- TAXATION NZ
Part A – Scenario
Michael and Pam
Michael and Pam live on a lifestyle block in Pokeno. They purchased their lifestyle block in
June 2004. Michael and Pam have rented out 2 rooms to boarders since December 2013.
They advertise the room availability on AirBnB. Each boarder pays $180 per week (including
meals and laundry). Pam pays for a cleaner to come two times a week for $85 per week. Her
total grocery bill is $300 per week.
Pam’s Pottery Store
Pam’s hobby is making pottery. She has modified a small shed on the lifestyle block so that
she can display more of the pieces that she makes. Her friend Mary helps with gardening and
working at the ‘Pottery shed’. Pam pays Mary $50 per week for gardening on the weekend
and allows her to take any of the pieces from the store. Pam also provided Mary with a new
pair of overalls which cost $80. Every Sunday Mary works extra hours to make tea and
coffee for visitors to the ‘Pottery Shed’. While working Mary is also provided with lunch.
Pam has been told there is a demand for large glazed pots. But in order to make the pots she
will need to invest in more equipment costing $1500. She has also received a letter from the
local council asking her if she is conducting a business activity and whether she is complying
with regulations around parking and resource consents.
Future Plans for Cottage Accommodation
Last year Michael became a beneficiary of a trust settled by his father. This year he will
receive a payment of trust funds. Michael would like to invest the funds in a business.
Michael and Pam are thinking of setting up a cottage accommodation business on their
lifestyle block. So far they have signed up to attend a Tourism Conference in Queenstown,
(which will run for 3 hours), and asked an architect friend to draw up some plans to place 6
‘cottages’ on their lifestyle block. In return for the plans the architect was given 3 large
pottery pieces for his garden valued at $350.
Michael and Pam may construct the cottages and then sell or lease the cottages to another
company to run an accommodation business. Michael is quite keen on the idea as his father
used to work as a builder. Michael intends to also carry out some of the building work
Discuss the 3 elements in the scenario above
1. Boarders (20 marks)
2. Pottery Store (20 marks)
3. Future Plans for Cottage Accommodation (35 marks)
For each element focus on the tax implications and consider relevant principles in the
Income Tax Act 2007 and related case law.
Some figures provided are incomplete but are included for the purpose of indicating the
scale of the situation.
Word Limit 3000 words (+10%)
Choose any ONE of the topics listed below.
Word limit 1500 words (10% allowance for word count). Please use APA referencing. Times
New Roman 12 font.
1. Information-sharing between countries and government departments can assist with
tax compliance. Consider whether information sharing is a positive aspect and if so
how far it should proceed.