The Inland Revenues investigation of the TradeMe transactions

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Definitely, Arthur, as one permanent resident of New Zealand, is liable to file his tax to the Inland Revenue if he has business activities in New Zealand according to New Zealand's tax year (from 1 Apr in one year to 31 Mar in next year) ( [1] ). The following is to discuss the tax implications of Arthur's activities from 1 December 2009 until 31 July 2010 in terms of the income tax and the GST.

The tax implications of his activities for the income tax

The income tax is a tax levied on the income of individuals or businesses, and it is usually levied annually according to the tax year ( [2] ). Before discussing the tax implications of Arthur's activities in terms of the income tax, the following terms should be clearly understood.

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The taxable income for a tax year: it is determined by the net income subtracting any available tax loss in a tax year. After working out the taxable income for a tax year, the annual income tax for the tax year is equal to the amount of the taxable income multiplying the applied income tax rate ( [3] ).

The net income and the available tax loss. The net income is equal to the amount of the annual gross income subtracting the annual total deductions (if the total income is more than deductions). The available tax loss comprises of the loss balances carried forward, the net loss, and the additional amounts that are prescribed in the Income Tax Act 2007 ( [4] ).

The total annual income and the annual total deduction. The annual gross income for a tax year comprises of all the assessable income being allocated to the corresponding income year, including the sales, income from equity, salary, and others. The annual total deduction for a tax year comprises of the total deductions being allocated to the corresponding income year, such as the expenditure, costs of purchase, financial costs, and others. Subtracting the annual total deduction from the annual income is the annual net income for that tax year ( [5] ).

Furthermore, according to the Inland Revenue's investigation of the TradeMe transactions, the revenues from the online sales belong to the total annual income and should be liable to the income tax. Logically, Arthur's income actualised through online sales should be liable to the income tax and he has to file it to the Inland Revenue.

Following these principles, Arthur's activities have the following tax implications. Arthur should file his annual income tax in two tax years. One is to file the income tax in the tax year from 1 Apr 2009 to 31 March 2010. During this period, the total annual income is $45000 and the annual total deduction is $15000 for the cost of goods plus $3000 for Sophia. The taxable income in this tax year is $27000 (without considering the tax loss). Another is to file the income tax in the tax year from 1 Apr 2010 to 31 Mar 2011. The annual gross income is $20000. The annual total deduction includes $7000 for the cost of goods and $1800 for the internet access ($150 per month X 12 months). The amount of $2500 used for the birthday and Christmas gifts for Kirsty's extensive family should be exempted from the income tax as it can be viewed as the payments to spouse, civil union partners, or de facto partners. Thus at the end, the taxable income in this tax year from 1 Apr 2010 to 31 Mar 2011 is $11200.

The tax implications of his activities for the GST

The following is to discuss the tax implications of Arthur's activities in terms of the GST. The first is whether his activity is the taxable activity. According to the Goods and Services Tax Act 1985, a taxable activity refers to 'any activity which is carried on continuously or regularly by any person, whether or not for a pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club' ( [6] ). Following this definition, Arthur's supply of the football related goods is one taxable activity, and should be liable to the Goods and Services Tax Act 1985.

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The second is whether he has to register the GST. According to the Goods and Services Tax Act 1985, 'every person who, on or after the 1st day of October 1986, carries on any taxable activity and is not registered, becomes liable to be registered' ( [7] ). Following this principle, because Arthur's activity of selling the football related goods is a taxable activity, he becomes liable to be registered to the GST.

The third is how much he should pay for the GST. Subject to the Goods and Services Tax Act 1985, the goods and services tax (GST) is a tax being charged in accordance with the provisions of this Act at the rate of 12.5 percent on the supply of the goods and services in New Zealand by a registered person for his or her taxable activity according to the value of that supply (the exempt supply is exclusive) ( [8] ). Thus he should firstly work out the value of his supply. Subject to the Goods and Services Tax Act 1985, the value of a supply of goods and services shall be such amount equal to the aggregate of '(a) to the extent that the consideration for the supply is consideration in money, the amount of the money: (b) to the extent that the consideration for the supply is not consideration in money, the open market value of that consideration'( [9] ). For Arthur's activity, the value of supply is equal to the amount of the money received from selling the football related goods. But he is able to deduct the GST paid for the goods and services associated with the taxable activity he consumes in New Zealand. Finally, in general, the GST amount he should pay is equal to the amount of one ninth of his sales subtracting one ninth of the goods and services consumed by him for the sales, if the sales amount are bigger than the amount of the goods and services consumed by him for the sales. Otherwise, he will get refund.

The fourth is the taxable period. According to the Goods and Services Tax Act 1985, 'a person's taxable period may be a 6-month period if (a) the person's taxable supplies in a 12-month period are no more, and are not likely to be more, than $500,000'( [10] ). Arthur's taxable period should be 6-month period, namely he should file the GST every half year.

The fifth is the implication of the Inland Revenue's investigation of the TradeMe online transactions. This implies that the online transactions are liable to the GST. Logically, for Arthur, his sales from the online platform should be filed for the GST.