Week 1 Flashcards
Why do we have taxes?
For financial expenditures (hospitals schools etc), to achieve economic goals (eg discourage people using petrol cars by taxing petrol etc), and to redistribute income to achieve social objectives
What type of taxes do we have?
Direct taxes (Assessed on and collected from person intended to bear it, Income tax).
Indirect taxes (Tax collected by intermediary from person that bears it, GST and Duties)
Sources of Tax Law
Primarily Statute law (Income tax act 2007, G&S Tax act 1985, Tax administration act 1994, maxation review authorities act 1994, inland revenue acts and several other acts),
Delegated legislation (Regulations and determinations)
Case Law/Common Law (NZ courts (eg Supreme court etc) and foreign courts)
Administration of tax system
Commissioner of Inland Revenue (CIR)
COE of Inland Revenue Department (IRD)
CIR charged with care and management of taxes
Duty to collect over time highest net revenue practicable having regard to
Resources available to CIR
Importance of promoting voluntary compliance
Compliance costs incurred by taxpayers
CIR delegates powers and functions to IRD employees
NZ tax system relies on self-assessment
Inland revenue publications
Binding rulings (Binding on IRD not taxpayer) (eg Public ruling, private ruling and product ruling)
Policy and Interpretation Statement (Not binding) (eg Interpretation statement, standard practice statements, questions we’ve been asked)
General Publications (eg tax info bulletin, inland revenue guides).
What is income tax
Tax on a persons income
Determining taxable income
Subtracting any available tax loss that a person has from their net income
A persons annual total deduction for the tax year
Total of their deductions that are allocated to the corresponding income year
Taxable income is
Annual gross income
less
Annual total deductions
equals
Net Income
less
Available Tax Losses
equals
Taxable Income
Assessable income
The amount of income that is not
Exempt income, Excluded income or non-residents’ foreign sourced income
An amount is income if
It is income under ordinary concepts (Case law)
or if it is income under a provision in part C of the act (modifies ordinary concepts)
Income defined under ordinary concepts is
something that comes in (a receipt) and it is money or money’s worth
What is not income?
Income is not what is saved from going out
Income is not something that cannot be converted to money
Income is not a receipt that is a
Windfall gain; or
Capital receipt
Non-income receipts examples
Use of colour TV for subscribing for debenture
(Dawson v CIR (1978) 3 NZTC 61,252)
Overseas holiday for meeting sales target
(FCT v Cooke & Sherden 80 ATC 4140)
Employer providing employee with use of a motor vehicle
What is a windfall gain?
Something that comes in
Something that is money or convertible to money
BUT not income
Windfall gain examples
Gifts
Donations
Inheritances
How is windfall gain different from income
No reciprocity (eg was something received in return, did the payer benefit from the payment or was the benefit not conditional/dependent on the payment)
Voluntary (eg was there an obligation to make the payment)
Character in hands of recipient (eg Used for maintenance and sustenance).
Reason for receipt (eg Particular occasion, personal characteristic)
Windfall Gains Characteristics
No reciprocity (Was something received in return? Payer did not receive benefit from the payment OR
Benefit not conditional/dependent on the payment)
Voluntary (Was there an obligation to make the payment?)
Character in hands of recipient (Used for maintenance & sustenance?)
Reason for receipt (Particular occasion or Personal characteristic)
Windfall Gain or Income Example 1
Louisson v C of T [1943] NZLR 1
Taxpayer resigned from job to enlist in Army
Employer decided to pay difference between Army pay and former salary
Commissioner included payment in assessable income
Was the receipt income?
Voluntary payment
Employment relationship had ceased
Not received as reward for services performed
Gift rather than income
Windfall Gain or Income Example 2
Blakiston v Cooper (Surveyor of Taxes) [1909] AC 104 (HL)
Church minister received collections made at church services
Paid to minister on regular basis over a number of years
Surveyor included collections in assessable income
Was the receipt income?
Received collections by reason of office
Continuity of receipt
Not result of special purpose or occasion
Used for minister’s maintenance
Amounts received were income
What is a Capital Receipt
Capital Receipt
Something that comes in
Something that is money or convertible to money
BUT not income
Example
Selling a capital asset
How do we distinguish from income?
Capital Receipt vs Income
Tree on the Land versus Fruit of the Tree
Periodicity, recurrence, or regularity of receipt
- Indicative that income rather than capital
- Interest / Rent / Dividends / Wages
Capital receipt tends to be non-recurring
- BUT one-off nature not conclusive
- Bonus / interest paid on maturity
Quality in recipients hands
- Is receipt for the “tree” or the “fruit”?
Income vs Capital Example 1
Chris owns shares in A1 Accountancy Services Ltd
A1 carries on the business of providing accountancy services
Chris receives an annual dividend from A1
Chris decides to retire from the accountancy business
Chris sells his shares
Is the receipt income?
Shares in A1 were Chris’s tree
Held to derive dividends
Receipt is capital not income
Income vs Capital Example 2
Chris uses the money from the sale of the A1 shares to buy shares in Apple Inc
As he is retired he has plenty of time to follow the stock market
He regularly buys and sells Apple shares as the market fluctuates
He makes $100,000 from buying and selling these shares
Are the receipts from selling Apple shares income?
Shares in Apple are Chris’s fruit
Held to make a gain on sale
Receipt is income not capital
Income under Part C of the ITA 07
Part C of the ITA 07 identifies amounts that are
- Income
- Exempt Income
- Excluded Income
Provisions in Part C operate in variety of ways
- Confirm ordinary concepts income amounts are income
- Deem amounts that are capital to be income
- Deem income where there is no receipt
- Make some income amounts exempt income
- Make some income amounts excluded income
Income derived from a business
An amount that person derives from a business is income
Does not apply to an amount that is of a capital nature
Amounts derived from a business Example 1
Mr G is a real estate agent and Mrs G a medical doctor
They purchase a run down farm property of 216 acres
Pasture infested with gorse and fencing non-existent
Intention to convert to economic farming unit
Commence organised programme to develop the property
Had between 25 to 109 cattle on property over relevant years
Over 13 year period Mr G spent large amount of time working on property
For 6 years in question farming activity made a loss
Was this a business?
Factors pointing to a business
Land area sizeable
With development could provide suitable ROI
Continuity of effort over 13 years
Organised and systematic nature of development
Farming operation followed usual pattern
Invested considerable amount of time and money
Maintained proper accounts
Amounts derived by the owner of the land
An amount the owner of land derives is income if it is from
- A lease, licence, or easement affecting the land; or
- The grant of a right to take the profits of the land; and
- The amount is
- Rent
- A premium
- A payment for the benefit of a statutory licence
- A payment for the benefit of a statutory privilege
- Other revenues
Amounts derived from employment
Following amounts person derives in connection with the person’s employment or service are income:
- Salary, wages, bonuses, allowances, and extra pays
- Expenditure on account of an employee
- Value of accommodation provided to person
- A benefit under a share purchase agreement
- Compensation for loss of employment or service
- Directors’ fees
- Any other benefit in money
Exempt Income Examples
Section CW 26 - Jurors’ and witnesses’ fees
Section CW 17 - Reimbursement amounts paid to employees
Section CW 33 - Some accident compensation payments
Section CW 39 – Income of local authorities
Sections CW 41 and CW 42 – Income of tax charities
Does Assessable income include example income?
No
Income derived directly or indirectly from business carried on by, or for benefit of trust, society, or institution that is a tax charity is exempt income if:
Charitable purposes carried out in New Zealand; and
no person with some control over business is able to direct or divert amount derived from business to benefit or advantage of person other than tax charity
Charitable purposes inside and outside NZ
- must apportion between charitable purposes
Covers a charities income from a business
- E.g. Operating an Op Shop
Excluded Income Examples
Section CX 3 - Fringe Benefits
Section CX 47 - Government Grants
Section CX 49 - Employer’s Superannuation Contribution
Section CX 51 – Income Equalisation Deposits
Does Assessable income include excluded income?
No
What is Non-Residents’ Foreign Sourced Income
Anamountofincomeof apersonisnon-residents’ foreign-sourced incomeif
- theamountis aforeign-sourced amount; and
- the personis anon-residentwhen it is derived
