Question 6 Business Tax Liability and Penalties (10 marks) Part A: Business Tax Liability Alvin and Lydia emigrated to New Zealand before the Covid-19 lock down. They have been living off their savings so far. One of their friends owns two separate companies and is having financial difficulties due to the loss of income during the lock down. Their friend has convinced Alvin and Lydia to buy one of his companies at a depressed price. The company (Superior Cleaners Ltd) has existing clients that Alvin and Lydia will take over when they purchase the company. After consulting with family and friends, Alvin and Lydia have purchased Superior Cleaners Ltd and will start operations on 1 July 2020. The financial statements of Superior Cleaners Ltd shows that the company made profits of $120,000 for the tax period ending 31 March 2020. Alvin and Lydia expect to make a profit of $90,000 for the tax period ending 31 March 2021. Alvin and Lydia are not familiar with the New Zealand tax system and have come to you for tax advice. (a) Explain to Alvin and Lydia how the tax liability of a business is calculated. Provide specific references to ITA 2007. (1 mark) (b) Explain to Alvin and Lydia what provisional taxpayer' means, what is provisional tax and how often provisional tax needs to be paid. Provide appropriate references to ITA 2007. (2 marks) (c) What are the options for calculating provisional tax? Which option should Alvin and Lydia choose? Explain. (2 marks) Part B: Penalties Mark Ingils is a New Zealand tax resident. He works as a security officer in New Market and earns a salary. His other income is made up of rental income, dividends, and interest sourced from various investments in New Zealand and Australia. Mark recently engaged R&M Chartered Accountants, to prepare his 2019/20 income tax return. However, Mark made little effort to check the completeness of the information that he had on hand and gather the required information and documents. Mark is aware that his return will be prepared from the information provided by him to R&M Chartered Accountants. R & M subsequently used the information Mark had provided to complete his 2019/20 Tax returns. Mark later discovered that he had omitted providing information on $12,000 of rental income he earned in this period in New Zealand and $1,500 of dividends income from Australian shares. Required: Discuss whether you consider Mark would be subject to a shortfall civil penalty. If he is subject to a penalty, then what type of shortfall penalty is likely to be imposed. What can Mark do to reduce the amount of penalty if any is imposed? Provide legislative references to support your explanations. (5 marks) Question 6 Business Tax Liability and Penalties (10 marks) Part A: Business Tax Liability Alvin and Lydia emigrated to New Zealand before the Covid-19 lock down. They have been living off their savings so far. One of their friends owns two separate companies and is having financial difficulties due to the loss of income during the lock down. Their friend has convinced Alvin and Lydia to buy one of his companies at a depressed price. The company (Superior Cleaners Ltd) has existing clients that Alvin and Lydia will take over when they purchase the company. After consulting with family and friends, Alvin and Lydia have purchased Superior Cleaners Ltd and will start operations on 1 July 2020. The financial statements of Superior Cleaners Ltd shows that the company made profits of $120,000 for the tax period ending 31 March 2020. Alvin and Lydia expect to make a profit of $90,000 for the tax period ending 31 March 2021. Alvin and Lydia are not familiar with the New Zealand tax system and have come to you for tax advice. (a) Explain to Alvin and Lydia how the tax liability of a business is calculated. Provide specific references to ITA 2007. (1 mark) (b) Explain to Alvin and Lydia what provisional taxpayer' means, what is provisional tax and how often provisional tax needs to be paid. Provide appropriate references to ITA 2007. (2 marks) (c) What are the options for calculating provisional tax? Which option should Alvin and Lydia choose? Explain. (2 marks) Part B: Penalties Mark Ingils is a New Zealand tax resident. He works as a security officer in New Market and earns a salary. His other income is made up of rental income, dividends, and interest sourced from various investments in New Zealand and Australia. Mark recently engaged R&M Chartered Accountants, to prepare his 2019/20 income tax return. However, Mark made little effort to check the completeness of the information that he had on hand and gather the required information and documents. Mark is aware that his return will be prepared from the information provided by him to R&M Chartered Accountants. R & M subsequently used the information Mark had provided to complete his 2019/20 Tax returns. Mark later discovered that he had omitted providing information on $12,000 of rental income he earned in this period in New Zealand and $1,500 of dividends income from Australian shares. Required: Discuss whether you consider Mark would be subject to a shortfall civil penalty. If he is subject to a penalty, then what type of shortfall penalty is likely to be imposed. What can Mark do to reduce the amount of penalty if any is imposed? Provide legislative references to support your explanations
