110389 Advanced Taxation

SECTION A

All amounts are expressed in New Zealand currency. All taxpayers are New Zealand tax residents and where relevant, the taxpayers have a standard balance date of 31 March. All scenarios are hypothetical and are set up for the purpose of this examination.

Use the following scenario for Questions 1, 2, 3, 4 and 5.

Gwyn Paltrow works as a beauty consultant for Zoop Ltd and receives an annual salary of $75,000 p.a. She is currently in a long-term relationship with Chris Marty, and they have plans to get married in the near future. Gwyn owns 70% of Zoop Ltd and the other 30% is owned by the Marty Family Trust. The trustees of the Marty Family Trust are Chris, his brother Steven and their solicitor Kevin, and the benefi ciaries are Chris and his three children from a previous marriage. The Marty Family Trust has not distributed any benefi ciary income for more than four years, including the current year.

Zoop Ltd owns a Rimu writing table which cost $1000 and could be sold to the public for $1,500. However, instead of selling it, the company decided to gift the table to Gwyn’s sister. Zoop Ltd also recently provided an interest-free loan of $200,000 to the Marty Family Trust.

During a trip to Amsterdam to attend a beauty makeup course, Gwyn visited a diamond factory and became captivated by the diamonds. Consequently, she invested in some diamonds and upon her return to New Zealand, her close friend Pascoe Hunt who is a jeweller, expressed interest in buying the diamonds from her. Gwyn has now decided to sell the diamonds to Pascoe. As they met at a café to discuss their respective businesses, Pascoe also suggested that Gwyn consider using a look-through company for her beauty business.

[TOTAL FOR SECTION A: 20 MARKS]

Question 1

Advise Zoop Ltd whether there are any FBT or dividend implications for gifting the table to Gwyn’s sister.             (4 marks)

Question 2

Briefl y explain to Zoop Ltd the fringe benefi t tax implications of the interest-free loan to the Marty Family Trust.        (4 marks)

Question 3

Advise Gwyn on the income tax implications when she sells the diamonds to Pascoe.           (4 marks)

Question 4

Advise Gwyn on whether Zoop Ltd qualifi es for election as a look through company based on the counted owner test. You are required to show how you work out the number of look through counted owners.           (4 marks)

Question 5

Briefl y explain whether electing to become a look-through company is advantageous for Gwyn and the Trust from a tax perspective. Provide 2 reasons to support your explanations.              (4 marks)

SECTION B

All amounts are expressed in New Zealand currency. All taxpayers are New Zealand tax residents and where relevant, the taxpayers have a standard balance date of 31 March. All scenarios are hypothetical and are set up for the purpose of this examination.

Use the following scenario for Questions 6, 7, 8 and 9.

Jordan, Jasmine, Jack and Jamie, who are best friends, have reached out to you for guidance on the income tax implications related to the sale of their individual properties.

a) Jordan’s father has been involved in the land development business since 2001. In May 2015, Jordan himself acquired a residential rental property and is currently contemplating selling it in November 2023.

b) Given the thriving property market in the past few years and Jordan’s endorsement of real estate as a sound investment, Jasmin, took out a bank loan to help finance his purchase of a residential property that cost $1.8 million and a commercial property that cost $2.5 million. Both properties were in Taranaki and purchased on 1 April 2022. Both properties are currently rented out. Jasmine has provided you with the following details:

Residential Property

- it is a residential rental property that generates an annual rental income of $46,400.

- the mortgage interest amounts to $54,000 per annum and other tax-deductible expenses total $10,000 per annum.

Commercial Property

- it generates an annual rental income of $100,800.

- the mortgage interest is $90,000 per annum and other tax-deductible expenses amount to $19,000 per annum.

c) Jack purchased a residential property for $950,000 on 14 February 2020 when the sale and purchase agreement was signed. The title of the property was transferred to Jack’s name on 10 March 2020. Initially, Jack rented out the property but later decided to sell it. The sale and purchase agreement was signed on 15 November 2022. The title of the house was registered in the buyer’s name on 15 January 2023.

d) In March 2019, Jamie bought a three-storey house constructed in 1995. Jamie resides on the third fl oor while the other 2 floors are rented out. However, Jamie intends to migrate to Australia and plans to sell her three-storey house in November 2023.

[TOTAL FOR SECTION B: 20 MARKS]

Question 6

Jordan wants to know the income tax implications of selling his residential property in 2023. Briefl y explain to him the income tax consequences under sections CB 6, CB 10 and CB 6A/CZ 39.           (6 marks)

Question 7

Jasmin wants to determine taxable income from her two properties. You are required to show her all the calculations for the net rental income or loss for each of her rental properties and the resulting taxable income for her in 2022-23.        (6 marks)

Question 8

Jack wants to know whether the bright-line rule applies to the sale of his residential property. You are required to briefl y explain to him whether he is subject to the bright line rule, showing all the relevant dates.          (5 marks)

Question 9

Briefl y explain to Jamie whether the sale of her three-storey house will be exempted under the bright line rule.          (3 marks)

SECTION C

Use the following scenario for Questions 10, 11, 12 and 13.

Mona and Lisa are partners in a limited partnership that commenced its business operations on 1 April 2022, focusing on selling cleaning products. In this limited partnership, Mona is a limited partner and is entitled to 70% of the partnership’s net income. On the other hand, Lisa serves as a general partner and her share is 30% of the net income.

At the beginning of the partnership, Mona contributed $40,000 in capital. However, during the 2022-23 income year, Mona made an additional capital contribution of $20,000. For the year ended 31 March 2023, the limited partnership’s income amounted to $50,000 with allowable deductions totalling $150,000.

Mona has other investments including some investments in a multi-rate portfolio investment entity (MRP). In 2022-23, Mona’s return from her PIE investment is $10,000. Mona has also invested in a widely held superannuation scheme (which is not a PIE). Mona’s marginal tax rate is 39%.

Lisa’s brother Leonardo is the sole owner of Davinci Ltd, a company that provides engineering services exclusively to one particular organisation only. Davinci Ltd does not have substantial business assets. Leonardo, being the sole employee, carries out these services through Davinci Ltd. The income and expenses of Davinci Ltd in 2022-23 are as follows:

[TOTAL FOR SECTION C: 20 MARKS]

Question 10

Briefl y explain the maximum amount of loss that Mona can offset against her other income in the 2022-23 income year (show all calculations).           (5 Marks)

Question 11

Claiming losses against Mona’s other income means that it will lower her tax liability. Briefl y explain whether structuring the business as a limited partnership and utilising the losses against her other income would be viewed as a form. of tax avoidance.       (4 marks)

Question 12

Provide a brief explanation to Mona on the following:

how the $10,000 return from her investment in the MRP is treated for income tax purposes

what are the two advantages of investing in MRP

the income tax implications when she receives a lump sum payment from the superannuation scheme on her retirement.   (6 marks)

Question 13

i. Briefl y explain to Leonardo whether he will be subject to the personal services attribution rule in relation to the business conducted by Davinci Ltd.

ii. Assuming that Leonardo is subject to the personal services attribution rule, calculate the amount of income derived by Davinci Ltd that will be attributed to Leonardo in 2022-23 under the personal services attribution rule.        (5 marks)

SECTION D

All amounts are expressed in New Zealand currency. Where relevant, the taxpayers have a standard balance date of 31 March. All scenarios are hypothetical and are set up for the purpose of this examination.

[TOTAL FOR SECTION D: 20 MARKS]

Question 14

Briefl y explain the rationale behind the implementation of the CFC rules in New Zealand.      (3 marks)

Question 15

Garfi eld, a New Zealand resident, owns 41% of the shares in Piazza Ltd, a foreign company located in Pizza Island. The four other shareholders, who are not associated with Garfi eld or with each other, are not New Zealand tax residents and they each hold 14.75% of the shares. Piazza Ltd has derived $600,000 active income and $1,500 passive income. In the following year, Piazza Ltd distributed dividends to its shareholders.

Briefl y explain whether

Piazza Ltd is a CFC under the New Zealand Income Tax Act. (3 marks)

any income will be attributed to Garfi eld under the CFC rules. (3 marks)

Garfi eld will be required to pay tax in New Zealand on the dividend received.     (2 marks)

(8 marks)

Question 16

On 5 April 2021, Wilson Ltd, a New Zealand resident company bought 15,000 shares in Jon Ltd for $5 per share. Wilson Ltd has held these shares and made no sales. Jon Ltd is an incorporated listed company in Bermuda and is not a NZ resident company.

Briefl y discuss whether Wilson Ltd is liable to pay any Foreign Investment Fund (FIF) income in the tax years 2021-22 and 2022-23. Wilson Ltd holds less than 10% interest in Jon Ltd. No calculations are required.            (4 marks)

Question 17

On 5 April 2022, Stan Lee, a New Zealand tax resident individual, bought 15,000 shares in Jon Ltd at $5 each and has not sold any of these shares. On 30 September 2022, Stan bought another 10,000 shares in Jon Ltd at $4 each. The closing market value of the shares on 31 March 2023 is $105,000. He holds less than 10% of the interest in Jon Ltd.

Briefl y explain whether Stan is liable to pay any FIF income in 2022- 23? Show your calculations.             (5 marks)

SECTION E

All amounts are expressed in New Zealand currency. Where relevant, the taxpayers have a standard balance date of 31 March. All scenarios are hypothetical and are set up for the purpose of this examination.

[TOTAL FOR SECTION E: 20 MARKS]

Question 18

a. Identify and explain two strategies employed by multinational corporations to circumvent tax payments via foreign enterprises. (4 marks)

b. Briefl y explain the measures implemented by the New Zealand government to counteract such strategies. (4 marks)

(8 marks)

Question 19

Goody Ltd, a profi table NZ resident company intends to expand its operations by purchasing 100% shares of Badee Ltd, a manufacturing company incorporated in the United States. The projected profi t of Badee Ltd for the 2022-23 income year is $5 million.

a. Briefl y explain whether the profi ts of Badee Ltd will be taxable in New Zealand.

b. If Goody Ltd establishes a branch in the United States, briefl y explain whether the profi ts generated by the US branch of Goody Ltd will be subject to tax in New Zealand.               (5 marks)

Question 20

Verrie Wealthy who is a NZ resident, has invested $200,000 in a foreign bank term deposit, and $100,000 in Australian-listed shares. In 2022-23, Verrie Wealthy derived the following returns from his investments: interest of $10,000 gross (foreign tax paid $1,000), dividends of $7,300 gross (foreign tax paid $1,100) and also earned a salary of $60,000.

Calculate the amount of foreign tax credit that Verrie can claim in New Zealand in 2022-23. You are required to show all calculations.   (7 marks)