UNIVERSITY OF SYDNEY
FACULTY OF LAW
CORPORATE TAXATION
EXAMINATION
NOVEMBER 2002
TIME ALLOWED: TWO HOURS
READING TIME: 20 MINTUES
CANDIDATES ARE REQUIRED TO ATTEMPT TWO QUESTIONS. ALL QUESTIONS ARE OF EQUAL VALUE. THIS IS AN OPEN BOOK EXAMINATION.
QUESTION 1
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. Would the following arrangements be debt interests or equity interests, or neither, under the debt/equity rules enacted by New Business Tax System (Debt and Equity) Act 2001? How would distributions under the arrangements in respect of the interests be treated for income tax purposes under the rules?
[You are not required to consider the income tax and capital gains tax consequences of conversion or termination of the interests under the arrangements.]
(a) A Co Ltd makes an interest free loan of $10 million, repayable on demand, to its wholly-owned subsidiary, B Co Pty Ltd. Both are resident companies.
(b) As in (a), except interest is charged at 8% per annum, and the loan has a fixed term of 5 years.
(c) A Co Ltd issues a debenture which is on the same terms as the debenture stock which was the subject of DCT (WA) v Boulder Perseverance Ltd (1937) 58 CLR 223.
(d) A Co Ltd subscribes $10 million for 10 million redeemable preference shares in C Co Pty Ltd. Both companies are resident, and unrelated. The shares are redeemable in 5 years, carry a right to a cumulative dividend of 8% per annum payable in priority to the ordinary shares, and have no voting rights.
The amount payable on redemption is $10 million plus an amount equal to any unpaid annual dividend entitlement.
(e) As in (d), except that the shares are non-redeemable convertible preference shares. At the end of 5 years the shares convert into ordinary shares in C Co Pty Ltd at the rate of 1 ordinary share for each preference share, plus an extra ordinary share for each dollar of unpaid annual dividend.
QUESTION 2
Dream Holiday Co Ltd is an Australian company that has issued preference shares requiring dividend payments of $35,000 each to be paid quarterly on the last day of each quarter. By the articles the preference shares are cumulative, that is, in the event that a dividend cannot be paid in any particular quarter the dividend will be paid in the following quarters in priority to the ordinary shareholders. The preference shares are held by resident financial institutions. The directors of Dream Holiday Co Ltd would also like to pay a dividend of $210,000 to the ordinary shareholders during the current year of income.
Non-residents hold a significant proportion of the ordinary shares.
Dream Holiday Co Ltd has a franking surplus as at 30 June 2002 of $70,000. Having paid tax instalments during 2002 it has not paid a final instalment for 2002 and will not receive any refund in respect of the 2002 income year. It expects a tax liability of $100,000 payable in 4 equal PAYG instalments. The directors wish to maximise the level of franked dividends, particularly those paid to the preference shareholders, but do not wish to incur any additional tax by way of penalty. The directors seek your advice as to the franking of dividends during the year including the timing of payment of dividends.
What problems might Dream Holiday Co Ltd have under the imputation provisions if it unexpectedly has a severe down turn in the second half of the year and its estimate of company tax liability for the year is revised to $50,000?
What are the imputation consequences for the following shareholders/investors in receipt of a dividend from Dream Holiday Co Ltd?
(i) A partnership which is in losses where one of the partners is a trustee of a fixed trust with resident individual beneficiaries and the other partner is a resident company.
(ii) A non-resident individual.
(iii) A trust distribution to a resident individual from a closely held fixed trust that bought shares in Dream Holiday Co Ltd 30 days prior to the payment of the dividend. The trust made the distribution immediately after receiving the dividend.
QUESTION 3
Bloomfield Pastoral Pty Ltd holds a pastoral property and carries on business as a sheep station owner in western New South Wales.
It is owned by Mrs Bloomfield as to 60% and her two daughters as to 20% each. The company acquired the property in the 1960s for $100,000, which is also the time that Mrs Bloomfield acquired her interest in the company.
The daughters acquired their shares in the company from their father in 1998. Each daughter has a cost base in the shares of $1m. The company has $100,000 in its share capital account. Mrs Bloomfield has decided to sell the property and move to the "big smoke" of Sydney. A purchaser has been found that is willing to buy the property for $6m. The company has accumulated profits of $3m which are reflected in its franking account.
If Bloomfield sells the pastoral property to the buyer, what are the income tax consequences of then liquidating the company?
How would your answer differ in each of the following situations:
(a) Bloomfield exhausts its franking account by distributing a fully franked dividend of 1.5m to each of the daughters, it then sells the property, is then put into liquidation and the liquidator distributes a final dividend to the mother of $5.6m and a final dividend of $200,000 to each of the daughters;
(b) Instead of accumulated profits and a credit in its franking account, Bloomfield has accumulated losses of $300,000 and prior to liquidation, sells its cattle producing assessable income of $200,000 and, on the sale of depreciated property, incurs a balancing charge of $100,000 under Division 40;
(c) Bloomfield is not liquidated but, after the sale of the property, its assets are appropriated on a pro rata basis by its shareholders and the company is struck off the companies register under Corporations Act Ch5A.
END
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