UNIVERSITY OF SYDNEY
FACULTY OF LAW
MASTER OF LAWS
MASTER OF TAXATION
CORPORATE TAXATION
2001 EXAMINATION SEMESTER 1
READING TIME: 10 MINUTES
WRITING TIME: 2 HOURS 10 MINUTES
CANDIDATES MUST ATTEMPT TWO QUESTIONS
OPEN BOOK EXAMINATION: CANDIDATES MAY TAKE INTO THE EXAMINATION ROOM ANY MATERIALS EXCEPT UNIVERSITY OF SYDNEY LIBRARY BOOKS
QUESTION 1
(32.5 marks, 1 hour 5 minutes)
DO BOTH PARTS
Part A (20 marks)
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.
Part B (12.5 marks)
How would your answer in Part A differ if, instead of paying cash for the transfer from B and C-
(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?
QUESTION 2
(32.5 marks, 1 hour 5 minutes)
DO BOTH PARTS
Part A (20 marks)
Aussie Ltd is a listed company whose shareholders consist one quarter of pre CGT resident shareholders, one quarter post CGT resident corporate shareholders, one quarter post CGT resident super funds and one quarter post CGT non-resident portfolio shareholders. Consider the tax consequences of the following:
(a) Aussie has a bonus plan whereby shareholders can elect in advance to forgo dividends and instead to receive bonus shares in accordance with a formula 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. What are the consequences if-
(i) the dividends paid by Aussie are unfranked;
(ii) the dividends paid by Aussie are franked 50%;
(iii) the dividends paid by Aussie are fully franked.
(b) Aussie makes a pro-rata bonus issue of convertible notes out of its share capital account. The notes will never be repayable but can only be converted to shares within certain time limits, with the interest rate floating within a band of 3% above or below the prime bank lending rate depending on the market price of Aussie shares.
Part B (12.5 marks)
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 outlook for the company 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
(32.5 marks, 1 hour 5 minutes)
Private Pty Ltd is a private pastoral company. Its shareholders are various members of a large family with incomes of varying levels. The company's articles permit the payment of dividends to such shareholders and in such amounts as the directors determine. It has been Private's policy to pay dividends to members of the family with income in the range of $15,000-30,000 so as to exhaust the company's franking surplus pursuant to the one dividend resolution on the last day of the company's franking year. On the following day, Private typically pays family members with incomes in the range of $0-$5,000. Private is concerned at how the recent changes to the imputation system affect this practice and seeks your advice.
Private also seeks your advice with respect to the following alternatives and proposals:
(a) Private recently built a number of town houses on property that was formerly used for grazing. Private redeems an issue of redeemable preference shares to Friendly Bank that was used to finance the construction of the town houses.
In order to comply with the terms of issue, Private debits its share capital account with the redemption price. In order to comply with corporate law, Private transfers an amount from profits to its share capital account.
(b) Private provides family members with free meat. Alternately, it sells the meat to family members at wholesale prices but forgives the debts created by the sale up to a maximum of $500 per year.
(c) Robert is the black sheep of the family, has left the country and taken up residence in the UK. The family is concerned that he does not have enough cash and cause the company to offer to buy-back some of his shares. How do the consequences differ depending on whether the company buys back the shares out of profits or capital?
END OF EXAMINATION