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CPA New Zealand Taxation study materials
CPA New Zealand Taxation study resources

CPA New Zealand Taxation practice questions

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Question 1New Zealand Taxation

Under New Zealand's GST Act 1985, at what point is GST generally charged on a supply of goods and services by a registered person?

  1. At the time the supply is made, unless the supplier accounts for GST on an invoice or hybrid basis Correct answer.
  2. At the time the invoice is dated
  3. At the end of the supplier's income year
  4. At the time the buyer makes payment

Explanation

Section 9 of the Goods and Services Tax Act 1985 imposes GST on the supply of goods and services by a registered person in the course or furtherance of a taxable activity, and the tax is charged at the time the supply is made. That default is modified for suppliers who account on an invoice or hybrid basis, where the time of supply shifts to the earlier of invoice or payment. The payment basis similarly shifts timing to when payment is received.

Question 2New Zealand Taxation

A New Zealand resident individual earns salary and wages. Which statement correctly describes how that income is taxed?

  1. It is taxed using progressive marginal rates applied to taxable income, with PAYE withheld during the year. Correct answer.
  2. It is exempt because PAYE has already been deducted.
  3. It is taxed only if the individual files an IR3 return.
  4. It is taxed at a single flat rate of 33% regardless of amount.

Explanation

New Zealand taxes individuals on taxable income using progressive marginal rates, and salary and wage earners generally have tax withheld through PAYE during the year. The withholding is a collection mechanism, not an exemption, and filing obligations depend on circumstances rather than determining liability. The obligation to pay tax arises from the Income Tax Act 2007, not from filing a return.

Question 3New Zealand Taxation

Which of the following best describes the New Zealand imputation system for company dividends?

  1. Companies attach imputation credits for tax paid, and resident shareholders can use those credits to reduce tax on the dividend. Correct answer.
  2. Company tax is a final tax and shareholders receive dividends free of further tax.
  3. Shareholders are taxed on dividends only when they sell their shares.
  4. Dividends are taxed at a flat 39% for all shareholders.

Explanation

Under the imputation rules in the Income Tax Act 2007, a company can attach imputation credits reflecting income tax paid, and resident shareholders may use those credits to offset tax on the dividend. This prevents double taxation of company profits distributed to shareholders. The system depends on credits rather than a single flat rate or deferral until sale.

Question 4New Zealand Taxation

For GST purposes, which person is required to register?

  1. Only companies incorporated in New Zealand
  2. Only persons who employ staff
  3. A person carrying on a taxable activity whose taxable supplies exceed the registration threshold in a 12-month period Correct answer.
  4. Any person who makes any sale of goods, regardless of value

Explanation

Liability to register for GST arises under the Goods and Services Tax Act 1985 where a person carries on a taxable activity and the value of taxable supplies exceeds the statutory registration threshold measured over a 12-month period. Registration is not limited to companies or employers. Small suppliers below the threshold may still register voluntarily.

Question 5New Zealand Taxation

Which of the following is generally a non-deductible expense for income tax purposes?

  1. Depreciation on business plant used to earn income
  2. Accounting fees for preparing business financial statements
  3. Interest on borrowings used to acquire a rental property
  4. Private household grocery costs of the business owner Correct answer.

Explanation

A deduction is allowed under the Income Tax Act 2007 for expenditure incurred in deriving assessable income or in carrying on a business for that purpose. Private or domestic expenditure, such as the owner's household groceries, is not incurred in deriving income and is therefore not deductible. Business-related depreciation, interest and accounting fees generally meet the nexus test.

Question 6New Zealand Taxation

What is the standard GST rate in New Zealand?

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

Explanation

The standard rate of GST in New Zealand is 15%, set by the Goods and Services Tax Act 1985. Most goods and services supplied in New Zealand are subject to this rate. Certain supplies are zero-rated or exempt, but the standard rate itself is 15%.

Question 7New Zealand Taxation

A New Zealand tax resident individual receives foreign-sourced rental income from an overseas property. Under the general rule, how is that income treated?

  1. It is taxed at a flat 15%.
  2. It is assessable income in New Zealand, with relief potentially available under a double tax agreement or foreign tax credit rules. Correct answer.
  3. It is exempt because it is earned overseas.
  4. It is taxed only if remitted to New Zealand.

Explanation

New Zealand residents are generally taxed on worldwide income under the Income Tax Act 2007, so foreign-sourced rental income is assessable. Double tax agreements and the foreign tax credit provisions may relieve double taxation. There is no general exemption or remittance-only rule for residents.

Question 8New Zealand Taxation

Which entity is treated as a company for New Zealand income tax purposes?

  1. A partnership
  2. A sole trader
  3. A limited liability company incorporated under the Companies Act 1993 Correct answer.
  4. A look-through company

Explanation

A limited liability company incorporated under the Companies Act 1993 is a company for income tax purposes and is taxed as a separate legal entity. Partnerships and sole traders are not companies, and a look-through company is a transparent flow-through vehicle whose income is attributed to owners. The company form is therefore the correct classification here.

Question 9New Zealand Taxation

A GST-registered business buys a laptop for $2,300 including GST for use solely in its taxable activity. Assuming full entitlement, how much input tax can it claim?

  1. $2,300
  2. $345
  3. $300 Correct answer.
  4. $230

Explanation

Input tax is the GST component of the price paid, calculated as the GST-inclusive price multiplied by 3/23 at the 15% rate. $2,300 × 3/23 = $300. The full amount is claimable where the goods are used solely in making taxable supplies.

Question 10New Zealand Taxation

A company has taxable income of $200,000 for its income year. Using the standard New Zealand company tax rate, what is its income tax liability before any credits?

  1. $66,000
  2. $66,000 plus a further 5% imputation penalty
  3. $78,000
  4. $56,000 Correct answer.

Explanation

The standard company tax rate in New Zealand is 28%, so tax on $200,000 of taxable income is $56,000. The rate applies to the company's taxable income for the year. No additional imputation penalty applies simply because tax is payable.

Question 11New Zealand Taxation

An employee receives a low-interest loan from their employer. Under the fringe benefit tax rules, how is the benefit generally measured?

  1. Only interest actually paid by the employee is taxed.
  2. The loan is exempt if it is repaid within five years.
  3. The difference between interest at the prescribed rate and interest actually charged is the value of the benefit. Correct answer.
  4. The full amount of the loan is a fringe benefit.

Explanation

For a low-interest or interest-free employment-related loan, fringe benefit tax is calculated on the difference between interest at the prescribed rate set for the period and the interest actually charged to the employee. The benefit is that interest differential, not the principal. FBT is payable by the employer on that value.

Question 12New Zealand Taxation

Which statement about the taxation of a partnership is correct?

  1. Partnership income is exempt if the partnership agreement is in writing.
  2. The partnership pays income tax at the company rate.
  3. The partnership files a return but income and deductions flow through to partners, who are taxed on their share. Correct answer.
  4. Partners are taxed only when profits are distributed in cash.

Explanation

A partnership is not itself liable for income tax; instead, each partner's share of partnership income and deductions is attributed to them under the Income Tax Act 2007. The partnership files an IR7 return to report the income and its allocation. Partners then include their share in their own returns, regardless of cash distributions.

Question 13New Zealand Taxation

A taxpayer sells a residential property 18 months after acquiring it. Which rule is most likely to make any gain assessable?

  1. The GST zero-rating rules
  2. The bright-line test for residential land Correct answer.
  3. The general capital gains rule
  4. The imputation credit rules

Explanation

The bright-line test in the Income Tax Act 2007 makes gains from disposing of residential land assessable if the disposal occurs within the applicable bright-line period after acquisition. New Zealand has no general comprehensive capital gains tax, so the bright-line rule is the relevant provision here. GST and imputation rules do not make the gain assessable income.

Question 14New Zealand Taxation

A GST-registered exporter makes zero-rated supplies of goods to an overseas customer. What GST treatment applies?

  1. GST is charged at 15% and then refunded.
  2. GST is charged at 0% and the supplier may still claim input tax on related costs. Correct answer.
  3. The supply is exempt, so no input tax can be claimed.
  4. GST is charged at 15% with no input tax recovery.

Explanation

Exported goods can be zero-rated under the Goods and Services Tax Act 1985, meaning GST is charged at 0% while the supplier remains entitled to input tax credits on costs incurred in making those supplies. Zero-rating differs from exemption because input tax recovery is preserved. The supplier therefore does not absorb GST on its inputs.

Question 15New Zealand Taxation

An individual has rental income and also pays resident withholding tax on interest. How are these items generally treated in the individual's return?

  1. Rental income is taxed at the company rate.
  2. RWT is a final tax and rental income is not assessable.
  3. Rental income is assessable and RWT on interest is a credit against the individual's tax liability. Correct answer.
  4. Both are exempt and excluded from the return.

Explanation

Rental income is assessable income for the individual and is included in the return. Resident withholding tax deducted on interest is a credit that offsets the individual's final tax liability, with any excess refundable. RWT is not a final tax for individuals whose marginal rate exceeds the deduction rate.

Question 16New Zealand Taxation

A business incurs $10,000 of legal fees, of which $4,000 relates to acquiring a new commercial building and $6,000 relates to recovering overdue trade debts. How are these treated?

  1. The $6,000 debt-recovery portion is generally deductible, while the $4,000 capital acquisition portion is generally not. Correct answer.
  2. The $4,000 portion is deductible and the $6,000 portion is not.
  3. Both amounts are non-deductible.
  4. Both amounts are deductible in full.

Explanation

Legal costs are deductible where they relate to income-earning activities such as recovering trade debts, but capital expenditure on acquiring a building is generally not deductible because it is capital in nature. The distinction turns on whether the cost is revenue or capital. The building acquisition cost may instead form part of the depreciable base or be dealt with under the capital limitation rules.

Question 17New Zealand Taxation

For a New Zealand resident company, what is the consequence of having a debit balance in its imputation credit account at year end?

  1. The company may be liable for imputation penalty tax. Correct answer.
  2. No consequence; the account is for information only.
  3. The company's income tax rate increases to 33%.
  4. The debit is automatically refunded by Inland Revenue.

Explanation

The imputation credit account tracks credits and debits, and a debit balance at the end of the imputation year can trigger imputation penalty tax under the imputation rules. The account is not merely informational, and Inland Revenue does not refund debit balances. The penalty encourages companies to maintain sufficient credits.

Question 18New Zealand Taxation

Which item is generally treated as a capital receipt rather than income for New Zealand income tax purposes?

  1. Interest earned on a business bank account
  2. A government grant received to purchase a long-term plant asset Correct answer.
  3. Fees charged for services rendered
  4. Sale proceeds of trading stock in the ordinary course

Explanation

A grant received to fund the purchase of a long-term capital asset is generally capital in nature, although specific provisions may spread or adjust its treatment. Trading stock proceeds, business interest and service fees are revenue items arising from ordinary income-earning activity. The capital/revenue distinction is fundamental to New Zealand income tax.

Question 19New Zealand Taxation

A GST-registered person makes both taxable and exempt supplies. How is input tax generally apportioned?

  1. No input tax is claimable.
  2. Input tax is apportioned between taxable and exempt supplies using a method acceptable under the GST Act, such as the turnover method. Correct answer.
  3. Input tax is apportioned equally between all activities.
  4. All input tax is claimable in full.

Explanation

Where goods and services are used to make both taxable and exempt supplies, input tax must be apportioned so that only the portion relating to taxable supplies is claimed. The GST Act permits apportionment methods such as a turnover-based approach, subject to the rules and thresholds. Claiming all or none of the input tax would misstate the position.

Question 20New Zealand Taxation

A company provides a motor vehicle to an employee for private use. Under the fringe benefit tax rules, how is the taxable value of the vehicle benefit generally determined?

  1. The full purchase price of the vehicle
  2. Only the fuel costs incurred by the employer
  3. The employee's marginal tax rate applied to the vehicle price
  4. A percentage of the vehicle's cost price or tax book value, or a specified rate per kilometre based on private use Correct answer.

Explanation

Motor vehicle fringe benefits are valued either using the cost price or tax value basis, applying the prescribed percentage depending on the age of the vehicle, or using the kilometre rate method based on private use. The employer pays FBT on that value at the applicable rate. The full purchase price or fuel cost alone is not the taxable value.

Question 21New Zealand Taxation

A taxpayer is a New Zealand tax resident but is absent overseas for part of the year. Which factor is most relevant to whether they remain resident under the day-count rule?

  1. The currency in which they are paid
  2. The number of days present in New Zealand over the relevant period, subject to the personal presence rules Correct answer.
  3. Whether they own a New Zealand passport
  4. The country in which their employer is incorporated

Explanation

Residence under the Income Tax Act 2007 can be determined by physical presence in New Zealand for the required number of days, subject to the personal presence rules and any permanent place of abode analysis. Day counts are therefore central to the test. Payment currency, passport ownership and employer location are not the statutory criteria.

Question 22New Zealand Taxation

A company pays a fully imputed dividend to a resident individual shareholder on a 33% marginal rate. What is the general tax outcome?

  1. The shareholder pays tax at the company rate on the gross dividend.
  2. The shareholder must pay further tax because the credit is only 28%.
  3. The shareholder pays no further tax because the imputation credit exceeds the tax on the dividend. Correct answer.
  4. The dividend is exempt from tax entirely.

Explanation

A fully imputed dividend carries an imputation credit reflecting 28% company tax. For a shareholder on a 33% marginal rate, the credit offsets part of the tax on the grossed-up dividend, and the shareholder may have further tax to pay only if their marginal rate exceeds the credit rate after gross-up. Where the credit equals or exceeds the tax on the grossed-up dividend, no further tax arises and a refund of excess may be available.

Question 23New Zealand Taxation

A GST-registered supplier receives a deposit for goods that will be delivered in a later period. If the supplier accounts for GST on a payments basis, when does the GST liability arise?

  1. At the end of the income year
  2. When the deposit is received Correct answer.
  3. When the invoice is issued
  4. When the goods are delivered

Explanation

For a supplier accounting for GST on a payments basis, the time of supply is generally when payment is received, so a deposit triggers GST at that point. Delivery date and invoice date are less relevant under this basis. The payments basis therefore accelerates GST on deposits compared with an invoice basis.

Question 24New Zealand Taxation

A New Zealand company incurs interest expense on borrowings used to acquire shares in a subsidiary that pays no dividends. Which principle is most relevant to the deductibility of that interest?

  1. Interest is deductible only if the shares are sold within the same income year.
  2. Deductibility depends on the nexus between the borrowing and the income-earning activity, and the capital limitation may deny a deduction where the shares are held as a capital investment. Correct answer.
  3. Interest is deductible only if the subsidiary is New Zealand resident.
  4. Interest is always deductible regardless of the use of the borrowed funds.

Explanation

Deductibility of interest turns on the use to which the borrowed funds are put and whether that use has a sufficient nexus with assessable income. Where the shares are held as a capital investment producing no income, the capital limitation may deny a deduction. The subsidiary's residence and the timing of any sale are not the governing principles.

Question 25New Zealand Taxation

A look-through company (LTC) makes a loss. How is that loss generally treated for New Zealand income tax purposes?

  1. The loss flows through to the owners, who may deduct it subject to the LTC loss limitation rules and their own circumstances. Correct answer.
  2. The loss is converted into an imputation credit.
  3. The loss is carried forward by the LTC and offsets future LTC income.
  4. The loss is forfeited and cannot be used.

Explanation

An LTC is transparent, so its income, deductions and losses flow through to its owners. Losses are subject to the loss limitation rules, which restrict deductions to the owner's economic exposure, and to the owner's own loss rules. The LTC does not carry the loss forward as a separate entity.

Question 26New Zealand Taxation

Under New Zealand income tax rules, which of the following best describes the treatment of a benefit received by an employee that is subject to fringe benefit tax (FBT)?

  1. The employer pays FBT and the value of the benefit is generally not included in the employee's gross income. Correct answer.
  2. The employee pays FBT directly through their employer's PAYE return.
  3. The benefit is exempt from tax for both the employer and the employee.
  4. The value of the benefit is included in the employee's gross income and taxed at their marginal rate.

Explanation

Fringe benefit tax is imposed on the employer for non-cash benefits provided to employees. The value of the fringe benefit is generally not included in the employee's gross income, avoiding double taxation. The employer calculates and pays FBT on the taxable value of the benefit.

Question 27New Zealand Taxation

A New Zealand resident individual derives only salary and wages during the income year. Which statement best describes their tax obligations for that income?

  1. They are exempt from tax on salary and wages below the annual median wage.
  2. They must file an IR3 return in every case regardless of income level.
  3. They must pay provisional tax on the salary income.
  4. PAYE deductions by the employer generally satisfy the income tax obligation, and filing may not be required. Correct answer.

Explanation

Salary and wage earners generally have tax withheld through PAYE, which satisfies their income tax obligation for that income. Filing a return is not required where PAYE is the final tax and no other circumstances require a return. Provisional tax does not apply to income already subject to PAYE.

Question 28New Zealand Taxation

Which of the following is a characteristic of the GST registration threshold for a person carrying on a taxable activity in New Zealand?

  1. Registration is compulsory only for companies, not for sole traders.
  2. Registration is compulsory only once taxable supplies exceed $500,000 in a 12-month period.
  3. Registration is compulsory once taxable supplies exceed $60,000 in any 12-month period. Correct answer.
  4. Registration is optional at all levels and never compulsory.

Explanation

A person must register for GST once their taxable supplies exceed $60,000 in any 12-month period, or are expected to exceed that threshold. Registration can also be voluntary below the threshold. The rule applies to any person carrying on a taxable activity, not just companies.

Question 29New Zealand Taxation

For New Zealand income tax purposes, which of the following is generally deductible as a business expense?

  1. Routine repairs and maintenance to a commercial building used in the business. Correct answer.
  2. The purchase of a residential rental property intended to be held long-term.
  3. Drawings taken by a sole trader for personal living costs.
  4. A capital contribution to the share capital of a new company.

Explanation

Routine repairs and maintenance are generally deductible because they restore an asset to its original condition without improving it. Capital expenditure, such as acquiring property or shares, is generally not deductible. Drawings are not expenses of the business.

Question 30New Zealand Taxation

A New Zealand resident company pays a dividend to a resident individual shareholder. What is the general effect of the imputation system on the shareholder?

  1. The shareholder receives a tax credit for the company tax already paid, which can reduce their tax on the dividend. Correct answer.
  2. The shareholder pays no tax on the dividend under any circumstances.
  3. The dividend is treated as a capital gain and is never taxable.
  4. The shareholder must pay company tax again on the dividend.

Explanation

Under the imputation system, dividends carry imputation credits representing company tax paid. Resident shareholders can use these credits to offset their own tax on the dividend. This avoids double taxation of company profits.

Question 31New Zealand Taxation

Which of the following best describes the tax treatment of a partnership for New Zealand income tax purposes?

  1. The partnership's income is taxed only when distributed to partners as dividends.
  2. The partnership is taxed as a company at the company rate.
  3. The partnership files a return but income and losses flow through to partners, who are taxed individually. Correct answer.
  4. The partnership is a separate taxable entity that pays income tax on its profits.

Explanation

A partnership is transparent for income tax purposes: it files an IR7 return but does not itself pay income tax. The partners are taxed on their share of partnership income or can use their share of losses. This flow-through treatment distinguishes partnerships from companies.

Question 32New Zealand Taxation

A New Zealand resident individual receives interest income from a New Zealand bank. Which statement best describes the general withholding treatment?

  1. Interest is taxed at the company rate regardless of the recipient.
  2. No tax is withheld from interest, and the individual must pay all tax at year-end.
  3. Interest is exempt from income tax for resident individuals.
  4. Resident withholding tax (RWT) is deducted by the payer, and the individual may need to account for any shortfall at year-end. Correct answer.

Explanation

RWT is generally deducted from interest paid to resident individuals, providing a credit against their income tax. If the RWT rate is lower than the individual's marginal rate, a shortfall may arise at year-end. Interest is taxable income and is not exempt.

Question 33New Zealand Taxation

Which of the following best describes the GST treatment of a supply of goods by a GST-registered person in New Zealand to a customer in New Zealand?

  1. The supply is exempt because it is a retail sale.
  2. The supply is zero-rated because it is domestic.
  3. The supply is generally subject to GST at the standard rate of 15%. Correct answer.
  4. The supply is outside the scope of GST.

Explanation

Domestic supplies of goods by a GST-registered person are generally subject to GST at the standard rate of 15%. Zero-rating applies to specific supplies such as exports, not ordinary domestic sales. Exempt supplies are limited to particular categories such as certain financial services.

Question 34New Zealand Taxation

A New Zealand resident company has a tax loss for the year. Under the loss carry-forward rules, what is the general treatment of that loss?

  1. The loss is forfeited and cannot be used in any future year.
  2. The loss must be refunded in cash by Inland Revenue.
  3. The loss may be carried forward to offset future taxable income, subject to the continuity of ownership or business continuity tests. Correct answer.
  4. The loss can only offset income of the same income year.

Explanation

A company tax loss can generally be carried forward to offset future taxable income. The carry-forward is subject to the continuity of ownership test or the business continuity test. Losses are not automatically refunded in cash.

Question 35New Zealand Taxation

A GST-registered business receives a payment for services it has not yet performed, and it accounts for GST on a payments basis. When is GST generally recognised on that payment?

  1. When the customer's financial year ends.
  2. When the payment is received, because the business uses the payments basis. Correct answer.
  3. When the services are actually performed.
  4. When the invoice is issued, regardless of the accounting basis.

Explanation

A business accounting for GST on a payments basis recognises GST when payments are received or made. Therefore, GST on the advance payment is recognised when the payment is received. The invoice basis would instead recognise GST when the invoice is issued.

Question 36New Zealand Taxation

An employee receives a subsidised loan from their employer at an interest rate below the market rate. Under the fringe benefit tax rules, what is the taxable value of the benefit generally based on?

  1. The employer's total interest expense.
  2. The difference between the market interest rate and the rate actually charged, applied to the loan balance. Correct answer.
  3. The full amount of the loan principal.
  4. The employee's salary level.

Explanation

A low-interest loan fringe benefit is valued using the difference between the market rate and the rate charged, applied to the outstanding loan balance. The principal itself is not the benefit. The employee's salary is not the measure of the benefit.

Question 37New Zealand Taxation

A New Zealand resident individual sells a residential property 18 months after acquiring it. Which rule is most likely to make any gain assessable?

  1. The goods and services tax, which applies to residential sales.
  2. The gift duty rules, which tax transfers of property.
  3. The bright-line test, which taxes gains on residential property sold within the applicable bright-line period. Correct answer.
  4. The capital gains tax, which taxes all property gains.

Explanation

The bright-line test makes gains on residential property assessable if sold within the applicable bright-line period, which has varied over time. A sale at 18 months may fall within the period depending on the acquisition date. New Zealand does not have a general capital gains tax, and GST does not apply to residential sales in this way.

Question 38New Zealand Taxation

A GST-registered business makes both taxable and exempt supplies. How is input tax generally apportioned?

  1. Input tax is apportioned based on the proportion of taxable supplies to total supplies, using a fair and reasonable method. Correct answer.
  2. No input tax is claimable.
  3. All input tax is claimed in full.
  4. Input tax is claimed only on exempt supplies.

Explanation

When a business makes both taxable and exempt supplies, input tax must be apportioned. The apportionment is generally based on the proportion of taxable supplies to total supplies, using a fair and reasonable method. Claiming all input tax would overstate the deduction.

Question 39New Zealand Taxation

A company provides a motor vehicle to an employee for private use. Under the fringe benefit tax rules, how is the taxable value of the motor vehicle benefit generally determined?

  1. Using either the cost price or tax value method, applying a prescribed percentage and adjusting for days available. Correct answer.
  2. Based on the vehicle's market value at year-end.
  3. Based on the employee's actual private kilometres only.
  4. Based on the employee's marginal tax rate.

Explanation

The motor vehicle fringe benefit is generally valued using either the cost price method or the tax value method. A prescribed percentage is applied and the value is adjusted for the number of days the vehicle is available for private use. The employee's marginal rate is not the measure.

Question 40New Zealand Taxation

A New Zealand resident company has a debit balance in its imputation credit account at year-end. What is the general consequence?

  1. The company receives a refund of company tax.
  2. The company is exempt from further imputation obligations.
  3. The company is liable for imputation penalty tax. Correct answer.
  4. The debit balance is carried forward with no consequence.

Explanation

A debit balance in the imputation credit account at year-end generally triggers imputation penalty tax. This penalises over-distribution of imputation credits relative to tax paid. A credit balance, by contrast, does not create a refund.

Question 41New Zealand Taxation

A taxpayer is a New Zealand tax resident but is absent overseas for part of the year. Which factor is most relevant to whether they remain a New Zealand tax resident?

  1. The taxpayer's occupation.
  2. The taxpayer's bank balance.
  3. The number of days absent and whether they have a permanent place of abode in New Zealand. Correct answer.
  4. The taxpayer's marital status.

Explanation

Residence depends on factors such as the number of days present in New Zealand and whether the person has a permanent place of abode here. An absence overseas does not automatically end residence. Occupation, bank balance, and marital status are not the determinative tests.

Question 42New Zealand Taxation

A New Zealand company incurs interest expense on borrowings used to acquire shares in a subsidiary that pays no dividends. What is the most likely tax treatment of the interest?

  1. The interest may be non-deductible or subject to limitation because the shares are capital assets producing no income. Correct answer.
  2. The interest is fully deductible because it is a business expense.
  3. The interest is deductible only if the subsidiary is overseas.
  4. The interest is automatically capitalised and never deductible.

Explanation

Interest on borrowings used to acquire shares is generally subject to the general limitation rules for deductions, because the shares are capital assets that may not produce income. Deductibility depends on the connection between the expense and assessable income. The location of the subsidiary is not the key test.

Question 43New Zealand Taxation

A New Zealand resident individual receives foreign-sourced rental income from an overseas property. Under the general rules, how is that income treated?

  1. It is taxed only if remitted to New Zealand.
  2. It is exempt because it is foreign-sourced.
  3. It is taxed at the company rate.
  4. It is generally taxable in New Zealand, with a credit potentially available for foreign tax paid. Correct answer.

Explanation

New Zealand tax residents are generally taxed on worldwide income, including foreign rental income. A foreign tax credit may be available for tax paid overseas. Remittance is not the test for residents.

Question 44New Zealand Taxation

A business incurs legal fees of $10,000, of which $4,000 relates to acquiring a new commercial building and $6,000 relates to recovering overdue trade debts. How is the $10,000 generally treated for income tax purposes?

  1. The $6,000 relating to debt recovery is generally deductible, while the $4,000 relating to the capital acquisition is generally not. Correct answer.
  2. The full $10,000 is non-deductible.
  3. Only the $4,000 relating to the building is deductible.
  4. The full $10,000 is deductible.

Explanation

Legal fees are deductible to the extent they relate to income-earning activity, such as debt recovery. Fees relating to acquiring a capital asset are generally capital and not deductible. The split follows the nature of the underlying transaction.

Question 45New Zealand Taxation

A company has taxable income of $200,000 for its income year. Using the standard New Zealand company tax rate of 28%, what is its income tax liability?

  1. $28,000
  2. $39,000
  3. $56,000 Correct answer.
  4. $200,000

Explanation

The company tax liability is 28% of taxable income: $200,000 × 0.28 = $56,000. The 28% rate applies to companies generally. The other figures do not reflect the correct multiplication.

Question 46New Zealand Taxation

A New Zealand resident individual has rental income and also pays resident withholding tax on interest. How are these items generally treated in the individual's return?

  1. Rental income is taxed at the company rate, and RWT is ignored.
  2. Rental income is exempt, and RWT is refunded automatically.
  3. Both are excluded from the return.
  4. Rental income is included as taxable income, and RWT is credited against the tax liability. Correct answer.

Explanation

Rental income is taxable and must be included in the individual's return. RWT deducted from interest is a credit against the individual's income tax liability. The two items are treated separately but both affect the final tax position.

Question 47New Zealand Taxation

A taxpayer sells a residential property and the gain is assessable under the bright-line test. Which factor is most relevant to determining the applicable bright-line period?

  1. The colour of the property.
  2. The taxpayer's marginal tax rate.
  3. The taxpayer's employment status.
  4. The date the property was acquired, because the bright-line period has changed over time. Correct answer.

Explanation

The bright-line period has changed over time, so the acquisition date determines which period applies. The taxpayer's marginal rate affects the tax on the gain but not the period. Employment status and irrelevant physical characteristics do not determine the period.

Question 48New Zealand Taxation

A New Zealand resident company wants to carry forward a tax loss. Which test is most relevant to whether the loss can be carried forward?

  1. The company's GST registration status.
  2. The continuity of ownership test or the business continuity test. Correct answer.
  3. The company's bank balance.
  4. The number of employees.

Explanation

A company can generally carry forward a loss if it satisfies the continuity of ownership test or the business continuity test. These tests ensure the loss is used by substantially the same owners or the same business. GST status, employee numbers, and bank balance are not the relevant tests.

Question 49New Zealand Taxation

A GST-registered business makes a supply that is exempt, such as certain financial services. What is the general consequence for input tax?

  1. Input tax is zero-rated.
  2. Input tax is fully claimable because the business is GST-registered.
  3. Input tax on costs relating to the exempt supply is generally not claimable. Correct answer.
  4. Input tax is refunded by the customer.

Explanation

Exempt supplies do not attract GST, and input tax on costs relating to those supplies is generally not claimable. This differs from zero-rated supplies, where input tax can be claimed. GST registration alone does not make all input tax claimable.

Question 50New Zealand Taxation

A New Zealand resident individual has a low-interest loan from their employer and also receives a motor vehicle for private use. How are these benefits generally treated for fringe benefit tax purposes?

  1. Both benefits are aggregated and valued as a single benefit.
  2. Only the motor vehicle is subject to FBT.
  3. Neither benefit is subject to FBT because both are provided by the employer.
  4. Each benefit is separately valued under the relevant FBT rules and the employer pays FBT on the combined taxable value. Correct answer.

Explanation

Each fringe benefit is valued under its own rules, such as the loan and motor vehicle valuation methods. The employer then pays FBT on the combined taxable value of the benefits provided. Providing benefits through the employer does not exempt them from FBT.