Spectrum Manufacturing Solutions Limited (SMS) is a New Zealand tax resident company that operates a successful manufacturing business in Hamilton, New Zealand.

The company recorded an accounting profit of $1,380,000 in its statement of profit or loss for the income year ending 31 March 2023. You are SMS's tax accountant, and your task is to perform a tax reconciliation to determine the taxable income for the same period.

The company's financial controller has provided the following additional information relating to the financial statements for the income year ended 31 March 2023:

1. On 1 June 2022, SMS received a cash dividend from TechFab Industries Limited (TechFab), a New Zealand tax resident company that services manufacturing machinery. SMS holds 100% of the shares in TechFab. No imputation credits were attached to the dividend, and no resident withholding tax (RWT) was withheld on the dividend. The cash amount of $45,780 was recognised as 'Other income' in the financial statements.

2. In 2019, SMS acquired a piece of non-residential land in nearby Cambridge for $1,200,000. At the time of acquisition, SMS's directors considered that the land could either function as an investment property to lease to another business or be sold in the short to medium term if land values rose significantly. During the 2023 income year, demand for commercial land in the area increased considerably and a large dairy cooperative offered $1,600,000 for the land. The board of directors accepted the offer and the property was sold, with settlement in January 2023. The sale was not included in accounting profit.

3. On 15 December 2022, SMS borrowed $100,000 from the bank to repay a shareholder current account balance with its main shareholder, Rita. She planned to use the funds to cover medical costs for her ailing mother. SMS paid interest of $1,250 on the loan for the income year ended 31 March 2023. The interest expense was included in accounting profit. Ignore the impact of the financial arrangements rules, if any.

4. The balance of SMS's provision for annual leave as at 31 March 2023 was $43,000, and no annual leave was accrued as at 31 March 2022. One employee, Ramesh, took annual leave during May 2023 and was paid $3,000 on 27 May 2023. As at 31 March 2023, Ramesh's accrued leave balance was $2,000. No other annual leave was taken in April, May or June 2023.

Required:

Calculate SMS's taxable income for the year ended 31 March 2023 by preparing a reconciliation from accounting profit to taxable income, identifying the required tax adjustments. Assume that SMS wishes to minimise its taxable income.

Briefly explain the income tax treatment of items 1-4 (even if the adjustment is nil).

For items 1-3, cite a relevant legislative reference using Income Tax Act 2007 https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html

Answer rating: 100% (QA)

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