CA ANZ Tax (NZ) Assessment 1 Case Study, Term 4 2026: Hume & Hearth Ceramics Limited

This CA ANZ Tax (NZ) case study is built around Hume & Hearth Ceramics Limited (HHCL), a Nelson-based, New Zealand tax resident close company that designs, makes and sells handcrafted ceramic tableware through its studio, online store and trade customers. Candidates reconcile accounting profit to taxable income, work through the imputation and resident withholding tax rules on a final dividend, and then advise on a proposed donation of trading stock together with a Code of Ethics dilemma faced by the company’s external accountant. All amounts are in New Zealand dollars and GST-exclusive unless stated otherwise.

Case Background (Summary)

• HHCL has a 31 March balance date, is registered for GST on an invoice basis with two-monthly returns, and is a close company owned 50/50 by its two directors, Maia and Sophie.
• Accounting profit before tax for the year ended 31 March 2026 is $486,000.
• An external bookkeeper prepares the special purpose financial statements, GST returns and payroll, and a firm of Chartered Accountants prepares the income tax return.
• Unless stated otherwise, all income and expenditure described is already included in accounting profit, and trading stock is treated the same for accounting and tax purposes.

Additional Information: Nine Categories (Year Ended 31 March 2026)

1. Prize money: $25,000 received from a national sustainable design award for a new travel-cup range that was later added to HHCL’s product line; recognised as revenue.
2. New premises: a $36,000 lease inducement received from the landlord on entering a six-year lease from 1 February 2026, with no requirement to spend it on any asset; for accounting purposes it reduced the right-of-use asset and was not included in profit.
3. Maia’s travel: $7,900 expensed for a three-day Melbourne ceramics conference extended by two private nights, including her partner’s airfare (Maia’s airfare $2,200, partner’s airfare $2,200, five nights’ accommodation at $700 per night).
4. New kiln: purchased for $72,000 on 15 April 2025 and available for use on 1 May 2025; accounting depreciation $9,000; IRD rates 10% DV and 7% SL (ignore Investment Boost).
5. Disposal of old kiln: sold on 30 September 2025 for $7,000 (cost $40,000, adjusted tax value at 1 April 2025 $11,500, accounting carrying amount $9,000, accounting loss $2,000).
6. Equipment maintenance: $22,800 paid for a 12-month maintenance contract running 1 June 2025 to 31 May 2026, fully expensed with no prepayment recognised.
7. Trade receivables: a $9,500 debt owed by a restaurant that entered liquidation in March 2026, written off in the accounting system on 15 May 2026 and expensed in the 2026 financial statements.
8. Trading stock: sales of $1,180,000; opening stock $7,800 and closing stock $8,900, both valued at cost.
9. Accounting fees: reversal of a $4,800 prior-year accrual for tax return fees invoiced and paid in the 2026 year, and a new $6,300 accrual at 31 March 2026 for work not yet started.

Task 1 (25 Marks)

Calculate HHCL’s taxable income for the income year ended 31 March 2026 by preparing a reconciliation from accounting profit to taxable income and identifying the required tax adjustments (even if the adjustment is nil). Show all workings.

Briefly explain the income tax treatment of the items in categories 1, 2, 3, 6, 7 and 8, even if the adjustment is nil. For category 8, cite a relevant legislative reference.

Note: Assume that the correct income tax treatment was applied in all prior income years.

Task 2 (8 Marks): Final Dividend

In March 2026 the directors decide to pay a final dividend, allocating a total of $90,000 in cash including any amounts HHCL must pay to Inland Revenue in relation to the dividend. HHCL wants to attach as many imputation credits as possible without its imputation credit account (ICA) going into debit; the ICA has a $20,000 credit balance immediately before the dividend. Both shareholders are New Zealand tax residents without RWT-exempt status.

For HHCL’s final dividend:

• (a) Calculate and explain the maximum amount of imputation credits that could be attached to the dividend. (3 marks)
• (b) Calculate the RWT that HHCL must withhold and pay to Inland Revenue. (3 marks)
• (c) Calculate the amount of cash HHCL will pay to each of Maia and Sophie. (2 marks)

Show all workings.

Task 3 (7 Marks): Proposed Donation of Ceramic Tableware

After flooding in the Nelson region in April 2026, HHCL is considering donating 200 ceramic dinner sets from its trading stock (total cost $3,900, expected market value $8,400) on 30 April 2026 to an approved donee organisation that is not associated with HHCL or its shareholders. Sophie asks HHCL’s external Chartered Accountant to claim an $8,400 charitable donation deduction, even though he knows this is not consistent with the tax rules and he is under pressure from his managing partner to keep the client satisfied.

• (a) Advise HHCL on the income tax treatment of the proposed donation and calculate its impact on HHCL’s taxable income for the income year ending 31 March 2027. Show all relevant workings. (4 marks)
• (b) In relation to Sophie’s request: (i) explain one key fundamental principle of the Code of Ethics that is at risk; (ii) explain one threat to the accountant’s compliance with that fundamental principle; (iii) recommend how he should respond to Sophie’s request. (3 marks)