QUES'HON ONE 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. a) b) Pepper. aged 50. is considering the purchase of a catering business in Wellington as he has recently been made redundant from his previ0us employment. The business can be operated under any form of business structure. Pepper is asking your advice on the most appropriate business structure to use. You are required to: (i) List the possible types of business structure that Pepper could use. (ii) Choose the m (2) types of business structure from your list above which are the most suitable for Pepper's proposed business in your opinion. You are required to give at least three reasons for each of the business structures you would recommend to Pepper. (3 Marks) Liam. Hany and Zakny are equal partners in a farming partnership and they are not associated to each other. Zakny decided to move to the Gold Coast and take up surng. Niallt. a good friend. has agreed to take over Zakny's interest in the partnership at the end of the 2017 income year by paying him $40,000. The partnership asset is expensive machinery. which originally cost $214.000. but due to depreciation now has an adjusted tax value of $90,000. You are required to: (i) Briey Summarise the income tax implications for Zakny when he exits the partnership business. Assume there are no other business assets or liabilities. (5 Marks) Bana Ltd (a loss company) owns 100% of Cana Ltd (a prot company). Dana Ltd is interested in buying 50% economic interest in Cana Ltd. An accountant suggests that one way of going about the sale is for Bana Ltd and Dana Ltd to establish a limited partnership with both partners contributing equally to the capital of the partnership. Dana Ltd will be the limited partner. Cana Ltd then sells its business to the limited partnership at the open market value. You are required to: (i) Briey explain the tax effects of this arrangement as suggested by the accountant. (ii) Briey discuss whether this would be considered a tax avoidance arrangement based on the parliamentary contemplation test. (7 Marks) [TOTAL: 20 MARKS] Question two continued REASONING ISSUE 2C (5 Marks) Will Baron's forgiveness of the 40 percent of the loan to Walrus trigger any income tax consequences for either party? Show all calculations to support your answer. CONCLUSION REASONING ........... ISSUE 2D (5 Marks) Is there any tax advantage for the trust in investing in the ANZ term PIE as far as tax rates are concerned? CONCLUSION REASONING [TOTAL: 20 MARKS]QUES'HON THREE Artichoke is a trustee of the Pui Family Trust. a discretionary complying trust. His father is the settler of the trust which was set up in 2001. Artichoke, his wife and children (Pea and Pod) are included in the list of discretionary beneciaries. The trust has held 100% of the shares in a land development company. Progress Ltd. since 2004. Progress Ltd acquired a bare piece of land on 31 August 2005 for $50,000 for future development. The Pui Family Tmst bought a commercial property on 1 January 2009 as a long term investment property and sold it for $3,000,000 on 31 December 201?. Artichoke's wife wants to purchase a residential building as a long term rental investment. However. she is concerned at the possibility of Progress Ltd's land development activities "tainting" the tax status of the residential building. Artichoke's sister. Broccoli. bought two properties: - A house for $400,000. The title of the house was transferred into her name on 3 September 2014. When she bought the house. she had planned to do it up and sell it after completion. However, she then decided to just let the house as it was. 0n 5 October 201?, she entered into a sale and purchase agreement to sell the house for $1 million. - An apartment for $570,000 as a long term investment property. Due to nancial difculties, she decided to sell the apartment. The sale and purchase agreement was entered into on 2 October 2015 and the title of the house was transferred into her name on 2 November 2015. On 23 September 201?. she entered into a sale and purchase agreement to sell the apartment for $1.5 million and the title of the apartment was ultimately transferred to the buyer on 23 December 201?. ISSUE 3A (5 Marks) Is the income from the sale of the commercial property by the Pui Family Trust subject to income tax? CONCLUSION ISSUE 33 (5 Marks) Will Progress Ltd's land development activities "taint" the tax status of the residential building if it is bought by Artichoke's wife? CONCLUSION Question three continued ever page.-. Question three continued ISSUE 3C (5 Marks) Is the income from the sale of Broccoli's house subject to income tax under Section CB 6 or Section CB 6A? CONCLUSION REASONING ISSUE 3D (5 Marks) Is the income from sale of the apartment by Broccoli be subject to income tax under s CB 6A? CONCLUSION REASONING [TOTAL: 20 MARKS]Question four continued ISSUE 4c (5 Marks) ls $1,000 the amount of FIF (Foreign Investment Fund) income that should be attributed to Green Jade Ltd from White Diamond Ltd for the year 2017-18? Show all workings in your reasoning. CONCLUSION ISSUE 4D (5 Marks) Is there a tax regime that allows Green Jade Ltd to reduce the effect of non-resident withholding tax for the non-resident shareholder? Assume the non-resident withholding tax rate is 15% and New Zealand does not have a bilateral treaty with the other oou ntry. CONCLUSION [TOTAL: 20 MARKS] QUESTION FIVE ISSUE 5A (5 Marks) tax policy? Are there any principles that have guided the New Zealand government in the design of international CONCLUSION REASONING .. ..... ISSUE 5B (5 Marks) Is the "Permanent Establishment" concept relevant for taxing cross-border business income? CONCLUSION REASONING . . . ... ISSUE 5C (5 Marks) Are there any tax constraints on the amount a foreign owned New Zealand company can borrow relative to the amount of its equity funding? CONCLUSION REASONINGSECTION HG 5 Disposal of Partner's Interests When this section applies (1) This section applies when a person disposes of some or all of their partner's interests (the current interests) in a partnership, if the amount calculated using the following formula is less than zero: disposal payment + previous payments - (gross tax value - liabilities) - $50,000. SECTION HG 11(3): PARTNER'S BASIS The amount that is the partner's basis is calculated using the following formula: investments - distributions + income - deductions - disallowed amount SECTION LP 2 Tax Credits for Supplementary Dividends Amount of credit (2) For the tax year corresponding to the income year in which the company pays the dividend, the company has a tax credit equal to an amount calculated using the formula- credit amount x 54 + 119. SECTION YB 1(3) TESTS: Association The tests of association are categorised as follows: (a) two companies, section YB 2; (b) a company and a person other than a company, section YB 3; (c) two relatives, section YB 4; (d) a person and a trustee for a relative, section YB 5; (e) a trustee and a beneficiary, section YB 6; trustees with a common settlor, section YB 7; (g) a trustee and a settlor, section YB 8; (h) a settlor and a beneficiary, section YB 9; a trustee and a person with a power of appointment or removal, section YB 11; a partnership and a partner, section YB 12; look-through companies and owners of interests, section YB 13; two persons who are each associated with the same third person, section YB 14.QUES'HON FOUR Green Jade Ltd is a NZ resident company. You are provided with the following information. Green Jade Ltd has a wholly owned subsidiary, Blue Opal Ltd, incorporated in the Isle of Man. Blue Opal Ltd does not cany any active business but mainly derives income from term deposits held with a bank in the Isle of Man. Green Jade Ltd receives net rental income of $50,000 from a property in the UK. Foreign tax paid in the UK on this property is $15,000 in 2017-18. In 2017-18, Green Jade Ltd receives a dividend of $1,000 from its 5% shareholding in a Singaporean company, White Diamond Ltd. On 1 April 2017, the market value of these shares was $30,000. On 1 April 2018, the market value of these shares was $40,000. Atotal of 2,000 shares were purchased during the year 2017-18. Green Jade Ltd pays a dividend of $7,200 (imputation credit is $2,800) to a non-resident shareholder (with only 6% voting interest in the company) during the year 2017-18. ISSUE 4A (5 Marks) ls Blue Opal Ltd's income from term deposits derived from the Isle of Man subject to tax in New Zealand? CONCLUSION ..... ------------------------------------------------------------------------------------------------------------------ ISSUE 43 (5 Marks) Is the rental income from the UK subject to NZ tax and can Green Jade Ltd claim a foreign tax credit of $15,000? CONCLUSION REFERENCES TAX RATES Individuai's Taxabie Income Up to $14,000 10.5% $14,001 - $48,000 17.5% $48,001 - $70,000 30.0% $70,001 and over 33.0% Company Tax Rate 28% Resident Withholding Tax on Dividends 33% Trustee Tax Rate 33% SECTION CB 6 DISPOSAL: LAND ACQUIRED FOR PURPOSE OR WITH INTEN'I10N OF DISPOSAL SECTION CB 6A DISPOSAL WITHIN 2 I5 YEARS: BRIGHT-LINE TEST FOR RESIDENTIAL LAND SECTION CB 9 DISPOSAL WITHIN 10 YEARS: LAND DEALING BUSINESS SECTION CB 10 DISPOSAL WITHIN 10 YEARS: LAND DEVELOPMENT OR SUBDIVISION BUSINESS SECTION EW 31 (5) FORMULA: Base Price Adjustment The formula is: consideration - income + exgenditure + amount remitted SECTION EX 52 QUICK SALES ADJUSTMENT Quick sale adjustment is the lesser of (a) the total of the amounts (the peak holding method amount) calculated for each FDR interest using the formula in subsection (10); (b) the total of the amounts (the quick sale gain amount) calculated for each FDR interest using the formula in subsection (14), treating a negative total as being zero. Peak hoiding method amount tormuia The formula is 0.05 at peak holding differential x average cost. Quick sale gain amount fannuia The formula, for each acquisition or increase in the attributing interest that is disposed of or reduced in the unit valuation period, is gain - (interest x average cost). The following instructions apply to QUESTIONS TWO, THREE, FOUR and FIVE. For Questions Two, Three, Four and Five, there are several statements of relevant fact with the tax issues identified. You are required to state your conclusion for each tax issue listed and to provide the reasoning underlying each conclusion. No marks are awarded if your reasoning is not provided. Please note that "justify your answer" means that you are required to defend your answer by giving reasons for arriving at your conclusion. All amounts are expressed in New Zealand currency. All taxpayers are New Zealand tax residents (except for Questions Four and Five) 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. QUESTION TWO Dolphin Tours Lid operates Sealion motel, a tourist motel in the Marlborough Sounds. Baron and his wife Baroness are the shareholder-employees of Dolphin Tours Lid. During 2017-18, Baron's mother, Duchess, sells her private art collection to Dolphin Tours Lid for $80,000 and the company intends to display it in the motel's reception area. The market value of the art collection is $70,000. On 1 April 2017, Baron lends $20,000 to his friend Walrus. Walrus was unable to repay the debt in full and arranges a payment of 60 percent in full and final satisfaction of the debt at the end of the year which Baron accepted. Baroness has acquired a few vehicle registration plates a few years back as an investment as her brother told her it is a good investment. Now she has decided not to keep them. She sold all of them to a friend and made a loss of $1,000. Ten years ago, Baron and Baroness established the Royal Family Trust. The beneficiaries of the trust are Charles and Camelia. Both beneficiaries are under 16 years of age and have no other income. Recently, the trust also invested in the ANZ term PIE (portfolio investment entity). ISSUE 2A (5 Marks) Will the sale of Duchess's art collection to Dolphin Tours Lid for $80,000 be treated as a fringe benefit for income tax purposes? CONCLUSION . . . .. REASONING . . .. . ISSUE 2B (5 Marks) Will the loss from the sale of Baroness's vehicle registration plates be tax deductible? CONCLUSION Question two continued over page...ISSUE so (5 Marks) Are there any differences in taxing a foreign branch and a foreign subsidiary of a New Zealand company? CONCLUSION [TOTAL: 20 MARKS]