UNIVERSITY OF SYDNEY

FACULTY OF LAW

 

postgraduate tax program

 

 

EXAMINATION IN goods & services tax

 

 

22 june 2000

TWO HOURS

 

 

 

 

 

 

INSTRUCTIONS:

1. Reading time allowed is 15 minutes.

2. This is an OPEN book examination. Candidates may take any books and materials whatsoever into the examination room. Candidates may also take calculators into the examination room.

3. Candidates must answer BOTH questions.

4. The examination is worth 70% of the marks for the course.

5. In each answer, state any further information (if any) that you may need to fully answer the question. Where necessary, state any assumptions that you have made in answering the questions.

 

 

 

 

 

This examination consists of 5 pages, including this cover page. Please be sure that your examination paper is complete.

QUESTION ONE (ANSWER ALL THREE PARTS: PART THREE HAS SOME INTERNAL CHOICE)

Part One (10 marks)

The five Australian manufacturers of fibbies have established the Fibby Institute of Australia. The Institute is an unincorporated association registered in New South Wales. The principal object of the institute is to promote a better understanding of the fibby industry in Australia by the public and all levels of government. The Institute undertakes an annual public advertising campaign to promote the sale of fibbies. It also lobbies government in respect of regulation of the fibby industry. The Institute is operated as a not-for-profit organisation. It is financed by annual subscriptions paid by the members. All members pay the same subscription regardless of market share. The Institute invoices members in January of each year. An additional levy may be imposed on members to make up any financial shortfall during the year. The Institute may participate in trade fairs. This is financed by a special levy imposed only on those members who wish to be represented at the trade fair.

Advise the Institute on the GST consequences of its operations.

Would it make any difference if the Institute is a company limited by guarantee?

AND

Part Two (10 marks)

Raiders Ltd wants to take over the operations of Target Pty Ltd. Both Raiders and Target obtain separate legal advice in respect of the takeover. In both cases, the lawyers’ fees are charged GST inclusive. Advise both Raiders and Target as to the availability of input tax credits in respect of the fees paid if –

(a) Raiders buys the assets of Target and, subject to some rationalisation, carries on the business previously carried on by Target.

(b) Raiders buys the shares in Target.

AND

Part Three (Answer three questions only; each question is worth 5 marks)

(a) Supamarket Ltd is running a special promotion on the sale of Named Brand detergents. When a customer purchases Named Brand Detergent, it receives a docket from the check out operator entitling the customer to 50 cents off the price of the next purchase of Named Brand Detergent.

Advise Supamarket. What if Supamarket receives 30 cents from the manufacturer of Named Brand Detergent if it in turn presents the docket to the manufacturer (this amount being paid by the manufacturer on a monthly basis)?

(b) Manufacturer Ltd manufactures conveyer belts. Many sales are made on terms through Manufacturer’s finance division. Manufacturer’s factory is destroyed by fire. The fire is caused by an electrical fault. Manufacturer is fully insured against the loss. The insurer pays $1m to Builder for the construction of a new factory.

Advise Manufacturer and the insurance company.

(c) What are the GST consequences of a state government subsidy paid annually to a manufacturer as an incentive to continue manufacturing operations in the state (the amount of the subsidy is determined by reference to annual turnover)?

(d) Nigel is a solicitor in sole practice. He attends a business meeting in Cairns. The meeting lasts for three days and Nigel decides to stay in Cairns for a further three days as a holiday. He incurs airfares and accommodation costs (GST-inclusive).

Advise Nigel on the availability of any input tax credits in relation to the trip.

 

 

QUESTION TWO (ANSWER THREE OF THE FOUR PARTS: EACH PART IS OF EQUAL VALUE – 11.6 marks )

Part One

Hank is a spec builder who owns a farmlet on the outskirts of a city. In 2001 he subdivides the land which he acquired in 1990 into five blocks and offers it for sale either as is or with a house on it constructed by him. He also sells the part of the land with the farmhouse on it which he built in 1995 and used as a weekender. He sells one of the blocks to his daughter for one-half of its value and erects a house on it for her at cost. After selling one of the blocks to a local land speculator he discovers that it is necessary to acquire an easement over that block to give proper access for the remaining blocks and he pays $11,000 to the speculator for the easement.

Hank seeks your advice on the GST treatment of these transactions and whether there is anything he can do to reduce the GST payable.

 

 

Part Two

FMAC is a finance company which provides stock to car dealers on a floor-plan arrangement. FMAC retains title to the cars until they are sold by the dealer. Once a dealer "sells" a car, and pays the price, title to the car is passed to the buyer. Ford Co of Balwyn is in some financial difficulties. It arranges a sale of a car to a customer but never forwards the price to FMAC. Once FMAC discovers the transaction it seizes the car from the buyer. After significant public outcry in the Press and Parliament, FMAC decides to allow the customer to keep the car.

What are the GST consequences of this transaction for FMAC and Ford Co of Balwyn? What additional issues would be raised if Ford Co of Balwyn also had an arrangement with FMAC whereby FMAC would issue a credit card to customers of Ford Co and allow customers to charge the cost of the car to the credit card account. FMAC would pay Ford Co 105% of the amount charged to the card and then charge the customer monthly interest equivalent to a 25% annual interest rate for the unpaid balance on the credit card.

 

Part Three

Rest Easy (Lorne) Ltd owns a small hotel in Australia and is a member of the Rest Easy worldwide franchise system for hotels. It participates in the Rest Easy voucher scheme. Under this scheme a customer can "pay" for accommodation by presenting a fully-paid voucher which can be purchased at many points around the world — usually travel agents, or other Rest Easy hotels.

Rest Easy provides accommodation to an American tourist for 4 nights. The tourist pays for the accommodation by presenting a voucher for 4 nights accommodation. The tourist had purchased the voucher for $US400 in the USA from a local hotel, Rest Easy (Urbana) Inc. Rest Easy (Lorne) forwards the voucher to Rest Easy (Chicago) Inc — the headquarters for processing vouchers. Rest Easy (Lorne) receives $AUS700. What are the GST consequences of these facts for Rest Easy (Lorne). Are there any GST consequences for Rest Easy (Chicago) Inc or Rest Easy (Urbana)?

 

 

Part Four

Charles owns a store selling fishing tackle and accessories. His company imports a number of items, including special fishing line made of silk for $150, directly from the Canadian manufacturer. The company also imports high technology Japanese-made lures. What is the amount of input tax credit if:

(a) he receives a cash discount of 10% on the items he purchases from Canada if the invoice is paid within 30 days — the invoices are issued for the full price of the goods, not net of the discount; and

(b) he purchases enough Japanese lures over the next few months to qualify for a volume rebate of 5% off the price — an adjustment is made by the Japanese supplier on the next invoice for supplies?

Would it make any difference if he acquired the items from local manufacturers? What is the position if the rebate is given off future purchases and Charles receives a rebate $2,000 in October 2000 off his purchases for July to September 2000 based on purchases in April to July 2000?