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Company and Shareholders' Taxation

ACB Ltd is an ordinary company. Belina, a New Zealand resident, is its sole shareholder.

XZY Ltd is a look through company. Yingy, a New Zealand resident, is its sole shareholder.

Belina and Yingy are not related, and so ACB Ltd and XZY Ltd are not associated companies.

Both Belina and Yingy each have only one source of income, being the dividend derived from ACB Ltd and XZY Ltd respectively.

ACB Ltd and XZY Ltd each derived $150,000 taxable income and $30,000 of realised capital gains in their first year of operation.

ACB Ltd must therefore pay residual income tax of $42,000 at the rate of 28% on taxable income.

Neither company intends to cease trading in the short to medium term.

ACB Ltd has chosen to pay provisional tax in its first year of business, rather than become liable for use of money interest. ACB Ltd has coincidentally estimated and paid its provisional tax for the first year to be exactly equal to its eventual resident income tax of $42,000 for the year. ACB Ltd therefore has credit balance of $42,000 in its imputation credit account, $108,000 in its retained earnings account, and $30,000 in its capital reserves account at the time it is ready to pay its first ever dividend on 1 April of its second year.

ACB & XZY Ltd intend to pay out all their taxable income and realised capital gains from the first year of operation as dividend to their sole shareholder.

ACB Ltd intends to attach all its currently available imputation credits of $42,000 with its dividend payment.

  • Calculate the gross dividend paid by ACB Ltd, the imputation credits attached, and the resident withholding tax (if any). Please also briefly explain the income tax treatment of the dividend.
  • Calculate the gross dividend paid by XZY Ltd, the imputation credits attached, and the resident withholding tax (if any). Please also briefly explain the income tax treatment of the dividend.
  • Calculate the gross income derived by Belina, the tax payable on the gross income, the tax credits available to Belina, the terminal tax (refund) payable and the net after –tax income (including capital income).
  • Calculate the gross income derived by Yingy, the tax payable on the gross income, the tax credits available to Yingy, and the terminal tax (refund) payable and the net after-tax income (including capital income).

You have been asked to determine the income tax treatment of the following transactions for Wonderland Enterprises Ltd, a property investment firm located at central Auckland. Please explain their income tax treatment and whether they are assessable income or deductible expenses. Please also advise whether they can be depreciated and at what depreciation rate.

The firm had the following transactions during the year:

  1. The manager’s car was damaged in a traffic accident in October 2016.  The firm received a cheque for $10,000 in final settlement of the claim on 18 October 2016 from their insurer.
  2. The firm bought a new Toyota Corolla for $50,000 on 1 December 2016.
  3. Goodwill paid to previous owner for the purchase of the business (not as a going concern and including a restrictive covenant) of $30,000
  4. Demolition and removal of the dilapidated building in April 2016.
  5. Compensation of $15,000 paid to “difficult customer” for defective product.
  6. Accrued incentive bonuses of $10,000 for staff to 31 March 2016 to be paid 15 July 2016.
  7. Loose tools purchased for $300 on 5 August 2016.
  1. Explain the income tax treatment of the above transactions for the company.
  2. Use the template provided in Appendix 1 to complete the depreciation schedule for the year ended 31 March 2017.
  3. For capital expenditure, calculate depreciation and gain or loss on disposal (if any). If there is a gain or loss on disposal, advise the manager of the income tax treatment on the disposal. 
  4. Advise the manager of the firm what the Pool method of depreciation is, and the criteria for using this method.  Also, identify one advantage and one disadvantage for using this method.
  5. Advise the manager of the firm the type of property is not depreciable

Vince and Cameila, both are New Zealand residents, set up a family trust two years ago.  The beneficiaries include themselves and their three children, age 18, 15 and 10.  Vince named himself as a trustee, and their family lawyer was appointed as another trustee.  The trust has met all the tax obligations in New Zealand.  

Vince is a dentist and his income for the year ended 31 March 2016 was $200,000. Cameila works as a part time teacher as she needs to spend time at home to take care of her two younger children.  Her income for the 2016 year was $20,000.

The trust made a distribution of trustee income in September 2016 to Vince of $20,000 and Cameila of $10,000.

  1. How will the trust be characterised at the time the distribution was made?
  2. Would Vince and Cameila be required to pay tax on the distribution received from the trust? Please explain your answer.
  3. What advice would you give Vince and Cameila to minimize the tax liability for the income from the trust?

Company and Shareholders' Taxation

Computation of Gross Dividend paid by ACB

Particulars

Amount ($)

Profit for the period

150000

Less: Tax @ 28%

42000

Profit after tax

108000

Realised capital gains

30000

Share of profits to Belina(Shareholder)

138000

Computation of Imputation credit and RWT calculation

Particulars

Amount ($)

Net dividend paid

138000

Add: IC attached

42000

Gross dividend paid

180000

RWT @ 33%

59400

Less: IC attached

-42000

RWT to be deducted

17400

Computation of Dividend paid by XYZ ltd

Particulars

Amount ($)

Profit for the period

150000

Capital gains

30000

Share of profits to Yingy (shareholder)

180000

Add: IC attached

0

Gross dividend

180000

RWT @33%

0

Computation of Income tax

Particulars

Rate of Taxation

Amount ($)

Income range

Income till $14000

10.50%

 $   1,470.00

$14001 to $ 48000

17.50%

 $   5,950.00

$48001 to $70000

30%

 $   6,600.00

$70001 to $180000

33%

 $ 36,299.00

Total

 $ 50,319.00

Computation of Income derived by Belina

Particulars

Amount ($)

Amount ($)

Profits derived from ACB Ltd

138000

Add: Imputation Credit attached

42000

Gross income

180000

Tax payable

0

Less: Imputation Credit attached

42000

-42000

Less: Tax deductible at source

RWT

0

Tax payable /( refundable)

-42000

Cashh dividend received

138000

Less: Tax payable/( refundable)

-42000

Net income derived after tax

180000

Computation of Income derived by Yingy

Particulars

Amount ($)

Amount ($)

Share of profits from XYZ Ltd

 $ 1,50,000.00

Capital gains

 $    30,000.00

Gross income

 $ 1,80,000.00

Tax payable

 $                -   

Imputation Credit attached

0

Total tax payable

 $                -   

Cash dividend received

 $ 1,80,000.00

Less: Tax payable

 $                -   

Net income after tax

 $ 1,80,000.00

The income tax treatment for the following transactions is as follows

  1. The settlement received for car accident by the manager can be claimed as deductions
  2. The purchase of new Toyota Corolla shall be considered for depreciation under declining value at a rate of 30%. This is because the car was acquired after 20 May 2010.
  3. During the sale of business where goodwill forms the part of selling price vendors generally wants that component of the sale price to be a in the form of tax-free component of selling price (Jones & Rhoades, 2013). Under the current scenario goodwill be considered as a tax-free component and will be allowed for deductions.
  4. As defined under the QB 14/08 of the Income Tax expenditure that is occurred on the demolition of an existing building forms the part of the capital account and cannot be claimed as deductions (Kaldor, 2014). As evident from the current scenario, expenditure incurred on the demolition and dilapidated of building cannot be claimed for deductions.
  5. The compensation paid to the consumer for the defective product will be treated as capital contribution business expenditure and such expenditure can be claimed for deductions under capital contributions.
  6. Bonus paid on regular basis are generally taxed by adding up the amount of bonus received by the employee to the gross wages regarding the period for which it is paid (Miller & Oats, 2016). The accrued incentive bonus of $10,000 paid to staff shall be considered as taxable.
  7. The purchase of loose tool will not qualify for depreciation since the value of the asset is below $500 and does not need to be depreciated (Alley et al., 2013).

In the Books of Wonderland Enterprises Ltd

Depreciation Schedule for the year ended 31 March 2016

Depreciation rate

Opening  

Current Year

Accum

Closing         

Cost

Addition

Rate

Period in months

Taxable Amount

Disposal

Depreciation

Depn

Tax Value

Property Plant & Equipment

Motor Vehicle

40,000.00

30%

Declining Value

12

28,000.00

8,400.00

20,400.00

19,600.00

Computer

3,000.00

50%

Declining Value

6

750

750

2,250.00

Furniture & fittings

20,000.00

7%

Straight-line Value

3

350

350

19,650.00

Total

40,000.00

23,000.00

28,000.00

0.00

9,500.00

21,500.00

41,500.00

Depreciation Schedule for the year ended 31 March 2017

Depreciation rate

Opening  

Current Year

Accumulated

Closing         

Cost

Addition

Rate

Period in months

Taxable Amount

Disposal

Depreciation

Depreciation

Tax Value

Property Plant & Equipment

40,000.00

30%

Declining Value

12

19,600.00

19,600.00

0

0.00

0.00

3,000.00

50%

Declining Value

12

19,650.00

0

9825

10,175.00

-7,175.00

20,000.00

7%

Straight-line Value

12

41,500.00

0

1400

22,900.00

-2,900.00

50,000.00

30%

Declining Value

4

5,000.00

5,000.00

45,000.00

63,000.00

50,000.00

80,750.00

19,600.00

16,225.00

38,075.00

34,925.00

Computation of Profit/ loss calculation

Car at cost

 $ 40,000.00

Less: accumulated depreciation

 $ 22,850.00

Book value

 $ 17,150.00

Less: Insurance Claim settlement

 $ 10,000.00

Profit/ Loss

 $ -7,150.00

The pool method of depreciation can be defined as one of the three method of computing depreciation loss an income year (Pallot, 2017). This method allows the taxpayer to put the number of assets under group together and perform depreciation of the pooled assets in the form of single asset which ultimately assist in lowering the cost of compliance. A pool method of depreciation is used by diminishing the value at the lowest rate by applying to any asset in the pool.

The advantage and disadvantage of this method of deprecation are as follows;

Advantage:

  1. This method of depreciation enables fast depreciation of assets with depreciation is at 18.75 for the first year and then 37.5% from the second year onwards.

Disadvantages:

  1. Once this method of depreciation is created all the low value assets from that year onwards must be put in the low value pool. If the pool method of depreciation is destroyed then an individual cannot write off the remaining amounts.

The types of properties that are not depreciable are as follows;

  1. Land
  2. Investments in stocks and bonds
  3. Property placed in service and that are used for less than one year
  4. Personal property that includes clothing, personal residence and car

The distribution made by the trust can be characterised as complying trust in the present context. A complying trust can be defined as the trust where the trusts is settled by New Zealand residents with New Zealand trustees (Pallot, 2017). The beneficiary in the present context both Vince and Cameila are residents of New Zealand and the family lawyer that is appointed in this context is also the resident of New Zealand.

According to the general rule, the trustee is liable for New Zealand income tax on the amount of income generated from New Zealand Irrespective of the trustee place of living (Sawyer, 2016). As evident from the current case, the settlor is resident of New Zealand during the income and shall be subjected to tax at a flat rate of 33 cents. Furthermore, in the present context both Vince and Cameila residual income tax is more than $2500 for which are liable to pay provisional tax on the following years income.

In order to reduce the tax liability the beneficiary can make the use of Income sprinkling strategy as one of the best strategy to reduce the instances of higher taxation (Elliffe et al., 2016). Under the current scenario, the trustee Vince and Cameila can accumulate their income in the trust distributed before December 31st of the year, which will be counted as the income for the beneficiary. Given that Cameila is under the bracket of lower tax, there will be usually significant amount of tax savings.

References:

Alley, C. (2015). Online resources and updates for the book New Zealand Taxation 2015.

Alley, C., Coleman, J., Elliffe, C., &Gousmatt, M. (2013). New Zealand Taxation 2014 Principles, Cases and Questions.

Elliffe, C., Peters, C., & Vial, P. (2016). New Zealand Branch Report, Subject 1: Assessing BEPS: Origins, Standards and Responses.

Jones, S., & Rhoades-Catanach, S. (2013). Principles of Taxation for Business and Investment Planning, 2014 edition. McGraw-Hill Higher Education.

Kaldor, N. (2014). Expenditure tax. Routledge.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Pallot, M. (2017). Recent GST developments in New Zealand. World Journal of VAT/GST Law, 1-6.

Sawyer, A. (2016). Complexity of tax simplification: A New Zealand perspective. In The Complexity of Tax Simplification (pp. 110-132). Palgrave Macmillan UK.

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[Accessed 22 February 2024].

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