Taxation Law Assignment - Questions and Answers

Question 1 - Residency and Income

Andrew and Linda were married in 2011 and settled in central Auckland where they have lived continuously. They have two children, aged 6 and 3.  However early last year (in January 2019), they decided to separate. Linda and the two children have remained living in central Auckland.  Andrew moved to Australia in January 2019 and rents a home there. He has a new job in Brisbane, and has met a new partner who has a small child. He has purchased a car in Brisbane and is a member of the local surf club. He has made numerous trips back to New Zealand to see his family when he stays at the family home. He has kept investments in New Zealand and has his insurance arrangements here, and is still a member of the local Art Society.  The Australian Tax Office has advised Andrew that he is a resident of Australia, based on the time he has spent there. The New Zealand Inland Revenue also maintains that Andrew is a New Zealand resident.Required:With reference to the statute and case law, advise whether Andrew remained a New Zealand tax resident while he was living and working in Australia. If you consider he ceased being a New Zealand tax resident, advise when that may have occurred and what factors led you to that conclusion.Question 2 – IncomeDerek is  a  police officer in Auckland. His house is located on a large corner site on a main street, which provides good exposure to passing traffic. He was approached by a  heat pump company who offered him two heat pumps plus installation of the pumps in his house free of charge, in exchange for allowing the house to be used in a marketing campaign. The value of the heat pumps including installation was $4,500. The agreement required a sign to be erected on the outside fence of Derek’s house. As part of the agreement, the house was also used in a television commercial which featured Derek enjoying a home warmed by heat pump.  The heat pump company paid Derek $ 2,000 for the commercial. During the same year he purchased a pearl necklace for $6,000 intending to give this to his girlfriend for her birthday but a month after the purchase his girlfriend broke up with him and he enrolled in a course about making jewellery.  Using the new skills, he has learned, Derek broke up the necklace and set each pearl into a separate ring. He spent $200 on ring mounts and settings and sold all the rings for $11,000.Required:Discuss whether (a) the value of the heat pumps and installation, (b) the $2,000 payment for commercial and (c) $11,000 for sale of rings is assessable income to Derek.  Support your discussions with references to the Income Tax Act 2007 and appropriate case law.Question 3 – DeductionsJimmy  Smith, who is a self-employed physiotherapist and has been operating a surgery from rental premises. During June 2019 he purchased a house in Ponsonby and decided to operate the surgery from home. (i)The roof of the house was damaged and leaking at the time of purchase.  It was replaced for $20,000 after the purchase(ii)The surgery and consulting rooms were painted in October 2019 at a cost of $2,500.  (iii) Expenses incurred in November 2019 for cleaning the gutter, gardening and the removal of a dead tree amounted to $1,200.  (iv)The vinyl flooring in the professional rooms was replaced with a rimu timber floor in December 2019 at a cost of $9,500. The floor was replaced due to water damage caused by a leaking pipe.(v)The patient’s gravel car park was replaced with concrete on 10 January 2020 for $8,000(vi) A gas heater was purchased for the consulting room on 10 March 2020 for $480.  The heater has an effective life of 5 years.(vii)On 24 March 2020 Jimmy was driving a business vehicle to visit a Covid 19 patient and had an accident with another vehicle.  Jimmy’s business vehicle was not insured.  He was responsible for the accident and had to pay the full cost of its repair ($2,500) to the other party’s insurer. Required:  For each of the items advise Jimmy what deductions (if any) could be claimed in respect of the above expenditure for the year ending 31 March 2020.  Support your answer with references to the Income Tax Act 2007 and the general permission, the general limitation and any specific rules as necessary and appropriate case law. Question 4 – GST(a)“All Possible” is a charitable organisation that makes dreams come true for children suffering from serious illness. It receives goods that people donate to the organisation and then sells those items each week to raise funds to finance the dreams of sick children.
Required:Do the activities of  “ All Possible” come within the definition of taxable activity? Discuss and support your answer with references to the Goods and Services Tax Act 1985 and appropriate case law.          (b)Bob owns a farm and buys avocado trees. The avocado trees are seedlings, sold in bags and are not yet producing fruit. The avocado trees were purchased from an unregistered vendor. Required:Can Bob claim  GST  on  the  purchase  of  these  avocado  trees?  You  must  provide  a  full  explanation with statutory reference(c)Health Products Limited (“HPL”) produces Manuka Honey and is registered for GST.  Identify the type of supply and give reason for each of the following independent transactions.(i)ASB Bank charged interest on HPL outstanding account balance totalling $5,000. (ii)If HPL sold their manufacturing plant, including all of the stock and equipment to another GST registered person.(iii)If HPL sold only their manufacturing plant to another GST registered person (that is, excluding all of the stock and equipment).(iv)HPL owned  a  domestic  rental  property  in  a  block  of  two  flats  (both  of  which  are  tenanted) and sold it to another buyer who is also GST registered.     Part 1 (a)In the year ended at 31 March 2020, ABC Ltd, an ordinary company makes a net profitof $120,000 after tax. The shareholders want to distribute this profit as dividends, but they have no idea how the imputation system works and dividends are taxed.  Required:Explain how the dividends are taxed under New Zealand’s imputation system. (b)XYZ Limited became a look through company on 1 April 2017.  Andrea is the sole director of the company.  On 1 September 2020 Andrea left New Zealand to stay with her ailing parents in Hong Kong and agreed to work through tele-conference, video-conference or Skype  from  her  home  at  Hong  Kong.  Advise  XYZ  Limited  the  implications  of  this  agreement.
Part 2  Bill  and  Winnie,  are  NZ  residents.    Their  brother  Paul  lives  in  Australia  and  owns  aimport/export business based in Australia.  He wants to set up set up a parallel imports business in New Zealand. Required:Bill, Winnie and Paul have asked whether it is possible to set up some suitable arrangement that will allow and access losses/income and contribute to capital by all the three but only Bill and  Winnie  manage  the  business.  You  should  advise  them  the  appropriate  structure,  the  formalities required to set up the suggested structure and suggest at least four benefits to set up the suggested structure. Part 3 Geoff is a resident of Canada, he has never been to New Zealand.  In 1986 he married a New Zealander, Jane and they have four children Karen, Tim, Rose and Brenda.  Rose and Brenda live in New Zealand but Geoff, Jane, Karen and Tim remain in Canada. Geoff created a trust in 2012.  He settled NZ $1 million upon three trustees, who are himself, Jane and their solicitor (Brian), all based in Canada.  The beneficiaries are all four children.  The trust has invested money in European shares and bonds. It has also made substantial capital profits.  The trust funds have grown to $NZ 2.5 million (on the equity side of the balance sheet represented by $1 million corpus, $750,000 of capital profits at arm’s length and $750,000 of retained earnings).  On 10 August 2020 it was proposed to distribute $1.6 million to the 4 children.  The trustee resolution read as follows:Having considered all the needs of the beneficiaries, the trustees resolve to distribute $NZ 400,000 to each of the following beneficiaries: Karen, Tim, Rose and Brenda.  This distribution will come from corpus ($1 million) and capital profits ($600,000).Required:(i)Describe the nature of this trust for New Zealand Tax purposes, the New Zealand taxation of trustee income and New Zealand taxation of any beneficiaries. (ii)Brian, the trustee and solicitor moved to New Zealand and became a New Zealand resident following the distribution referred to above.  Does having a New Zealand resident trustee affect your analysis.(iii)Are trustees personally liable for tax on trustee income or is the Inland Revenue restricted to claiming the assets of the trust to satisfy the tax liability? Explain
Question 6: Individual Income Tax ReturxBruce is a New Zealand tax resident client who provides you with the following information for the year ended 31 March 2020. All figures given are in New Zealand dollars.1Bruce is a chef employed by the Counties Manukau District Health Board. From this employment he has earned a gross salary of $80,000 from which tax of $17,320 has been withheld. The Counties Manukau District Health Board owns a Gym and membership fees are $1,500.  Gym membership is waived for all the staff employed. 2The Counties Manukau District Health Board had employed Bruce from Southland and paid him a work related relocation allowance of $10,000 to take up employment with them from 1 April 2019.  3Bruce has a small rural property in Southland. He receives rent from his neighbour who uses the land for grazing. The rental after deducting all expenses amounted to $5,200 for the year.4Bruce owns shares in three New Zealand registered companies. All three companies paid out fully imputed dividends during the year ending 31 March 2020. Brucereceived into his bank account $5,025 in dividends on these shares. 5Bruce has a term deposit with Westpac Bank. During the year his account was credited with $1,675 after the deduction of resident withholding tax at the top marginal tax rate. 6Bruce has a bank account in the Sydney branch of the Commonwealth Bank of Australia. From this he earned NZ$3,000 gross interest. Australian non-resident withholding tax (10%) had been deducted from this amount as required by the Double Taxation Relief (Australia) Order 1995.6During the 2020 tax year Bruce was selected as a member of the Olympic Games “A” squad and during this year he participated in the Goodwill Games and won prize money totalling NZ$5,000. 7In appreciation of his performance at the Goodwill Games the employer paid his sports club membership fees amounting $2,000.  8Bruce is a trustee of a local community trust and derived income amounting to $3,000. 9Bruce enjoys catering for special wedding and 21st birthday party events throughout the year.  He received from these events catering $25,000 during the year. Bruce purchased materials for catering costing $12,000 during the year.  The room at his home is used to  store  these  supplies  and  other  catering  gear.  The  room  occupies  10%  of  the  total  house.  Bruce provides receipts for house outgoings amounting to $22,000 for the year. In April 2019, Bruce purchased a van to use for the catering events, and for his own private use. The logbook shows that the van usage is 60:40 between catering purposes and  private  use.  The  van costs  $26,000  excluding  GST  (Inland  Revenue’s  SL  
depreciation rate 13.5%) and he is able to provide you with receipts for van outgoings amounting to $3,000 for the year.10Proceeds of $2,925 during the year from the sale of a case of Bollinger champagne which he bought for $1,795 for his 40th Birthday in 2016 but failed to drink.  11 Your fee for preparing Bruce’s tax return is $500.Required:Calculate Bruce’s income tax liability for the year ended 31 March 2020, showing all workings and indicating clearly the appropriate taxation treatment of all items 1 – 11 including, statutory references.  Round all calculations to the nearest dollar