Untitled

UNIVERSITY OF SYDNEY FACULTY OF LAW

MASTER OF LAWS
MASTER OF TAXATION

CORPORATE TAXATION

NOVEMBER 2001 EXAMINATION

TIME ALLOWED: TWO HOURS
(TWENTY MINUTES READING TIME)

CANDIDATES ARE REQUIRED TO ATTEMPT TWO QUESTIONS. ALL QUESTIONS ARE OF EQUAL VALUE. WHERE QUESTIONS HAVE PARTS EACH PART IS OF EQUAL VALUE. THIS IS AN OPEN BOOK EXAMINATION.

QUESTION 1

(ANSWER ALL PARTS)

1. 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.
Would the shareholders be taxable on these benefits?

2. A private company owns a beach house that it allows its shareholders to use without charge. It also pays electricity bills, rates and insurance for the house which are in the name of the major shareholder in the company who is the main user of the house.
Is any amount assessable to the shareholders under s. 108 or Part III Div. 7A?
What are the imputation consequences if they are assessable?

3. Conglomerate Ltd, a listed company, issues convertible notes which are never repayable but can only be converted to shares at each fifth anniversary of their issue at the election of the company or the noteholder (that is, in year 5 after issue, year 10 after issue, year 15 after issue etc). The notes are convertible at the stockmarket price of Conglomerate shares when the notes were issued. The interest rate floats within a band of 3% above or below the prime bank lending rate depending on the market price of Conglomerate shares. How would the notes be treated under New Business Tax System (Debt and Equity) Act 2001?

QUESTION 2

A, B, C and D hold respectively 10%, 10%, 40% and 40% of the shares in Little Pty Ltd which has a history of tax losses on capital and revenue account in recent times.
All the shares have the same voting, dividend and capital rights.
A and B consider that the problems arise from the poor management of C and D who have run the company during that time. Accordingly A purchases a 30% interest from C and B a 30% interest from D for $1m each.
A and B take over active management of Little which commences to dispose of a number of existing businesses and to acquire new businesses. Little also disposes for $4m in that year of a commercial building that it acquired in 1984.
The building cost $1m and was worth $6m when the shareholdings in the company changed. It disposes for $3m of another building that cost $5m three years ago and was worth $4m at the time of the share transfers.
The agreement for sale of the shares provides that the rights attached to the remaining shares of C and D will be changed so that they are entitled to a 10% cumulative preferential dividend with no further participation in profits and to a priority of return of capital in a winding up with no participation in surplus assets.
The constitution of the company is altered to give effect to this agreement. The voting rights of the shares held by C and D are unaltered.
In the current year of income Little makes a profit which enables it to pay a dividend that just covers the preference dividend and it is likely to be some years before a dividend can be paid to A and B.
(a) Consider the tax treatment of Little in respect of the tax losses and of the sale of the buildings.
(b) What difference would it make if C and D only sold 20% each to A and B?
(c) What difference would it make if A, B, C and D were private companies owned by individuals E, F, G and H?

QUESTION 3

(ANSWER BOTH PARTS)

1. What are the distribution, imputation and CGT treatments of:
(a) bonus shares that directly or indirectly capitalise profits;
(b) bonus shares that neither capitalise profits nor debit existing share capital.
Does it make any difference if the bonus shares are fully or partly paid? if the recipient is an Australian resident company?
if the bonus issue is pro rata? or if the bonus shares are held on revenue or capital account? What happens when the bonus shares are sold?

2. A listed company 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:
(a) the dividends paid by the company are unfranked;
(b) the dividends paid by the company are franked 50%; or
(c) the dividends paid by the company are fully franked?
How would your answer differ if the company had a dividend reinvestment plan whereby the shareholders elect to apply declared dividends to pay up an issue of shares to them?