Assumed knowledge quiz questions and solutions

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1 Taxation New Zealand (1) 2018 (TAXNZ118) Taxation New Zealand Assumed knowledge quiz questions and solutions charteredaccountantsanz.com Last updated: 23 November 2017 taxnz118_assumed knowledge quiz_01

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3 Chartered Accountants Program Taxation Assumed knowledge quiz Questions Question 1 Larry is a New Zealand tax resident but regularly travels around the world earning income from his job as a systems engineer. Larry works for New Zealand customers and also has a UK bank account upon which he earns interest. Which of the following statements is correct? A Larry is only subject to tax on the income he earns in New Zealand. Larry is subject to tax on his worldwide income because he is a New Zealand tax resident. C Interest is not taxable in New Zealand as it is sourced in the UK. D ecause Larry travels regularly, he is an international tax resident and exempt from tax in New Zealand. Question 2 What is a double tax agreement? A An agreement between two businesses over which will report certain expenditure in their respective income tax returns. An agreement between the trustees of a trust over which trustee will pay the income tax of the trust. C An agreement between two countries that is designed to ensure taxpayers do not have to pay income tax on the same income in both countries. D The legislation that provides for both income tax and goods and services tax in New Zealand. Question 3 Which of the following statements most accurately reflects the characteristics of a business for New Zealand tax purposes? A An activity that generates a net profit before tax. An activity that is not a personal hobby. C An activity carried out with the intention to make a profit, organized in a business-like way and supported by sufficient actions of the taxpayer to realize the intention. D Any activity that derives assessable income. Question 4 Which of the following is an example of a consumption tax? A Income tax. Goods and services tax. C Withholding tax. D Capital gains tax. Assumed knowledge quiz Page 1

4 Taxation Chartered Accountants Program Question 5 What is the main difference between a look-through company and an ordinary company? A Look-through companies do not have limited liability for the shareholders while ordinary companies do. Look-through companies can only hold rental properties while ordinary companies can hold anything. C Profits and losses of look-through companies are allocated to the shareholders while ordinary companies are treated as taxpaying entities in their own right. D Look-through companies and ordinary companies are incorporated under different Acts. Question 6 Mr Smith, a New Zealand tax resident, derives a gross dividend of $10,000 with imputation credits of $2,800 and $500 of RWT. The dividend is Mr Smith s only income for the year. Which of the following statements describes the tax outcomes for Mr Smith most accurately? A Mr Smith is liable for tax of $1,050 on his dividend income, at the 10.5% personal tax rate. This tax is satisfied by all of the RWT and a portion of the attached imputation credits. The remaining imputation credits will be refunded. Mr Smith is liable for tax of $1,050 on his dividend income, at the 10.5% personal tax rate. This tax is satisfied by a portion of the imputation credits. The remaining imputation credits will be carried forward, and the RWT credits will be refunded. C Mr Smith is liable for tax on the dividend at the company tax rate of 28% because the income was derived from a company. The tax liability is $2,800 which is satisfied by the imputation credits. The RWT credits will be refunded. D Dividends that are fully imputed are exempt in the hands of the shareholders because the company has paid sufficient tax on the underlying profits when they were derived by the company. Question 7 Four eligible wholly owned companies form a consolidated group at the start of the income year on 1 April Which of the following is not a tax consequence of forming a tax consolidated group for income tax purposes? A Current year income and expenses can be offset between members of the group without the need for elections or subvention payments. A single tax return is filed for all four companies. C Transactions between the companies are ignored for tax purposes. D A single GST return is filed for group as a whole. Page 2 Assumed knowledge quiz

5 Chartered Accountants Program Taxation Question 8 On 1 April 2016, ob s akery Limited acquired a $1,000,000 (excluding GST) depreciable asset (a croissant machine) which is to be depreciated using a 16% diminishing value (DV) rate. What is the depreciation loss for the croissant machine for the years ended 31 March 2017 and 31 March 2018? A $160,000 and $134,400. $160,000 and $160,000. C $160,000 and $105,000. D $40,000 and $153,600. Question 9 For income tax purposes, which of the following statements most accurately describes assessable income? A It is determined by the courts in cases brought by the Commissioner of Inland Revenue or a taxpayer. It is prescribed in s. D 1(5) of the Income Tax Act 2007 (ITA 2007). C It is the gross income of the taxpayer less allowable deductions of the taxpayer. D It is the income derived by the taxpayer before any allowable deductions. Question 10 For income tax purposes, which of the following statements most accurately describes the test for determining whether expenditure is an allowable deduction? A deduction is permitted: A If it is explicitly permitted by the Income Tax Act 2007 (ITA 2007). If the taxpayer is carrying on a business that earns assessable income. C If A (above) and (above). D Where it has a nexus with income, satisfies the general permission and is not denied by any of the general limitations set out in the ITA Question 11 Which of the following attributes are principles that need to be adhered to when a Chartered Accountant provides tax planning compliance advice to clients? A Integrity, professional behaviour and confidentiality. Professional behaviour, objectivity and integrity. C Confidentiality, professional competence, and due care and objectivity. D All of the above. Assumed knowledge quiz Page 3

6 Taxation Chartered Accountants Program Question 12 Frank acquired 30 hectares of land on the outskirts of a metropolitan area in New Zealand. His intention is to divide the land into six lifestyle blocks to sell, with plans to complete and sell one block each year. Which of the following statements most accurately describes the tax consequences of the land development for Frank? A New Zealand does not tax land sales because it does not have a capital gains tax. Land sales are only taxable if you carry on a business related to land. C A land sale is potentially subject to tax if the land was acquired for the purpose of disposal. D The land sale is not subject to tax provided Frank is not a foreign investor. Question 13 A retailer has unsold trading stock on hand at year end. This stock is made up of some stock purchased during the year and some stock acquired in the previous income year. Which of the following statements best describes the tax consequences? A The trading stock purchased in the previous year is written off as obsolete; a deduction can be claimed for current year purchases; and the stock on hand at year end is added back as income. The trading stock purchased in the previous year is deducted; a deduction can be claimed for current year purchases; and the stock on hand at year end is added back as income. C The trading stock purchased in the previous year is added back as income; a deduction can be claimed for current year purchases; and the stock on hand at year end is deducted as an expense. D The trading stock purchased in the previous year is deducted; no consequences arise for the current year unsold stock; and the closing stock is added back as income. Question 14 Which of the following statements is false in relation to New Zealand s depreciation regime? A Land is not depreciable as it generally does not decline in value. A taxpayer may elect to deduct the amount it has calculated as its accounting depreciation in its income tax return. C Intangibles assets without a fixed life are not depreciable. D A taxpayer does not need to be carrying out a business to claim a depreciation deduction. Question 15 Which of the following circumstances constitute tax avoidance? A Entering into an arrangement that has tax avoidance as its purpose or effect. Directly or indirectly altering the incidence of income tax by causing the income to be taxed at a lower rate or not at all. C Reducing a GST-registered person s liability to pay GST, or increasing the entitlement of a GST-registered person to a refund of GST. D All of the above. Page 4 Assumed knowledge quiz

7 Chartered Accountants Program Taxation Question 16 What are some types of long-term savings vehicles that are available in New Zealand? A Portfolio investment entities (PIEs), 401(k)s, unit trusts and individual retirement accounts (IRAs). PIEs, group investment funds (GIFs), KiwiSaver and unit trusts. C Unit trusts, KiwiSaver, GIFs and IRAs. D KiwiSaver, 401(k)s, PIEs and GIFs. Question 17 Which of the following statements is false in relation to the taxation of financial arrangements? A The financial arrangement rules require taxpayers to spread income and deductions over the life of the arrangement. The financial arrangement rules exist so that taxpayers cannot enter into arrangements that advance deductions and defer revenue (therefore reducing their tax liability). C The financial arrangement rules are optional and taxpayers need to elect to use them. D There are excepted financial arrangements that are not subject to the rules, including employment contracts, bets, insurance contracts and membership in a superannuation scheme. Question 18 Which of the following legislative schemes relate to taxation of the primary sector: (i) herd scheme; (ii) emissions trading scheme; (iii) income equalisation scheme; (iv) adverse event income equalisation scheme? A (i), (iii) and (iv). (i), (ii) and (iii). C (ii), (iii) and (iv). D (i), (ii) and (iv). Question 19 Which of the following statements about general (i.e. not limited) partnerships are correct? (i) A partnership is an agreement between two or more parties to operate a business together and share in the income, expenses and obligations of that business. (ii) Each partner is personally taxed on their share of the partnership profit. (iii) All partners in a partnership are responsible for debts incurred by other partners. (iv) A partnership cannot own any assets. A (i), (ii) and (iii). (ii), (iii) and (iv). C (i), (iii) and (iv). D All of the above. Assumed knowledge quiz Page 5

8 Taxation Chartered Accountants Program Question 20 When a trustee of a complying trust derives an amount of income, what options are available in order to distribute that amount to a beneficiary? A The trustee pays tax, receives an imputation credit for the tax paid and attaches the imputation credit to the amount distributed. The trustee must pay tax on the income amount itself and then distribute the amount as a tax free distribution of accumulated income. C The trustee may decide to either distribute the amount to the beneficiary to be taxed at the beneficiary s marginal tax rate, retain the amount as trustee income or a combination of both. D Trusts are transparent from a tax perspective and all income is taxed in the hands of the beneficiary. Page 6 Assumed knowledge quiz

9 Chartered Accountants Program Taxation Assumed knowledge quiz solutions Question 1 The correct answer is. A and C are incorrect as New Zealand tax residents are taxed on their worldwide income, not just on amounts derived in New Zealand. D is incorrect as Larry s permanent place of abode deems him to be a New Zealand tax resident. Question 2 The correct answer is C. A, and D are incorrect. A double tax agreement is an agreement between two countries that is designed to ensure taxpayers who are resident in one country but have income in another do not have to pay income tax in both jurisdictions on the same income. Question 3 The correct answer is C as held by case law such as Grieve v. CIR (1984) 6 NZTC 61,682. A, and D are incorrect. A business may be found despite no net profit being derived. Further, an activity that derives income and makes a profit may lack the necessary actions to amount to a business (and simply be a passive investment). A business may be based around a hobby if the hobby is carried out with the elements of a business. Question 4 The correct answer is. Goods and services tax is an example of a consumption tax. This tax is added to the price of goods or services. A, C and D are incorrect. Question 5 The correct answer is C. A, and D are incorrect. Generally speaking from a legal perspective, a look-through company is the same as an ordinary company. They have limited liability for shareholders, they are incorporated under the same Act and can hold the same assets. The main difference is that look through companies are transparent for tax purposes, meaning that the income and expenses, assets and liabilities are treated as being earned and held by the shareholders. Question 6 The correct answer is. A, C and D are incorrect. When dividends are received by individual investors resident in New Zealand, the dividends are generally taxed at the recipients marginal tax rate. A tax credit is available for any credit attached to the dividend - usually imputation credits or RWT credits. Imputation credits are used before RWT credits.. Excess imputation credits are carried forward while excess RWT credits are refunded. Assumed knowledge quiz Page 7

10 Taxation Chartered Accountants Program Question 7 The correct answer is D. A, and C are incorrect. A consolidated group has the broad effect of treating all the members of the group as a single company for income tax purposes. The GST consequences for the companies are unaltered. Question 8 The correct answer is A., C and D are incorrect. The depreciation is calculated as follows: 31 March 2017 Cost ($1,000,000) DV rate (16%) = $160, March 2018 Opening book value ($1,000,000 $160,000) DV rate (16%) = $134,400. Question 9 The correct answer is. A, C and D are incorrect. Assessable income is a defined term in the Income Tax Act 2007 (ITA 2007) (see ss YA 1 and D 1(5)). Question 10 The correct answer is D. A, and C are incorrect. A deduction is allowed if it satisfies the general permission and is not denied by any of the general limitations set out in the ITA 2007 (see ss DA 1(1) and (2) and DA 2). Question 11 The correct answer is D. All of the attributes listed are ethical principles that must be applied as a Chartered Accountant, including during tax planning engagements. Question 12 The correct answer is C. A, and D are incorrect. While New Zealand does not have a comprehensive capital gains tax, the sale of land held on capital account is subject to income tax in some situations, even when there is no business being carried out. The land rules do not generally distinguish between residents and non-residents. Question 13 The correct answer is. A, C and D are incorrect. Page 8 Assumed knowledge quiz

11 Chartered Accountants Program Taxation Question 14 The correct answer is. A, C and D are incorrect. Depreciation is only deductible for tax purposes if it satisfied the legislative requirements, is calculated using the legislative formula and is based on depreciation rates issued by Inland Revenue. Question 15 The correct answer is D. All of the circumstances mentioned would amount to tax avoidance. Question 16 The correct answer is. A, C and D are incorrect. IRAs and 401(k)s are long-term savings vehicles that are only available in countries outside of New Zealand. Question 17 The correct answer is C. A, and D are incorrect. Question 18 The correct answer is A., C and D are incorrect. The emissions trading scheme is designed to reduce carbon emissions in New Zealand and is not directly related to taxation. Question 19 The correct answer is D. A partnership itself is not taxed, but each partner receives a portion of the profit to return as their taxable income. Partners are jointly and severally liable for debts incurred. The partnership itself does not own the assets, but they are owned jointly by the partners. Question 20 The correct answer is C. A, and D are incorrect. Trusts are not transparent for tax purposes, and the trustee can decide how much of the income to distribute and tax at the beneficiary s marginal tax rate, and how much to retain as trustee income. Assumed knowledge quiz Page 9

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