TOPIC 8 INCOME TAX TAX IMPOSITION, CALCULATION, ASSESSMENT & PAYMENT LEARNING OBJECTIVES After studying the material for this week you should be able to: Explain the imposition of income tax; Outline the general format of income tax assessments; Explain the general principles of rebates; Outline the Family Assistance Scheme; Define and calculate provisional tax, residual income tax and terminal tax; Describe Resident Withholding Tax on interest and dividends; Explain assessments and determinations of income tax. Page 1 of Topic 8
Supplementary Readings 1. Supplementary Readings in this Study Guide: Page: (a) Inland Revenue Department (2007). Receiving interest and dividends with tax deducted. Retrieved 24 March, 2009 from the World Wide Web: http://www.ird.govt.nz 18 (b) Inland Revenue Department (June 2006) Aligning Provisional Tax Payments with GST. Tax Information Bulletin (TIB), Vol 18, No 5, pp. 69-74. 22 (c) Inland Revenue Department (2009). Donations, childcare and housekeeper tax credits (formerly rebates). Retrieved 24 March, 2009 from the World Wide Web: http://www.ird.govt.nz 28 Additional Readings 2. Additional Reading Reference: Alley, C., Chan, C., et al (2009). New Zealand Taxation (Chapters 12, 13 & 17 (part), 20 (part)). Wellington: Thomson Brookers. Page 2 of Topic 8
Topic Eight Outline A. TAX IMPOSITION, CALCULATION, ASSESSMENT & PAYMENT 1. Tax imposition - who must pay income tax? 2. The general format of Income Tax Assessments for filing taxpayers. 3. General principle of rebates - distinction between exempt income, deductions and rebates. 4. Tax credits: (i) (ii) (iii) Family Assistance tax credits; Working for Families package (refer to www.ird.govt.nz/family assistance/wff-programme) Overseas tax credit. 5. What are Residual Income Tax, Provisional Tax and Terminal Tax? 6. Introduction to Resident Withholding Tax. 7. Assessments and determinations. Page 3 of Topic 8
This Topic Page 4 of Topic 8
Explanatory Notes (Form of presentation for filing of Taxation Returns e.g. IR3). Also refer to NZT 2009, Table 12.8, pp 456. ANNUAL GROSS INCOME Overseas Income Rent Business income Less: Annual Total Deductions Net Income Plus: Other income Less: Exempt income : Available losses Taxable income TOTAL TAX LIABILITY (calculation required) Less: Allowable Rebates Tax liability Less: PAYE (ex wages, interest ÷nds) Overseas Tax Credit Residual Income Tax Less: Provisional tax paid Tax payable (terminal tax) Page 5 of Topic 8
A. TAX IMPOSITION, CALCULATION, ASSESSMENT & PAYMENT Refer to NZT Chapters 12, 13 & 17 (part) 1. Tax Imposition: who must pay tax? Refer to NZT 12.1 & 12.2.2 1.1 A person who is resident in New Zealand or who has income from New Zealand is subject to New Zealand income tax. Sec.YA 1 no longer defines a person (in a generally applicable sense), or an individual taxpayer. Nevertheless taxpayer and person mean those who are liable to pay income tax. The following are taxpayers/persons, liable to pay income tax on income derived by them: individuals (i.e. natural persons); companies (this includes any body corporate, not just those incorporated under the Companies Act, for example incorporated clubs and societies); local and public authorities (in fact, most of these are specifically exempted from paying income tax); and trusts (the actual liability is imposed on the trustee or trustees). A partnership is not a person. Each member of a partnership is liable for income tax on the person s share of the partnership income for the year. A partnership must however furnish a tax return of partnership income for the year. A company is liable for tax on its income. Up until 31 March 1988 where a company paid dividends from its income to its shareholders, the shareholders were in turn liable for tax on the dividends as these dividends were a form of assessable income. Thus, to some extent, there was double taxation on the income earned by a company. It was taxed as income of the company and, for amounts distributed, again as a dividend in the hands of the shareholders. A general exception to this was where a company was a shareholder of another company. In this case the dividend received by the shareholder company was not assessable income. Dividends passing down through a group of companies were only assessable for income tax when they reached the end of the chain in the hands of a person other than a company. As from 1 April 1988 a full imputation system was introduced and the double taxation of company income ceased. The basic principles of imputation shall be covered in Topic 8. Taxpayers are generally either non-filing or filing [refer NZT 12.3.1]. Nonfiling taxpayers have had tax deducted from all their income at source and their tax liability is the tax they have paid i.e. salary and wage earners. Page 6 of Topic 8
2. Tax Calculation Refer to NZT 12.3 2.1 The General Format of Income Tax Assessments for filing taxpayers Refer to NZT 12.3.2-4 To arrive at the actual income tax payable by an individual person in any income year, the following steps are taken: (1) Determine the annual gross income derived by the person during the year. (2) Deduct annual total expenses, e.g. business and income-related expenditure, depreciation, losses carried forward. The total now arrived at is the taxable income. (3) Calculate the tax payable on the taxable income, using the appropriate tax tables. (4) Deduct the total amount of rebates from the calculation in (3). The answer obtained is the tax payable. Sec BC 6 provides the process for calculating a filing taxpayer s income tax liability. The steps are summarised in a table on page 5 of this topic. Refer to NZT 12.4.1 & 12.9.5, Tables 12.9 & 12.21 3. General Principle of Rebates - Distinction between Exempt Income, Deductions and Rebates Refer to NZT 12.6 3.1 General Principle Behind Rebates As was pointed out in Topic 1 any system of taxation should take account not only of the equality of the burden of taxation between persons having the same taxable incomes, but also between persons in different circumstances. In recognition of this, the Act provides for rebates which are intended to make a token allowance for the personal circumstances of the individual person. Because of this, the rebates are available only to individual persons and in special circumstances, a trustee. They are not available to companies. Page 7 of Topic 8
3.2 Distinction between Exempt Income, Deductions and Rebates (a) (b) (c) Exempt income is income which is specifically exempted from income tax for example, scholarships and bursaries Deductions are expenditures incurred in the production of assessable income which may be deducted [sec DA 1] from total income to determine the amount of income which is assessable for income tax. If the deductions exceed gross income a tax loss is recorded and this may be carried forward to be offset against total income in future tax years. A rebate is a reduction in the taxes payable. It should be noted that a rebate cannot be carried forward to a subsequent tax year. If there is insufficient taxes payable from which to deduct rebates, the rebates are lost forever! This fact is especially important in connection with the taxation of farmers and others when there is some flexibility as to the spread of particular expenses across a number of income years. 3.2.2 Rebates and Tax Credits (1) As part of the wide sweeping changes in tax legislation introduced by the previous Labour Government the rebates available were significantly reduced. However, to ensure families on low incomes did not suffer from the various changes the Family Support Scheme was introduced. Further forms of family assistance schemes have since been added to this system of credits as a means of assisting low and middle-income earning families [refer point 3 below]. (2) Some rebates are still available under various sections in the Act and an individual person may be entitled to a number of these in an income year. The amounts of all the rebates to which the person is entitled are totalled and the total deducted from his/her tax liability for the year. Note that as from the 2001 income year donation and housekeeper rebates are to be claimed on a separate form, IR 526, instead of the income tax return. Where the total rebate exceeds the tax liability for the year, the excess of the rebates is dealt with under Sec BC 8. There is no entitlement to a refund or to carry forward any amount to a subsequent year. Page 8 of Topic 8
(3) Personal Rebates Currently Available A general knowledge of the following rebates presently available is expected. They are: Tax credit rebates (annual tax return adjustment): (a) School child: (Sec.LC3) [Refer NZT 12.6.1]; (b) Transitional tax allowance (Sec.LC4-5) [Refer NZT 12.6.2]; (c) Independent Earners (Sec.LC13) [Refer NZT 12.6.3] (d) Low income rebate (Sec.LC1-2) [Refer NZT 12.6.4]; Repealed from 1 April 2008 Tax credits refunds (claimable on IR526 form) (d) Housekeeper/childcare rebate: (Sec.LC6-8) [Refer NZT 12.7.1]; (e) Donations/Gifts of money rebate: (Sec.LD1-3) [Refer NZT 12.7.2]; (Note: School donations are claimable but school fees (including activity fees) are not. From 1 April 2008 there is no limit on Donations up to one-third of your taxable income. Prior to this the rebate was capped at $630. 4. Tax Credits Refer to NZT 12.5 4.1 Family Assistance Tax Credits Refer to NZT 12.8 Following the abolition of the Family Benefit (terminated 31 March 1987) and the introduction of GST, a Family Support Scheme was introduced from 1 October 1986. This scheme was the first negative tax scheme to be introduced in New Zealand. Since then this system of credits have undergone a few changes and from 1 October 1999 the revamped package is referred to as family assistance made up of family plus and family support. The most recent change is the introduction of the Working for Families package (in the 2004 Budget) and which will be phased in over a number of years to provide more financial support to low and middle-income families. For more information on the current family income assistant packages refer NZT 12.8.1. The schemes are complicated and knowledge of the basic principles is all that is required. Under a negative tax scheme the IRD has Page 9 of Topic 8
payments made to (an individual) person, from taxes paid by others, as a supplement to weekly/fortnightly pay. 4.2 The current family assistance system has 2 distinct parts including the recent changes. Refer to NZT 12.8 for adjustments. To arrive at net specified income means adjusting net income by Part M of the ITA2007, e.g. alimony payments are deductible and alimony received is added for tax credit purposes. 4.3 When studying this topic take general note of (1) The eligibility to receive the tax credits. (2) The differences in the application and operation of the various family assistance tax credits. 4.4 Foreign tax credits Refer to NZT 17.3 Where overseas tax has been paid on income earned overseas, a tax credit is provided for by Subpart LJ of the ITA 2007.The maximum amount of tax credit is specified in Sec. LJ 2 of the Act, and the procedure for ascertaining the New Zealand tax payable on a particular class of income (necessary for determining the tax credit which may be claimed) is set out in Sec. LJ 5 of the Act. The tax credit is the lesser of [refer to NZT 17.3.3]: the actual overseas tax paid on the overseas income; or the New Zealand tax applicable to the overseas income. Example:A person derives the following income in the year to 31 March 2008. Salary (gross) $37,300 PAYE (say) $10,844 Interest (net) New Zealand $760 (RWT $240) Australian $250 (Australian tax $25) All amounts are expressed in New Zealand currency. New Zealand tax: Salary $37,300 Plus: Other income Interest (gross) New Zealand $1,000 Australian $275 (a) Net Income/ Taxable Income $38,575 (c) Tax on taxable income: Page 10 of Topic 8
(d) $9,500 @ 13.75% $1,306.25 $4,500@ 16.75% $753.75 $24,000 @ 21% $ 5,040.00 $575 @ 27% $155.25 $7,255.25 New Zealand tax on Australian interest: Formula Net [Total] Foreign Income (a-b)* x Notional (unadjusted) Tax Liability (d) Net Income (c) $275 x $7,255 = $51.72 $38,575 The tax credit is limited to the smaller of the Australian tax paid of $25.00 or the New Zealand tax payable on the income of $51.72 so the tax credit is $25.00. Note: In the calculation of the tax credit the figure representing the * is the net figure i.e total foreign income (a) deductions (b) which, in our example, is zero; and notional tax liability/payable is the taxpayer s taxable income (net income less available losses brought forward from previous years) x applicable basic tax rate. 5. What are Residual Income Tax, Provisional Tax and Terminal Tax? Refer to NZT 13.4 5.1 Residual income tax 5.2 Provisional tax Refer to NZT 13.4.3 It is generally the total tax payable (on taxable income) less the various tax credits (such as imputation credits, PAYE, RWT and personal rebates). Refer to NZT 13.4.2-16 & 13.4.18. Provisional tax calculation is based on residual income tax. Also, refer to IRD: Provisional Tax booklet. Page 11 of Topic 8
5.3 Terminal Tax From 2008 Provisional tax due dates were changed to align them with GST return and payments dates. Refer to reading (b) from the IRD TIB Aligning provisional tax payments with GST. Generally payments are due on the 28th of the month. The exceptions are the December payment, due on 15 January and the April payment due on 7 May. For example a person with a 31 March 2009 balance date has provisional tax payments due on 28 August 2008, 15 January 2009 and 7 May 2009. See Table 13.15 on p551 of NZT. The Taxation (Business Tax Measures) Act 2009 brought in new measures to assist smaller businesses applicable from 1 April 2009. For taxpayers who have filed their previous year s return provisional tax is based on residual income tax with no uplift (previously 5%). For taxpayers who have filed the return 2 years prior, there is a 5% uplift (previously 10%). These measures are recognition by the government that businesses need cash flow in tough economic times and apply for the 2008/09 income years and 2009/10 income years. Different rates apply to new provisional taxpayers. Use of Money Interest (UOMI) for underpayments of tax has been reduced from 14.24% to 9.73%. The rate payable by IRD for overpayments has reduced from 6.66% to 4.23%. These are both effective from 1 March 2009. Refer to NZT 13.4.17 It is the net figure resulting from deducting the provisional tax (paid in advance for that income year) from the residual income tax calculated. If the terminal tax works out to be a negative figure the person is entitled to a refund. Should it be a positive amount this net tax liability is payable generally on the 7 th day, in the month laid down in the 3 rd Schedule, ITA 2007. See Table 13.15 on p551 of NZT. For example, a person with a 31 March 2009 balance date has to pay terminal tax on 7 th February, 2010 or 7 th April 2010 if person has a tax agent. Another person with a December 2009 balance date has a terminal tax payment due on 7 th November, 2010 (or 15 th January 2010 if a tax agent is involved). Page 12 of Topic 8
6. Resident Withholding Tax on Interests and Dividends Refer to NZT 13.6 6.1 Introduction Refer to NZT 13.6.1-8 On 26 July 1989 New Zealand introduced the Resident Withholding Tax (RWT) regime which required a withholding tax to be deducted from certain New Zealand sourced interest and dividend income and the net is then passed down to the New Zealand resident (income) recipient. The regime is based on similar principles to those which govern the PAYE (Pay As You Earn) regime, and a domestic version of non-resident withholding tax (which affects non-resident persons). The stated objective in introducing the regime was the reduction of tax evasion. However, as a result of the introduction of the regime, the collection of tax on interest and dividends is accelerated (pp.18-15, Butterworths Tax Practitioner (2000)). Note that in some cases RWT is an interim tax collected (ie a withholding tax). The amount collected from the person is credited against any final tax liability of the person and in the wash-up round there may be a surplus or shortfall. For example, a person chooses to apply 19.5% RWT rate on the interest income. However, the person s total gross income is above $60,000 which incurs income tax at a marginal tax rate of 39%. Hence, there is a shortfall in the tax deducted from the interest of 19.5%. The reverse applies should the RWT rate be greater than the person s marginal tax rate. Unlike dividend imputation credits RWT is treated as a refundable credit. Non-resident persons who receive New Zealand sourced interests and dividends are liable for New Zealand income tax at the non-resident withholding tax rates. 6.2 Interest RWT Refer to NZT 13.6.9 There are three rates for Interest RWT which are currently applicable. They are based on the personal marginal tax rates derived by the person (refer to IRD Publication: Receiving interest and dividends with tax deducted in the readings). The tax is deducted at source and at the end of the year the person is entitled to claim a credit for the amount of tax deducted against tax payable. Page 13 of Topic 8
Necessary changes to the resident withholding tax ( RWT ) rates on interest following the tax cuts will not be fully implemented until there has been further consultation with banks and other financial institutions. However, banks and other financial institutions will be able to apply a new optional 38% RWT rate from 1 April 2009. It is likely that changes to the RWT rate structure to fully implement the new personal tax rate structure will apply from 1 April 2010. 6.3 Dividend RWT Refer to NZT 13.6.10-11 A New Zealand company paying dividends to a New Zealand resident shareholder (including a shareholder/employee) has to deduct RWT if the imputation credit attached to the dividend is less than 30%. In other words imputation credits attached to a dividend plus RWT equates to 30% of gross dividend payable to a shareholder. The shareholder is entitled to claim for these credits in their tax returns. Please note: A general idea of the application of RWT in terms of the calculation of tax payable is all that is required for this paper. 7. Assessments and Determinations Refer to NZT 20.3, 20.4 What is an Assessment/Determination? Refer to NZT 20.4.1-5 Sec. 92 Tax Administration Act (TAA) 1994: it is the act...carried out by the taxpayer (and, in some circumstances, the Commissioner or delegated officer of the Inland Revenue Department (IRD)); the administration of the ITA requires the Commissioner to advise the persons, within reasonable time, their tax liability. Hence, the date of the notice of the tax liability (assessment) is issued is generally assumed to be the date of assessment - Sec.111, TAA 1994; under certain circumstances an income statement can be deemed a return of income and the person is deemed to have made an assessment Secs. 80G and 80H, TAA 1994; Page 14 of Topic 8
it is important to note the date of assessment because persons generally have only two months from this date to dispute an assessment. However, from 2003 income year, under selfassessment procedures, the Commissioner of Inland Revenue (CIR) no longer makes the initial assessment and effectively the persons are disputing their own assessments; the CIR has the right to amend an assessment, at any time, if he considers it necessary (Sec.113, TAA). Where the amendment results in a fresh or additional tax liability the CIR has to issue a notice of proposed adjustment to the person. The amended assessment becomes the assessment, i.e. an amended assessment over-rides other earlier assessments; under Sec.108, TAA, the CIR has a limited time and justification to amend an assessment; in the dispute process to assessments some determinations are regarded as assessments (e.g. provisional tax as determined by the CIR); determinations are generally statutory discretions exercised by the Commissioner of Inland Revenue in respect of a specific tax issue (www.ird.govt.nz/technical-tax/determinations). Page 15 of Topic 8
Work Preparation Read and study the material required for this week. Review the following questions. 1. Amanda Reeves received a dividend of $750 from an Australian Co. The tax paid on this was $270. Her statement of tax payable is as follows: Taxable income $39,000 Tax (say) $7,370.00 Less: rebates 16.30 PAYE 734.00 RWT 17.62 6,602.08 Less Provisional Tax Paid 6,555.00 Tax to be Paid 47.08 What is the overseas tax credit she may claim? 2. (a) What is the difference between an assessment, a notice of assessment and a notice of determination? (b) (c) What is likely to happen if the IRD finds it has overlooked issuing an assessment to a person? Is there any time limit when the issuing of assessments for any income year becomes statute barred? 3. Continuing with John Kurarangi s plumbing business (see Topics 4 and 6, Review Question 3) these additional information are available in calculating John s income tax assessment: (a) The dividend from Telecom Ltd had $158.40 of imputation credits attached; (b) Resident Withholding Tax (RWT) of $48.75 was deducted at source from the interest income derived from BNZ bank. Page 16 of Topic 8
(c) Combining all the information (from Topics 2, 4 and the above) together: Calculate John s taxable income for the 2009 income tax year. Draw up a schedule(s) to send in with the completed individual income statement to show the Inland Revenue Department how you arrived at the individual s taxable income. Calculate John s 2009 terminal tax and state when the tax payment is due. Calculate John s standard provisional tax due for the 2009 income year and calculate the amounts and dates of payments. Clearly show how these figures are calculated and explain why John has to pay provisional tax. Note: (i) (ii) A Statement of Financial Position (balance sheet) is not required. You can find a depreciation calendar under www.ird.govt.nz Page 17 of Topic 8
Inland Revenue Department (2007). Receiving interest and dividends with tax deducted. Retrieved 24 March, 2009 from the World Wide Web: http://www.ird.govt. nz Page 18 of Topic 8
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Inland Revenue Department (June 2006) Aligning Provisional Tax Payments with GST. Tax Information Bulletin (TIB), Vol 18, No 5, pp. 69-74. Page 22 of Topic 8
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Inland Revenue Department (2009). Donations, childcare and housekeeper tax credits (formerly rebates). Retrieved 24 March, 2009 from the World Wide Web: http://www.ird.govt.nz Page 28 of Topic 8
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