Taxation notes PDF

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Week 1- What is tax?Purpose of Taxation4 main reasons: To provide public goods and services funded from taxes; FISCAL PURPOSES To redistribute wealth; NON FISCAL PURPOSES To manipulate the economy, by adjusting the amount individuals have to spend. NON FISCAL PURPOSES To achieve social goals. NON FI...

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Week 1- What is tax?! Purpose of Taxation! 4 main reasons:! • To provide public goods and services funded from taxes; FISCAL PURPOSES! • To redistribute wealth; NON FISCAL PURPOSES! • To manipulate the economy, by adjusting the amount individuals have to spend. NON FISCAL PURPOSES! • To achieve social goals. NON FISCAL PURPOSES! Alternative ways of raising revenue! • • • • •

Commandeering resources eg. War! Creating money (triggers inflation)! Borrowing from public or from overseas! Asset sales eg. Govt selling state assets! User charges eg. Toll roads!

Adam Smith’s 4 canons:# • Equity- Tax payable by a person should be consistent with their ability to pay the tax. !

- Horizontal Equity: People who are in similar situations should be treated similarly with respect to taxation. eg. If earning same salary should be treated the same regardless of job!

- Vertical Equity: People who are in different situations should be treated differently with

respect to taxation eg. A person earning a higher salary will pay more tax than a person who earns less.!

• Certainty- That is, taxpayers ought to be able to work out the tax effect of transactions and business deals and so on, in advance, and with certainty. ! • Convenience- Should be easy to pay taxes (assessed through compliance cost of how much time and effort it takes a business person to pay their taxes)! • Efficiency- Cost-benefit if collecting max amount of tax at minimum cost ! Other criteria! • Neutrality- Does the tax effect the decisions of the taxpayers? Eg. Cigarettes and Alcohol! • Meeting Revenue needs! • Visibility- Link the taxes they pay with the benefits they receive! • Coherence! Formal incidence- Persons legally required to pay the tax! Effective/ Economic incidence- Those who will ultimately pay or bear tax! Direct Taxes- Formal & effective/economic incidence on taxpayer. ! Note: Direct taxes are only used for distribution of wealth because indirect taxes remain fixed.! Eg. Income tax! Violates the principle of equity if the tax system provides incentives! High direct taxation tends to reduce a persons ability to save and companies to invest! May still be passed down to consumer! Effective way of redistributing Income and Wealth

Indirect Taxes- Formal incidence on retailer; effective/economic incidence is anyone along the supply chain. ! Note: Tax is fixed ! Eg. GST! A softer tax; taxpayers more willing to pay! Taxpayer given a greater choice of spending now or in the future;! Can be an effective anti-inflammatory device Indirect taxes on commodities & services can violate the principle of equity especially on lower income taxpayers! Characteristics of taxes ! • Progressive: Tax rate increases as income increases.! • Proportional: Tax rate is fixed, no change as the taxable base amount increases or decreases. Eg. Company tax rate set at 28% (Will increase proportionate to inflation)! • Regressive: Tax rate decreases as income decreases.! • Negative: A negative tax rate occurs when a taxpayer receives more in tax credits or other benefits than he or she pays in tax eg. Receive unemployment benefit instead of paying taxes to the government.! Tax rates! Marginal tax rate: Rate of tax that is applied to a particular range of income. ! For example, under New Zealand’s tax scales, an individual earning $48,000 has a marginal tax rate of 17.5%. An individual earning $48,001 has a marginal tax rate of 30%. ! Effective marginal tax rate (EMTR): Occurs because a taxpayer may have additional income which has not formed part of their taxable income (tax base) because it is either exempt or nonassessable. Eg. Receiving payments under working for families ! Calculation: Total tax payable/ Taxable income (tax base)! Average tax rate: Occurs because a taxpayer may pay a number of different marginal rates of tax on different ranges of income. ! Eg. In the fiscal drag example below, the individual earning $60,000 has an average tax rate of 18.4%, and the individual earning $80,000 has an average tax rate of 21.6%. ! Calculation: Total tax payable/ Total income! Difference between what an individual earns and takes home is called a..! Tax wedge = Total income - income tax - student loan repayments - ACC levy + Working for families credits etc.! Fiscal drag- The deflationary effect of a progressive tax system on a country’s economy (As you earn more you jump the tax brackets with all other things being held equal)! Eg. If you earn say, $60,000 per annum, then you pay 10.5% tax on the first $14,000, 17.5% on the next $34,000, and 30% on the last $12,000 of your income. All other things being equal, your total tax bill will be $11,020, or 18.4% of your income. However, over time, your income will (hopefully) increase. As you earn more and more income, you will move up through the tax brackets. Imagine that your income reaches $80,000. At that level, your total tax bill will be $17,320, or 21.6% of your income. Even though the tax brackets haven’t changed at all, the government is able to collect more tax from you, because your income has increased. !

Bracket creep- Increased tax liability from increase in income (Inflation causes jump to higher tax bracket; Average tax rate increases, Marginal tax rate increases)! The NEW ZEALAND TAX SYSTEM can be characterised as broad-based, low-rate (BBLR) The system has been based on changing social and economic objectives and conditions.! Eg. ! • Lowering income tax rates! • Remove inefficient tax systems ! • Reducing tax evasion! Income Tax Act 2007 Purpose: Define and Impose income tax, provisional tax, withholding liabilities, and other tax obligations concerning tax and impose other obligations concerning tax.! Goods and Services Tax Act 1985! Tax administration Act 1994! Purpose: To encourage taxpayers to comply voluntarily with their tax obligations and to cooperate with the department; and to ensure that penalties for breaches of tax obligations are imposed impartially and consistently; and to sanction non-compliance with tax obligations effectively and at a level that is proportionate to the breach.!

Week 2- GST Concepts! GST contributes 26% of government revenue in NZ GST is a value-added tax which is indirect. It aims to tax the value added at each stage of the production of a product (good) or service, until it is finally used, or consumed. Credit offset basis, the end consumer bears full cost of tax. Very efficient tax, because it has very broad coverage, virtually no goods and service are exempt from it. Unlike in Australia where there is no GST charged on basic foods !

Sales price - Cost price = Value added price Must charge GST output tax on taxable supplies —-> Output tax = Price charged * 0.15 Must pay input tax on the goods and services they acquire and import —-> Input tax = Output tax of last item sold! What is caught in the GST tax net?# Goods: Includes all types of real (land) and personal property eg. Motor vehicles, home appliances, books etc.!

Excludes choses in action eg. (copyrights, debts, mortgages) rights to give action! Services: Anything which is not goods or money and includes choses in action; generally performed by a client or customer.! Taxable Activity a) Any activity which is carried on continuously or regularly by any person, not necessarily for profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration, and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, club, charitable organisation b) Without limiting the generality of paragraph a) the activities of any public authority or any local authority Taxable Activity Exclusions • Hobbies • Contract of services i.e: An activity where an employer-employee relationship exists (NOTE: CONTRACT OF SERVICE DIFFERENT FROM CONTRACT FOR SERVICE)! Private transactions/ One-off, Between family and friends (This includes trade me sale on • auction site) • An activity, in part or in whole, which involves making exempt supplies Taxable Supply A supply of goods and services in New Zealand, which is charged with tax either at standard rate (15%) or at the zero-rate (0%) • • • •

Defined very broadly to include “all forms of supply”! Must be a taxable supply for GST to be charged! Must be supplied in the course or furtherance of a taxable activity! Exempt supply is not charged with GST (compare zero-rated supply)!

GST Registration Requirements! • A taxable activity must first exist! • Registration compulsory if at the end of any month and proceeding 11 months, turnover is > than $60,000 (GST excl)! • Registration compulsory if over the next twelve months, turnover will be > than $60,000 (GST excl)! • Registration not compulsory for persons with a total tax supply in any given 12 month period fall < $60,000! Compulsory registration must be made within 21 days (Otherwise could be fined a penalty) • Can apply for reregistration if turnover drops below threshold! • Registered person! • Only registered persons can charge GST on a taxable supply and are eligible to recover GST charged on making taxable supplies • Registered persons are entitled to deduct GST paid (input) on goods and services received in relation to making such supplies against GST collected (output)! Who has to Register?! • If a person has 2 seperate taxable activities. Each has a turnover < $60,000 but together the aggregate > $60,000! • If expected or actual turnover is $60,000

Zero- rated taxable supplies • GST-registered persons do not charge GST 0% on their zero-rated supplies but are still able to claim input tax credits on goods and services acquired in relation to zero-rated supplies Export supplies: Zero-rated for competitive reasons because sellers would carry an extra • tax burden • Sale and purchases of businesses: Zero-rated because person who bought would be able to collect it all back • Sale of land is zero-rated: The land is sold by one GST registered person, to another GST registered person, and the land is going to be used for making taxable supplies. Sale of going concerns: A going concern is when a taxable activity or part of a taxable activity is sold to a registered person as a going concern and the supply is zero-rated on the basis that the supplier and purchaser have agreed in writing that the supply is of a going concern s11(1)(m) of the GST Act. The going concern test is applied at the time of supply and the supplier must be registered in order for the supply of a going concern to be zero-rated. eg. Sale of businesses transfers debt obligation ! Exempt supplies Completely excluded from the tax regime, and GST can’t be charged in respect of those supplies • This means the person engaged in the activity can’t register for GST • Pay GST for goods and services used but can’t claim input GST back from IRD for expenses incurred in the making of that supply Examples: • Supply of financial services: Because they are very much like money they are not subject to GST and very hard to establish value of supply. Eg. Provision of loan and credit facilities (banks), share issues/disposals, life insurance and superannuation. Supply of residential accomodation: Residential accommodation is GST exempt. This • means that tenants don’t pay GST on rent, and landlords can’t claim GST deductions. However, this is only for residential rentals. Commercial rentals are caught in the GST net. Supplies of fine metal • • Donated goods and services sold by non-profit body • Sale of rental dwelling rented for at least 5 years before • Renting of leasehold land Residential Accomodation Commercial accomodation becomes residential accomodation after 4 weeks, but you still need to pay GST on services eg. Room cleaning! Commercial dwelling: Hostel, motel, hotel, B&B, boarding house, a serviced apartment, nursing home, camp ground. EXCLUDES HOSPITAL ! • If you stay in a hotel or a motel or other type of commercial dwelling for a ! short period of time, then the GST rate is 15% as per the normal GST rules. • If you stay in a hotel or a motel or other type of commercial dwelling for 4 or more weeks, then the GST rate drops to 9% (or 15% of 60% of the value of the supply). Residential establishment: So if 70% or more of the people who are staying in the commercial dwelling are going to be there for four or more weeks, then GST can be charged at 9% (or 15% of

60% of the value of the supply). # Value of Supply! Amount of Consideration (Sale price) exc GST= Consideration x 20/23! Consideration= Value of supply (excl) + 15% (GST)! GST inc value of supply / 1.15 = Value of supply (excl)! Example: A registered person sells goods for $115 cash. ! Value = 115 x 20/23 = & 100 (GST exclusive)! GST = 100 x 15% (3/20) = & 15 GST Consideration =& & 115 (GST inclusive)! Tax fraction = 3/23! Time of Supply ! There are rules which specify the time when GST (output tax) is to be charged on a supply in a particular period! General rule ! The time of supply is the earlier of:! • The time an invoice is issued by supplier! • The time any payment is received by supplier! Special rules ! Such as GST on fridge benefits, associated persons, hire purchase, lay-by sales etc! Second hand goods: A registered person can claim 3/23 of the purchase price of second hand goods as input tax deduction, even if the seller is unregistered. If • Dealer is registered • The supply isn’t a taxable supply • The goods are in NZ • The goods are supplied by a NZ resident • An input tax credit hasn’t been claimed on previous importation • The goods are acquired for the purpose of making taxable supplies. Fringe benefits tax (FBT): Fringe benefits are a taxable supply so theres GST on them, which is collected via FBT return. Fringe benefits are received by employee from employer eg. GST can be claimed by employer for a motor vehicle purchased by employer for employee

Week 3- GST Accounting! Taxable periods: Time intervals when GST must be charged and paid to IRD; End of this period registered person to account for the net GST! 4 categories:! • Categories A/B- 2 monthly intervals of odd/even months eg. Dec-Jan/ March-April ! • Category C- 6 monthly interval! • Category D- 1 monthly interval!

< $500,000 – MAY file 6 monthly, 2 monthly, or monthly! $500,001 - $24,000,000 - MAY file 2 monthly or monthly returns! > $24,000,000 – MUST file monthly

Filing tax returns takes time and effort. This creates compliance costs for the registered person. Filing returns every six months rather than every two months reduces compliance costs. ! Accounting Basis: 3 methods used! Invoice basis: • Automatic allocation unless registered person requests otherwise.! • Claim GST (input) when a tax invoice is received; ! • Account for GST (output) when an invoice is issued or payment is received, whichever is earlier. • In most cases payment will be made or received after invoices are issued / received. • Date of the invoice will therefore usually be relevant! Payment basis: Available only to registered persons • Whose taxable supplies during previous/ or during next 12 months are $2.0 m or less;! • Such as local authorities listed in an Order in Council, and non-profit bodies; for whom this basis would be appropriate, eg. Corner dairy! GST (input and output) accounted for in the taxable period when a payment is received or • made. • Receipt for date of payment will therefore be relevant! Hybrid basis: Available to any registered person! • Sales on a Invoice basis; Purchases on a Payments basis • A “cash flow” disadvantage: Requires that output tax is recognised when invoices are issued, and input tax deductions are claimed only when payment is made. Example of Hybrid Basis: Jenny Wynn-Miles sells a van to Orson Carte, a delivery company for $23,000 including GST, and issues a tax invoice dated 3 January. Payment is received $13,800 on 20 February and $9,200 on 4 April.! a) If both account on Invoice Basis;! b) If Jenny is on Invoice Basis and Orson on Payments Basis.! a) Jenny to account for GST (as output tax) of $3,000 (3/23 x $23,000) in the taxable period covering 3 January.! Orson, claims for $3,000 GST (as input tax) in the taxable period covering 3 January.! b) Jenny will account for GST (output) as in a) above.! Orson claims $1,800 (3/23 x $13,800) GST (input) for period covering 20 Feb, and $1,200 (3/23 x $9,200) for period covering 4 April.!

Payment and Filing rules for GST! GST payable and relevant return must be filed on the 28th day of the month following the end of the taxable period Exceptions: December’s filing date (for November taxable period) => 15 January April’s filing date (for March taxable period) => 7 May The basic concept of the return is that you record total GST inclusive taxable supplies for the relevant period (box 5), deduct zero-rated invoices (box 6) to arrive at the total figure for invoices charged at normal GST rate (box 7), and then use the tax fraction to work out how much GST you have collected (box 8). The amount collected may then be adjusted further to reach a final total for GST charged on taxable supplies (box 10). The amount of GST charged on supplies is known as “output tax”. ! '! It is then necessary to calculate the total GST inclusive expenses and purchases for the period for which you have met the tax invoice requirements (box 11), calculate the GST on those expenses and purchases using the tax fraction (box 12), make any adjustments and then calculate the total GST paid in the taxable period (box 14). This amount is known as “input tax”. ! '! The final stage of completing the return is deducting input tax from output tax to arrive at a net figure (payment or refund).!

! Tax Invoices

A tax invoice is simply a written notification that payment is required. A tax invoice is a certain type of invoice, that must comply with certain requirements.. The words “tax invoice” in a prominent place The name and registration number of the supplier The date upon which the tax invoice is issued A description of the goods and services supplied, and The consideration for the supply and a statement that it includes a charge in respect of tax. It differs from an ordinary invoice because a Registered person must hold a tax invoice in order to claim input tax on relevant expense – this is critical. The requirements set out in s24 GST Act. Supplier required to issue within 28 days of supply ! The exception is there is no need for tax invoice where value of supply is $50 or less

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GST adjustments ! GST adjustments are required where there is a change in use of an asset, or where the degree of private or business use of the asset as originally estimated changes by more than a specified amount. Where assets are used partly for a taxable activity, and partly for private purposes, then when the asset is first acquired, an apportionment is made only the portion relating to the taxable activity can be claimed as an input tax deduction. If the split between private and taxable activity use changes, then further adjustments can be made, provided that no adjustment is needed if the original value of the good or service was less than $5,000. Adjustments can only be made once in any “adjustment period”. ! 2 rules which determine number of adjustment periods! • Same as useful life in years of the asset as per depreciation rules eg. Useful life of 5 years allowed 5 adjustments! • Determined by value of asset!

The first adjustment period starts on the day the asset is acquired, and ends at either the first balance date after acquisition, or on the first balance date that falls at least 12 months after the date of acquisition. ! In subsequent years, deduction adjusted if difference between actual use and intended use is 10% or more (or adjustment is more than $1,000) NOTE: Must have a GST exclusive price of $75,000 No subsequent adjustment if GST-exclusive value is less than $5,000 Expenditure may need to be apportioned where it is not fully incurred for making taxable supplies

Eg. Hans acquired a car for $23,000 (included GST of $3,000) on 1/4/16, which will be used in his business and privately! Old car used 80% for business purposes, so H...