Charlotte decided to close all
her New Zealand bank accounts.

Charlotte was unexpectedly assigned to an M&A project in Auckland and flew back to
New Zealand arriving the in the country on 1 August 2019. The project lasted 4 months and
Charlotte left New Zealand on 30 November 2019. She was present in New Zealand for the
entire length of the project, a total of 122 days. Charlotte managed to rent out her Hong Kong
apartment for a period of three months (August to October) while she was away.

While working on the project in Auckland, Charlotte started a romantic relationship with a
colleague who was seconded from the UK office. After returning to Hong Kong, Charlotte
decided to relocate from Hong Kong to the UK to be with her new partner. She arranged for
a permanent internal transfer to the UK office effective January 2020 and only returned to
New Zealand to visit her family for two weeks over Christmas on 22 December 2020.

Charlotte earned the following income during the 2020 income year:
• Salary from her Hong Kong employer
• Interest from her term deposit
• Rent from her Hong Kong property while she was on assignment in Auckland.

Required

(a) Briefly outline how a person loses their New Zealand tax residency. (8 marks)
Determine when Charlotte’s loses her New Zealand tax residence.
Justify your answer.
(b) Explain the source rules for income and discuss whether the listed (4 marks)
income items will be considered assessable income in New Zealand.
You are not required to provide references.
12 marks

End of Activity 1C

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Activity 2A (7 marks)

Unit Topic Unit Learning Objectives

2 Taxation fundamentals 2
8. Examine what constitutes ethical tax advice by explaining the difference
between tax planning, avoidance and evasion
9. Explain and apply the anti-avoidance rules
10. Analyse the statutory and professional (ethical) requirements applicable, for
example, to a tax agent

You are a tax advisor in the tax team of an accounting firm specialising in advising medical
professionals. One of your clients, Kim, is seeking to restructure her plastic surgery business.
Under the proposed restructure, Kim will sell her practice to a company owned by her family
trust and will become an employee of the company. Prior to the restructure, Kim derived net
income of $500,000 per annum. Kim’s new salary is to be set at $120,000 per annum. Kim is
concerned that the anti-avoidance provision may be applied in this situation and has come to
you for advice.

Required

Discuss the current approach adopted by the courts in determining the

issue of tax avoidance and explain how it would apply to Kim’s situation.
Cite cases to support your answer.
7 marks

End of Activity 2A

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Activity 2B (4 marks)

Unit Topic Unit Learning Objectives

2 Tax fundamentals 2
2. Describe key activities of Inland Revenue and the key powers of
the Commission in the New Zealand tax system
4. Explain the various steps in the disputes resolution process, both
prior to the issue of an amended assessment and through the
court system

Your client, Martha Jones, has a number of investments in forestry partnerships around
New Zealand. Following the advice received from her investment advisor, Martha did not
include a portion of the funds she received from one of the forestry partnerships in her
income tax return for the year ended 31 March 2021, as it was considered a capital receipt.

After filing her income tax return, Martha received a notice of proposed adjustment from
Inland Revenue, which included this capital receipt as part of her taxable income for the year.

Martha is deciding what to do about the situation and is considering the following options:

a. Issue a notice of response.

b. Issue a notice of proposed adjustment.
c. Issue an statement of position.
d. Do nothing.

Required

For each option listed, give a brief explanation whether the option is
available to Martha.
4 marks

End of Activity 2B

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Activity 2C (4 marks)

Unit Topic Unit Learning Objectives

2 Tax fundamentals 2 8. Examine what constitutes ethical tax advice by explaining the
difference between tax planning, avoidance and evasion
9. Explain and apply the anti-avoidance rules

Each of the following scenarios are to be considered in relation to the general anti-avoidance
rules:

a. Rebecca is a New Zealand tax resident who earns a salary taxed at the top marginal
tax rate. She has recently inherited $100,000 and has decided to invest these funds in
shares. After doing her research, Rebecca learns that dividends paid out by New Zealand
companies will often have imputation credits attached that she can use to offset her
income tax liability, whereas dividends from foreign companies will not. Rebecca chooses
to invest in New Zealand companies due to this tax advantage.
b. Paul and Sharon are a married couple who are equal shareholders in a successful
company, Profit Co. Their friend Steve is the sole shareholder of a company, Loss Co,
which has a large amount of historic tax losses brought forward. Steve buys Paul and
Sharon’s shares in Profit Co at market value with the purchase price owing to Paul and
Sharon on an interest-free basis. Paul and Sharon remain directors of Profit Co. The
arrangement also allows for Paul and Sharon to buy back their shares in five years’ time
for the outstanding balance of the purchase price, or $1 if the loan is fully paid. Every
year Profit Co pays Loss Co a management fee equal to its annual net profit before the
management fee. Loss Co also pays the same amount to Paul and Sharon in partial
repayment of the purchase price of the shares.

Required

Briefly explain whether each scenario is likely to be subject to the

general anti-avoidance rules.
4 marks

End of Activity 2C

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Activity 2D (4 marks)

Unit Topic Unit Learning Objectives

2 Taxation fundamentals 2 3. Explain the key features of the binding rulings regime
4. Explain the various steps in the disputes resolution process, both prior to the
issue of an amended assessment and through the court system

Debbie Roberts owns a successful private tutoring business. She intends to bid to establish
some primary educational establishments with the New Zealand Government under a public–
private partnership arrangement. If the bid is successful, there would be a significant amount
of design and construction expenditure in establishing the enterprise, some of which would
be funded by the New Zealand Government. However, Debbie and her accountant are unsure
about the tax treatment of the project.

Required

Identify two options available to Debbie to gain assurance of the tax

treatment of her proposed actions, and briefly discuss one advantage
and one disadvantage of each option.
4 marks

End of Activity 2D

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Activity 2E (6 marks)

Unit Topic Unit Learning Objective

2 Taxation Fundamentals 2 5. Calculate the amount of a shortfall penalty for several types of non-compliance.

Sally has been running a hairdressing business for two years. The first year of business
was quiet and Sally had plenty of time to keep good records and fulfil her tax obligations.
However, business picked up in the second year and Sally found that she had little time
to keep up to date with record-keeping and general business administration. When it was
time to fulfil her tax obligations, she found that she did not have receipts for a number of
expenditures that she was sure she had incurred. Therefore, Sally made an estimate of what
she thought these expenses might be ($10,000) and claimed these as deductions. Inland
Revenue challenged Sally’s tax return as part of a risk review and asked for evidence of the
expenses, which she could not provide.

Required

(a) Identify the likely penalties and corresponding penalty rates that
Sally may incur as a result of claiming deductions for which she did
not have receipts. Include legislative references in your answer.
(b) Identify one option that exists for Sally’s penalties to be reduced and
the rate of reduction under the Tax Administration Act 1994. Include
the legislative reference in your answer.
6 marks

End of Activity 2E

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Activity 3A (12 marks)

Unit Topic Unit Learning Objectives

3 Property 1. Explain and apply the provisions of the taxation of personal property sales.
2. Explain and apply the taxation treatment of land transactions.
3. Explain the associated persons’ provisions as they apply to transactions
involving property.

You are a tax advisor in an accountancy firm specialising in land and personal property
transactions. You have been asked to advise on the following three unconnected client situations.
All taxpayers are New Zealand tax residents and all land is situated in New Zealand.

(I) Irene Speedy received a tip-off from a friend that the price of gold bullion is likely to
increase in the short-term. Following the tip-off, Irene purchased some gold bullion with
the purpose of disposal at a profit. Irene soon realised that she did not have the time to
follow the fluctuating price of gold, and chose to hold the bullion long-term as part of her
overall investment portfolio. In 4 years’ time Irene’s friend urged her to sell the gold, as
prices were high. Irene agreed and made a profit on the sale.

(II) Mr Money owns 25% of the voting shares in Build Co. The remaining 75% is owned by
a non-associated investor. Build Co carries on a business of erecting buildings for sale
and has done so since 1995. Mr Money acquired a bare piece of land on which he built
a rental property in 2012. The land and house was acquired for the purposes of long-
term rental, was not related to Build Co’s building business and was not acquired for
the purpose or intention of disposal. Five years after completing the build, Mr Money’s
health started to fail and he was forced to sell the property for a profit which he used to
fund his medical bills.

(III) Sam acquired a 5,000 square metre piece of land with a single house and a large back
section. Sam acquired the property as his primary residence and not for the purpose or
intention of disposal. Sam has not undertaken any other property investments and is not
associated with any taxpayers who are in the business of dealing in land, developing or
subdividing land or erecting buildings. Sam and his family lived in the house for 5 years
before they subdivided the original single title and created two titles. Sam undertook
this subdivision for the purpose of creating a separate title on which he intended to
build a small flat. This flat was rented out to some university students for $300 per week.
The subdivision work was more than minor but did not involve significant expenditure.
Three years after completing the subdivision, Sam sold both sections for a profit.

Required

Explain whether the above situations will give rise to taxable income
on disposal, include any applicable exemptions. Cite all legislative
references.
12 marks

End of Activity 3A

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Activity 3B (5 marks)

Unit Topic Unit Learning Objectives

3 Property 1. Explain and apply the provisions of the taxation of personal

property sales
2. Explain and apply the taxation treatment of land transactions
3. Explain the associated persons’ provisions as they apply to
transactions involving property

Johnny and Jill Longdollar are husband and wife. Johnny owns 50% of the voting interests in
Cash Co, a New Zealand tax resident company that operates a land dealing business. Johnny
also owns 24.9% of the voting shares in Profit Co. Johnny does not have any form of control
over these two companies other than through his voting rights.

Jill is the sole shareholder in Invest Co, a company which holds four rental properties.

Consider the relationships of the taxpayers listed below:

a. Johnny and Jill.

b. Johnny and Profit Co.
c. Johnny and Invest Co.
d. Profit Co and Invest Co.
e. Cash Co and Invest Co.

Required

Briefly explain whether each pair of taxpayers are associated for the
purposes of the land provisions.
5 marks

End of Activity 3B

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Activity 3C (10 marks)

Unit Topic Unit Learning Objectives

3 Property 2. Explain and apply the taxation treatment of land transactions

3. Explain the associated persons’ provisions as they apply to transactions
involving property

You are a newly qualified Chartered Accountant and you have recently gained a new client,
Larissa. Larissa has come to you for advice on some property transactions she has made.
She is concerned that she may have unintentionally entered into an arrangement that could
result in a tax liability for her. She tells you the following facts:
• On 1 April 2012, Larissa purchased a small house on a large section of land (1,500 square
metres) in Auckland. The house and land cost $500,000. She purchased the property as
a residence for her elderly father. Larissa lives in a nearby property.
• After 3 years, her father became unwell. Larissa concluded that the land the house
was on was too much for him to look after. In 2015 she sub-divided the land into three
equal sections, retaining the section with the house and selling the other two sections
for $400,000 each.
• As part of the sub-division, it was necessary to undertake some development work.
This included building new access ways (driveways), some retaining walls and providing
additional utility services including plumbing and electrical. These development costs
amounted to $100,000. There were no administrative costs incurred directly related to the
sub-division, as Larissa’s husband of 20 years (Peter) has a sub-dividing business, which
he has owned and operated for 25 years, and did not charge her for these costs.
• On 1 December 2016, Larissa’s father moved into a retirement village. She sold the
remaining section of land (and the house on it) for $900,000.

Larissa is not associated with any land dealers or builders.

Required

Explain whether the proceeds from the sale of the land are likely to
be considered income to Larissa under each of ss CB 6–CB 13 of the
Income Tax Act 2007. Identify whether any exclusions apply and provide
legislative references for each exclusion.
10 marks

End of Activity 3C

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Activity 4A (12 marks)

Unit Topic Unit Learning Objectives

4 Trading stock 1. Explain the ‘trading stock’ definition

2. Explain and calculate the effect of trading stock expenditure on taxable income
3. Explain and calculate the taxation consequences of a disposal of trading stock
5. Explain and calculate the taxation consequences of a change in use of
trading stock

All amounts are stated in New Zealand dollars and are exclusive of GST, unless otherwise
stated.

You are a Chartered Accountant working in the finance team at Fridge Guy Limited (FGL),
a specialist refrigeration retail and repair store. FGL sells high-end refrigerators and provides
repair and maintenance services to its customers. FGL values its stock at cost in its financial
statements.

The following financial information is available for the year ended 31 March 2021:
• Sales of $2,700,000.
• Purchases of fridges of $1,500,000.
• Purchases of spare parts for repairs and servicing of $300,000. These parts are only used
by the service and repairs team and are not for sale to the public.
• Total other expenses of $600,000.

You have also obtained the following information for tax purposes:

(I) Insurance receipt of $300,000 for fridges stolen at the end of the previous year not
included in net profit.

(II) Closing stock of fridges for the year ended 31 March 2020 was $400,000 valued at cost.

(III) Closing stock of fridges for the year ended 31 March 2021 is valued as below:

– Cost of $570,000.
– Discounted selling price $500,000.
– Replacement value $490,000.
– Market selling value supported by the appropriate documentation $520,000 including
expected selling costs.
(IV) Closing stock of spare parts for the year ended 31 March 2020 was $40,000 valued at cost.

(V) Closing stock of spare parts for the year ended 31 March 2021 is valued as below:
– Cost of $55,000.
– Discounted selling price $60,000.
– Replacement value $75,000.
– Market selling value $65,000.
(VI) Four fridges were donated during the year to a home renovation show by FGL. The cost
to FGL is $20,000 with a retail price of $24,000. No amount has been included in net profit.

You have been asked by the owner, Brian, to calculate the taxable income for the year. FGL
aims to minimise its income tax.

Activity 4A continues, please turn over

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Required

Calculate FGL’s taxable income for the year ended 31 March 2021.
Provide a legislative reference for each of the items (I) to (VI) explaining
whether it is included in taxable income. Show all workings for any
calculations you make.
12 marks

End of Activity 4A

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