To
The Trustee,
Subject: Tax relate advice related to transaction
In this letter an advice is made regarding the matters that are disused in the issues and the laws are applied for reaching the conclusion. The discussion is provided below.
In this case the Neil’s bought a land for farming for the price amount of $750,000, which was funded by bank loan of $500,000 and cash deposit of $250,000. A house was constructed paying an amount of $200,000. After some years Neil’s decided to allocate the land to the trusts whose recipients were the children and grandchildren. The trustees made an application subdivide the Land into five lots total cost of the resource and signed an agreement with a Real Estate to sell the lots. Neil’s kept the largest one, the remaining four lots were divided into fifteen lots as this would return a higher financial yield. They were successful in selling seven of the lots. Right then they have received a letter from Inland Revenue Department declaring to pay the income tax based on the profit earned. The trustees have come minimise Tax Limited to seek advice on the tax treatment of the profits.
New Zealand Citizens are required to pay taxes on their global income. The scale of income is progressive and is depended on the level of income. If a land is bought with the intention of resale at the time of purchase, then it is taxable from the very first day as it is a profit-making method is a taxable revenue event. Taxes are retained in New Zealand by Inland Revenue Department under Government of New Zealand (Saad, 2014).
CA 1 Amounts that are income: Incomes are precisely recognized as a sum amount which is an income of an individual under a facility in this section. Ordinarily, the sum amount is also the income of an individual beneath the ordinary perceptions if then the income belongs to them.
CA 2 Amounts that are exempt income or are excluded income: This part recognises the subsections in this Act which functions with the excluded income and the exempt income. Excluded income: The part that is regarded as the excluded income is –
Exempt income: An Exempt income is the sum of income of an individual if it is considered as the exempt income which comes under the jurisdiction in subsections of CZ which means Termination Provisions and CW which specifies Exempt income (Kelsey, 2015).
CB7 land acquired for the business purpose:
It also applies-
The applied are:
The individual A and his associated person passed on a commercial on the land they acquired of establishing buildings.
The individual A intentions were to perform a commercial on the land he acquired.
The individual A and his accompanying individual made enhancements on the land after or before getting the land.
In CB 16 abide by the eliminations for residential land this subsection (1) is dominated. And in section CB 19 is for business sites.
CB 8 Disposal when the land is used as landfill:
The amount that an individual receives by disposing a land is known as the income where the land is not regarded as landfill at the period of disposing. The individual whoever is owing the land is not considered as the associated individual.
CB 9 Disposal in the period of 10 years:
The sum becomes the income of an individual whenever the disposing of the owned land is disposed in the span of 10 years or they continue a dealing of business on the land while the land was not acquired for business purpose (Marsh et al., 2015). On another matter the individual A performs a business dealing on the land or ever the land was bought for the business purpose of the individual B. These all are also considered as the income.
CB 11 improvement of the business within 10 years:
The land is disposed within 10 years of finishing advancements in it, the growth has begun to improve, and buildings were erected though the land was not acquired for this criterion. Suppose Individual A has acquired the land and has started with erecting buildings and the individual B has acquired the land for the matter of business only. This also falls in the characters of income (Lewis, 2016).
CB 12 development schemes:
The scheme specifies about the development of the land or distributing the land into lots though the matter of division is not a minor, the scheme started its action within 10 years of the land acquired. This is also considered as the income.
CB 26 Certain shares are disposed:
This section is applied during the income from the disposal is excluded and a dividend is declared from the share.
CB 16 exclusions from sections 6 to 11:
Sections from CB 6 to section CB 11 is not applicable if the individual occupied the land with a house dwelled on it. And this house which is dwelled is engaged mainly as the residing space where the total space will be comprised of 4500 sq.mt. or more than this if it is required for an enjoyment purpose or a reasonable occupation.
CB 19 Business exclusion from sections 6 to 11:
From section 6 to 11 it is observed that the land is not applied for disposal as for the business lands are regarded as the premises. The individual whoever occupied the land is the chief to carry on a large business. So, here the exclusions do not apply as because the individual who is on a daily method to dispose and acquiring a premise for business (Bennett, 2015). Here the land is regarded as the land which is occupied with the premises for the use of business.
In this current case study, it is observed that the Neils’ family have acquired the land for business of farming and poultry and erected a building on the same land. Though as per CB 7 if an individual along with an associated individual buys a land and acquires it and dwells house on it or else it is said that some development is done on by either the individual A that is the man who acquired the land or some expansion is done by the associated individual then on this ground it is considered as the income of the person. Again, some exclusions are also applicable as per CB 16 that an individual can buy a land and can dwell a house on the same ground on some specific area, and for any reasonable occupation is permitted by this law, as in this case the Neils’ were having a diary and a poultry farm. After 12 years the Neils’ gave the land to the trusts and the trustees that is, in this case they are known as the associate individuals (James et al., 2016). They divided the land into 5 plots, after this the trustees decided to keep one plot for them and the rest 4 plots with the opinion of one real estate company they decided to divide the 4 plots into 15 plots and sell them to earn. They sold almost 7 plots out of 15 and earned a good amount. This amount is known as income as per CA 1. As per CB 7 the dividing of plots and doing business on it is considered as income. As per CB 8 the amount that is derived from the disposing of a land is also known as income. According to CB 9 and CB11 a land acquired by the individual A, if business dealings happens on this land within 10 years of acquiring it by the individual A or the associate individual and making business out of it then it is also known as the income (Solt, 2016). As in this case, the Neils’ trustees were making business out of the plots thus it is considered as the income. As mentioned in the Section CB 19 it is mentioned that sections CB 6 and 11 is not applied on the disposal of the land as the land is the premises of a business and the individual whoever erected or occupied the premises to perform a considerable business from them. But the exclusions are not applied on an individual who has got busy in a continuous method of disposing and acquiring or disposing and erecting of land for business (Tan et al., 2016).
Conclusions:
Thus, to continue the business these trusties have to follow some rules and regulation imposed by the Income Tax Act 2007. By reviewing these sections and the exclusions of the sections the trustees will get a clear idea of the provisions of the land transactions.
Thanking You
To,
The Director,
Tim Brown Limited,
Subject: Letter of advice for determining the tax residency of the company
Sir,
With due respect and humble submission it is honoured that request have been received for assisting for the assisting you to determine the residential status of Just Juices Limited for taxation. It is glad to inform you that it will be my pleasure to help you in this case. To determine the suggested case, it is necessary to provide the overall position of the company regarding the taxation purpose and thus come to a conclusion in order to state the final decision about the tax residency status of the company. In the following points, the key factors for determining the tax residency of the company are given:
Just Juices Limited is a organic Apple juice production company which operates its business in all over Australia. The market share of the company is quite substantial in Australia. The products made by the company are sold across 90% of the market in Australia. The directors responsible for making the essential decisions are operating the business from Australia. But as the company do not have any offices in the country, the registered office of the country is situated in 99 Sylvia Park Road, Auckland, New Zealand.
As the main office of the company is situated in New Zealand, it is necessary to figure out the issues related taxation of the company in accordance with the legislations of New Zealand. Currently, the company is bearing a dual residential status, which means, the company is being regarded as the resident of both Australia and New Zealand for taxation purpose. Thus the case for this particular company needs to be examined by considering that the main motive of creating this assessment is to minimize the complexity of the taxation process for the company (Newbold et al., 2016). In order to do that, certain factors need to be undertaken and considered to determine whether the company is liable to pay tax to which of these countries and why. For making further decision, the key factors that are needed to be considered is the residency status of the company and the statutory provisions for residential status according to the legislature, the implications of the residential status of the company, the application of double tax agreements between Australia and New Zealand, and the application of tie-breaker test for resolve the problem of dual residence. After analysing these theories and implementing the suitable theories and legislations with the concurrent status of the company, it can be determine how the company will be taxed and to which country it is liable to pay the taxes (Dabla-Norris et al., 2017).
The residential status for taxation of a company is stated in the section HM7 of the Income Tax Act 2007. According to it, the entity must be a residence of New Zealand, should have a company structure, and must not carry a business of life insurance business in order to be a PIE. In section HM 11 and HM 12, the requirements of investment and the income type has also been stated. Thus, the company can be declared as a resident of New Zealand for taxation (Evans & Tran-Nam, 2014).
But in the Income Tax Assessment Act 1997 of Australia, it is stated that a foreign company which is gaining revenue from Australia will be regarded as a resident eligible for taxation under the legislation of Australia. In this way, The Company is liable to pay tax to both of these countries (Richardson, 2016). In order to figure out the actual residential status for taxation, the company must apply the methods stated in the Double Taxation Agreement for this determination. The theory of this method is:
Double Taxation Agreement:
Double taxation agreement is a convention between two countries in order to avoid the chances of double taxation on income and fringe benefits. The agreement is applicable to a person or entities who are the residents of one or both of the countries. The agreement covers all the legislations of both of the countries. In order to determine the taxation status of a company, the permanent establishment test is done. The permanent establishment is the method to find the core of the company’s establishment in which the properties of the company like a branch, an office, a factory, a mine, an agricultural farm and other such fixed assets are included (Palmer et al., 2018). Apart from that, the PE status can also be determined by doing the 183 day test. It is determined by checking the place of operation for the company where is mostly operated in the last 183 days of a twelve month period. If the company is succeeded to fulfil both of these requirements, the tie breaker test is needed to be done in order to clarify the residential status of the company for taxation.
Tie-breaker Test
This test is a provision for double tax agreement. If a company is capable of fulfilling both of the requirements stated in the agreement, the tie breaker test is done in order to determine the actual taxation status of the company. Generally there are multiple steps to solve the issue of a tie in the permanent establish process (Vegh & Vuletin, 2015). But in most cases, the place where the company is actually belong or is established permanently indicates the first preference of for determining the taxations status of the company.
The residential status for taxation of the company is tied between Australia and New Zealand as the company has succeeded to fulfil the requirements of both of the countries legislations for residential taxation. In accordance with the Income Tax Assessment Act 1997 of Australia and the Income Tax Act 2007 of New Zealand, The Company has successfully obtained all the necessary requirements to be liable to pay tax to these countries. To solve this confusion, the solution of this problem is stated in the Double Taxation Agreements between these two countries (Seuffert, 2018). In order to figure out the actual solution of this problem, the permanent establishment status of the company needs to be considered. According to this section, if the company has a permanent property in a particular nation, the company is liable to pay tax to that country. But it also says that if the company operated mostly in one particular nation for more than 183 days in one year duration, The Company is liable to pay tax to that country.
Thus, it can be seen that the head office (which is the only office of the company) is situated at Auckland, New Zealand. So According to the first section of PE status, the Company is liable to pay tax to New Zealand. But Apart from this, all of the revenue of the company is generated from the operations made in Australia and it is the biggest market for the company to generate sales (Easton, 2018). The company is working in this particular country for five years and captured 90% of the supermarkets and general stores of Australia. So from this point of view, the company has passed the 183 days test and is liable to pay taxes to Australian Government.
To fix this ambiguity, a particular provision come handy named tie breaker test. This test is provisioned to solve these types of issues where the company is liable to pay taxes to multiple countries which are in a Double Tax Agreement (van der Deen et al., 2016). There are many provisions which can be used in order to solve such issues, but the one which is widely used and most relevant for this case is the permanent residential status of the company. According to this provision, the place where the core establishment of the company is permanently situated is regarded as the actual residential status for taxation of the company. Thus, as the head office of the company is situated in New Zealand, the company is liable to pay taxes to the government of New Zealand as a result of the tie breaking test (Rashbrooke, 2015).
Conclusion
The residential status of the company for taxation has been identified by the Double taxation Agreement and the tie breaking test. The company will be liable to pay the taxes over their annually generated revenue to the Government of New Zealand. Thus it is advised to the Tim Brown Limited to prepare the appropriate taxation measurement over the annual income of the company Just Juice Limited by following the legislations of the Income Tax Act 2007 of New Zealand. Tim Brown Limited is also advised to follow the provisions for tax reduction and the rebate on tax as far as the taxation ruling of that particular country is concerned.
Yours truly,
References
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