I85PREP
⌘ K
CA ANZ Core 4: Tax (NZ) study materials
CA ANZ Core 4: Tax (NZ) study resources

CA ANZ Core 4: Tax (NZ) practice questions

One question at a time. Build your CA ANZ Core 4: Tax (NZ) understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Tax administration and the New Zealand tax system

Which organisation is responsible for administering the Goods and Services Tax and income tax in New Zealand?

  1. The Treasury
  2. Inland Revenue (Te Tari Taake) Correct answer.
  3. The Ministry of Business, Innovation and Employment
  4. The Reserve Bank of New Zealand

Explanation

Inland Revenue, also known as Te Tari Taake, is the government department that administers New Zealand's main taxes, including GST, income tax and withholding taxes. It collects revenue, processes returns and enforces the Inland Revenue Acts. Other agencies have policy or economic roles but do not administer the tax system day to day.

Question 2Tax administration and the New Zealand tax system

For a standard balance date taxpayer, by which date must an individual's income tax return for the year ended 31 March generally be filed?

  1. 31 March of the following year
  2. 7 July of the following year Correct answer.
  3. 31 December of the following year
  4. 31 August of the following year

Explanation

The standard filing date for most taxpayers with a 31 March balance date is 7 July following the end of the tax year, unless an extension applies. For example, returns for the year ended 31 March 2024 are due by 7 July 2024. Tax agents and taxpayers with non-standard balance dates may have different dates.

Question 3Tax administration and the New Zealand tax system

Which of the following best describes the New Zealand tax year for income tax purposes?

  1. 1 July to 30 June
  2. 1 April to 31 March Correct answer.
  3. 1 January to 31 December
  4. 1 October to 30 September

Explanation

The standard New Zealand income tax year runs from 1 April to 31 March of the following calendar year. Taxpayers may apply for a non-standard balance date, but the default year is set by the Inland Revenue Acts. This affects filing dates and the period covered by a return.

Question 4Tax administration and the New Zealand tax system

What is the standard GST rate in New Zealand?

  1. 15% Correct answer.
  2. 20%
  3. 12.5%
  4. 10%

Explanation

New Zealand's GST rate has been 15% since 1 October 2010, when it increased from 12.5%. GST applies broadly to goods and services supplied in New Zealand by registered persons. The rate is set in the Goods and Services Tax Act 1985.

Question 5Tax administration and the New Zealand tax system

Which of the following is generally the primary source of New Zealand's tax law?

  1. Cabinet minutes
  2. Accounting standards
  3. The Inland Revenue Acts and related statutes Correct answer.
  4. Inland Revenue published guides

Explanation

Statutes such as the Income Tax Act 2007 and the Goods and Services Tax Act 1985 are the primary source of tax law in New Zealand. Inland Revenue guides and statements are interpretive aids that explain how the Commissioner applies the law. Case law also interprets the statutes but does not replace them.

Question 6Tax administration and the New Zealand tax system

A GST-registered business makes supplies in New Zealand. Which document must generally be provided to customers for taxable supplies over $50?

  1. A tax invoice Correct answer.
  2. A purchase order
  3. A statement of account
  4. A bank deposit slip

Explanation

A registered supplier must generally issue a tax invoice for taxable supplies, and a full tax invoice is required where the consideration exceeds $50. The invoice supports the customer's input tax claim and records the supplier's output tax. Simplified requirements apply to supplies of $50 or less.

Question 7Tax administration and the New Zealand tax system

An individual earns only salary and wages with tax deducted at source and has no other income. What is the usual position regarding filing an income tax return?

  1. A return may not be required because the income is already taxed at source Correct answer.
  2. A return is required only if the person is GST registered
  3. A return must be filed by 31 March each year
  4. A return is always required regardless of circumstances

Explanation

Where an individual's only income is salary or wages with the correct amount of tax deducted, Inland Revenue may not require an annual return. The system uses information from employers and may issue an automatic assessment. Filing obligations depend on the person's circumstances rather than a universal rule.

Question 8Tax administration and the New Zealand tax system

A taxpayer disagrees with an assessment issued by the Commissioner. What is the first formal step in the disputes process?

  1. Requesting a ministerial review
  2. Issuing a notice of proposed adjustment Correct answer.
  3. Applying to the Ombudsman
  4. Filing proceedings in the High Court

Explanation

The disputes process generally begins with a notice of proposed adjustment (NOPA) issued by the taxpayer or the Commissioner. The parties then exchange statements of position before the dispute can proceed to challenge in the hearing authority. This structured process is intended to resolve disagreements before litigation.

Question 9Tax administration and the New Zealand tax system

Which body hears a taxpayer's challenge to a tax assessment after the disputes process is complete?

  1. The Commerce Commission
  2. The Taxation Review Authority or the High Court Correct answer.
  3. The District Court criminal division
  4. The Employment Relations Authority

Explanation

Once the disputes process is concluded, a taxpayer may challenge the assessment in the Taxation Review Authority or the High Court. These bodies hear the substantive dispute and apply the tax statutes. Other bodies listed do not have jurisdiction over tax assessment challenges.

Question 10Tax administration and the New Zealand tax system

A business registered for GST makes a supply to a customer and charges GST. What is this GST called from the supplier's perspective?

  1. Withholding tax
  2. Input tax
  3. Output tax Correct answer.
  4. Fringe benefit tax

Explanation

GST charged by a supplier on its taxable supplies is output tax. The supplier returns this to Inland Revenue, generally netting it against input tax claimed on purchases. Input tax arises on the recipient side, while withholding and fringe benefit taxes are different taxes entirely.

Question 11Tax administration and the New Zealand tax system

An employer provides a non-cash benefit to an employee. Which tax generally applies to that benefit?

  1. GST only
  2. Fringe benefit tax Correct answer.
  3. Non-resident withholding tax
  4. Resident withholding tax

Explanation

Fringe benefit tax (FBT) applies to non-cash benefits provided by employers to employees, such as motor vehicles or low-interest loans. It is designed to parallel the taxation of cash remuneration. Resident and non-resident withholding taxes apply to different payment types.

Question 12Tax administration and the New Zealand tax system

Which of the following payments would generally be subject to resident withholding tax when paid to a New Zealand resident?

  1. Interest paid by a bank on a deposit Correct answer.
  2. A GST-refunded business sale
  3. A capital gain on shares
  4. A salary paid through payroll

Explanation

Resident withholding tax (RWT) is deducted at source from certain resident investment income, including interest and dividends. Salary and wages are subject to PAYE rather than RWT. Capital gains are generally not taxed in New Zealand absent specific provisions.

Question 13Tax administration and the New Zealand tax system

What is the purpose of the PAYE system in New Zealand?

  1. To collect customs duties on imports
  2. To collect GST on business sales
  3. To deduct income tax and ACC levies from salary and wages at source Correct answer.
  4. To tax non-cash employee benefits

Explanation

PAYE (pay as you earn) requires employers to deduct income tax and ACC earners' levies from salary and wages and remit them to Inland Revenue. This collects tax progressively during the year rather than in a lump sum at year end. GST, FBT and customs duties operate under separate regimes.

Question 14Tax administration and the New Zealand tax system

A taxpayer wants certainty about how the Commissioner will treat a proposed arrangement. Which service is most appropriate?

  1. A tax invoice
  2. A statement of position
  3. A notice of assessment
  4. A binding ruling Correct answer.

Explanation

A binding ruling is a formal statement from the Commissioner about how the tax laws will apply to a specific arrangement, and it binds Inland Revenue provided the facts are as described. Tax invoices, assessments and statements of position serve different functions in the tax system. Binding rulings give taxpayers greater certainty before entering transactions.

Question 15Tax administration and the New Zealand tax system

Which of the following best describes the Commissioner's power to amend an assessment?

  1. Only the taxpayer can request an amendment
  2. The Commissioner may amend an assessment within the time limits set by the Inland Revenue Acts Correct answer.
  3. The Commissioner can never amend an assessment once issued
  4. Amendments are limited to GST assessments only

Explanation

The Commissioner has statutory power to amend assessments, but the time available to do so is limited by provisions such as the four-year time bar, subject to exceptions for fraud or evasion. This allows errors to be corrected while providing finality. The power is not restricted to GST or to taxpayer-initiated changes.

Question 16Tax administration and the New Zealand tax system

A taxpayer deliberately fails to disclose income. How does this affect the Commissioner's ability to amend an assessment outside the usual time bar?

  1. The assessment becomes permanently unenforceable
  2. The time bar may not apply where fraud or evasion is involved Correct answer.
  3. Only the taxpayer can waive the time bar
  4. The time bar still applies without exception

Explanation

The general four-year time bar on amendments does not protect a taxpayer where the return was fraudulent or wilfully misleading, or where income was omitted. In such cases the Commissioner can amend outside the usual period. This exception reflects the principle that deliberate non-disclosure should not gain the benefit of finality.

Question 17Tax administration and the New Zealand tax system

Which of the following is an example of a tax credit that may reduce an individual's income tax liability in New Zealand?

  1. The GST input credit
  2. The customs drawback
  3. The fringe benefit credit
  4. The independent earner tax credit Correct answer.

Explanation

The independent earner tax credit is an income tax credit available to certain individuals who earn income but do not receive a main benefit or Working for Families tax credits. GST input credits relate to GST on business purchases, while fringe benefit and customs rules are separate regimes. Tax credits reduce the amount of income tax otherwise payable.

Question 18Tax administration and the New Zealand tax system

A company with a 31 March balance date wants to know when provisional tax is generally due during the year. Which pattern applies to a standard uplift instalment arrangement?

  1. A single payment on 31 March
  2. Instalments due only in December
  3. Instalments generally due on 28 August, 15 January and 7 May Correct answer.
  4. Payments made weekly through payroll

Explanation

For a standard 31 March balance date, provisional tax under the standard uplift method is generally payable in three instalments: 28 August, 15 January and 7 May. These dates spread the payment of tax across the year based on prior-year liability. GST and PAYE follow different cycles.

Question 19Tax administration and the New Zealand tax system

What is the main consequence for a GST-registered person who fails to keep adequate records?

  1. The GST rate changes for that person
  2. The person may face penalties and difficulty substantiating GST positions Correct answer.
  3. The person becomes exempt from income tax
  4. The registration is automatically cancelled

Explanation

Registered persons must keep records sufficient to support their GST returns and input tax claims. Failure to do so can result in penalties and may prevent the person from substantiating positions if Inland Revenue queries them. Record-keeping obligations do not alter the GST rate or automatically cancel registration.

Question 20Tax administration and the New Zealand tax system

Which statement best describes the role of case law in New Zealand's tax system?

  1. It applies only to GST disputes
  2. It interprets the statutes and guides their application Correct answer.
  3. It has no relevance to tax administration
  4. It replaces the Inland Revenue Acts entirely

Explanation

New Zealand courts interpret the tax statutes and their decisions guide how the law is applied in later cases. Case law works alongside legislation rather than replacing it. It is relevant across income tax, GST and administration matters, not confined to one tax type.

Question 21Income tax fundamentals: assessable income, deductions, and timing

Under New Zealand income tax law, which of the following best describes the treatment of a fringe benefit received by an employee in relation to their employment?

  1. It is a non-taxable capital receipt for the employee and ignored by the employer.
  2. It is generally exempt income in the employee's hands but subject to fringe benefit tax on the employer. Correct answer.
  3. It is deductible to the employee as a work-related expense.
  4. It is assessable income of the employee and also subject to fringe benefit tax on the employer.

Explanation

Fringe benefits are taxed at the employer level through fringe benefit tax, and the value is generally not assessable income of the employee. This avoids double taxation of the same benefit. The employer pays FBT on the taxable value of the benefit provided.

Question 22Income tax fundamentals: assessable income, deductions, and timing

A New Zealand resident company receives a cash dividend from another NZ resident company. What is the income tax treatment of that dividend in the recipient's hands?

  1. Assessable, but only to the extent it exceeds the imputation credit.
  2. Exempt income because it is a dividend between resident companies. Correct answer.
  3. Taxable at the trustee rate regardless of the recipient.
  4. Fully assessable with no credit for imputation credits.

Explanation

Dividends between New Zealand resident companies are generally exempt income under the inter-corporate dividend exemption. This prevents cascading of tax through layers of companies. The exemption applies broadly to resident company recipients.

Question 23Income tax fundamentals: assessable income, deductions, and timing

Which of the following receipts is most clearly a capital receipt and therefore not assessable income?

  1. Interest earned on a short-term business deposit.
  2. Proceeds from selling a personal family home. Correct answer.
  3. A bonus paid for meeting a sales target.
  4. Commission earned on a one-off sales contract.

Explanation

Proceeds from disposing of a private family home are generally capital in nature and not assessable, subject to specific property rules. Ordinary income receipts such as commission, interest and bonuses are assessable. The distinction turns on whether the gain arises from a capital asset held privately.

Question 24Income tax fundamentals: assessable income, deductions, and timing

For a taxpayer who is not a specified person, when is a deduction for an expense generally allocated under the accrual rules in New Zealand?

  1. When the expense is paid in cash.
  2. When the expense is incurred, applying the accrual basis. Correct answer.
  3. When the financial year is audited.
  4. When the invoice is filed with Inland Revenue.

Explanation

Deductions are generally allocated to the income year in which the expense is incurred, using the accrual basis. Cash payment timing is not the general rule for non-specified persons. This matches income and related expenditure to the correct period.

Question 25Income tax fundamentals: assessable income, deductions, and timing

A self-employed builder pays a fine for a breach of health and safety legislation. How is the fine treated for income tax purposes?

  1. Deductible as a cost of doing business.
  2. Deductible as a business expense.
  3. Deductible only if it is under a set threshold.
  4. Non-deductible because fines and penalties are not deductible. Correct answer.

Explanation

Fines and penalties imposed for a breach of the law are not deductible, reflecting public policy that the cost of punishment should not be subsidised by tax relief. The rule applies regardless of whether the fine relates to business activity. Ordinary business costs remain deductible, but penalties are excluded.

Question 26Income tax fundamentals: assessable income, deductions, and timing

A business pays a $30,000 premium for a two-year insurance policy covering the next 24 months. Under the general accrual rules, how much is deductible in the first income year (assume a 12-month year and the policy starts at the beginning of the year)?

  1. $7,500 in the first year.
  2. $0 in the first year.
  3. $30,000 in the first year.
  4. $15,000 in the first year. Correct answer.

Explanation

The premium relates to two income years, so the accrual approach allocates half to each year. A deduction of $15,000 matches the portion of cover consumed in the first year. The remaining $15,000 is deductible in the second year.

Question 27Income tax fundamentals: assessable income, deductions, and timing

An employee receives a $500 gift voucher from their employer as a reward for good performance. How is this treated?

  1. A fringe benefit subject to FBT on the employer. Correct answer.
  2. Assessable salary income with PAYE deducted.
  3. Exempt income for the employee and ignored by the employer.
  4. A deductible expense for the employee.

Explanation

A voucher provided to an employee in connection with employment is a fringe benefit, and the employer is liable for fringe benefit tax on its value. It is not taxed as salary with PAYE. The employee generally does not include it as assessable income.

Question 28Income tax fundamentals: assessable income, deductions, and timing

A company incurs $8,000 of legal fees in an unsuccessful attempt to acquire a new long-term business asset. How are these costs generally treated?

  1. Capital in nature and not deductible, because they relate to acquiring a capital asset. Correct answer.
  2. Fully deductible as a business expense.
  3. Deductible only if the acquisition succeeds.
  4. Deductible over five years.

Explanation

Costs incurred in acquiring a capital asset are capital in nature and generally not deductible, even if the attempt fails. The fact that the acquisition did not proceed does not convert the cost into a revenue expense. Capital costs may instead be added to the asset's cost base where relevant.

Question 29Income tax fundamentals: assessable income, deductions, and timing

A taxpayer derives $5,000 of interest income in the year. They also have $2,000 of allowable deductions relating to earning that interest. What is the net amount included in assessable income?

  1. $5,000, because interest is gross assessable income.
  2. $3,000, being interest less allowable deductions. Correct answer.
  3. $0, because interest is exempt.
  4. $7,000, being interest plus deductions.

Explanation

Interest is assessable income, and allowable deductions incurred in deriving that income reduce the net amount included. The net figure is $5,000 less $2,000, giving $3,000. Deductions are not added to income.

Question 30Income tax fundamentals: assessable income, deductions, and timing

A business uses the cash basis for a small trading operation and receives $10,000 in December for work to be performed in the following year. Under the cash basis, when is the income recognised?

  1. When the contract is signed.
  2. When the work is performed.
  3. When the cash is received. Correct answer.
  4. When the invoice is sent.

Explanation

Under a cash basis, income is recognised when cash is received rather than when the work is performed. This is a permitted approach for certain small taxpayers. The general accrual approach would instead recognise income as it is earned.

Question 31Income tax fundamentals: assessable income, deductions, and timing

Which of the following is the correct treatment of depreciation on a building used in a business, given current New Zealand rules for non-residential buildings?

  1. Depreciation is deductible only for residential rental buildings.
  2. Depreciation is deductible only in the year of sale.
  3. Depreciation on non-residential buildings is not deductible. Correct answer.
  4. Depreciation on non-residential buildings is fully deductible at 10% straight line.

Explanation

Depreciation deductions for non-residential buildings have been removed, so no deduction is available for the building itself. Fit-out and certain other items may still be depreciable separately. Residential rental buildings are also generally non-depreciable.

Question 32Income tax fundamentals: assessable income, deductions, and timing

A taxpayer sells trading stock that cost $12,000 for $20,000. What is the effect on assessable income?

  1. No amount is assessable because stock is capital.
  2. $12,000 assessable income.
  3. $8,000 net assessable income, being sale proceeds less cost. Correct answer.
  4. $20,000 assessable with no deduction.

Explanation

Sale proceeds from trading stock are assessable income, and the cost of the stock is deductible, giving net income of $8,000. Trading stock is revenue in nature, not capital. The matching of proceeds and cost produces the correct net result.

Question 33Income tax fundamentals: assessable income, deductions, and timing

A landlord receives a non-refundable payment from a tenant to surrender a lease early. How is this receipt generally treated?

  1. Capital and non-assessable.
  2. A loan to be repaid.
  3. Assessable income as a lease surrender payment. Correct answer.
  4. Exempt because it is not rent.

Explanation

A lease surrender payment received by a landlord is generally assessable income. It is treated as income arising from the lease relationship rather than a capital receipt. The non-refundable nature confirms it is not a repayable loan.

Question 34Income tax fundamentals: assessable income, deductions, and timing

Which of the following expenses is most likely deductible under the general permission for a business?

  1. A personal holiday for the owner.
  2. Interest on borrowed money used to purchase business inventory. Correct answer.
  3. A fine for late payment of rates.
  4. A donation to a political party.

Explanation

Interest on funds borrowed to acquire income-producing inventory is incurred in deriving assessable income and is generally deductible. Political donations, fines and private expenses are not deductible. The general permission requires a nexus with assessable income.

Question 35Income tax fundamentals: assessable income, deductions, and timing

A company makes a $50,000 payment to a shareholder-employee that is excessive relative to the services provided. How is the excess treated?

  1. Non-deductible to the extent it is excessive, and may be treated as a dividend. Correct answer.
  2. Fully deductible as salary.
  3. Deductible only if approved by shareholders.
  4. Treated as a capital contribution.

Explanation

Payments to shareholder-employees that exceed a reasonable amount for services are not fully deductible, and the excess may be treated as a dividend. This prevents companies from disguising distributions as deductible salary. The reasonable remuneration test applies.

Question 36Income tax fundamentals: assessable income, deductions, and timing

A taxpayer receives a government grant to purchase a new machine used in their business. How is the grant generally treated?

  1. Deductible to the taxpayer.
  2. Assessable income, with possible adjustment to the asset's cost base. Correct answer.
  3. Fully exempt and ignored for tax.
  4. Treated as a loan.

Explanation

Government grants received in connection with business are generally assessable income, and the cost base of the asset may be reduced accordingly. This prevents a double benefit from both the grant and depreciation on the full cost. A grant is not a loan or an exempt receipt.

Question 37Income tax fundamentals: assessable income, deductions, and timing

A business incurs $6,000 of repairs to restore a building to its original condition after damage, and separately spends $40,000 to add a new extension. How are these treated?

  1. Both amounts are capital.
  2. The $6,000 is capital; the $40,000 is deductible.
  3. The $6,000 repairs are deductible; the $40,000 extension is capital. Correct answer.
  4. Both amounts are deductible as repairs.

Explanation

Repairs that restore an asset to its original condition are generally deductible, while costs that add to or improve the asset are capital. The extension creates a new capital asset and is not deductible. The distinction turns on whether the work restores or improves.

Question 38Income tax fundamentals: assessable income, deductions, and timing

A taxpayer on the accrual basis provides services in March but invoices the client in April and is paid in May. In which period is the income recognised?

  1. April, when the invoice is issued.
  2. March, when the services are performed. Correct answer.
  3. May, when cash is received.
  4. The following year.

Explanation

Under the accrual basis, income is recognised when it is earned, which is when the services are performed. Invoice and payment timing do not shift recognition for accrual taxpayers. This matches income with the period in which the earning activity occurred.

Question 39Income tax fundamentals: assessable income, deductions, and timing

A company sells goods on credit in the current year and, based on reliable evidence, expects $3,000 of the debt to be irrecoverable. How should this be treated under the accrual approach?

  1. No deduction until the debt is formally written off.
  2. A deduction for the estimated bad debt in the current year. Correct answer.
  3. The sale should be reversed entirely.
  4. A deduction only when the debtor is declared bankrupt.

Explanation

Under the accrual approach, a deduction for a bad debt can be recognised when there is reliable evidence it is irrecoverable, even before formal write-off in some cases. This matches the loss to the income it relates to. The sale itself is not reversed.

Question 40Income tax fundamentals: assessable income, deductions, and timing

A business receives a deposit from a customer for goods to be delivered next year. Under the accrual basis, when is the deposit generally recognised as income?

  1. When the goods are delivered and the income is earned. Correct answer.
  2. When received, because cash has changed hands.
  3. Never, because deposits are capital.
  4. When the contract is signed.

Explanation

Under the accrual basis, a deposit is generally recognised as income when the goods are delivered and the earning process is complete. Receipt of cash alone does not trigger recognition for accrual taxpayers. The deposit may be a liability until the obligation is fulfilled.

Question 41Income tax fundamentals: assessable income, deductions, and timing

A taxpayer incurs costs of $20,000 to investigate the feasibility of a new business venture that is ultimately abandoned. How are these feasibility costs generally treated?

  1. Fully deductible as revenue expenses.
  2. Deductible only if the venture proceeds.
  3. Capital in nature and generally not deductible, because they relate to establishing a capital structure. Correct answer.
  4. Deductible over ten years.

Explanation

Feasibility costs incurred in investigating a new capital venture are generally capital in nature and not deductible, even if the venture is abandoned. They relate to establishing a capital structure rather than to ordinary revenue operations. There is no general ten-year spreading rule.

Question 42Income tax fundamentals: assessable income, deductions, and timing

A New Zealand resident individual receives rental income from a residential property. Which statement best describes the treatment of the rental income and related interest deductions under current rules?

  1. Rental income is assessable, and all interest is fully deductible without limitation.
  2. Rental income is exempt and interest is not deductible.
  3. Rental income is assessable, and interest deductibility is subject to specific limitation rules. Correct answer.
  4. Rental income is capital and interest is deductible.

Explanation

Residential rental income is assessable, and the deductibility of interest is subject to specific limitation rules that phase in over time. Not all interest is automatically deductible. Rental income is revenue, not capital.

Question 43Income tax fundamentals: assessable income, deductions, and timing

Which of the following best describes the general permission for deductibility in New Zealand income tax?

  1. An expense is deductible if it is approved by the Commissioner.
  2. An expense is deductible if it is reasonable in amount.
  3. An expense is deductible if it is paid in cash.
  4. An expense is deductible if it is incurred in deriving assessable income or in carrying on a business for that purpose. Correct answer.

Explanation

The general permission allows a deduction for expenditure or loss incurred in deriving assessable income or in carrying on a business for that purpose. Reasonableness, Commissioner approval and cash payment are not the tests. Specific limitations and prohibitions may still apply.

Question 44Income tax fundamentals: assessable income, deductions, and timing

A business owner uses a business vehicle 70% for business and 30% for private purposes. The vehicle costs $10,000 in total running costs for the year. How much is deductible?

  1. $3,000, being the private proportion.
  2. $0, because the vehicle is used privately.
  3. $10,000, being the full running costs.
  4. $7,000, being the business proportion. Correct answer.

Explanation

Only the business-use proportion of mixed-purpose expenses is deductible. Seventy per cent of $10,000 is $7,000. The private portion is not deductible because it is not incurred in deriving assessable income.

Question 45Income tax fundamentals: assessable income, deductions, and timing

Which of the following is the correct treatment of a capital gain made on the sale of shares held as a long-term investment by an individual who is not a share dealer?

  1. Generally not assessable, because the gain is capital in nature. Correct answer.
  2. Always assessable as income.
  3. Exempt only if the shares are listed.
  4. Assessable only if the gain exceeds $50,000.

Explanation

For an individual who is not a dealer, a gain on the sale of shares held as a long-term investment is generally capital in nature and not assessable. There is no general capital gains tax in New Zealand. Specific rules may still catch certain share disposals.

Question 46Income tax fundamentals: assessable income, deductions, and timing

A New Zealand resident individual earns a salary from employment and also receives a cash dividend from a New Zealand company. What is the general treatment of the dividend under the Income Tax Act 2007?

  1. The dividend is only assessable if the shareholder holds shares as trading stock
  2. The dividend is a capital receipt and is not assessable in the hands of the shareholder
  3. The dividend is exempt income because it is a distribution of company profits
  4. The dividend is assessable income, generally with imputation credits attached Correct answer.

Explanation

Dividends received by a New Zealand resident shareholder are generally assessable income under the Income Tax Act 2007. Where the company has paid NZ tax, imputation credits are attached and can be used to offset the shareholder's tax liability.

Question 47Income tax fundamentals: assessable income, deductions, and timing

An individual pays $1,200 of interest on a loan used to acquire a residential rental property that is rented to tenants. How is this interest generally treated for income tax purposes?

  1. It is deductible in full in the year the loan is repaid
  2. It is deductible only against the taxpayer's salary and wage income
  3. It is a non-deductible capital cost because it relates to acquiring the property
  4. It is a deductible expense against the rental income, subject to any applicable limitation rules Correct answer.

Explanation

Interest on borrowed money used to acquire an income-producing asset is generally deductible under the general permission because it has a nexus with deriving assessable income. For residential rental property, specific limitation rules may restrict the amount deductible in a given year.

Question 48Income tax fundamentals: assessable income, deductions, and timing

A business incurs $4,000 of interest on money borrowed to purchase a delivery van used entirely for business. The business also earns $60,000 of trading income. Assuming no specific limitation applies, what is the tax treatment of the interest?

  1. The interest is non-deductible because the van is a capital asset
  2. The interest is added to the cost base of the van and depreciated over its useful life
  3. The interest is deductible only to the extent of 50% of the amount incurred
  4. The interest is deductible against the trading income because it relates to an income-producing asset Correct answer.

Explanation

Interest incurred on borrowings used to acquire an asset that produces assessable income is deductible under the general permission. The deduction is taken in the year the interest is incurred, not capitalised into the asset's cost.

Question 49Income tax fundamentals: assessable income, deductions, and timing

A company receives $15,000 in advance from a customer in March for services to be performed evenly over the following 12 months. The company uses the accrual basis. How much of the $15,000 is assessable income in the year of receipt?

  1. $0, because the services have not yet been performed
  2. $7,500, because advance payments are always split equally between two years
  3. The portion earned in that year, with the balance recognised as income as services are performed Correct answer.
  4. $15,000, because the cash was received in that year

Explanation

Under the accrual basis, income is recognised when it is earned rather than when cash is received. An advance payment for future services is recognised as the services are performed, so only the earned portion is assessable in the year of receipt.

Question 50Income tax fundamentals: assessable income, deductions, and timing

A taxpayer incurs $9,000 of legal and valuation costs in successfully defending a claim that a business asset belongs to a third party. The asset is used in the taxpayer's business to produce income. How are these costs generally treated?

  1. They are deductible only if the claim is unsuccessful
  2. They are added to the asset's depreciable cost base and recovered through depreciation
  3. They are non-deductible capital costs because they relate to the ownership of a capital asset
  4. They are deductible because they relate to protecting an income-producing asset and are revenue in nature Correct answer.

Explanation

Costs incurred to defend or protect title to an asset used in producing income are generally revenue in nature where they merely preserve the asset rather than acquire or improve it. Such costs are therefore deductible under the general permission.