CPA New Zealand Taxation common mistakes
CPA New Zealand Taxation · Understand the traps and how to avoid them.
Treating GST as a cash-flow afterthought: recording sales and purchases at GST-inclusive amounts in the accounts and then trying to back out the GST at filing time, rather than maintaining a GST-exclusive ledger with a separate GST clearing account.
Candidates often come from bookkeeping habits where the bank statement is the record. They forget that GST is a tax on the supply, not on the bank movement, and that timing differences (invoice basis vs payments basis) and credit/debit note adjustments must be tracked separately from the cash.
What to do instead
For every scenario, first identify the GST accounting basis (invoice, payments, or hybrid), then compute output tax on supplies and input tax on purchases at the supply date, and reconcile to the GST return boxes (Box 5 sales and income, Box 8 purchases and expenses, Box 9 GST collected, Box 11 GST credits). Practise the two-step: gross amount ÷ (1 + rate) gives the GST-exclusive value; multiply by the rate for the GST component. Do ten mixed-basis drills until the basis choice is automatic.
Applying the company tax rate, the trustee rate, or the top individual marginal rate to every entity without checking the entity type and the year, and ignoring that the trustee rate and top personal rate have moved over recent years.
Candidates memorise one headline rate and reuse it. The exam deliberately mixes sole traders, partnerships, look-through companies, close companies, trusts, and PIEs, each with different rate rules and attribution consequences.
What to do instead
Build a one-page rate table for the exam year: individual marginal brackets, company rate, trustee rate, PIE rates (10.5/17.5/28), and the lower rates for certain savings vehicles. Before calculating, write the entity type and the income year at the top of your working. Where a rate has changed, state the year you are applying and why.
Ignoring the imputation credit account: calculating a dividend's cash amount and stopping there, without grossing up for imputation credits, applying RWT, or checking the ICA balance and the benchmark dividend rule.
Candidates treat dividends as simple income. The interaction of imputation credits, RWT, the 20% and 33% top-rate thresholds, and the continuity/benchmark rules is genuinely layered, and candidates skip the gross-up step.
What to do instead
For every dividend, work through: cash dividend → imputation credit attached (max 28/72 of cash) → gross dividend → RWT withheld at the shareholder's rate → tax payable/refundable after the imputation credit. Separately note the benchmark dividend ratio and whether the ICA has a debit balance that would trigger further imputation penalty. Do a full shareholder-level computation, not just the company-level one.
Failing to distinguish deductible repairs and maintenance from capital improvements: writing off a replacement roof, a full re-fit, or a seismic strengthening as repairs because it 'restores' the asset.
The repairs versus capital distinction turns on fact and degree, and candidates apply a single test (does it restore the asset?) instead of the full framework (is it a repair of an existing asset, does it create a new asset, does it extend useful life or change character, is it part of a project?).
What to do instead
Use a decision checklist: identify the asset; ask whether the work restores the asset to its original condition or improves it; consider whether the work is part of a larger project; check specific regimes (residential rental ring-fencing, commercial building depreciation removal and reinstatement, earthquake strengthening deductibility). State each factor in your answer even when the conclusion is obvious, because marks are allocated to reasoning.
Mixing up the treatment of residential rental property: claiming depreciation on residential buildings, ignoring the interest limitation rules, and forgetting the residential rental ring-fencing of losses.
These rules changed repeatedly and candidates rely on old study notes. The residential building depreciation prohibition, the phased interest deductibility rules, and ring-fencing interact, and candidates apply one without the others.
What to do instead
Keep a current summary sheet: residential buildings are not depreciable (unless on the exceptions list, e.g. certain commercial or emergency/employee accommodation); interest deductibility is limited with phased percentages by year and subject to the grandparenting and new-build exemptions; rental losses are ring-fenced to rental income. For each rental scenario, tick all three boxes before computing net rental income.
Treating a sale of shares or a business asset as automatically capital, or automatically revenue, without analysing the purpose, the intention at acquisition, the nature of the asset, and the surrounding circumstances.
Candidates look for a bright-line rule. New Zealand has no general capital gains tax, so the answer depends on the specific provision (e.g. trading stock, land dealing, personal property held for profit, scheme of disposal) and on the facts, and the exam tests exactly that judgement.
What to do instead
For every disposal, run the statutory checklist: is it trading stock; is it land subject to the land sale rules (intention, dealing, development, zoning); is it personal property acquired for the purpose of disposal; is there a scheme or undertaking; does an exclusion apply (e.g. residential land exclusions, business premises). Write the provision you are relying on, then the facts that satisfy it.
Calculating provisional tax without checking the threshold, the instalment dates, the method (standard, estimation, ratio), and the use-of-money interest consequences.
Candidates treat provisional tax as a single formula. The rules differ by year, by whether the taxpayer uses a GST ratio, and by whether they are a new business or have a late balance date, and UOMI is assessed on underpaid instalments, not on the annual total.
What to do instead
For provisional tax questions, set out: residual income tax of the prior year, the threshold and whether it is exceeded, the instalment dates for the taxpayer's balance date, the chosen method, and each instalment amount. Then compute UOMI on each shortfall from its instalment date to the terminal tax date. Practise with a two-instalment and a three-instalment case.
Ignoring the shareholder-employee and close company rules: failing to apply PAYE to shareholder-employee remuneration, missing the ACC earners' levy treatment, and not accounting for the imputation consequences of remuneration versus dividends.
Candidates see a company and a person and treat them as unrelated. The shareholder-employee rules, the close company attribution rules, and the choice between salary and dividend are core exam scenarios with different tax outcomes.
What to do instead
Classify the person first: employee, shareholder-employee, or independent contractor. Then apply the relevant PAYE, ACC, KiwiSaver, and imputation treatment. For a close company, check whether income must be attributed to shareholders and whether the attribution changes the marginal rate. Compare the salary route and the dividend route numerically before concluding.
Omitting the tax administration layer: not filing or filing late, missing the 30-day voluntary disclosure window, and failing to recognise shortfall penalties and the reduction for voluntary disclosure.
Candidates focus on computation and treat penalties as an afterthought. The exam tests whether you know the penalty categories (not taking reasonable care, unacceptable interpretation, gross carelessness, evasion), the shortfall penalty percentages, and the 100% reduction for voluntary disclosure before notification.
What to do instead
Build a penalties flow: establish the shortfall, categorise the behaviour, apply the percentage, then apply reductions (voluntary disclosure, cooperation, previous good behaviour) and the 30-day payment discount. Memorise the voluntary disclosure timing rule (before notification, or within 30 days of notification) and the effect on the shortfall penalty. Do one full penalty computation end to end.
Not applying the residence and source framework: assuming a person's worldwide income is always taxable in New Zealand, or that foreign income is always out of scope, without checking the residence tests, the source rules, the transitional resident exemption, and double tax agreements.
Candidates treat residency as a single fact. The 183-day and permanent place of abode tests, the transitional resident exemption, the foreign investment fund rules, and DTA tie-breakers each change the answer, and the exam uses inbound and outbound scenarios.
What to do instead
For any cross-border scenario, work in order: is the person a New Zealand tax resident under the 183-day or permanent place of abode test; is the income New Zealand-sourced or foreign-sourced; does the transitional resident exemption apply and for how long; do the FIF or controlled foreign company rules apply; does a DTA alter the result and is a foreign tax credit available. State each step, even where the answer is 'no'.