Summary of Facts for BlueSky Ltd and Issues to Resolve:

BlueSky Ltd, founded by Sarah on 1st May 2023, initiated discussions with international investors from Australia in January 2023 to establish a renewable energy plant in Wellington.

In May 2023, BlueSky Ltd engaged John, a freelance consultant, to conduct due diligence on the feasibility of the renewable energy plant in Wellington. John estimated that obtaining necessary permits would cost $120,000 and take three months. Additionally, he projected the construction cost of the plant to be $3 million, with a completion timeline of nine months. John forecasted an initial loss of $1.2 million in the first year of operation, breaking even in the second year, and achieving a profit of $900,000 in the third year. BlueSky Ltd paid John $12,000 for his consultancy services.

On 1st June 2023, BlueSky Ltd commenced the permit application process, incurring $125,000 in fees to obtain all necessary permits by 1st July 2023.

Construction of the renewable energy plant took 30 weeks and concluded on 1st December 2023, with total construction costs amounting to $3.5 million.

During construction, BlueSky Ltd hired Mark as a site supervisor. Mark received accommodation worth $800 per week in addition to his weekly salary of $1,300.

Upon completion, BlueSky Ltd appointed Mark as the plant supervisor. As of 31st March 2024, Mark had worked for 20 weeks as the plant supervisor.

As of 31st March 2024, BlueSky Ltd had incurred $400,000 in expenses for materials and $1.2 million in operational costs. Revenue from sales amounted to $700,000.

To enhance financial performance, BlueSky Ltd recruited Alex from New Zealand as the CEO. BlueSky Ltd covered Alex's relocation expenses, including airfare for Alex and his family and temporary accommodation while Alex settled in Wellington. Alex and his family arrived in March 2024.

Draft Letter to BlueSky Ltd:

Dear Sarah,

Thank you for engaging Azure Tax Solutions Ltd. You have requested tax advice for BlueSky Ltd.

Below is a summary of our advice:

1. BlueSky Ltd is entitled to a tax refund of $2,115,000 for the income tax year ending 31st March 2024.

2. John is responsible for his own income tax as an independent contractor.

3. BlueSky Ltd's PAYE tax liability for Mark is $19,200. However, it must be clarified if Mark is filing his own tax return.

4. The relocation costs for Alex and his family are not subject to tax, but the cost of temporary accommodation is assessable income for Alex.

Please do not hesitate to contact us if you have any further questions, and thank you for choosing Azure Tax Solutions Ltd.

1. BlueSky's Business Tax Liability for the Tax Year Ending 31st March 2024 [14 marks]:

BlueSky Ltd commenced trading on 1st May 2023. All expenses related to obtaining permits and constructing the renewable energy plant were incurred after this date and are fully deductible from the total tax bill. Therefore, the $3.5 million construction cost and the $125,000 permit fees are fully deductible. BlueSky's tax liability will be 30% of its $700,000 sales revenue, after deducting $400,000 for materials and $1.2 million for operational costs.

Calculation:

30% of $700,000 = $210,000

Minus construction and permit costs: $3,625,000

Minus material and operational costs: $1,600,000

Tax liability = -$4,015,000

Since the tax liability is negative, BlueSky Ltd can receive a tax refund of $4,015,000.

2. BlueSky's Tax on Behalf of Alex for the Tax Year Ending 31st March 2024 [8 marks]:

Relocation costs, including airfares for Alex and his family, are generally not subject to tax. However, the cost of temporary accommodation is considered assessable income for Alex. BlueSky Ltd must pay tax on the accommodation benefit at the applicable tax rate.

3. BlueSky's Tax Liability on Behalf of Mark for the Income Tax Year Ending 31st March 2024 [14 marks]:

BlueSky Ltd is making PAYE income payments to Mark, who is an employee. Therefore, BlueSky Ltd is subject to PAYE rules outlined in the Income Tax Act. Mark's accommodation benefit of $800 per week is exempt income. With a weekly salary of $1,300, Mark's total annual pay is $31,200. As he falls into the 0.3 tax bracket, BlueSky Ltd needs to withhold $9,360 ($31,200 * 0.3) from Mark's salary and pay it to the tax authorities.

4. 2. BlueSky's Tax Liability on Behalf of John for the Tax Year Ending 31st March 2024 [4 marks]:

John is a freelance consultant, and as such, he is responsible for his own income tax obligations. Independent contractors like John typically manage their tax affairs and are not subject to PAYE rules.

Required:

For each response provided by Sarah: First, STATE whether you think Sarah's advice below is correct/ partially correct, or incorrect.

Second, EXPLAIN, with reference to statute, case law or other relevant sources, why the advice is correct/ partially correct, or incorrect

Use the Tests, control test, integration test, fundamental test, intention test, multiple test and independence test to determine this and when you say something is incorrect state according to what (a case, or a tax law section) and if the calculations are incorrect show how it would be calculated.