SUPPORT MATERIALS

TAXNZ
TAXATION NEW ZEALAND

WORKSHOP 1

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

Activity 1A – Suggested solution (14 marks)

Unit Topic Unit Learning Objectives

1 Taxation 1. Calculate the tax payable of a taxpayer
fundamentals 1 2. Explain and calculate the assessable income of a taxpayer
3. Explain and calculate the deductions available to a taxpayer

Item Explanation and workings Amount

$

1. Engineering fees invoiced
2. Overhead and wages
The $1,525,000 of fees invoiced are taxable in full as Brayden 1,575,000
returns income on an accruals basis.
The $50,000 of fees not yet billed has been earned despite not
being invoiced and is therefore assessable for tax purposes. The
amount needs to be added to the total amount invoiced in the
year
IS 16/06 provides guidance as Brayden’s engagement letter
indicated an entitlement to bill clients each month
$1,525,000 + $50,000 = $1,575,000
Overhead and wages expenses are deductible expenditure (465,000)
Employment expenditure is only deductible when paid;
therefore, as the annual leave amount of $26,000 has not been
included as a deduction, no adjustment is required. Despite
this, the $1,000 paid within 63 days of balance is an allowable
deduction (s. EA 4)
Total deduction available is therefore:
$464,000 + $1,000 = $465,000

3. Penalties and interest Penalties are not deductible (IS 09/01 and s. DB 1) (50)
Interest is a deductible expense

4. Motor vehicle deduction As no log book was kept, only a deduction of 25% of actual (750)
costs is allowed $3,000 × 25% = $750

5. Entertainment expense Deductions for entertainment expenditure incurred in New (4,500)

Zealand are generally limited to 50%. This limitation applies
to both client and staff entertainment and so the following
amount is deductible:
$9,000 ÷ 2 = $4,500

6. Interest income Interest income is assessable on a gross basis. Therefore, the 20,000
total amount of interest income to include will be:
$14,000 + $6,000 = $20,000

Taxable income 1,124,700

Tax at marginal tax rate (14,000 × 10.5%) + (34,000 × 17.5%) + (22,000 × 30%) + 362,071
(1,054,700 × 33%) = 362,071

Less RWT (6,000)

Residual income tax 356,071

Less provisional tax paid (350,000)

Terminal tax payable 6,071

Page 2 of 16 | Activities – Suggested Solutions

 TAXNZ

Activity 1B – Suggested solution (13 marks)

Unit Topic Unit Learning Objectives

1 Taxation 2. Explain and calculate the assessable income of a taxpayer
fundamentals 1 3. Explain and calculate the deductions available to a taxpayer

Item Explanation for the errors made Correct amount

$

Income from Non-refundable deposits are considered to be derived when 54,000

landscaping received. As the $7,000 is already included, no adjustment is
required
The work completed during February 2021must be accounted for
in the 2021 income year, and so an additional $4,000 should be
included
The landscaping income to be included in assessable income is
therefore:
$50,000 + $4,000 = $54,000

Purchase of land Capital expenditure 0

Home office costs No basis upon which to apportion the cost 0

Trading stock No error (8,000)

Interest and legal fees Allowable deductions ($800 + $500) (1,300)

The $800 interest expense is deductible because it is incurred in
carrying on business for the purpose of deriving assessable income
The $500 legal fees are deductible because they are expenditure
incurred in carrying on business for the purpose of deriving
assessable income. The capital limitation for the legal fees is also
overridden by s. DB 62 (legal fees less than $10,000) and s. DB 5
(expenditure incurred in borrowing money)

Loan principal No deduction, as loan principal repayments are not expenditure 0

Potting mix and No error – these are consumable aids, with no amount unexpired at (500)
fertiliser year-end

Training course Not deductible as expenditure incurred prior to commencing 0

business in October 2019

Brochure printing No error – these are consumable aids, with no amount unexpired at (1,200)
costs year-end

Vehicle running No records kept, so only 25% of the expenditure is an allowable (1,750)
expenses deduction: $7,000 (total expenditure) × 25% = $1,750

Entertainment Limited to 50% of the expenditure, as food and drink were provided (600)
expenditure off premises
$1,200 ÷ 2 = $600

Taxable income $40,650

Activities – Suggested Solutions | Page 3 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 1C – Suggested solution (12 marks)

Unit Topic Unit Learning Objective

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

Section YD 1 is used to determine a natural person’s New Zealand tax residency.

For a New Zealand tax resident to lose their New Zealand tax residency, they need to lose both
their Permanent Place of Abode (PPOA) in New Zealand and be physically out of the country for
more than 325 days in a 12-month rolling period.
Residency will be lost on the first day once the days count test is met in conjunction with the
PPOA test.
The PPOA test looks to determine the fixed and habitual place of abode where a person has an
enduring relationship and where they habitually live. This is determined by weighing up relevant
factors, such as the:
• duration of a person’s presence in New Zealand and whether their presence is continuous or
interrupted, and the length of their stay.
• durability of a person’s association with New Zealand – this is the availability and use of
a dwelling, their family and social ties, employment and business interests, economic ties
and personal property held in New Zealand are all considered. Past and potential future
associations with New Zealand are also considered.

Days count test

In a 12-month period from 14 March 2019, when Charlotte left New Zealand, to 13 March 2020,
Charlotte was present in New Zealand for 122 days. Charlotte was therefore out of the country
for only 243 days (365 – 122 days) and therefore does not meet the 325 days count test.
Charlotte then leaves New Zealand again on 30 November 2019, and is absent from New Zealand
for the 12-month period from 1 December 2019 to 30 November 2020. Charlotte therefore
meets the 325 days count test and assuming she loses her PPOA, will be a non-resident from the
day following her departure, being 1 December 2019.

PPOA
Charlotte sold her Wellington townhouse upon leaving New Zealand so does not have a
permanent home in New Zealand. Additionally, as she has no dependants living in New Zealand
and has taken up employment overseas, it is likely Charlotte will have broken her PPOA upon
leaving the country.
Despite returning to New Zealand for a project, Charlotte is still employed by her Hong Kong
employer and owns a property in Hong Kong. In buying her Hong Kong property, Charlotte
closed her New Zealand bank accounts which lends weight to breaking ties with New Zealand.
On leaving New Zealand again, she decides to move further abroad with her partner. As a result,
her family ties are stronger outside of New Zealand.
Charlotte will likely be deemed to have lost her New Zealand PPOA from when she first left the
country. Her subsequent actions further strengthen the position of her losing her New Zealand
PPOA.

Page 4 of 16 | Activities – Suggested Solutions

 TAXNZ

As Charlotte must meet the tests for non-residency under both the days count test and the PPOA
test, she will be considered a non-resident of New Zealand for tax purposes from 1 December 2019
when she meets the days count test.

Income sources
A New Zealand tax resident is liable for New Zealand income tax on their worldwide income.
A non-resident is only liable for New Zealand income tax on their New Zealand sourced income.
Hong Kong salary – this is overseas sourced income so is taxable in New Zealand while Charlotte
is still a New Zealand tax resident. Therefore, the salary will be taxable in New Zealand up to and
including 30 November 2019.
Bank interest – this is New Zealand sourced income so will be taxable income in New Zealand
regardless of Charlotte’s tax residency.
Rent from Hong Kong apartment – this is overseas sourced income derived while Charlotte was a
New Zealand tax resident, so the income will be taxable in New Zealand.

Activities – Suggested Solutions | Page 5 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 2A – Suggested solution (7 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
10. Analyse the statutory and professional (ethical) requirements
applicable, for example, to a tax agent

The New Zealand courts have established a two-step approach in determining tax avoidance
when applying the general anti-avoidance rules found in s. BG 1.
The first step is to identify whether there is an “arrangement”. Section YA 1 defines arrangement
as an agreement, contract, plan, or understanding, whether enforceable or unenforceable,
including all steps and transactions by which it is carried into effect.
The second step is to determine whether the arrangement has tax avoidance as a purpose or
effect. To do this, the parliamentary contemplation test, which was set out in the case Ben Nevis
Forestry Ventures Limited v. CIR, is used.
This test asks whether the arrangement, viewed commercially and economically, makes use of the
Act in a manner that is consistent with what Parliament would have intended for. Applying this
test involves identifying:
• Parliament’s purpose regarding the relevant provisions, and
• The commercial reality and economic effects of the arrangement

For Kim’s situation, the first step is met as there is a plan involving several steps to restructure her
business from a sole trader to a company.
The second step is likely to be met as Kim’s taxable earnings, and therefore tax liability, becomes
significantly reduced with no real economic change in her situation. This is unlikely to have been
how parliament would have intended that the provisions of the act would be applied.
Additionally, this situation is similar to the facts in the case CIR v. Penny and Hooper, in which
the Supreme Court ruled that a tax avoidance arrangement was present. Therefore, the anti-
avoidance provision is likely to apply in Kim’s situation.

Page 6 of 16 | Activities – Suggested Solutions

 TAXNZ

Activity 2B – Suggested solution (4 marks)

Unit Topic Unit Learning Objectives

2 Tax fundamentals 2
2. Describe key activities of Inland Revenue and the
key powers of the Commissioner 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

Upon receiving a notice of proposed adjustment from Inland Revenue, the taxpayer has two
options: either accept the position of Inland Revenue (do nothing), or issue a notice of response.
a. If Martha chooses to issue a notice of response, she must do so within two months of the
date of issue of the notice of proposed adjustment, and it must contain certain information
prescribed in s. 89G TAA 1994.
Martha may choose not to issue a notice of response for a number of reasons, for example, if
the difference in tax payable is not a material amount, or if she believes that she will not be
successful in following the disputes resolution process.
b. A notice of proposed adjustment is the first step in the disputes process, which in this case
was already issued by Inland Revenue. It is therefore not a valid option for Martha.
c. A statement of position is issued by the party initiating the dispute only after the conference
stage in the disputes process. In Martha’s case, this is not the next step available to her.
d. Martha may choose to do nothing and simply accept the position of Inland Revenue. She is
not obliged to respond but the opportunity to issue a notice of response is available for up to
two months.

Activities – Suggested Solutions | Page 7 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 2C – Suggested solution (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

a. Rebecca’s choice of investment vehicle is a legitimate way to reduce her tax liability and would
have been within Parliament’s contemplation when enacting the imputation regime.
b. The Commissioner is likely to consider this a tax avoidance arrangement under s. BG 1. In
terms of commercial reality or economic effects, Paul and Sharon have not had any change
to their economic position in selling the shares and are able to repurchase the shares at no
economic cost in the future. They also retain the management and control of the company.
There is also artificiality in setting the management fee to Profit Co’s net profit, and it is
unlikely the parties could show that the Loss Co is providing any services to Profit Co. This
arrangement is unlikely to have been contemplated by Parliament in enacting the relevant
provisions, tax avoidance appears to be a purpose of the arrangement and the tax effect is
more than merely incidental.

Page 8 of 16 | Activities – Suggested Solutions

 TAXNZ

Activity 2D – Suggested solution (4 marks)

Unit Topic Unit Learning Objectives

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

Options include the following.

1. Apply for a private binding ruling. This achieves certainty, and transactions can be
undertaken knowing that penalties will not follow from the action. However, it is costly, and
will take time for the binding ruling to be considered.
2. File a tax return adopting the optimal approach. The advantage is that IR may accept the
approach and, after the time bar, no further action may be taken by the Commissioner.
The primary disadvantage is that penalties may follow if the transaction turns out to
be incorrect.
3. File a tax return and then file a notice of proposed adjustment (NOPA) to adjust the return.
In this case, the primary advantage is that no penalties will result. However, the outcome
remains uncertain; it may take time to resolve the issue, and it may be costly.

Activities – Suggested Solutions | Page 9 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 2E – Suggested solution (6 marks)

Unit Topic Unit Learning Objective

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

(a) Penalties include:

• Failing to take reasonable care (s. 141A TAA 1994), in which case a 20% penalty
will apply.
• Gross carelessness (s. 141C TAA 1994), in which case a 40% shortfall penalty will
apply. Sally’s actions are unlikely to be classified as evasion (s. 141E TAA 1994), taking
an abusive tax position (s. 141D TAA 1994), or taking an unacceptable tax position
(s. 141B TAA 1994).
(b) Sally will be entitled to a 50% penalty reduction as the information provided indicates that
she has not incurred penalties in the previous four years (s. 141FB TAA 1994).
Sally may also be entitled to a penalty reduction under s. 141G TAA 1994 if she makes a
full voluntary disclosure of the shortfall prior to an audit notification. This may reduce the
penalty by 75% or 100%.

Page 10 of 16 | Activities – Suggested Solutions

 TAXNZ

Activity 3A – Suggested solution (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

I. Personal property purchased with the purpose of disposal will be income under s. CB 4.
As Irene purchased the gold with the purpose of disposal, the sale will be caught under
s. CB 4. The dominant purpose of acquiring personal property is to be determined at the
time the property is acquired, which in Irene’s case was to sell the gold for a profit despite the
fact that she changed her mind and held it for 4 years. As such, the proceeds from the sale of
the gold will be income under s. CB 4. Irene will also be allowed a deduction under s. DB 23
for the cost of the gold.
II. Under s. CB 11, the sale proceeds will be taxable on the following basis:
a. Mr Money sells the land within 10 years of completing improvements on the property.
b. Mr Money is associated with a person in the business of erecting buildings.
Mr Money and Build Co are associated, as Mr Money owns 25% of the shares/voting rights in
Build Co under s. YB 3.
The residential exemption or business exemption does not apply in this situation. Further,
the investment exemption does not apply to s. CB 11. Accordingly, the proceeds will
be income.
III. Section CB 12 is the relevant provision in this situation and is likely to apply for the
following reasons:
a. There has been an undertaking or scheme in relation to the property.
b. The property was developed/divided by Sam.
c. The undertaking or scheme was commenced within 10 years of acquiring the property.
d. The property involved work of more than a minor nature.
However, the residential exemption in s. CB 17 is likely to apply to the property with the
house on it as Sam resided on the land. The investment exemption in s. CB 23 is likely to
apply to property with the flat on it, as this development was undertaken to derive rental
income. Accordingly, the sale proceeds will not be income.

Activities – Suggested Solutions | Page 11 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 3B – Suggested solution (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

a. Johnny and Jill will be associated under s. YB 4, as they are husband and wife.
b. Johnny and Profit Co are not associated as Johnny holds less than 25% of the voting shares in
Profit Co (s. YB 3).
c. Because Johnny and Jill are associated under s. YB 4, Johnny and Invest Co will be associated
under s. YB 3 as that section provides that Johnny is deemed to hold anything held by Jill.
As Jill holds more than 25% voting interest in Invest Co, Johnny will also be deemed to hold
more than 25% voting interest in Invest Co. The tripartite rules in s. YB 14 are also likely to
apply as Johnny is associated with Jill (as outlined above) and Jill is associated with Invest Co,
as she holds more than 25% of Invest Co (s. YB 3).
d. Profit Co and Invest Co are not associated, as there is no group of persons who hold 50%
or more of the voting interests in both companies under s. YB 2. Furthermore, there is no
tripartite relationship under s. YB 14.
e. Jill will be attributed Johnny’s interest in Cash Co and Johnny will be attributed Jill’s interest
in Invest Co under the associated person’s aggregated interest rule in s. YB 2. As such, there
will be a group of people (Johnny and Jill) who own more than 50% of the voting interests in
both companies. Therefore, Cash Co and Invest Co will be associated under s. YB 2.

Page 12 of 16 | Activities – Suggested Solutions

 TAXNZ

Activity 3C – Suggested solution (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

The proceeds are likely to constitute income for Larissa under the following sections:
• Section CB 6A – this section does not apply as Larissa purchased the land before
1 October 2015.
• Section CB 6 – this section does not apply as Larissa’s intention was to provide a house for her
father and there is no indication in the scenario that she intended to dispose of the property.
• Section CB 7 – this section does not apply despite Larissa’s association with Peter and
his sub‑dividing business (s. CB 7(1)(b)). This is because the land was not acquired for
the business.
• Section CB 8 – this section does not apply (no landfill).
• Section CB 9 – this section does not apply (no land dealing business).
• Section CB 10 – this section applies because the land was sold within 10 years of acquisition
and Larissa has an association with Peter and his subdividing business. This is regardless of
whether the land was purchased for the subdivision business. Neither s. CB 16 (residential
exclusion) nor s. CB 19 (business exclusion) applies as Larissa did not live at the property, and
it was not used for business premises. The proceeds will be treated as income.
• Section CB 11 – this section does not apply (no building business).
• Section CB 12 – all five parts of s. CB 12 have been met; therefore, the proceeds from the
subdivision and sale will also be income under this section:
– there was an undertaking or scheme
– it involved the subdivision of the land
– the subdivision was carried out
– it was not minor
– it occurred within 10 years of acquisition of the land.

The work is not of a minor nature due to the importance of the work in relation to the physical
nature of the land. In addition the total cost of the work done is significant in both absolute
and relative terms. The professional services required was that of a professional subcontractor,
regardless of the fact that it was Larissa’s husband and he did not charge fees.
The residential exclusion in s. CB 17 does not apply, as Larissa did not live at the property.
The other exclusions (i.e. s. CB 20 (business), s. CB 21 (farm land) or s. CB 23 (investment
land)) also do not apply.
• Section CB 13 – this section only applies where the amount is not income under ss CB 6A
to CB 12 or CB 14. The amount will be income under s. CB 10 or s. CB 12; therefore s. CB 13
does not apply.

Activities – Suggested Solutions | Page 13 of 16

CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 4A – Suggested solution (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

Sales $2,700,000

Less:

Fridge purchases $1,500,000

Parts purchases $300,000

Other expenses   $600,000

$2,400,000

$300,000

Insurance receipt $300,000

Closing fridge stock $520,000

Opening fridge stock ($400,000)

Donation of fridges   $24,000

Taxable income $744,000

Item Treatment Support Explanation

(I) Insurance receipt Add s. CG 6 Insurance receipts relating to trading stock are
$300,000 income to the recipient

(II) Closing stock of Deduct s. DB 49 A deduction is allowed for the opening value of
fridge 31 March 2019 $400,000 trading stock

(III) Closing stock of Add s. CH 1 The closing value of trading stock is income to
fridge 31 March 2020 $520,000 the person

s. EB 11 Market selling value can be used to value the

trading stock if lower than cost. (Otherwise
consistency of disclosure requires the continued
use of cost per s. EB 12)

(IV) Closing stock of spare n/a s. EB 2 The definition of trading stock excludes spare
parts 31 March 2019 part not held for sale.

(V) Closing stock of spare n/a s. EB 2 The definition of trading stock excludes spare
parts 31 March 2020 part not held for sale

(VI) Donation of fridges Add $24,000 s. GC 1 Disposed for inadequate consideration,

therefore, deemed to be sold at market value

Page 14 of 16 | Activities – Suggested Solutions

 TAXNZ

NOTES

Activities – Suggested Solutions | Page 15 of 16

DISCLAIMER: Copyright © 2021 Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). All rights reserved. The content of this document is protected by copyright and under international
copyright conventions. Except as permitted by law, if you wish to reproduce, copy, publish, communicate, exploit or make an adaptation of any of our content, you must first request our permission by sending an
email to info@charteredaccountantsanz.com.au.
This document is intended for general information only and is not accounting or other professional advice. Any opinions expressed in this material do not necessarily represent those of CA ANZ or its members.
While care and consideration has been taken in the creation of this document, CA ANZ does not warrant, represent or guarantee that the material published in this document is in all respects accurate, complete or
current. To the extent permitted by law, CA ANZ excludes any liability including but not limited to liability for negligence, loss or damage arising from reliance on this document.

905_CASM_TAXNZ221_WS1_ACTSOLS_02