UNIVERSITY SOUTH WALES
AUSTRALIAN SCHOOL
BUSINESS
BUSINESS LAW AND TAXATION
SCHOOL
LEGT 2751 BUSINESS TAXATION
FINAL EXAMINATION SESSION ON DURATION:
HOURS
READING
MINUTES
TOTAL NUMBER NUMBER
2009
QUESTIONS:
QUESTIONS REQUIRED
THREE BE ATTEMPTED: TW
Candidates must attempt either question two or three. Candidates
re permitted to answer both questions two an
three.
Do not consider GST issues in answering an question. Al Alll calculati ons be made on GS exclusive basis. Candidatess are pennitte Candidate
made ar
to bring electronic ca culators into the examination room.
There are no restrictions on the written materials that candidates may bring into the examination room. Eac
question is
equal value.
Answer each question attempted in a separate book.
pJ
ANSWERS l\.1UST BE WRIITEN IN INK. EXCEPT WHERE THEY ARE EXPRESSLY REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING SKETCHING OR GRAPHICA WORK.
to
QUESTION ONE
Austfur Ltd is an unlisted company. Assume that at all relevant times Austfu Ltd is resident stralia. Austfur Ltd was incorporated on 1 July 2007.
During the period expenses:-
July 2007 to
September 2008 Austfur Ltd incurred the following
(i)
$600,000 on the acquisition
kangaroo skin tanning and drying equipment;
(i )
$500,000 the construct on spec assist in the drying kangaroo skin;
room with specific design features which
the directors Austfur Ltd as a travel llowance for a trip (iii) $3000 paid to lames, one to Canberra in August 2007 (the trip was to obtain licence to export kangaroo skin dolls, lames was away three nights and travelled in his own car). October 2008 Austfur Ltd commences manufacturing kangaroo dolls from kangaroo skin. Th dolls are very popular in the United States and sales there are very good. On
January 2009 th e United States government bans the import products made from kangaroo sk in. On February 2009 the board Austfur Ltd resolves to suspend the manufacture kangaroo skin dolls and to send tw directors to Ne Zea land to investigate the possibility acquiring rabbit skin as a substitute for kangaroo skins. The directors are away three weeks, on week hich is spent bushwalking in the South land Ne Ze land. Austfur Ltd pays the director a travel, accommodation and air fares allowance in respect this trip On
On their return to Australia the directors recommend that Austfur Ltd hould use rabbit skin
as substitute for kangaroo skin and should also set up Australia from which to obtain it raw materials.
rabbit breeding programme in
April 2009 Austfur Lt spends $100,000 on converting its tanning and drying equipment so that it able to tan rabbit skin. Assume that rabbit skin requires a longer and hotter tanning process than kangaroo skin does. At the time conversion the equipm en wa in need repair. To assist the tanning and drying process Austfur Ltd also spends $30,000 on Apri 2009 on installing a specia ventilation system in its tanning and drying room. To avoid jealousy from its clerical staff Austfur Ltd also spends $30,000 on installing ai conditioning in its office so that its clerical staff can also have a cool working envirorunent. On
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QUESTION
NE (continued)
On 30 April 2009 Austfur Ltd co mmence breeding rabbits and manufacturing kangaroo lik
doll from abbit kin. Required
.
2.
Adv se Austfur Ltd, giving reason for your advice and pecif ing which provision you conside to be relevant, as to whether it can obtai a deduction either under 5.8· ecific deduction provision in respect of: or under a (a)
the cost
the tanning and drying equipment
(b)
the co nstruction
(c)
the travel allowance paid to lames in cOIUlection with
(d)
the allowance paid Zea land
(e)
the conversion
(t)
the in tallation room;
(g)
the installation
the tanning and drying room
to
the director
hi
trip to Canberra.
in connection with their trip to New
the tannin and drying quipm the special ventilation syste
nt
its tanning and drying
ai conditioning in its office.
Advise la es and the other directors as to whether they can obtain deductions under s.8 -1 for the ex pense associated with their trips to Canberra and Ne Zealand.
I. see over fo
Question
QUESTION
You must answer either this question or question three. question an question three.
You may answer both this
Aztec Pt Ltd is resident private company for tax purposes in the business constructing pyramids. Aztec Pty Ltd has a 1 July - 30 June tax year. Aztec Pt Ltd is not a member consolidated group for Australian tax purposes The dosing balance in Aztec Pty Ltd's franking account as at 1 July 2007 was nil. During the year ending 30 June 2008 Aztec Pty Ltd paid total $60,000 in instalments tax relating to the 1 July 2007 to 30 June 2008 tax year. Assume that no instalments tax elating to the year ending 30 June 2007 were paid in the year ending 30 June 2008. On January 2008 Aztec Pty Ltd received a non portfolio dividend $70,000 from Inca Pty Ltd ts wholly owned subsidiary resident in Peru. The non portfolio divided $70 000 was non assessable non exempt income to Aztec Pty Ltd under ITAA 1936 s23AJ. July 2007 Aztec Pty Ltd sold for $70,000 parcel shares in No News Ltd (an Australian resident company). Aztec Pty Ltd purchased the shares on 1 December 2000 for $50,000. On July 2007 Aztec Pty Ltd so sold a vacant block land that it had purchased the land was $200,000. The legal costs on 1 December 2002 for $100,000. Th sa price and stamp duty associated with the purchase were $5,000. The legal costs assoc ated with the sale were $2,000. Aztec Pty Ltd financed the purchase by borrowing the whole the purchase price from That Bank Ltd (an Australian resident company and bank). Simp interest at a fixed rate 8% per annum was payable on the loan from That Bank Ltd. Originally Aztec Pt Ltd had intended to mine the land for stone for its pyramids but geological research that Aztec Pty Ltd had conducted in 2003 found that the stone on the land was unsuitable for pyramids so Aztec Pty Ltd decided to sell the land. On 1 February 2008 Aztec Pty Ltd received dividend $7000 franked to 100 from Cortez Ltd (an Australian resident company). On 1 Jun 2008 Aztec Pty Ltd received a dividend of$14,000 franked to 50% from Nostra Pty Ltd (an Australian resident company and a private company for tax purposes). On
Aztec Pty Ltd's taxable income from its construction activities for the year ending 30 June 2008 was $200,000. Calculate the balance in Aztec Pty Ltd's franking account as at
30
June 2008.
Assume that the on y events whic affect the franking account occurring between 30 June 2008 and 1 September 2008 are the payment the 28 th July 2008 instalment tax th $10,000 and the final payment tax on 20 August 2008 for the year ending 30 June 2008. Calculate the balance in Aztec Pty Ltd's franking account as at Septembe r 2008 On September 2008 Aztec Pty Ltd distributes ll its after tax distributable profits from the year ending 30 June 2008 as dividend. Calculate the maximum franking credit that Aztec Pty Ltd can attach to this dividend. Comment on what the consequences will be for Aztec Pty Ltd the dividend is franked to this amount. Recommend a percentage to which Aztec Pty Ltd should frank the dividend.
... se over fo Question
continued
QUESTION TW
(continued)
Assume that Aztec Pty Ltd ha three har lders Hernando (an unemp oyed house husband whose income from other sources is nil and who ha tax loss carried forward $20,000 for the year ending 30 June 2007) and Francesc (a erchant banker whose income from other sources is $500,000) and Montuzuma Pty Ltd (an Australian resident company). Each ow one third the ares in Aztec Pty Ltd. Di sc ss the Austra li an income tax effects for eac ese hareholder the receipt a dividend franked to the percentage that you recommend.
I. .. se
overJor Question
Part
QUESTION THREE
You must answer either this question or question two. question an question two.
ANSWER BOTH PARTS
You ma
THIS
answer
both this
QUESTION
Part A (12 marks) The Trusty Unit Trust is an Australian resident trust estate. conducts business selling teapots. For financial accounting purposes it value its inventory at cost. The va lu its opening stock (at cost) at July 2008 was ,000,000. anticipates that it purchases through the year nding 30 June 2009 will be $700,000 while its sa es (excluding expenses associa ed with sale) will be $660,000. se ll it teapots at cost plus 10%. Assume that the expenses associated with each sa le are 2% the cost eac item sold the sales June 2009 for which payment had not 110 ,000 represents invoices issued in the month been received as at 30 June 2009. Trusty Unit Trust hear a rumour that, to fund Australia 's emissions trading sc eme, an increase in income tax: rate will be announced effective from July 2009. Advise Trusty Unit Trust as to what adjustments it can make for tax purposes, to the valuation its trading stoc as at 30 June 2009 so that more its income is recognised for tax purposes in the year ending 30 June 2009. In the year ending 30 June 2009 Trusty Unit Trust proposes to make a provision $30,000 for accrue long service leav for it employees. In fact none its employees were entitled to take long service leave in the year ending 30 June 2009. Assume that after making t h ~ adjustments you suggest to the valuation its trading stock for the year ending 30 June 2009 Trusty Unit Trust makes a distribution its net profit for trust law and financial accounting purposes to its unit holders The distribution is made on 30 June 2009. Calculate the net income the trust estate and the income [consider, net profit]ofthe trust estate ofthe Trusty Unit Trust. There are 10 unit holders in Trusty Unit Trust. Each unit holder owns one unit and is equally entitled to a distribution the trust income the Trusty Unit Trust. One the unit holder is the Cline Discretionary Trust an Australian resident trust estate. The trustee the Cline Discretionary Trust Cline Pty Ltd. The objects the trustee's discretion are Alpha (a resident minor), Beta (an adult resident whose income from other sources s 100,000) and Peter (an adult resident whose income from other source is zero). Assume that the only income the Cline Discretionary Trust for the year ending 30 June 2009 was he distribution that it received from the Trusty Unit Trust on that day. Cline Pty Ltd as trustee wants to make distribution the income the trust estate on 30 June 2009 in a manner which minimises the tax liabilitie the trust and th objects the trustee's discretion. Advise the trustee as what distributions it hould make to achieve this result. Your answer ould show all relevant calculations and hould make reference to relevant legislative provisions and principles taxation law
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Question
Part B
Part B
(8 marks)
Dixon, Latham and Starke are in partnership as solicitors. Each has 113 interest in the partnership. The partnership accounts for its income on a cash basis. The partnership uses a I July 30 June tax year. On 25 th December 2008 Latham assigns 50% his interest in the partnership to his sister Carol. As at the 25th December 2008 the partnership's records disclosed the following information: eceipts for accounts rendered Accounts rendered bu unpaid Salary paid to Starke* Other expenses
$300,000 $200,000 $ 50,000 $100,000
As at 30 June 2009 the records for the partnership disclosed the following information: Receipts for accounts rendered Accounts rendered but unpaid Salary paid to Starke* Expenses paid
$500,000 $ 50,000 $100 000 $200,000
*Starke is also qualified valuer and in that capacity is emp oyed by the partnership to value properties that clients offe r to mortgagees as security. Comment on the income tax position for the year ending 30 June 2009
each
the
any further information you would require before giving definitive advice. Do not consider CG issues.
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