UNIVERSITY OF SYDNEY
FACULTY OF LAW
POSTGRADUATE TAX PROGRAM
GOODS & SERVICES TAX PRINCIPLES
28 June 2002
EXAMINATION
TIME ALLOWED: TWO HOURS
READING TIME: 20 MINTUES
INSTRUCTIONS:
1. This examination paper consists of 5 pages, including this cover page. Please ensure that your examination paper is complete.
2. This is an OPEN book examination. Candidates are permitted to bring any books and materials into the examination room, other than University of Sydney Library Books. Candidates may also bring calculators into the examination room.
3. There are three questions. Candidates should answer ANY TWO questions. Each question is worth 35 Marks. Some questions have more than one part. The value of each part is specified.
4. The examination is worth 70% of the marks for the course.
5. In each answer,:
state any further information (if any) that you think you would need to fully answer the question
state any assumptions you have made in answering the question.
QUESTION ONE - ANSWER BOTH PARTS
1. (10 Marks Þ 18 minutes) John is a solicitor in sole practice. John is registered for GST purposes.
John wrote a textbook entitled "GST Law & Practice". In the last calendar year, John's royalties were $10,000.
(a) Is John required to charge GST on the royalties paid by the publisher?
(b) What if the book was a novel unrelated to John's work?
(c) After retirement, John continues to receive royalties, which grow from $10,000 to between $40,000 & $60,000 per annum, as his book develops a cult following. His only other income is from superannuation. Is John required to charge GST on the royalties paid by the publisher?
2. (25 Marks Þ 42 minutes) The Royal Society for the Protection of Goldfish (RSPG) is a non-profit body and a gift deductible entity. It runs an annual fair in October to raise funds for its activities. The fair includes competition events for fish owners and breeders. To help with the running costs, RSPG enters into a sponsorship agreement with Fishies, a supplier of fish food flakes for the home aquarium. As part of the sponsorship agreement, the parties agree that:
(a) RSPG will give Fishies naming rights to the main tent, and will include an acknowledgement of Fishies sponsorship on all advertising materials for the fair
(b) Fishies will donate $75,000 to the fund-raising efforts of the fair
(c) Fishies will provide $1,000 sample packets of fish flakes, to be given away on a first come first serve basis to attendees at the fair
(d) Fishies will supply award two prizes of one-year's supply of Fishies Flakes, which would normally retail for $385, to the winners of the two main competitions.
Ron is a professional goldfish breeder and pet shop owner, who wins one of the competitions. His prize includes one of the one-year's supplies of Fishies Flakes and $1,000 in cash, which he immediately donates to RSPG.
What GST issues arise for RSPG, Fishies, and Ron? Assume that RSPG has decided NOT to treat the event as an input taxed fund-raising event.
QUESTION TWO - ANSWER BOTH PARTS
1. (5 Marks Þ 10 minutes) Firm Ltd has incurred input tax on the acquisition of legal advice in relation to its entire business structure and operations. The amount of tax is $10,000. Firm decides that it is not realistic to allocate the advice to any particular aspect of its operations. Firm has the following revenue sources:
(a) $11,000 from making taxable supplies
(b) $10,000 from making input-taxed supplies
(c) $10,000 from making GST-free supplies
(d) $10,000 revenue which does not arise from making supplies - ie. the money is a subsidy from the government which is not for making a supply
(e) $10,000 revenue from making supplies but these supplies are not connected with Australia.
What are the issues that arise in applying the Commissioner's rulings to determine Firm's input tax credit entitlement in respect of the GST paid on the legal fees? What do you think is the correct way to determine the input credit and why? What factors would you consider?
2. (30 Marks Þ 50 minutes)
Super Big Limited is a new supermarket chain hoping to build its business into an Australia wide operation to match it name. It sells the full range of supermarket products, including basic foods (which you can presume are GST?free) and taxable items such as confectionery & chocolate, cleaning products, manchester, crockery, magazines, etc. Super Big decides to entice customers to its stores by offering an Easter promotion. Advise Super Big on the consequences of the following possible promotional ideas and scenarios.
(a) To every shopper who spends more than $150 on any one visit, Super Big will give an egg carton containing a dozen chocolate eggs, normally valued at $11 (including GST). Kay spends $155, including $100 of basic foods and $55 on taxable items.
How much GST should Super Big remit in relation to Kay's shopping?
(b) Would your answer be different if the promotional item was a dozen fresh, organic, free-range eggs, normally valued at $5.50?
(c) What if the promotional item was a voucher entitling the holder to $11 off her next purchase of over $100 at SuperBig?
(d) What if the promotional item was a $10 phone card, which AuzTel had given to SuperBig (for no monetary payment) to give away as part of a joint promotion?
QUESTION THREE - Answer Part A OR Part B
PART A: (35 Marks Þ 1 Hour)
Answer BOTH Questions in this Part OR Answer PART B
1. (5 Marks Þ 10 minutes) 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. Charles's company also imports high technology Japanese-made lures and sometimes buys imported lures locally (in Australia) from other suppliers. What are the GST consequences for Charles?
Is Charles entitled to an input tax credit and if so 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?
(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
2. (30 Marks Þ 50 minutes)
UK Bank (UKB) has a subsidiary in Australia (OzB). At the end of each year, UKB charges a management fee to all its subsidiaries, which covers, among other things, general administration and management of group functions, legal advice, Head Office costs relevant to all branches and subsidiaries; promotional costs (advertising, web site development costs etc), and licence fees for software licensed from third parties and used by UK Bank and its branches and subsidiaries throughout the world.
UKB has contracted UK Accountants (UKA) to supply accounting services to its subsidiaries all around the world. UKA asks its Australian arm, Aussie Accountants Pty Ltd (AA), to audit OzB. Invoices are sent as follows: AA invoices UKA through their global settlements system; UKA on-charges to UKB; UKB includes a portion of its audit fees from UKA in the management fee charged to OzB.
Discuss the GST issues that arise for UKB, AA, UKA, and OzB.
PART B (35 Marks Þ 1 Hour)
Do not answer this if you have done Part A
In 1990, H and W purchased land on Wallis Lake in New South Wales. They built a small cottage on the land and used it for holidays. They also kept a small herd of cattle on the land. These were minded by a neighbouring farmer in return for the farmer being allowed to graze his cattle on H and W's property. In 2001, H&W incorporate a company (H & W Pty Ltd) and transfer ownership of the property to the company, in return for shares in the company.
In 2003, H & W decide to move to the Wallis Lakes property permanently and run the property as a bed and breakfast, operated by H&W Pty Ltd. They make extensions to the building so that there are two extra bedrooms with ensuites.
In 2008, H & W decide to sell the property to Developer Pty Ltd which plans to subdivide and develop the property. H&W are considering the following options:
(i) H & W Pty Ltd sells the land to Developer Pty Ltd;
(ii) H and W sell their shares in H&W Pty Ltd to Developer .
Advise all parties on the effect of GST in light of of:
(a) The effect of the herd of cattle and the use by the neighbouring farmer to graze his cattle after 1 July 2000.
(b) The transfer of the property to H&W Pty Ltd;
(c) The operation of the bed and breakfast and the extensions to the cottage; and
(d) The two proposals for transferring the property to the Developer.
END
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