Week 1 Flashcards by Brad Cvitanich

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

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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)

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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)

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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

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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).

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What is income tax

Tax on a persons income

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Determining taxable income

Subtracting any available tax loss that a person has from their net income

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A persons annual total deduction for the tax year

Total of their deductions that are allocated to the corresponding income year

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Taxable income is

Annual gross income
less
Annual total deductions
equals
Net Income
less
Available Tax Losses
equals
Taxable Income

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Assessable income

The amount of income that is not
Exempt income, Excluded income or non-residents’ foreign sourced income

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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)

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Income defined under ordinary concepts is

something that comes in (a receipt) and it is money or money’s worth

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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

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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

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What is a windfall gain?

Something that comes in
Something that is money or convertible to money
BUT not income

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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?

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?

What is Non-Residents’ Foreign Sourced Income

An amount of income of a person is non-residents’ foreign-sourced income if - the amount is a foreign-sourced amount; and - the person is a non-resident when it is derived