UNIVERSITY OF SYDNEY FACULTY OF LAW

POSTGRADUATE TAX PROGRAM

GST SPECIAL ISSUES

EXAMINATION

NOVEMBER 2001

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 (ANSWER ALL PARTS)

Big Ltd is a developer. It has been consolidating a number of properties in a former inner city light industrial suburb for a large scale residential development.
1. Big purchased one derelict factory site in 1998 for $1m. and began to build an apartment building on the site immediately (the value of the work being $2m. and the site $1.5m. on 1 July 2000).
2. Big purchased another nearby site in 1999 for $1m. but did not begin development until 2001 because of difficulty in getting development approval.
3. Big purchased a number of residential properties linking the two sites from their owner occupiers for $200,000 each in 2001 but because they are heritage classified, it can only effect minor repairs and modifications to the cottages before selling them.
4. Big purchased in 2001 a vacant block of land from another developer adjacent to the second site. The developer charged GST on the sale of this site. Big proceeded to build an apartment block that spanned the second and last sites.
5. Big purchased a company title apartment block adjacent to the development. It refurbishes the existing building and adds two storeys to it. Big then converts the building to strata title.

Before selling any apartments it is Big's practice to lease them to residential tenants for a period of six months to a year so that any defects can be fixed and so that the apartments will be attractive to investors.

How should Big and the investors who purchase from Big account for GST on sales and leases of the houses and apartments and how should they deal with claims for input tax credits on GST charged to them in relation to the development?

QUESTION 2 (ANSWER ALL PARTS)

Consider in the following cases if the various supplies are connected with Australia, which parties are required to register, the general input tax credit situation of the recipients of the supplies, whether supplies are GST-free and any elections or actions that the suppliers could take to affect their GST position favourably.

(a) Wonder NZ Ltd specialises in installing equipment in factories around the world. In some cases it purchases equipment from third parties in Australia and sells and installs for client's in Australia and in other cases it installs equipment that belongs to the client.
All ordering of equipment and arrangements for sale/installation of equipment is done from New Zealand and staff are flown in from there to effect the installations (which take about two weeks on average).
Wonder does about 5 installations in Australia every year with turnover of $45,000 for installations and $1,500,000 for purchases and installations.

It also provides advice to local Australian firms engaged in similar activities usually by email from New Zealand but occasionally through a member of staff visiting Australia for a day or two.

(b) Air Asia leases aircraft to Australian regional airlines sometimes on a wet basis and sometimes on a dry basis. In wet leases where it is responsible for the servicing of the aircraft they are flown by its staff to ports in Asia for servicing to occur. The cost of this is part of the wet lease rentals. It also services aircraft leased on a dry basis where the airline so requests, again with the servicing occurring in Asia.

(c) Giant Accounting is one of the Big 6. It has the worldwide auditing contract from the Computer Group which has both a branch and subsidiary in Australia. Giant Accounting Australia carries out the audit in Australia of the branch and subsidiary.
It charges the cost to Giant Accounting, which charges Computer Group with a mark up which in turn on-charges the branch and subsidiary in Australia with a further markup.
Consider the case where Giant Accounting Australia is simply part of a worldwide partnership of Giant Accounting and where Giant Accounting Australia is a separate partnership (Giant Accounting being a corporation in which Giant Accounting Australia holds shares.

(d) Hotel Sydney sells rooms on a block basis to UK Tours plc for various periods during the year. UK Tours then on sells the booking to retail travel agents in the UK who are paid by the tourists who book through them. Both UK Tours and the travel agents charge whatever they wish (usually more but sometimes less than they pay for the bookings).
They issue documents that show the dates of the booking which the tourists present at the hotel on arrival.

The hotel is paid by UK Tours on a quarterly basis for rooms booked irrespective of whether the booked rooms have been sold by UK Tours or by the travel agents to a tourist.

Neither the travel agents nor UK Tours have any presence in Australia.

(e) UK Resorts buys blocks of time shares in centrally managed resorts built by developers in Australia. It then on-sells the time shares to UK residents who use them for their holidays. UK Resorts has no presence in Australia.
(f) Bank Oz acquires a variety of specialised services from overseas suppliers who provide the services remotely from overseas. It also acquires licences to use various patented processes from overseas owners with the contracts sometimes signed in Australia and sometimes overseas.
Some of the services qualify for reduced input tax credits and some do not.
Bank Oz generally apportions half of its acquisitions to taxable supplies and half to input taxed financial supplies. What difference would it make if the supplies were acquired by the Australian branch of Bank UK.

QUESTION 3 (ANSWER ALL PARTS)

Consider the GST consequences of the following situations.

1. A and B own a commercial building in Sydney as joint tenants. The building is leased for rents that total $60,000 per year. Would it make any difference if A owned other commercial buildings and was already registered for GST as a result?

2. C and D acquire a block of land as joint tenants for $60,000. They intend to resell the land at a profit. The land is sold for $80,000. Would it be different if they sold the land for $40,000 or if this was the second time in the last year that C and D had engaged in this kind of transaction? What if C had an intention to resell but D did not?

3. E and F jointly lease a farming property from the state government under a 30 year lease.

The farm is operated by a partnership consisting of E, F and G in equal shares and has an annual turnover of $500,000. The partnership is allowed to use the farm on the basis that it pays the annual rent of $50,000 to the government. At the end of or at any time during the lease, E and F are entitled to purchase the freehold of the property for $1,500,000. Any rent paid under the lease is to be credited against the purchase price.

4. What would happen in 3 if the partnership agreement provides that in the event of the incapacity or death of a partner, the other partners may choose that the partnership will continue. In that event, the representative, executor or beneficiary of the incapacitated or deceased partner can become a member of the partnership. Alternatively the other partners can pay the representative, executor or beneficiary an amount in respect of the incapacitated or deceased partner's interest based on a valuation.

What happens if E becomes incapacitated or dies and the other partners choose the former or latter course?

5. X is the responsible entity of a widely held unit trust that specialises in investing in shares that pay high levels of franked dividends. The deed provides that X will not receive a management fee but will hold a special unit in the trust that entitles it to 1% of the dividends received by the trust each year. It is not a condition of this entitlement that X render management services.

X may be removed as responsible entity by an ordinary resolution of unitholders in which event the special unit is to be redeemed at its cost of $1.

6. Y owns a business and is registered. Y dies and Y's executor carries on the business for a year at which point it is sold and the proceeds distributed to the beneficiaries. Would it make a difference if the business were transferred to one of the beneficiaries under the will or sold to one of the beneficiaries under a power in the will with half the proceeds being distributed to the beneficiary in accordance with the entitlement under the will.

END

Back to Faculty Exams