Question

New Zealand tax,

a number of statements (independent of each other) are presented which relate to a particular scenario. For each of the statements, specify whether it is TRUE or FALSE , and justify your answer with an appropriate explanation (in no more than 150 words). All persons mentioned below are New Zealand tax residents unless specifically stated otherwise. All taxpayers have a 31 March balance date.

a) Apple Family Trust holds investments in a multi-rated Portfolio Investment Entity (MRP) and the trustees have chosen 28% as its Portfolio Investor Rate (PIR). The attributed income from the MRP when distributed to the beneficiaries must be included in the beneficiary’s income tax return.
TRUE/FALSE?

b) Bana is 55 years old and would like to retire in 10 years’ time. He has invested in the sharemarket, holding a portfolio of shares in different New Zealand companies. On the whole, the shares yield good dividends. However, not happy with the performance of one of the companies in which he has invested, Bana sold the shares and made a loss. For tax purposes, Bana can claim a deduction for the losses made.

c) Kerry, a limited partner, owns a 50% interest in the KK Limited Partnership which was formed on 1 April 2016. Kerry contributed capital of $75,000. For the year ended 31 March 2017, the partnership reports a $40,000 loss and distributes $4,000 to Kerry. Kerry’s partner’s basis at the beginning of 1 April 2017 is $51,000.
TRUE/FALSE?

d) During the year ended 31 March 2017, Luckee Ltd has the following dividends:
- From unassociated New Zealand resident companies: $7,200 (net)
- From a New Zealand resident company in which Luckee Ltd has a 66% shareholding: $3,600 (net)
- From a New Zealand resident company in which Luckee Ltd has a 100% shareholding: $14,400 (net)
All dividends are fully imputed. The figures given are the amount of dividends declared by the companies. The amount of Luckee Ltd’s gross dividend that is taxable in 2016-17 is $35,000.

Answer 1

Question a

True. If the trustees have:

• chosen either 0%, 10.5%, 17.5%, or
• had the default rate applied as the PIR for the trust(28%).

The income attributed by the PIE will not be excluded income and will need to be included in the trust's return of income. Hence this statement is true.

Question b

False. Capital gains are taxable in New Zealand only if they are for trading purposes. Since Bana has primarily invested to collect dividends his income would not be taxed. Accordingly his loss cannot be claimed as a deduction as well.

Question c

True. Partnerships are considered as Tax glow through entities in New Zealand. Hence the Amount of loss attributable to Kerry amounting to 50% of 40000 is to be deducted from Kerry's capital. The 4000 is a distribution and constitues a further dilution of the capital. Hence it should be deducted as well. Hence the Partner's basis is 75000 -20000 - 4000 = 51000;

Question d

False. tax on fully owned subsidiary is not taxable. Hence the taxable dividend is 3600 + 7200 = 10800