SUPPORT MATERIALS

TAXNZ
TAXATION NEW ZEALAND

WORKSHOP 2

Activities
Suggested Solutions
Questions and suggested solutions provided for learning purpose only
CA MASTERS PATHWAY SUPPORT MATERIALS

Activity 5A – Suggested solution (8 marks)

Unit Topic Unit Learning Objective

5 Depreciation 1. Explain, calculate and recommend the most appropriate
decline in value for depreciating assets

Coffee machine
The continuation of the diminishing value (DV) method under s. EE 12(2)(a) will maximise the
depreciation charge for the 20X1 income year. The formula under s. EE 16(1) is:
= 30% × $1,715 × 12 ÷ 12
= $514.50

Waste disposal unit

The DV method under s. EE 12(2)(a) will maximise the depreciation charge for the 20X1 income
year. The formula under s. EE 16(1) is:
= 25% × ($5,000 + $500) × 10 ÷ 12
= $1,145.83

Cash registers
Using the pool method under s. EE 21(2):
40% × (($8,000 + $8,000) ÷ 2) × 12 ÷ 12 = $3,200

Industrial washing machine

Depreciable property that is temporarily subject to repair or inspection is treated as still available
for use if it was used or available for use immediately before going for repair or inspection.
Therefore, the full year’s depreciation will be allowed as a deduction.
The DV method under s. EE 12(2)(a) will maximise the depreciation charge for the 20X1 income
year. The formula under s. EE 16(1) is:
= 25% × $10,640 × 12 ÷ 12
= $2,660

Vacuum cleaner
Under s. EE 38, the full cost of certain depreciable assets can be claimed as the depreciation loss
amount in the year of purchase if they cost $5,000 or less (the threshold is $5,000 if the item
is acquired on or after 17 March 2020 and before 17 March 2021, and is $1,000 if the item is
acquired on or after 17 March 2021).
As the vacuum cleaner was purchased for less than this threshold, the full cost, $450, can be
claimed as a depreciation loss.
Total depreciation = $514.50 + $1,145.83 + $3,200 + $2,660 + $450
= $7,970.33

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Activity 5B – Suggested solution (9 marks)

Unit Topic Unit Learning Objective

5 Depreciation 1. Explain, calculate and recommend the most appropriate
decline in value for depreciating assets

Note: All amounts are in New Zealand dollars and exclusive of GST, unless otherwise stated.

Item Workings Depreciation loss

($)

Colin McCahon painting 0

Patent $50,000 × 10% 5,000

Laminator 400

Office chairs 16% × [(3,500 + 6,000) ÷ 2] = 760

16% × 9,500 = $760

2

Binding machine 25% × $24,375 × 12 ÷ 12 6,094

Total depreciation loss 12,254

Additional explanations
Colin McCahon painting
Depreciation may only be claimed on an asset that is depreciable property. This is ‘property that,
in normal circumstances, might reasonably be expected to decline in value while it is used or
available for use: (a) in deriving assessable income; or (b) in carrying on a business for the purpose
of deriving assessable income’ (s. EE 6). In this case, the painting does not appear to be likely
to decline in value. Moreover, there is no indication that it will be ‘used’ for deriving assessable
income. Instead, the facts suggest that it has been purchased for investment purposes. Therefore,
no depreciation may be claimed on the painting.

Patent
The patent is depreciable intangible property, as per s. EE 62 and Schedule 14. Under
Schedule 14, depreciable intangible property includes ‘a patent or the right to use a patent’.
Under s. EE 62, the property must be intangible and have a finite useful life that can be estimated
with a reasonable degree of certainty. In Redfern’s case, the patent meets both these criteria.
Section EE 34 outlines the formula for calculating the annual rate for patents granted after the
2005–06 income year: 1 ÷ legal life (in this case, 1 ÷ 10 (10%)). Therefore, the depreciation that
may be claimed is:
10% × $50,000 = $5,000
Note that the cost value is used (i.e. $50,000) and not the adjusted tax value (i.e. $30,000). This is
because Redfern must use the straight-line method for an item of fixed life intangible property in
accordance with s. EE 12(2).

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Laminator
Under s. EE 38, items of property acquired for less than the threshold value ($5,000 if the item is
acquired on or after 17 March 2020 and before 17 March 2021, or $1,000, if the item is acquired
on or after 17 March 2021) may be claimed in full as a depreciation loss in the income year of
acquisition. The laminator qualifies as a low value asset, and the full amount may be claimed as a
depreciation loss in the current income year.

Office chairs
The office chairs are depreciated using the pool method. The formula (as per s. EE 21) is:
(Starting adjusted tax value + Ending adjusted tax value)
Rate × × Months ÷ 12
2
Therefore, the depreciation calculation for the office chairs is:
(3,500 + 6,000)
16% × =
2
9,500
16% × = $760
2
There is no need to adjust for ‘months’, as under the pool method this is the number of months
in the income year. There is no suggestion in the question that Redfern’s income year is longer or
shorter than 12 months.

Binding machine
The formula for calculating the depreciation loss is provided in s. EE 16:

Annual rate × Value or cost × Months

12
Therefore, the depreciation loss on the binding machine is calculated as:
25% × $24,375 × 12 ÷ 12 = $6,094
As the diminishing value method is used for calculating the depreciation, the adjusted tax value
is used in the formula, rather than the cost of the binding machine. The asset is owned for the
whole income year and therefore apportionment is not required.

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Activity 5C – Suggested solution (6 marks)

Unit Topic Unit Learning Objectives

5 Depreciation 1. Explain, calculate and recommend the most appropriate
decline in value for depreciating assets
2. Explain and calculate depreciation recovery

Note: All amounts are in New Zealand dollars and exclusive of GST, unless otherwise stated.
No depreciation loss may be claimed in the year of disposal of the asset (s. EE 11).

Scanner
The adjusted tax value of the scanner is $2,500, and it was sold for $1,500. Where an asset is sold
for less than its adjusted tax value, any resulting loss is allowable as a deduction. Therefore, the
$1,000 loss on disposal of the scanner may be claimed as a deduction in the income year.

Lettering machine
The adjusted tax value of the lettering machine is $6,500 and it was sold for $9,000.
The difference between sale price and the adjusted tax value is $2,500. However only $1,500 is
depreciation recovery income and the other $1,000 is a non-taxable capital gain.
Where depreciable property is sold for more than its adjusted tax value, the excess is included
as income only to the extent that depreciation has been previously claimed. Therefore, the
difference between the adjusted tax value and original cost is the maximum depreciation
recovery income amount.

Folding machine
The adjusted tax value of the folding machine is $2,000 and it was sold for $2,200.
Where depreciable property is sold for more than its adjusted tax value, the excess is included as
income only to the extent that depreciation has been previously claimed.
Therefore, the sale of the folding machine generates depreciation recovery income of $200.

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Activity 6A – Suggested solution (8 marks)

Unit Topic Unit Learning Objective

6 Primary sector 3. Explain and apply the rules relating to the taxation of livestock
activities

In order to calculate the taxable income for Bob, both the opening and closing values of the
livestock must be calculated.
Because Bob has previously elected to use the herd scheme, this calculation must be done using
the herd scheme for the year ended 31 May 2020 (under s. EC 8). The opening values of the
livestock are determined by using the 2020 national average market values determined by Inland
Revenue (under s. EC 16).

Opening stock

Class of livestock Quantity Value/ each Total

($) ($)

Rising one-year heifers 100 526 52,600

Rising two-year heifers 220 888 195,360

Mixed-age cows 30 1,090    32,700

280,660

Closing stock

Class of livestock Quantity Value/each Total

($) ($)

Rising one-year heifers 150 526 78,900

Rising two-year heifers 300 888 266,400

Mixed-age cows 55 1,090   59,950

405,250

       

Taxable income 124,590

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Activity 6B – Suggested solution (5 marks)

Unit Topic Unit Learning Objectives

6 Primary sector 2. Explain and calculate the taxable income of a primary industry
activities business
4. Explain the income equalisation scheme

Dorothy should deposit funds into the Income Equalisation Scheme (IES) and withdraw the
funds as required in future income years.
Dorothy is eligible to utilise the Income Equalisation Scheme (IES) as she is a farmer carrying on a
farming or agricultural business on land.
The maximum amount which can be deposited into the IES is Dorothy’s dairy farming business
income of $240,000, as her deposit is limited to the amount of net income she would have if she
derived only farming or agricultural income.
The amount deposited is treated as a taxable deduction against her 20X1 income. Dorothy’s
taxable income for the 20X1 income year would then be $60,000 (the farmstay business
net income).
In the future income years, when Dorothy is expecting adverse trading conditions, she can
withdraw funds from the IES which will be treated as assessable income in the income year
of withdrawal.

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Activity 6C – Suggested solution (6 marks)

Unit Topic Unit Learning Objective

6 Primary sector 2. Explain and calculate the taxable income of a primary industry
activities business

Expense Deduction Reference

$

Telephone charges (50% × 1,000) 500 Deductible under s. DA 1

Power 2,500 Deductible under s. DA 1

Petrol and vehicle maintenance 5,500 Deductible under s. DA 1

Construction of dog kennels (including materials 3,200 Capital expenditure under s. DA 2(1) - see
and labour) below

Re-grassing of paddocks 3,000 Deductible under s. DO 1

Planting of trees to provide shelter for animals 2,500 Deductible under s. DO 2

Planting of trees alongside driveway 7,500 Deduction limited to $7,500 under s. DO 3

24,700

Casey is a ‘Type 2 farmer’ as her farmhouse and curtilage make up 40% (i.e. more than 20%) of the
farm’s total value.
Construction of dog kennels (including materials and labour) – depreciation = $8,000 × 40% × 12/12

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Activity 6D – Suggested solution (6 marks)

Unit Topic Unit Learning Objectives

6 Primary sector activities 2. Explain and calculate the taxable income of a primary
industry business
4. Explain the income equalisation scheme

Income

Sale of Meat and Wool 250,000

Estimated value of meat/milk/farm produce consumed by household 5,000

Total income 255,000

Deductions

Deposit into IES Scheme 60,000

Other costs, including depreciation and staff wages 50,000

Purchase of hay and stock feed 57,000

Fences built 27,500

General farmhouse expenses (Type 1: 20% x $10,000) 2,000

Fertilising of farming land 15,250

Construction of supporting frames for growing crops ($50,000 × 10%) 5,000

Total deductions allowed 216,750

Taxable income 38,250

• The household consumption of farm produce is taxable income for the farm.
• While the construction of supporting frames for growing crops does not meet the definition
of depreciable property, certain farm development expenditure can be claimed on an
amortisation basis under s. DO 4 if it is of a type listed in Schedule 20. Construction of
supporting frames for growing crops is listed in Schedule 20 with a diminished value rate of
10% allowed as a deduction per year.
• The IES deposit is a deductible expense in the 20X1 tax year, not assessable income.

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Activity 7A – Suggested solution (4 marks)

Unit Topic Unit Learning Objective

7 Financial arrangements 1. Explain and apply the taxation of financial
arrangements provisions.

It is important to first check whether the financial arrangement rules are applicable. The loan
to the company and the mortgage are financial arrangements, while the share portfolio is an
excepted financial arrangement.
Barry’s absolute value of income and expenditure for all financial arrangements is $70,000,
constituted by $30,000 from the loan to Acme Limited ($300,000 × 10%) and the $40,000
interest payable on his mortgage ($800,000 × 5%).
Barry’s absolute value of all financial arrangements is $1,100,000, comprising the $300,000 loan
to the company and the $800,000 mortgage.
Under s. EW 54, to be a cash basis person, the tax payment must meet either the ‘income and
expenditure threshold’ (s. EW 57(1)) or the ‘absolute value threshold’ (s. EW 57(2)) in addition to
the ‘deferral threshold’ (s. EW 57(3)). Therefore, Barry would meet the criteria for being a cash
basis person.

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Activity 7B – Suggested solution (3 marks)

Unit Topic Unit Learning Objective

7 Financial arrangements 2. Determine the appropriate exchange rate for foreign
currency transactions

The spot rate at 31 March 20X1 should be used in calculating Bernard’s income, which gives
assessable income of $19,201 (€12,500 ÷ 0.6510).
It is generally expected that when a transaction occurs that converts the foreign currency into
New Zealand dollars, the actual exchange rate used for the transaction is used to calculate taxable
income. Under s. YF 1, the close of trading spot exchange rate must be used. This is defined as
the rate of a spot contract for the purchase of New Zealand dollars based on a rate and market
approved under Determination G6D.
Where the transaction has been converted to New Zealand dollars, the approved rate is the rate
of exchange obtained in relation to the cash flow.

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Activity 7C – Suggested solution (8 marks)

Unit Topic Unit Learning Objective

7 Financial 1. Explain and apply the taxation of financial arrangements
arrangements provisions

(a) Base price adjustment (BPA) calculation (4 marks)

Consideration = $2,145,000 - $2,000,000 = $145,000
Income = $700,000
Expenditure = $0
Amount remitted = $1,500,000

BPA = $145,000 - $700,000 + $0 + $1,500,000

= $945,000
The consideration is the amount of money paid to RLL less the amount RLL paid to L13.
RLL received $2,145,000 and lent $2,000,000, resulting in consideration of $145,000.
In 20X0, RLL returned income of $700,000. Therefore, to ensure RLL is not overtaxed on the
investment, RLL deducts the $700,000 from the BPA calculation.
No expenses were incurred by RLL in respect of this financial arrangement and the amount
remitted is the $1,500,000.

(b) (4 marks)
The BPA results in an income amount of $945,000 for RLL. Pursuant to s. EW 31(3), a positive
base price adjustment amount is income under s. CC 3.
As RLL is in the business of lending money, the remitted amount of $1,500,000 written off as a
bad debt is deductible under s. DB 31(3)
Economically, RLL has made a total gain on this financial arrangement of $145,000, being the
$2,145,000 recovered less the $2,000,000 lent. However, RLL has already returned income of
$700,000 in the 20X0 income year.
The BPA calculation and the bad debt written off results in a net deduction of $555,000
($945,000 – $1,500,000) for RLL. This aligns the total income returned on this financial
arrangement with the economic outcome.

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Activity 8A – Suggested solution (4 marks)

Unit Topic Unit Learning Objectives

8 International tax 1. Explain and calculate the tax payable by taxpayers in
receipt of foreign income
4. Explain and apply the double taxation treaties

Description Income Deductions Tax credit calculation Notes

$ Allowable Segment Person’s Person’s Notional Section LJ 5 Notional

credit deduction net liability calculation liability = tax
under income on net income
s. LJ 5* at personal tax
$ $ $ $ $ rates

1 Dividend 100,000 10,000 100,000 220,000 63,520** 28,873 Dividends from

companies
outside the
FIF regime are
assessable

2 Interest 70,000 20,211 70,000 220,000 63,520** 20,211 Foreign tax

credits are
available
despite the
absence of
a DTA with
Jamaica

3 Rent 50,000

220,000 30,211

Taxable income 220,000

Income tax liability 63,520

Less: foreign tax credits 30,211

Terminal tax payable 33,309

*Available foreign tax credits are limited to the lesser of actual tax paid or the amount calculated under s. LJ 5.
**The notional liability is calculated on the following basis: $14,000 taxed at 10.5%, $34,000 taxed at 17.5%, $22,000
taxed at 30% and $150,000 taxed at 33%. If the notional liability is being calculated for a tax year beginning on or after
1 April 2021, the new 39% tax rate would need to be considered, which in this case would increase the foreign tax credit
for allowed in respect of the interest.

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Activity 8B – Suggested solution (15 marks)

Unit Topic Unit Learning Objectives

8 International tax 1. Explain and calculate the tax payable by taxpayers in receipt of
foreign income
2. Explain and calculate taxpayer’s liability to interest, dividend and
royalty withholding tax
3. Explain the concepts behind the non-resident withholding tax
regime and the Approved Issuer Levy
4. Explain and apply the double taxation treaties
9 International tax: 2. Explain the controlled foreign company rules in a non-complex
anti-avoidance international transaction

(a) (9 marks)

Description Income Deductions Tax credit calculation Notes

($) ($)

Allowable Segment Person’s Person’s net Notional Section LJ 5

credit under deductions income liability calculation
s. LJ 5*
($) ($) ($) ($) ($) ($)

1 PE income 300,000 100,000 56,000 300,000 100,000 700,000 196,000 56,000

2 NZ business 500,000 – –
income

3 British Corp – Exempt under

dividend s. CW 9, no
assessable
income so no tax
credit.
No controlled
foreign company
(CFC) income
as it is a non-
attributing active
CFC

4 Legal action – Relates to

costs derivation of
exempt income –
no deduction per
s. DA 2(3)

5 British Corp – – No CFC income

income as it is a
non‑attributing
active CFC

*Available foreign tax credits are limited to the lesser of actual tax paid (30% × $200,000) or the amount calculated under s. LJ 5
(($300,000 – $100,000)/$700,000 × $196,000).

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Taxable income 700,000

Income tax liability (at 28%) 196,000

Less: Foreign tax credit 56,000

Terminal tax payable 140,000

(b) (4 marks)
Royalty
Royalties derived by a non-resident with a New Zealand source (i.e. paid by an NZ resident
– s. YD 4(9)) are included as non-residents’ passive income and are subject to non-resident
withholding tax (NRWT). Section RF 7(2) provides that the domestic withholding rate
for royalties is 15%. The New Zealand–Australia double tax agreement (DTA) reduces the
withholding tax on the royalty to 5% (see Article 12).
NRWT liability is calculated as $10,000 × 5% = $500.
The definition of ‘pay’ for the purposes of the NRWT rules includes where a person receives
a credit for the amount. As World Corp is crediting this royalty against a liability owed to the
company, the royalty will be seen as being paid.

Interest
Interest derived by a non-resident who is not engaged in business in New Zealand and which has
a New Zealand source (i.e. interest from money lent in NZ: s. YD 4(11)) will be subject to NRWT.
Section RF 7(2) provides that the domestic rate of withholding tax is 15%. The New Zealand –
United Kingdom DTA reduces this rate to 10% (see Article 12).
NRWT is calculated as $15,000 × 10% = $1,500.

(c) (2 marks)
World Corp may apply to become an approved issuer and take advantage of the Approved Issuer
Levy (AIL) regime. In this situation, NRWT is reduced to 0% (s. RF 12) and a 2% levy is charged.

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Activity 8C – Suggested solution (6 marks)

Unit Topic Unit Learning Objectives

8 International tax 2. Explain and calculate taxpayer’s liability to interest, dividend
and royalty withholding tax
3. Explain the concepts behind the non-resident withholding tax
regime and the Approved Issuer Levy
4. Explain and apply the double taxation treaties

Item ITA 2007 rate ITA 2007 Rate under UK-NZ DTA NRWT
reference(s) UK–NZ DTA Article payable
reference
(%) (%) $

Unimputed cash dividend from 30 s. RF 8 15 Article 11 750

Company A

Interest on a loan to Company B 15 s. RF 2(1)(d) 10 Article 12 1,000

or s. RF 7

Royalties from licensing a patent to 15 ss RF 7 10 Article 13 1,500

Company C

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Activity 8D – Suggested solution (12 marks)

Unit Topic Unit Learning Objectives

8 International tax 2. Explain and calculate taxpayer’s liability to interest, dividend
and royalty withholding tax
3. Explain the concepts behind the non-resident withholding tax
regime and the Approved Issuer Levy
4. Explain and apply the double taxation treaties

(a) (6 marks)
To determine whether 2BNZ is a New Zealand tax resident, consideration must be given to the
four tests in s. YD 2(1) :
1. Incorporation: The incorporation of a company in New Zealand is conclusive of residence.
2BNZ is incorporated in the United Kingdom.
Therefore, this test is not met.
2. Head office: A company is considered resident if the physical location of the head office
(being the centre of its administrative management) is in New Zealand. Administration of
the New Zealand company is run from the Auckland office, as functions such as payroll,
bookkeeping, staff management and ordering decisions are made from this office.
Therefore, this test is met.
3. Centre of management: Decisions relating to, and management of, the entire global
operations for 2BNZ are executed in New Zealand. The day-to-day duties are carried out in
the Auckland office.
Therefore, this test is met.
4. Directors’ control: The directors are located 50/50 in the United Kingdom and New Zealand
respectively, but control is exercised in New Zealand, decisions are made in New Zealand,
and annual directors’ meetings are held in New Zealand.
Therefore, this test is met.
As 2BNZ meets one (or more) of the four tests, it is prima facie a New Zealand tax resident.
However, as 2BNZ is also a UK tax resident, the tiebreaker clause in the United Kingdom –
New Zealand double tax agreement (UK–NZ DTA) also applies to assess who has the right to
tax the income of the company. Article 4(3) of the UK–NZ DTA has been replaced by paragraph
1 of Article 4 of the MLI, which provides that the UK and New Zealand competent authorities
shall endeavor to determine by mutual agreement the country of which the company shall be
deemed to be a resident for the purposes of the UK-NZ DTA, having regard to its effective place
of management, the place where it is incorporated and any other relevant factors. In the absence
of such agreement, the company shall not be entitled to any relief from tax as provided by the
UK-NZ DTA.

(b) (2 marks)
As a New Zealand tax resident, 2BNZ will be taxed on its worldwide income, and the interest on
the United Kingdom investment will be taxable in New Zealand.

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(c) (4 marks)
Bradley qualifies as a transitional resident because he meets the following criteria:
• He is a New Zealand tax resident through either acquiring a permanent place of abode
(PPOA) or under the 183-day rule. He was in New Zealand for 183 days during the period
15 June 20X0 to 15 December 20X0, so he is resident by way of the 183‑day rule.
• He has not been resident in New Zealand for at least 10 years before he became a resident.
Bradley had never travelled to New Zealand before his arrival on 15 June 20X0. Therefore, he
would not have previously qualified as a tax resident.
• He has not previously been, or ceased to be, a transitional resident. As Bradley had never been
to New Zealand before, he would not have previously been a transitional resident.
• He has not made an election to not be treated as a transitional resident.

Transitional residents’ foreign‑sourced income is exempt income for New Zealand tax purposes
and is not included in their New Zealand tax return (with the exception of income from
employment or the supply of services). This would mean that, with the exception of the two
types of income, Bradley will be treated as if he were a non-resident for the income year ended
31 March 20X1.

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Activity 9A – Suggested solution (4 marks)

Unit Topic Unit Learning Objectives

9 International tax: 1. Explain and apply the foreign investment fund rules
Anti-avoidance 2. Explain the controlled foreign company rules in a non-complex
international transaction

Investment CFC/FIF consequences

Voting shares in Oz Co Pty Limited Exempt from FIF rules as it is listed on the ASX

Voting shares in SydRail Limited Subject to CFC rules but will be a non-attributing
Australian CFC

Foreign bank account with US bank Not subject to FIF rules as it is not a company, life insurance
policy or super scheme

Ordinary shares in Trafalgar Co Subject to FIF rules. Will be an attributing FIF

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Activity 9B – Suggested solution (6 marks)

Unit Topic Unit Learning Objectives

9 International tax: anti- 1. Explain and apply the foreign investment fund rules
avoidance 2. Explain the controlled foreign company rules in a non-
complex international transaction

$ Explanation

Aussie Co. 10,000 Aussie Co is exempt from the FIF rules as it is listed on the
Australian Securities Exchange. However, the dividend of
$10,000 will be taxable

Pom Co. 0 No CFC income, as the business is active. No dividend income,

as dividend received was from a foreign company that is not
exempted from the CFC/FIF rules

Wombat Pty Co. 1,250 Investment will be subject to FIF rules, FDR must be applied
$25,000 × 5% = $1,250

Dingo Pty Limited 0 No CFC income as CFC is resident in Australia. No dividend

income, as dividend received was from a foreign company
that is not exempted from the CFC/FIF rules

Total income 11,250

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Activity 9C – Suggested solution (3 marks)

Unit Topic Unit Learning Objective

9 International tax: anti- 3. Explain the thin capitalisation provisions
avoidance

For interest apportionment to be required under the thin capitalisation rules for a company, both
of the following safe-harbour thresholds must be exceeded (s. FE 5(1)(a)):
(a) the New Zealand group debt percentage must exceed 60% for the income year, and
(b) the New Zealand group debt percentage must exceed 110% of the worldwide group debt
percentage for the income year.
To calculate whether the New Zealand group debt percentage exceeds 110% of the worldwide
group debt percentage, the following is calculated (s. FE 5(1)(a)(ii)):
70% × 110% = 77%
As the New Zealand group debt percentage is 75%, this does not exceed 110% of the worldwide
group debt percentage calculated above. As the second threshold is not met, Apollo NZ will not
be required to make an interest apportionment.

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