INCOME AND LAND TRANSACTIONS (TOTAL: 40 MARKS) PART 1: INCOME FROM BUSINESS AND
ID: 452216 • Letter: I
Question
INCOME AND LAND TRANSACTIONS (TOTAL: 40 MARKS)
PART 1: INCOME FROM BUSINESS AND LAND TRANSACTIONS 24 marks
Mr and Mrs Sims bought and sold several properties in Auckland from January 2007 to December 2014. Thinking that there is no separate capital gains tax in New Zealand, they have never bothered to file a tax return until they were told by their friends that they might be in property business and therefore are liable for taxes on the proceeds from the property transactions. The following information are provided by Mr and Mrs Sims to their accountant on January 2015.
• Bought a home in Botany in January 2007 for $300,000 and live there – House A.
• Bought a house in Botany in July 2007 for $320,000 and sold it within 8 months. They tidied up the house and replaced all carpets, curtains and repainted the house. Made a gain of $80,000 – House B.
• Bought a house in Dannemora in May 2008 for $400,000. They replaced the bathroom and sold it within 6 months for $490,000 – House C.
• Bought a unit in Pakuranga in December 2008 for $350,000 and sold it within 3 months. Made a gain of $50,000 – House D.
• Bought a run-down house in Howick in March 2009 for $500,000 and engaged a builder to refurbish the property. Sold it within 9 months. Made a gain of $200,000 – House E.
• Bought a run-down house in Manukau in February 2010 for $350,000 and engaged a builder and interior decorator to do up the house. The house was extensively marketed by a real estate agent. Sold the property in March 2011 with a gain of $310,000 – House F.
• Sold House A in March 2012 and bought a five bedroom house in East Tamaki in April 2012. Gain from sale of House A is $120,000. The house in East Tamaki cost $1 million – House G.
• Sold House G in November 2014 and made a gain of $250,000. Bought a house (House H) in Botany for $1.4 million to live in it in October 2014. As at January 2015, Mr and Mrs Sim still live in House H.
Required:
1. Are Mr and Mrs Sims undertaking a business in relation to land transactions? Why and why not? Justify your answer. 12 marks
2. How much income from the land transactions is likely to be assessable? Provide evidence to support your answer. 12 marks
PART 2: INCOME FOR INDIVIDUALS 16 marks
Best Restaurant was opened five years ago by Mr and Mrs Minach. Their business has flourished the last three years and they sought assistance from relatives and friends with their business. Previously, they had hired relatives a couple of times. However, the last two years has seen an increase in customers and they hired Sam (a student) and Margaret to help with their business. They were hired from Tuesdays to Sundays as the restaurant closes on Mondays. Each of them were given one week’s training in restaurant operation. Sam worked from Tuesdays to Saturdays for four hours per day. His duties included getting supplies and paying suppliers invoices on Tuesdays and Fridays. The other duties are serving customers and helping in the kitchen. Margaret worked from Wednesdays to Sundays for eight hours per day. Her duties included taking orders, receiving cash, banking cash and reconciling cash on a daily basis. The other duties included taking orders and food preparation. Both of them were given free meals during working hours. To minimise the administrative work, Best Restaurant paid Sam and Margaret by cheque their gross weekly wages at the end of the week.
Required: Inland Revenue believes that Sam and Margaret are employees of Best Restaurant and therefore Best Restaurant must deduct PAYE from their weekly payment. Do you agree? Discuss your answer. (16 marks)
Explanation / Answer
Well, after going through the information provided here, it is very much clear and evident that the couple, Mr. & Mrs. Sims are into the business of property or are doing the same with getting registered with the concerned authority of New Zealand.
This can be provide by the way, timing and the work related being done in order to make the purchased house more suitable for bigger profits at the time of sale. All the houses purchased by this couple was only meant for sale purpose only and if one follows the pattern it is very much likely that Mr. and Mrs. Sims are going to sell the present house, House H, also in the near future.
Actually, this couple is making profit out of every property purchased by them, either by selling the property as it is or by renovating the same and then selling it for better profits and margins. So, with the sole purpose of profit in their minds while undertaking the land transactions, one can be certain that Mr. & Mrs. Sims are into the business of land and property.
Regards.