UNIVERSITY OF SYDNEY
FACULTY OF LAW
MASTER OF LAWS
MASTER OF TAXATION
CORPORATE TAXATION
FEBRUARY 2001 INTENSIVE
TAKE HOME EXAM
AVAILABLE FRIDAY 30 MARCH 2001
DUE 5.00 PM MONDAY 2 APRIL 2001 (by delivery to the Law School, fax to Bridget 02 9351 0200 or e-mail bridget@law.usyd.edu.au)
YOU MUST ANSWER TWO ONLY OF THE FOLLOWING THREE QUESTIONS (YOU CAN CHOOSE WHICHEVER QUESTIONS YOU LIKE). EACH ANSWER MUST BE YOUR OWN WORK AND MUST NOT EXCEED 10 PAGES (3,000 WORDS) IN LENGTH. AN ANSWER MAY BE LESS THAN THIS LIMIT BUT ANSWERS WILL NOT BE CONSIDERED TO THE EXTENT THEY EXCEED THE LIMIT.
Question 1
A listed company has a bonus share plan whereby shareholders can elect in advance to forgo dividends and instead to receive bonus shares in accordance with a formula typically related to the amount of the dividend paid on other shares.
Over half of its pre-CGT and non-resident shareholders elect to receive shares under the bonus plan. The company has recently sold its pre CGT property portfolio (its major asset) into a unit trust for $100m, half the units in which have been issued to existing shareholders of the company. The cost of the property portfolio was $50m.
The company plans to return half the proceeds to its shareholders. Shareholders who have not made an election under the bonus share plan are to receive a cash payment whereas shareholders who have made such an election are to receive bonus shares.
What are the income tax consequences if the cash payments are debited-
(a) to the company's share capital account; or
(b) against the company's profits.
What if the company decides to liquidate instead?
What are the tax consequences for the shareholders when they receive distributions from the liquidator?
Question 2
1. Advise on the tax consequences for the company and shareholders in the following situations:
(a) Supermarket Ltd, a listed company, sells goods to shareholders in the company at a 10% discount; it also forgives (up to a maximum of $500 per employee annually) lay-by debts of employees who are shareholders under its employee share acquisition scheme;
(b) Sydney View Courts Ltd is a home-unit company and Ms Jones is a shareholder in the company; under the articles of association of the company, she is entitled to a lease of a flat at a nominal rent designed to cover the company's outgoings; such a lease has been granted to her.
2. A merchant bank is issued with $1m worth of 5% perpetual cumulative preference shares in a closely-held company. What are the tax consequences for the bank, particularly of imputation, when it receives dividends from the company?
How would your answer differ if at the time the shares were issued, the bank received a guarantee for the payment of the dividends from the owners of the company (secured over private real estate)?
Sometime later, the company's cash-flow is looking grim and the bank is threatening to call up the guarantee. At this time the company owns an asset which cost much less than its current market value. Instead of selling the asset and to pacify the bank, the owners provide an injection of share capital into the company and the company proceeds to make a distribution to the bank. What are the tax consequences of the distribution?
Question 3
1. A holds all the shares in A Pty Ltd which holds 20% of the shares in Little Pty Ltd. The other shares in Little are held as to 40% each by B and C who are individuals. Little specialises in developing custom software for particular clients. It conducts its business from premises on the outskirts of Newcastle which it bought in 1995 for $1m. Little has a history of tax losses on capital and revenue account in recent times. A considers that Little's problems arise from the poor management of B and C who have run the company during that time. Accordingly, A Pty Ltd purchases 30% of the shares in Little from B for $1m and similarly purchases a 30% interest from C for $1m. A then takes over active management of Little and subsequently Little-
(a) develops some software for general sale to the public;
(b) retails a limited amount of software similar to its own but that is developed by other companies; and
(c) sells the premises on the outskirts of Newcastle for $800,000 and moves to new premises closer to the centre of the city.
Little now seeks your advice as to its ability to use the tax losses, including the loss incurred on the sale of the premises.
2. How would your answer in 1 differ if, instead of paying cash for the transfer, A Pty Ltd makes a similar offer to B and C and as a result-
(a) B transfers 30% of the shares in Little to A Pty Ltd in exchange for the issue of 30% of the shares in A Pty Ltd; and
(b) C similarly transfers 30% of the shares in Little but in exchange for 15% of the shares in A Pty Ltd and a cash payment.
What is the tax treatment of A Pty Ltd, B and C with respect to the acquisition and disposal of the shares?
END OF EXAMINATION