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Report on .... Of the company(prepared for). Table of contents. As of 8/05/19. By Terry SmithAdvice(Memo): 8/05/19 Company/persons name, Subject, From Terry SmithInterpretation:No tax can be levied (imposed) without the consent of parliament Constitution Act 1986 Each year a tax act sets the rates f...

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Report on …. Of the company(prepared for). Table of contents. As of 8/05/19. By Terry Smith Advice(Memo): 8/05/19 Company/persons name, Subject, From Terry Smith Interpretation: No tax can be levied (imposed) without the consent of parliament -

Constitution Act 1986

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Each year a tax act sets the rates for coming year Every year parliament passes new tax legislation So it is important that we are able to read and understand tax legislation

Traditional rules of interpretation focus on the words of the statute: -

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Literal Rule: o Words be given their natural or ordinary meaning (words of statute are paramount) Golden Rule: o Judges can depart from literal rule and words may be given extraordinary meanings to avoid contradiction (inconsistency) or absurdity. Mischief Rule: o Statutes must be construed to avoid the mischief that led to their being enacted. Related to the ‘purposive approach’ o What is the legislation trying to prevent (what is its purpose)? Purposive approach o Where words of the legislation are read in their fullest context, and with a view to giving effect to the purpose of the legislation.

Interpretation Act 1999: -

Section 5: Ascertaining meaning of legislation 1. The meaning of an enactment must be ascertained from its text and in the light of its purpose. 2. The matters that may be considered in ascertaining the meaning of an enactment include the indications provided in the enactment. 3. Examples of those indications are preambles, the analysis, a table of contents, headings to Parts and sections, marginal notes, diagrams, graphics, examples and explanatory material, and the organisation and format of the enactment.”

Scheme the context of the section must be considered; the Act must be read as a whole - may reveal a clear theme that clarifies the section - Other provisions of the same Act may clarify ambiguity

Purpose Words should be given a liberal interpretation to ensure that the purpose of the legislation is achieved. Any shortcomings in the drafting of the Act should not be allowed to obstruct its purpose if that purpose is clear.”

A section read in isolation may bear a different meaning when read in context CIR v Alcan 1994 -

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“words are to be given their ordinary meaning”; If the words are capable of more than one meaning and the object of the legislation is clear, then the words must be given ‘such fair, large and liberal construction as will best ensure the attainment of the object of the Act where “the particular purpose is unclear ... the safest guide to meaning will be found in the actual words of the statute”; in determining the scheme and objectives of the legislation, what is required is “a careful reading of its historical context of the whole Statute, analysing its structure and examining the relationships between the various provisions and recognising any discernible themes and patterns and underlying policy considerations”

Statute intention: -

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BG 1: o general anti avoidance rule. a sole trader restructures their business and “commercially unrealistic” salaries are paid, with the effect that tax is reduced o ITA does not define a “commercially realistic salary” what the Act does require of taxpayers is that they should not structure their transactions with a more than merely incidental purpose of obtaining a tax advantage unless that advantage was in the contemplation of Parliament courts’ role is to interpret the broad wording of general provisions to give effect to that provision in light of the scheme and purpose of the Act as a whole

interpretation aids: Intrinsic Aids - things within the legislation itself - Specific purpose provisions - Scheme of the particular legislation o Interpretation/definition section (eg Part Y ITA o Interpretation act section 5 (3)

Extrinsic Aids - things outside the particular legislation] - Commentary to the Bill when introduced into Parliament - Committee reports (explain why particular legislation enacted or amended) - Parliamentary debates - Dictionaries - Textbooks - IRD websites (interpretation statement) - Other legislation may define key words - Overseas cases involving interpretation of legislation

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Read and re-read the question noting key information

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Read each section noting parts that could apply

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Find the issue for the question

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State relevant legislation

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Find what more information is needed to be able to determine whether the legislation applies to Kim

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Think what would happen if the conditions set in GB 27 (1) are satisfied what would happen (GB 29 (1))

Capital Gains Tax: Issues with capital gains tax: -

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What rate should be used o Currently taxed at marginal rate, levied at one rate o Separate flat rate (15%)  Its regressive flat rate taking more from lower incomes  Impact on behaviour (incentive to still derive capital gains and not income) o Do what Australia does tax is halved when owned for more than 12 months o Should it be progressive (what should be the max?) proportion at marginal income tax Exemptions o Family home  Define the family home. Can married couples have one residence each?  Using the house as a business problem  Renting the house out for part of time  Lifestyle blocks. Is there a limit on the $ amount? o Collectables  Classical cars going up? Capital gain? o Personal property  Laptops Is it a separate tax act or included in ITA? Loses can they be offset to ordinary income When will it apply? Recognition o Realisation (i.e. when you sell it) o Accrual basis (annually) Short term vs long term o Should short term gains be taxed more than long term gains Death o A transfer of shares from dead to beneficiary  Will they pay tax on the gain of the shares?  Rollover? Tax applied when the beneficiary sells the shares Tax free threshold o Gains below a certain threshold will have no tax o Compliance cost of monitoring low incomes outweigh the benefit Implementation (complex valuation) o How are we going to value the assets? All on implementation date or at cost. o Grandfathering provision assets prior to introduction exempt What to do with existing sections (CB1, 3, 4, 5 CC1(2), 3, 9)

A capital gain may be defined as: -

"that form of gain that arises to the owner when some property of his appreciates in value or when he realises it at a price greater than its cost of acquisition" As an analogy, therefore, think of capital as a tree. The fruit of the tree can be regarded as income. However, any other growth, such as an increase in the size of the tree, or an increase in its fruit bearing capacity, is a capital gain.

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Unfortunately, the distinction between what is the fruit of the tree (income) and what is the tree itself (capital), is not always clear in IRC v British Salmson Aero Engineers Limited [1938] o There have been many cases which fall on the borderline. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter Income/capital distinction o Taxpayer purchases shares in Company A because Company A has both a capital accretion (growth) policy and dividend policy o The dividends received by the taxpayer from Company A will be income and taxable. o If the shares increase in value due to growth and the taxpayer realises the increase in value (ie sells the shares), the gain realised on sale will be capital and non-taxable.

Arguments for Capital gains: -

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Equity and fairness o Horizontal equity taxpayers with the same capacity to pay tax should bear the same burden of taxation  In the absence of a comprehensive capital gains tax, there is no horizontal equity because some taxpayers are in a position to derive non-taxable capital gains o Vertical equity requires higher-income taxpayers to bear a proportionately greater tax burden than taxpayers on lower incomes  Absence of vertical equity higher-income taxpayers are more likely to generate a higher proportion of non-taxable capital gains than taxpayers with lower incomes Efficiency o The lack of a comprehensive capital gains tax gives rise to uneven effective rates of tax on different investments. Resources not allocated to most efficient investments Tax minimisation o The failure to comprehensively tax capital gains provides an incentive for taxpayers to engage in tax avoidance. Convert income receipt into capital receipts

Arguments against capital gains: -

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Nature of capital gains o Capital gains have a different nature to income receipts. o Income receipts are used for consumption, capital gains are more likely to be treated as additions to capital not for consumption o Consequently, the introduction of a capital gains tax would penalise saving. Double taxation o Capital gains represent increases in the present value of expected future income o A capital gains tax would result in double taxation  First on the capital value of the future income and secondly, on the income as it is received. Source of revenue o Suggestion that a capital gains tax would not be a significant source of revenue. This is debatable, as in Australia it is only 2% of tax revenue. But in absolute terms can be a significant tax source. o It more acts to protect the tax system, and is seen as unpredictable Complexity

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The implementation and administration of a capital gains tax are likely to lead to an increase in administrative and compliance costs Due to exemptions tend to be very complex

International Tax: FIF’s: Step one: -

A person has an attributing interest in an FIF if they have direct interest in company/superannuation (less than 10% of company) Transitional resident  a person who has relocated permanently to NZ will not be subject to the rules during the transitional resident period (48 months)

Step two: -

Exempt if 10% or more interest in Australian company treated as NZ investments The taxpayer is simply taxed on any dividends received (CD 1) and any capital gains (gain of sale) not taxable unless They are a dealer in such investments in this case they would also pay tax on any gains on the sale of the investments (CB 1 and 5 ITA)

Step three: -

Individual under the 50,000 threshold at all times during the year No trusts due to the risk of multiple trusts being used for the benefit of individuals These investments are exempt from the FIF rules. Cannot elect to use the FIF rules If don’t know the cost of the shares (only for prior 2000) (only individuals) o The market value of these shares at 1 April 2007 is halved that will be the cost for shares acquired before 2000.

Step four: -

Choice differs depending on ‘entity’: individual, family trust choice of 3 methods; other entities choice of 5 methods If no method chosen, Fair dividend rate (FDR) is default method General rule o If company once method chosen for shares that have a market value, must use it unless impractical or requirements for using that method not met. o However can switch between FDR and CV from year to year if individual/trust. But the same method must be used within one particular year. o Company can use one method for each shareholding but cant change

Fair dividend rate 5% x opening market value + Quick sale adjustment* = deemed income *0.33= FIF tax -

No adjustment for (i) dividends, (ii) change in the market value of the portfolio, or (iii) for shares acquired during the year or disposed of during the year. QSA - shares that are bought after the start of the year and those same shares are sold before the end Ideal where actual rate of return on investment exceeds 5%

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Most common in small investors as likely to match their dividends

Comparative value: (closing market value of shares held + total sales proceeds + dividends received) – (opening market value of shares held + total cost of purchases) -

Total sale proceeds = shares sold during the year (selling price) Total cost of purchases = cost price of shares brought during the year No deductions for losses treated as a zero Use when making a loss or less than 5% return Need access to market valuations (complicated)

Use cost method if don’t have market values(5% x cost of the investment x MTR)Increase 5% per year Year 1 10,000 * 5% = 500 deemed income Year 2 10,500 * 5% = 525 deemed income CFC regime: Controlled foreign companies -

Applies to income years after July 1st 2009 Three attribtes required: o CFCs are companies  includes most entities that have a legal existence separate from that of their members and trust units o CFCs are non-resident  This means it must not be resident in New Zealand or must be treated as not being resident under a double tax agreement. If foreign CFC rule apply o CFCs are controlled by New Zealand residents  A non-resident company will not be a CFC unless it is controlled by New Zealand residents.  The most common case of control is 100% ownership of the nonresident company by a New Zealand company  Other cases:  group of 5 or fewer New Zealand residents has total control interests (eg a shareholding) of more than 50%, or  single New Zealand resident has a control interest of 40% or more and no unassociated non-resident owns a greater control interest, or  group of 5 or fewer New Zealand residents can control the exercise of shareholder decision-making rights for the company.

A person has CFC income if they have a 10% or more interest in the active (manufacturing, distribution or sales function) CFC. New Zealander is not taxed on the CFC income or loses If a person has an income interest of 10% or greater in a CFC that is not an active business, the investor is taxed on their passive income (interest, rent, royalties, dividends) -

will be deemed active CFC income if the passive income amounts to less than 5% of gross

Transfer pricing (Double Tax Agreement) Article 7

The profits of an enterprise (X) of a Contracting State(NZ) shall be taxable only in that State (NZ) unless the enterprise(X) carries on business in the other Contracting State(AUS) through a permanent establishment. The profits of the enterprise(X) may be taxed in the other State(AUS) but only so much of them as is attributable to that permanent establishment. [Para 1] In determining the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, expenses which are incurred for the purposes of the permanent establishment [Para 3] if have PE in other state will pay tax in other state if PE have to be treated as a sperate establishment in other state If have PE profits of the enterprise will pay tax in the second state to the extent of the profits attributed to that PE Article 5 -

Permanent establishment (PE) means a fixed place of business through which the business of the enterprise is wholly or partly carried on. [Para 1]. Tied to a location not temporary

Includes especially: [Para 2] -

Branch, office, factory

PE shall not include: [Para 7] -

the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; E just going around to see if there is demand for product

Agents service provided independent (works for business and others) [Para 9] -

not deemed to have PE merely because it carries on business in that State through a person who is a broker, general commission agent or any other agent of an independent status

Non-agent services provided in contracting state: [para 4] -

Individual present in other state for period exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues OR periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals deemed to be permanent establishment need sizable sales (level of income generated)

Non-agent person will need [Para 8] -

an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or manufactures or processes in other state for the enterprise goods or merchandise belonging to the enterprise To be construed as PE

Ethics: If its illegal, then it must be ethical:  

Something may be right but illegal May be legal but may seen as not right

Guidelines of NZ, AUS and US: -

Guidelines of several relevant professional societies in a number of jurisdictions, you will see a consistent theme emerging

NZICA: Chapter 1: Integrity -

1.1 You will practice with independence, integrity and objectivity 1.2 Practice with honesty, ensuring that all statements you make are truthful and accurate 1.3 Comply with relevant laws and encourage clients to comply

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1.4 Serve your client’s interests faithfully, putting aside any compromising interests or loyalties

Chapter 2: Respecting clients trust and confidence -

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Confidence 2.1 You will not reveal any client information to anyone outside your tax practice unless o (a) you have proper authority or o (b) you are required Accountants and Tax Agents Institute of New Zealand Code of Ethics Page 15 to by law or as part of legal proceedings or o (c) you need to disclose information in order to defend yourself or another member of your tax practice at a disciplinary or judicial hearing o Will not use the information to benefit yourself or anyone else other than client 2.2 maintain the highest standards of trusteeship o Keep clients fund separate from your own and only use the funds for the purposes of the client with the clients written instructions o Will be able to account for the client’s funds at all times, clearly stating movements

Chapter 3: Service -

3.1 Will be open and transparent. Keep clients well informed about all matters 3.2 Provide service that are appropriate and are authorised by client o Ask client to look into something that you find 3.3 Comply with accounting standards 3.4 Carry out work in a careful and timely manner 3.5 charge fair and reasonable fees

Chapter 4: Professional conduct -

4.1 Won’t do anything to bring ATAINZ into disrepute 4.2 Will behave fairly and honourably towards everyone you deal with 4.3 If you believe a member has breached the law or the code of ethics must inform ATAINZ, provided there is no compelling ethical or legal reason for keeping the information

Key principles:

New Zealand Institute of Chartered Accountants’ (NZICA’s) Code of Ethics

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Integrity (Being honest) Objectivity (Being fair) Professional Competence Due Care (effort made by an ordinary person to avoid harm) Confidentiality Professional Behaviour

Reinforced by TG1 and EG 2 TG 1: tax compliance services -

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Put forward best position in favour of the taxpayer. Provide service is with professional competence and it does not impair integrity, and objectivity, and in their opinion consistent with the law Anything put forward must be confident in it

EG 2: guideline on ethics in tax -

Overlap with TG 1 Responsibility process where become aware of error/omission o Advise client to make discl...