tax of business Nov 2002

UNIVERSITY OF SYDNEY FACULTY OF LAW

TAXATION OF BUSINESS AND INVESTMENT INCOME

EXAMINATION

NOVEMBER 2002

TIME ALLOWED: TWO HOURS

READING TIME: 20 MINUTES

INSTRUCTIONS FOR CANDIDATES

· This examination represents 70% of your total assessment for this subject.
Candidates must answer ALL questions.
· The number of marks allocated to each question is marked on the question.
· Begin your answer for each question in a new booklet.

QUESTION 1 (25 marks)

Bigstore Limited owns and operates an upmarket retail store in the centre of Melbourne's central business district.

Megastore Limited owns and operates retail stores in the capital city of each of Australia's six states, including a store in Melbourne.

The following events occur:

(a) Bigstore purchases a property in Sydney's central business district with a view to opening a retail store there.
The property costs Bigstore $20 million. As soon as Megastore learns of Bigstore's intentions, it offers to purchase the property for $21 million if Bigstore will agree not to open stores in either Sydney or Canberra for a period of 5 years. Bigstore agrees.

(b) Bigstore leases a whole floor of its Melbourne property to Planet K, a manufacturer and retailer of clothing.
The term of the lease is 5 years, with rental fixed by reference to Planet K's annual turnover.
In consideration of Planet K agreeing to lease the premises in its store, Bigstore pays to Planet K a lump sum amount of $100,000.
Upon signing the lease, Planet K installs depreciable fittings worth $80,000 which, under the terms of the lease, it is required to remove on termination.

(c) On 1 July, Bigstore entered into a lease with Finance Limited, a finance company, under which Bigstore leased from Finance 100 cash registers for five years at an annual rental of $40,000.
The lease provided that at the termination of the lease, the residual value of the cash registers would be $100,000. The lease further provided that at the termination of the lease, Finance would sell the cash registers and, if it sold them for less than residual value, Bigstore would be required to pay Finance the amount of the shortfall. On 30 June, the lease terminates, and Finance offers to sell the cash registers to Bigstore for $100,000.

Bigstore accepts and, on the same day, sells the cash registers for $120,000.

Advise Bigstore, Megastore, Planet K and Finance on the taxation consequences of these events.

QUESTION 2 (25 marks)

In 1989, Universal Distributors entered a contract with Japan Auto Ltd (JAL) to act as its sole agent to represent JAL and its products in Australia for 20 years.
Under the terms of that contract Universal was permitted, with the consent of JAL (which could not be unreasonably withheld), to assign all or part of Universal's rights and interest in the contract.
Universal is entitled to receive a commission of about 12.5% on all sales that it negotiates for JAL.

Over the time that the arrangement has been in operation, JAL's range of products have become particularly popular in Australia and Universal has done well from its arrangement.

The arrangement originally represented about 15% of Universal's gross turnover but grew to about 67% of gross turnover.

JAL and Universal operated harmoniously until JAL started receiving offers from Universal's competitors to replace Universal as the distributor.

When Universal heard about these offers, it brought an action in the Supreme Court of Victoria seeking an injunction to restrain what it feared would be a breach of the contact.

After about 6 months' protracted negotiations Universal agreed to settle its action against JAL in return for an immediate payment by JAL of $2.5m.

However, as part of the settlement, Universal agreed to reduce its commission to 9.5% on future sales.
Universal estimates that the action cost about $250,000 in legal fees.

As part of its restructuring during the recession, Universal decided to abandon the NSW market to Competitor Ltd. The NSW market had accounted for about 42% of all Universal's sales in Australia but had been declining quickly. It now represented about 28% of sales. Under the terms of the agreement, Universal appointed Competitor as a sub-distributor for N.S.W.

Competitor agreed to direct all its orders for JAL products through Universal.
Competitor agreed to pay to Universal $1.5m and 10.5% on all sales. Universal had to bring an action against JAL to secure its consent to the rearrangement, at a cost in legal fees of $85,000. This was financed by borrowing from Bank.

The directors of Universal have now decided to buy back the NSW franchise because of the upturn in the NSW economy. It paid $16.5m to Competitor.

Advise Universal and Competitor of the tax consequences of these facts.

QUESTION 3 (20 marks)

Builder Ltd is a large construction company. It employs around 250 people in various management roles and, while it mostly uses independent contractors for its major projects, also employs around 35 people in various technical and project roles.

It decides to use some of its building labourers and engineers (when they can be spared from other projects) to construct a new multi-storey car park on land that it owns at the rear of its head office in Parramatta.
It bought the land two years ago for $1m with the object of using it as a staff car park.

The staff also work on the manufacture and installation of internal partitioning, built-in desks and other free-standing office furniture in the guard house and office located at the entrance of the car park.

The work takes around 18 weeks and during that time Builder pays $250,000 in wages, around $150,000 of which was paid to the employees who were working to some extent on the project.
It spent $750,000 on materials.

(a) What is the treatment of the wages paid to the employees who worked on the project?

(b) Builder has been paying rates on the vacant land for 2 years. What is the treatment of those payments?

END

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