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THE UNIVERSITY OF NEW SOUTH WALES

AUSTRALIAN SCHOOL OF BUSINESS

SCHOOL OF BUSINESS LAW AND TAXATION

LEGT 2751 BUSINESS TAXATION

FINAL EXAMINATION

SESSION ONE 2009

TWO HOURS

READING TIME: TEN MINUTES

TOTAL NUMBER OF QUESTIONS: THREE

NUMBER OF QUESTIONS REQUIRED TO BE ATTEMPTED: TWO

Candidates must attempt either question two or three.

Candidates are permitted to answer both questions two and three.

Do not consider GST issues in answering any question. All calculations if made are to be made on a GST exclusive basis.

Candidates are pennitted to bring electronic calculators into the examination room.

There are no restrictions on the written materials that candidates may bring into the examination room.

Each question is of equal value.

Answer each question attempted in a separate book.

ANSWERS l\.1UST BE WRIITEN IN INK. EXCEPT WHERE THEY ARE EXPRESSLY REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING, SKETCHING OR GRAPHICAL WORK.

QUESTION ONE

Austfur Ltd is an unlisted company. Assume that at all relevant times Austfur Ltd is a resident of Australia. Austfur Ltd was incorporated on 1 July 2007.

During the period 1 July 2007 to 1 September 2008 Austfur Ltd incurred the following expenses:-

(i) $600,000 on the acquisition of kangaroo skin tanning and drying equipment;

(ii) $500,000 on the construction of a special room with specific design features which assist in the drying of kangaroo skin;

(iii) $3000 paid to lames, one of the directors of Austfur Ltd as a travel allowance for a trip to Canberra in August 2007 (the trip was to obtain a licence to export kangaroo skin dolls, lames was away three nights and travelled in his own car).

On 1 October 2008 Austfur Ltd commences manufacturing kangaroo dolls from kangaroo skin. The dolls are very popular in the United States and sales there are very good.

On 1 January 2009 the United States government bans the import of products made from kangaroo skin. On 1 February 2009 the board of Austfur Ltd resolves to suspend the manufacture of kangaroo skin dolls and to send two directors to New Zealand to investigate the possibility of acquiring rabbit skins as a substitute for kangaroo skins. The directors are away three weeks, one week of which is spent bushwalking in the South Island of New Zealand. Austfur Ltd pays the directors a travel, accommodation and air fares allowance in respect of this trip.

On their return to Australia the directors recommend that Austfur Ltd should use rabbit skin as a substitute for kangaroo skin and should also set up a rabbit breeding programme in Australia from which to obtain its raw materials.

On 1 April 2009 Austfur Ltd spends $100,000 on converting its tanning and drying equipment so that it is able to tan rabbit skin. Assume that rabbit skin requires a longer and hotter tanning process than kangaroo skin does. At the time of conversion the equipment was in need of repair. To assist the tanning and drying process Austfur Ltd also spends $30,000 on 1 April 2009 on installing a special ventilation system in its tanning and drying room. To avoid jealousy from its clerical staff Austfur Ltd also spends $30,000 on installing air conditioning in its office so that its clerical staff can also have a cool working envirorunent.

.. .!see over for Question 1 - continued

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QUESTION ONE (continued)

On 30 April 2009 Austfur Ltd commences breeding rabbits and manufacturing kangaroo like dolls from rabbit skin.

Required

J. Advise Austfur Ltd, giving reasons for your advice and specifying which provision you consider to be relevant, as to whether it can obtain a deduction either under 5.8· 1 or under a specific deduction provision in respect of:

(a) the cost of the tanning and drying equipment;

(b) the construction of the tanning and drying room;

(c) the travel allowance paid to lames in cOIUlection with hi s trip to Canberra.

(d) the allowance paid to the directors in connection with their trip to New Zealand;

(e) the conversion of the tanning and drying equipment;

(t) the installation of the special ventilation system In its tanning and drying room;

(g) the installation of air conditioning in its office.

2. Advise lames and the other directors as to whether they can obtain deductions under s.8-1 for the expenses associated with their trips to Canberra and New Zealand.

I. .. see over for Question 2

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QUESTION TWO

You must answer either this question or question three. You may answer both this question and question three.

Aztec Pty Ltd is a resident private company for tax purposes in the business of constructing pyramids. Aztec Pty Ltd has a 1 July - 30 June tax year. Aztec Pty Ltd is not a member ,of a 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 a total of $60,000 in instalments of tax relating to the 1 July 2007 to 30 June 2008 tax year. Assume that no instalments of tax relating to the year ending 30 June 2007 were paid in the year ending 30 June 2008.

On 1 January 2008 Aztec Pty Ltd received a non portfolio dividend of $70,000 from Inca Pty Ltd its wholly owned subsidiary resident in Peru. The non portfolio divided of $70,000 was non assessable non exempt income to Aztec Pty Ltd under IT AA 1936 s23AJ.

On I July 2007 Aztec Pty Ltd sold for $70,000 a parcel of shares in No News Ltd (an Australian resident company). Aztec Pty Ltd purchased the shares on 1 December 2000 for $50,000. On I July 2007 Aztec Pty Ltd also sold a vacant block of land that it had purchased on 1 December 2002 for $100,000. The sale price of the land was $200,000. The legal costs and stamp duty associated with the purchase were $5,000. The legal costs associated with the sale were $2,000. Aztec Pty Ltd financed the purchase by borrowing the whole of the purchase price from That Bank Ltd (an Australian resident company and a bank). Simple interest at a fixed rate of 8% per annum was payable on the loan from That Bank Ltd. Originally Aztec Pty 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 sI February 2008 Aztec Pty Ltd received a dividend of $7000 franked to 100% from Cortez Ltd (an Australian resident company). On 1 June 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).

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 only events which affect the franking account occurring between 30 June 2008 and 1 September 2008 are the payment of the 28th July 2008 instalment of tax of $10,000 and the final payment of tax on 20th August 2008 for the year ending 30 June 2008. Calculate the balance in Aztec Pty Ltd's franking account as at 1 September 2008.

On 1 September 2008 Aztec Pty Ltd distributes all of its after tax distributable profits from the year ending 30 June 2008 as a 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 if the dividend is franked to this amount. Recommend a percentage to which Aztec Pty Ltd should frank the dividend.

I ... see over for Question 2 - continued

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QUESTION TWO (continued)

Assume that Aztec Pty Ltd has three shareholders Hernando (an unemployed house husband whose income from other sources is nil and who has a tax loss carried forward of $20,000 for the year ending 30 June 2007) and Francesca (a merchant banker whose income from other sources is $500,000) and Montuzuma Pty Ltd (an Australian resident company). Each own one third of the shares in Aztec Pty Ltd. Discuss the Australian income tax effects for each of these shareholders of the receipt of a dividend franked to the percentage that you recommend.

I. .. see over Jor Question 3 Part A

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QUESTION THREE

You must answer either this question or question two. You may answer both this question and question two.

ANSWER BOTH PARTS OF THIS QUESTION

Part A (12 marks)

The Trusty Unit Trust is an Australian resident trust estate. It conducts a business of selling teapots. For financial accounting purposes it values its inventory at cost. The value of its opening stock (at cost) at 1 July 2008 was $1,000,000. It anticipates that its purchases through the year ending 30 June 2009 will be $700,000 while its sales (excluding expenses associated with sale) will be $660,000. It sells its teapots at cost plus 10%. Assume that the expenses associated with each sale are 2% of the cost of each item sold. Of the sales $110,000 represents invoices issued in the month of June 2009 for which payment had not been received as at 30 June 2009. Trusty Unit Trust hears a rumour that, to fund Australia 's emissions trading scheme, an increase in income tax: rates will be announced effective from I July 2009. Advise Trusty Unit Trust as to what adjustments it can make, for tax purposes, to the valuation of its trading stock as at 30 June 2009 so that more of 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 of $30,000 for accrued long service leave for its employees. In fact none of its employees were entitled to take long service leave in the year ending 30 June 2009. Assume that, after making th~ adjustments you suggest to the valuation of its trading stock for the year ending 30 June 2009 Trusty Unit Trust makes a distribution of 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 of the trust estate and the income [consider, Inet 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 of the trust income of the Trusty Unit Trust. One of the unit holders is the Cline Discretionary Trust an Australian resident trust estate. The trustee of the Cline Discretionary Trust is Cline Pty Ltd. The objects of the trustee's discretion are Alpha (a resident minor), Beta (an adult resident whose income from other sources is $100,000) and Peter (an adult resident whose income from other sources is zero). Assume that the only

. income of the Cline Discretionary Trust for the year ending 30 June 2009 was the distribution that it received from the Trusty Unit Trust on that day. Cline Pty Ltd as trustee wants to make a distribution of the income of the trust estate on 30 June 2009 in a manner which minimises the tax liabilities of the trust and the objects of the trustee's discretion. Advise the trustee as what distributions it should make to achieve this result.

Your answer should show all relevant calculations and should make reference to relevant legislative provisions and principles of taxation law ..

I ... see over for Question 3 Part B

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Part B (8 marks)

Dixon, Latham and Starke are in partnership as solicitors. Each has a 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% of his interest in the partnership to his sister Carol. As at the 25th December 2008 the partnership's records disclosed the following information:

Receipts for accounts rendered Accounts rendered but 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 a qualified valuer and in that capacity is employed by the partnership to value properties that clients offer to mortgagees as security.

Comment on the income tax position for the year ending 30 June 2009 of each of the following persons: Dixon, Latham, Carol and Starke. Include in your advice a statement of any further information you would require before giving definitive advice. Do not consider CGT issues.

END OF PAPER

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