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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.

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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.

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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) Family Assistance tax credits;

(ii) Working for Families package

(refer to www.ird.govt.nz/family assistance/wff-programme)

(iii) Overseas tax credit.

5. What are Residual Income Tax, Provisional Tax and Terminal Tax?

6. Introduction to Resident Withholding Tax.

7. Assessments and determinations.

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This Topic

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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 &dividends)

Overseas Tax Credit

Residual Income Tax

Less: Provisional tax paid

Tax payable (terminal tax)

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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]. Non-

filing 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.

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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.

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3.2 Distinction between Exempt Income, Deductions and Rebates

(a) Exempt income is income which is specifically exempted from

income tax for example, scholarships and bursaries

(b) 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.

(c) 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.

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(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 re-

vamped 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

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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:

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$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

(d)

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

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).

5.2 Provisional tax

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.

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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.

5.3 Terminal Tax

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 7th

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 7th

February, 2010 or 7th April 2010 if person

has a tax agent. Another person with a December 2009 balance

date has a terminal tax payment due on 7th November, 2010 (or

15th January 2010 if a tax agent is involved).

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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.

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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;

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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 self-

assessment 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).

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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) What is likely to happen if the IRD finds it has overlooked issuing an

assessment to a person?

(c) 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.

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(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) A Statement of Financial Position (balance sheet) is not required.

(ii) You can find a “depreciation calendar” under www.ird.govt.nz

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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

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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.

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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

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