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ACTY 6120 Taxation

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Questions:

Q 1. 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).

Q 2. Income and deductions

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.

Required

  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

Q 3. Trust

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.

Required

  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?
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