Topic 12. Revision
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Tax Calculation
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3
TAX CALCULATION [30 marks]
1. With the following information, prepare a statement of taxable income for Bridge
Repairs Ltd for 31 March 2022. Bridge Repairs Ltd has a single shareholder, Arthur.
Note that:
The company is GST registered, and its financial year ends at 31 March.
All figures mentioned are GST exclusive, unless otherwise stated.
Q1
4
Bridge Repairs Ltd
Statement of Financial Performance for the year ended 31 March 2022
Income $
Sales 1,570,263
Deposits received 17,000 (a) The deposits have been received but no work has been
commenced.
Interest 38,160 (b) Interest excludes $14,840 of RWT (received 31 March
2022)
Total income 1,625,423
Expenses
Cost of sales 976,438
Depreciation 72,500 (c) This is accounting depreciation
Net salaries/wages 335,974
PAYE 108,387
Provision for holiday pay 24,873 (d) No holidays were taken before July 2022
Christmas party 3,971
Provision for doubtful debts 10,000 (d) These are not specifically identified debts that have been
written off.
FBT 13,808 (e) This is for the Polestar car.
Donations 1,500 (f) The donation was made to the Salvation Army for their
Christmas appeal.
New digger bucket 16,500 (g) This is for a new bucket for digger, purchased on 21
January 2022.
Other expenses 53,500
Total expenses 1,617,451
Profit for the year 7,972
5
Tax fixed asset schedule:
Details of
assets
Purchase
date
Disposal
date
Cost
(GST
exclusive)
Tax
accumulated
depreciation
at 1.4.21
Disposal
proceeds
Tax
depreciation
rate (DV)
Polestar car 15/3/2021 $108,000 $2,700 30%
Office
furniture
15/3/2019 $44,400 $26,373 40%
Digger 1/3/2020 $111,720 $19,127 16%
Bucket for
digger
1/3/2010 21/1/2022 $4,000 $4,000 $1,500 16%
Truck 15/6/2007 $175,000 $166,983 20%
Tax Depreciation
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A 1(1) Tax depreciation
1) Add back accounting depreciation
2) Check if there is recovery gain/loss from disposal of an asset
No adjustment in the year of sale.
On the disposal of depreciable assets a taxpayer should calculate gain or loss [s EE 48 ITA 2007].
If a sale price is greater than ATV, gain is assessable income.
Recovery gain is the lesser of:
– sale price minus ATV
– total depreciation previously claimed
3) Calculate tax depreciation (see next slide) & remember to include
recovered gain or loss to your income tax calculations
Details of assets Purchase date Disposal
date
Cost
(GST
exclusive)
Tax accumulated
depreciation
at 1.4.21
Disposal
proceeds
Tax
depreciation
rate (DV)
Bucket for
digger
1/3/2010 21/1/2022 $4,000 $4,000 $1,500 16%
Details of
assets
Purchase
date
Disposal
date
Cost
(GST
exclusive)
Tax
accumulated
depreciation
at 1.4.21
Disposal
proceeds
Tax
depreciation
rate (DV)
Depn
Polestar
car
15/3/2021 $108,000 $2,700 30%
Office
furniture
15/3/2019 $44,400 $26,373 40%
Digger 1/3/2020 $111,720 $19,127 16%
Bucket
for digger
1/3/2010 21/1/2022 $4,000 $4,000 $1,500 16%
Truck 15/6/2007 $175,000 $166,983 20%
Bucket
for digger
21/1/2022 $16,500 16%
Total
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A 1(1) Tax Depreciation Cost minus Tax Accumulated Depreciation * Tax Depreciation Rate
Taxable income
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A 1(2) Statement of taxable income
Bridge Repairs Ltd
Statement of Financial Performance for the year ended 31 March 2022
Income $
Sales 1,570,263
Deposits received 17,000 (a) The deposits have been received but
no work has been commenced.
Interest
38,160
(b) Interest excludes $14,840 of RWT
(received 31 March 2022)
Total income 1,625,423
Expenses
Cost of sales 976,438
Depreciation 72,500 (c) This is accounting depreciation
Net salaries/wages 335,974
PAYE 108,387
Provision for holiday pay 24,873 (d) No holidays were taken before July
2022
Christmas party 3,971
Provision for doubtful debts 10,000 (d) These are not specifically identified
debts that have been written off.
FBT 13,808 (e) This is for the Polestar car.
Donations 1,500 (f) The donation was made to the
Salvation Army for their Christmas appeal.
New digger bucket 16,500 (g) This is for a new bucket for digger,
purchased on 21 January 2022.
Other expenses 53,500
Total expenses 1,617,451
Profit for the year 7,972
Statement of Taxable Income
Profit per accounts
Add:
RWT on interest
Accounting depreciation
Provision for holiday pay
Christmas Party (50%)
Provision for doubtful debts
New digger bucket
Depreciation recovery on old digger bucket
Deduct:
Deposits
Tax depreciation
Taxable income
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A 1(2) Alternative: Calculation of taxable income based on the ITA
Bridge Repairs Ltd
Statement of Financial Performance for the year ended 31 March 2022
Income $
Sales 1,570,263
Deposits received 17,000 (a) The deposits have been received but
no work has been commenced.
Interest
38,160
(b) Interest excludes $14,840 of RWT
(received 31 March 2022)
Total income 1,625,423
Expenses
Cost of sales 976,438
Depreciation 72,500 (c) This is accounting depreciation
Net salaries/wages 335,974
PAYE 108,387
Provision for holiday pay 24,873 (d) No holidays were taken before July
2022
Christmas party 3,971
Provision for doubtful debts 10,000 (d) These are not specifically identified
debts that have been written off.
FBT 13,808 (e) This is for the Polestar car.
Donations 1,500 (f) The donation was made to the
Salvation Army for their Christmas appeal.
New digger bucket 16,500 (g) This is for a new bucket for digger,
purchased on 21 January 2022.
Other expenses 53,500
Total expenses 1,617,451
Profit for the year 7,972
Alternative calculation
Gross income:
Sales
Interest
RWT on interest
Depreciation recovery on old
digger bucket
Total gross income
Deductions:
COS
Net salaries
PAYE
FBT
Christmas Party (50%)
Tax depreciation
Donation
Other expenses
Total deductions:
Taxable income
Note: a new digger bucket is a depreciable item
Companies
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COMPANIES [30 marks]
Shabby Dogs Ltd is a mobile dog grooming business. Charissa is the sole shareholder. Shabby Dogs Ltd owns a
station wagon that Charissa uses to travel around to visit her clients. The station wagon is always full of dog grooming
equipment and gets quite smelly at times so Charissa has another car for her private use.
Charissa is also a shareholder in Property Investors Ltd. In the year ended 31 March 2022, she received a dividend
from Property Investors Ltd of $25,000 deposited into her personal bank account. It was fully imputed at 28/72. The
RWT was withheld. In addition to this, at the end of the financial year, the company decided to reduce its portfolio of
properties due to the forecasted decline in the property market and it gave each of its five shareholders a property
valued at $150,000 each.
During the year to 31 March 2022, Shabby Dogs Ltd paid the following amounts to the IRD:
PAYE deducted from Charissa’s salary $6,020
Third provisional tax instalment 2020/21 tax year $2,650
First and second provisional tax instalments 2021/22 tax year $3,460 each
FBT on Charissa’s health insurance and gym membership $700
RWT on interest received in the bank account $267
Charissa has another business enterprise with her friend Jimmy. They have a company, Jimmy’s Doors Ltd, in which
they own 50% each. Jimmy’s Doors Ltd has not been doing so well and made a loss in the 2022 tax year.
Q&A 2. Discuss whether Shabby Dogs Ltd would be liable for FBT
on the station wagon. [5 marks]
“Shabby Dogs Ltd owns a station wagon that Charissa uses to travel around to visit her
clients. The station wagon is always full of dog grooming equipment and gets quite smelly
at times so Charissa has another car for her private use.”
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Q 3. Calculate the gross dividend, RWT and imputation credits on the
dividend from Property Investors Ltd. [3 marks]
“Charissa is also a shareholder in Property Investors Ltd. In the year
ended 31 March 2022, she received a dividend from Property Investors Ltd
of $25,000 deposited into her personal bank account. It was fully imputed
at 28/72. The RWT was withheld. In addition to this, at the end of the
financial year, the company decided to reduce its portfolio of properties
due to the forecasted decline in the property market and it gave each of its
five shareholders a property valued at $150,000 each.”
What is a dividend and when the dividend is “gross”
What does “fully imputed” mean
What is the formula for RWT on dividends
What is a dividend
Dividend [ss CD 4 to CD 21 ITA 2007]:
a transfer of value from the company to a shareholder
the transfer must be made because of a shareholding relationship
What does ‘value’ mean
‘Value’:
money or money worth benefits
a net payment above market value
release of the shareholder’s debt
Who can be a recipient of the value
‘Value’ can be transferred to:
a shareholder
a person associated to a shareholder
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Deemed dividends
Company forgives a debt owing by shareholder to the company [s CD 5(2)
ITA 2007]
Sums credited to the shareholder’s current account with the company
(interest should be charged, otherwise – these sums are deemed dividend)
Property transferred by a shareholder to a company at above market value
[s CD 5(1) ITA 2007]
Property transferred to a shareholder by a company at below market value
[s CD 5(1) ITA 2007]
Tax credits linked to dividends: imputation credits attached to the dividend,
RWT, NRWT, and foreign tax credits are added to the amount of the dividend
[s CD 15(1) ITA 2007]
Non-cash benefits to any shareholder or associated person [s CD 20 ITA
2007]
Excessive remuneration to relatives of shareholders or directors ss GB 23(1),
GB 25 ITA 2007]
17
18 Source: IRD, Imputation: A Guide for New Zealand Companies IR274 (January 2018)
A dividend which has the maximum imputation credit ratio (28/72) is said to
be “fully imputed”
What is an RWT
Resident withholding tax (RWT) is a tax on passive income such as
dividends, interest, royalty of New Zealand residents
Who pays the RWT
RWT is withheld by a person who pays resident passive income; the
RWT incidence is on a recipient of passive income; RWT credit can be
used to satisfy the recipient’s income tax liability
RWT rate on dividends
33%
RWT formula for cash dividends
( 0.33 x gross dividend) – imputation credits
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Resident Withholding Tax (RWT) on fully imputed dividends
Source: IRD, Imputation: A Guide for New Zealand Companies IR274 (January 2018)
RWT payable on dividends Shareholders exempt from RWT
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NZ Company
1) Declares dividend
2) Decides on the payment & ratio of imputation credits
3) Withholds RWT
$72
Yes, full imputation
Imp credit $28
No
Imp credit $0
(0.33 x gross dividend) – imp credits
RWT (0.33*($72+$28))-$28=$5
Net dividend: $72-$5=$67
RWT (0.33*$72)=$23.76
Net dividend: $72-$23.76=$48.24
Available credits: imp credit $28; RWT $5 Available credits: RWT $23.76
NZ shareholder NZ shareholder
Gross dividend vs Declared dividend vs Net dividend. Are their amounts
always the same or always different
Not always, the amount can vary. It depends on two facts:
1) distribution of imputation credits (or a lack of it);
2) withholding of an RWT (or a lack of it).
Variant A: a company has no imputation credits (or decided not to attach them to the
dividend) and the company is not required to collect RWT.
gross dividend= declared divided=net dividend
Variant B: a company decides to attach imputation credits but is not required to collect RWT.
gross dividend=declared divided + imputation credit; net dividend = declared divided
Variant C (the most common): a company attaches imputation credits and is required to
collect RWT.
gross dividend=the declared divided + imputation credits + RWT;
net dividend = declared divided minus RWT
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Calculation of a gross dividend will depend on the case facts:
E.g. you know only an amount of a declared dividend and that it was fully imputed, i.e. the imputation
ratio is 28/72
Let’s say $100 is a declared dividend (an amount of after-tax profits the company will distribute to its
shareholders). If this dividend is fully imputed, $100 is 72% of a gross divided.
The gross dividend: $100/72*100 = $138.88 or 100/0.72 = $138.88
The imputation credit is 28% of this gross dividend, i.e. $138.88*0.28 =$38.88
If you know the imputation ratio and the declared dividend, you can calculate the imputation credit without
the calculation of the gross dividend, i.e. (100/0.72) *0.28
If the dividend distribution was subject to RWT, to find out the RWT amount you need to apply the formula
(RWT rate* gross dividend) minus imputation credits. In our example (0.33*$138.88) -$38.88 = $6.95.
E.g. you know only an amount of a net dividend (i.e. after RWT was withheld) that it was fully imputed,
i.e. the imputation ratio is 28/72
Let’s say $100 is a net dividend (an amount of after-tax profits the company will distribute to its
shareholders). If this dividend is fully imputed, $100 is 67% of a gross divided
Gross dividend: 100/0.67 = $149.25
Imputation credit (100/0.67)*0.28 = $41.79
RWT= (0.33*$149.25) – 41.79 = $7.46
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A 3. Calculate the gross dividend, RWT and imputation credits on the
dividend from Property Investors Ltd. [3 marks]
“Charissa is also a shareholder in Property Investors Ltd. In the year ended 31 March
2022, she received a dividend from Property Investors Ltd of $25,000 deposited into
her personal bank account. It was fully imputed at 28/72. The RWT was withheld”
Gross dividend:
Imputation credits:
RWT:
25
Q&A 4. If the imputation ratio for the dividend from Property Investors Ltd is 5:95 (due
to their being a lot of untaxed capital gains in the company), calculate the gross dividend,
RWT, and imputation credits on the dividend. [4 marks]
“Charissa is also a shareholder in Property Investors Ltd. In the year ended 31 March
2022, she received a dividend from Property Investors Ltd of $25,000 deposited into her
personal bank account. It was fully imputed at 28/72 [imputed at 5/95]. The RWT was
withheld.”
Gross dividend:
Imputation credits:
RWT
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Q&A 5. Discuss how Property Investors Ltd and Charissa should deal with
the distribution of the property from a tax point of view. [3 marks]
“In addition to this [cash divided distribution], at the end of the financial
year, the company decided to reduce its portfolio of properties due to the
forecasted decline in the property market and it gave each of its five
shareholders a property valued at $150,000 each.”
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Q&A 6. With the information given, complete the imputation credit account
for Shabby Dogs Ltd for the year to 31 March 2022. [5 marks]
Date Item Dr Cr Balance
1 April
2021
Opening balance 2,300
31
March
2022
Closing balance
“During the year to 31 March
2022, Shabby Dogs Ltd paid the
following amounts to the IRD:
PAYE deducted from Charissa’s
salary $6,020
Third provisional tax
instalment 2020/21 tax year
$2,650
First and second provisional
tax instalments 2021/22 tax
year $3,460 each
FBT on Charissa’s health
insurance and gym
membership $700
RWT on interest received in the
bank account $267”
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Q&A 7. Discuss whether the losses in Jimmy’s Doors Ltd can be offset against the profits in
Shabby Dogs Ltd. Show any calculations required to reach your conclusion. [5 marks]
Profit Co Loss Co Lowest common %
Charissa
Jimmy
“Charissa has another business enterprise with her friend Jimmy. They have a company,
Jimmy’s Doors Ltd, in which they own 50% each. Jimmy’s Doors Ltd has not been doing
so well and made a loss in the 2022 tax year.”
Commonality of shareholding test:
To be treated as a group for a purpose of loss grouping, the
two or more companies must have an aggregate of common
voting interest of at least 66% [ss IC 1 to IC 6 ITA 2007]
The common voting interest is the lowest % voting interest of
each shareholder in each company at a point in time
The 66% commonality needs to be maintained at all times –
from the commencement of income year in which the loss is
incurred to the end of the loss company’s income year in
which the loss is offset
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Q&A 8. Given Jimmy’s Doors Ltd is loss-making, discuss whether there is
any way the shareholders of the company can access the losses to utilise
against their other sources of income. Discuss any tax risks associated with
your suggestion. [5 marks]
Look-through company
Not a specific company in a corporate sense but as specific treatment of
company’s income tax
The look-through treatment is available to some companies that
– are eligible (eligibility criteria must be met for the whole the income
year), and
– all their shareholders should elect for the LTC rules to apply
LTCs are “looked-through” (transparent) for income tax purposes, in a
similar way to partnerships
The look-through treatment does not apply to GST, PAYE, FBT, RWT, RSCT,
ESCT or the income tax rules for company amalgamations. Therefore, these
tax obligations of a company are the same as for an ordinary company
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Trusts
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TRUSTS [20 marks]
Billy Carrot has separated from his wife and decides it is time to establish a
family trust in favour of his children before he goes out in search for a new
spouse. After receiving his share of the matrimonial property, he settles his
house and some investments in shares and bonds onto the trustees of the newly
formed, Billy Carrot Family Trust. The trustees are Billy Carrot, his trusted
friend Bryan Apple, and the Lawyers Trustee Company Ltd. The beneficiaries
of the Billy Carrot Family Trust are Billy’s three children – Orange, Peaches,
and Clementine, their children (should they have any in the future), and Billy
himself. As at 31 March 2022, Orange is 22 years old, Peaches is 17 years old,
and Clementine is 12 years old.
Q&A 9. Assuming the trust does not make any distributions or
allocations of income, discuss how the income of interest and dividends
from the investments will be treated for tax purposes. [2 marks]
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Q&A 10. If the trustees decided to allocate $5,000 of the trust income to each
beneficiary from the year to 31 March 2022, discuss how this will be treated
for tax purposes for each beneficiary. [ 3 marks]
“The beneficiaries of the Billy Carrot Family Trust are Billy’s three children –
Orange, Peaches, and Clementine, their children (should they have any in the
future), and Billy himself. As at 31 March 2022, Orange is 22 years old,
Peaches is 17 years old, and Clementine is 12 years old.”
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Q&A 11. Discuss whether anything in your answer above would change if
the distribution to Clementine was reduced to $800 on account of her age.
[2 marks]
36
Minor beneficiary rule [ss HC 7(2) & HC 35(4)(a) ITA]
Applies to trust distributions of income to NZ resident individual
beneficiary who is under the age of 16 years old at the balance date of
the trust
Beneficiary income of more than $1,000 derived by a minor is treated as
excluded income of the minor under s CX 58 ITA 2007. Therefore:
no income tax liability will arise in the minor’s name
the trustee is liable to pay the tax at the trustee tax rate (33%) &
include the beneficiary income in trustee’s income tax return
If distributed income does not exceed $1,000, this income is treated as
ordinary beneficiary income and taxed at the beneficiary’s marginal tax
rates
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Q&A 12. Assume the tax return is filed by the trusts’ tax agent on 21 October
2022, state what is the latest date for making an allocation of beneficiary
income. [2 marks]
Timing of allocation of beneficiary income
Income must be allocated to a beneficiary within the income year,
or by the later of the following dates:
6 months after the trust balance date, or
the earlier of:
– the date on which the trustee files the return of income for
the income year, or
– the date by which the trustee must file a return for the
income year
Q&A 13. Assume the trust finds it has made a loss in the year to 31 March
2023, discuss whether the loss can be allocated to beneficiaries to offset
against their other sources of income. [2 marks]
40
Q&A 14. Assume the allocations of income to the beneficiaries occurred after
the date in your answer above, discuss how the distributions would be treated
for tax purposes. [5 marks]
41
42
Current year’s income derived by a trust
Beneficiary income
paid or applied during the income
year, or within 6 months after, or
before tax return is filed, or vested
absolutely during the income year
taxed at individual’s marginal tax
rates
if a beneficiary is a resident in NZ,
then liable on income sourced
worldwide, otherwise on NZ
sourced income only
Trustee income
income not distributed to beneficiary
taxed at 33%
if a settlor is a tax resident in NZ any time
during the income year, then a trustee is
liable on income sourced worldwide,
otherwise – on NZ sourced income only
settlor, trustee or beneficiary of a foreign
or non-complying trust can elect for it to
be a complying trust and, therefore, liable
for income tax in NZ
Minor beneficiary
(under 16 yo at the trust’s balance date)
=or<$1,000 >$1,000
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Q&A 15. Orange is working full time and earns $65,000 as a police officer.
Peaches and Clementine do not earn any income. While allocating $5,000
income to each beneficiary for the year, the trustees are considering whether
they can allocate a higher amount of tax credits to Orange than the younger
siblings as she will be able to utilise them against her other sources of income
and her higher marginal tax rate. The tax credits are imputation credits and
RWT attached to the dividend and interest income earned by the trust. Discuss
whether this is advisable. [4 marks]
Tax Administration
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TAX ADMINISTRATION [20 MARKS]
Sally Crown operates a massage therapy business in Invercargill, New Zealand. The business
operates in a company, Invermassage Ltd. Invermassage employs Sally and three other full time
staff members. One of the staff members is responsible for administration and she has come up with
an excellent way to save tax. She has suggested to Sally, who is the CEO and director of the
company, that all four employees of Invermassage Ltd could become contractors to Invermassage
rather than employees. This would mean that Invermassage can deduct the costs of the contractors
against its income, but the employees or ‘contractors’ could also deduct their costs – such as travel
from home to work, cost of their lunches, a proportion of their homes as ‘home office’ costs and
perhaps a number of other expenses as well. You are having a drink with Sally in a wine bar one
evening when she mentions this great idea to you. As you have done the wiki in 110.289 Taxation,
you know this does not feel right. You explain to Sally the problems with treating employees as
contractors and the implications of the tests set out in the Bryson v Three Foot Six Ltd case.
Assume Sally takes on your advice and alters the contractual arrangements with the employees to
align better with the tests for independent contractors. From there, each employment contract is
cancelled and the individuals recontract with Invermassage Ltd as independent contractors.
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Q&A 16. Discuss whether this is a tax avoidance arrangement. [5 marks]
Income tax avoidance [s YA 1 ITA 2007]:
direct or indirect altering the incidence of any income tax
direct or indirect relieving a person from liability to pay income tax or from a
potential or prospective liability to future income tax
direct or indirect avoiding, postponing, or reducing any liability to income tax or
any potential or prospective liability to future income tax
GST tax avoidance includes [s 76(8) of the ITA 2007]:
a reduction or postponement in the liability of a GST-registered person to pay
tax
an increase or earlier claim of in the entitlement of a GST-registered person to a
refund of tax
a reduction in the total consideration payable by a person for a supply of goods
and services
Note: in this course we largely focus on income tax avoidance
47
Q&A 17. If the Commissioner wants to challenge this arrangement, discuss the steps the
Commissioner will need to take in order to reassess the taxpayer’s tax position.
[8 marks]
48
Tax disputes process (simplified)
NOPA
(CIR or TP)
NOR
(Other party)
Conference phase Disclosure notice
(CIR)
SOP
(Both parties)
Adjudication
Response must be within
2 months or NOPA
deemed accepted
Voluntary – not legislated Voluntary – not legislated
SOP must be within 2
months of disclosure
notice
NOPA – Notice of proposed adjustment
NOR – Notice of response
SOP – Statement of position
Tax Review
Authority or
High Court
50
Q&A 18. If the Commissioner is correct and this is a tax avoidance
arrangement, discuss the consequences for Invermassage Ltd, Sally, and the
other staff. [5 marks]
Q&A 19. Given the tax risks involved, discuss whether Invermassage and the
staff have any other options available to them to reduce the risk by gaining the
Commissioner’s view prior to entering into the arrangements. [2 marks]
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Binding Rulings. General [Part 5A TAA]
Initiated by the CIR or a taxpayer
Interpret tax legislation
Intention is to provide certainty for taxpayers and reduce the number of
disputes
Not law
Non-binding on taxpayers
Binding on the CIR
If taxpayers apply the ruling correctly and provided correct information, CIR cannot
disagree with that tax position (cannot impose penalties on taxpayer)
Non-disputable (cannot be challenged through the dispute resolution process)
Full cost recovery for rulings initiated by a taxpayer (rulings other than public
rulings) (fee per application + hourly rate for drafting the ruling)
For more detail see IRD, “Binding Rulings” IR 715
Questions
53
