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LEGT2751 Business Taxation Sem 1 2009
LEGT2751 Business Taxation Sem 1 2009
LEGT2751 Business Taxation Sem 1 2009
TWO HOURS
READING TIME:
TEN MINUTES
THREE
Do not consider GST issues in answering any question. All calculations if made are to
be made on a GST exclusive basis.
Candidates are pennitted to bring electronic calculators into the examination room.
There are no restrictions on the written materials that candidates may bring into the
examination room.
Each question is of equal value.
Answer each question attempted in a separate book.
pJ
QUESTION ONE
Austfur Ltd is an unlisted company. Assume that at all relevant times Austfur Ltd is a
resident of Australia. Austfur Ltd was incorporated on 1 July 2007.
During the period 1 July 2007 to 1 September 2008 Austfur Ltd incurred the following
expenses:(i)
(ii)
$500,000 on the construction of a special room with specific design features which
assist in the drying of kangaroo skin;
(iii) $3000 paid to lames, one of the directors of Austfur Ltd as a travel allowance for a trip
to Canberra in August 2007 (the trip was to obtain a licence to export kangaroo skin
dolls, lames was away three nights and travelled in his own car).
On 1 October 2008 Austfur Ltd commences manufacturing kangaroo dolls from kangaroo
skin. The dolls are very popular in the United States and sales there are very good.
On 1 January 2009 the United States government bans the import of products made from
kangaroo skin. On 1 February 2009 the board of Austfur Ltd resolves to suspend the
manufacture of kangaroo skin dolls and to send two directors to New Zealand to investigate
the possibility of acquiring rabbit skins as a substitute for kangaroo skins. The directors are
away three weeks, one week of which is spent bushwalking in the South Island of New
Zealand. Austfur Ltd pays the directors a travel, accommodation and air fares allowance in
respect of this trip.
On their return to Australia the directors recommend that Austfur Ltd should use rabbit skin
as a substitute for kangaroo skin and should also set up a rabbit breeding programme in
Australia from which to obtain its raw materials.
On 1 April 2009 Austfur Ltd spends $100,000 on converting its tanning and drying
equipment so that it is able to tan rabbit skin. Assume that rabbit skin requires a longer and
hotter tanning process than kangaroo skin does. At the time of conversion the equipment was
in need of repair. To assist the tanning and drying process Austfur Ltd also spends $30,000
on 1 April 2009 on installing a special ventilation system in its tanning and drying room. To
avoid jealousy from its clerical staff Austfur Ltd also spends $30,000 on installing air
conditioning in its office so that its clerical staff can also have a cool working envirorunent.
Required
J.
2.
Advise Austfur Ltd, giving reasons for your advice and specifying which provision
you consider to be relevant, as to whether it can obtain a deduction either under 5.8 1
or under a specific deduction provision in respect of:
(a)
(b)
(c)
(d)
the allowance paid to the directors in connection with their trip to New
Zealand;
(e)
(t)
(g)
In
Advise lames and the other directors as to whether they can obtain deductions under
s.8-1 for the expenses associated with their trips to Canberra and New Zealand.
QUESTION TWO
You must answer either this question or question three. You may answer both this
question and question three.
Aztec Pty Ltd is a resident private company for tax purposes in the business of constructing
pyramids. Aztec Pty Ltd has a 1 July - 30 June tax year. Aztec Pty Ltd is not a member ,of a
consolidated group for Australian tax purposes.
The dosing balance in Aztec Pty Ltd's franking account as at 1 July 2007 was nil.
During the year ending 30 June 2008 Aztec Pty Ltd paid a total of $60,000 in instalments of
tax relating to the 1 July 2007 to 30 June 2008 tax year. Assume that no instalments of tax
relating to the year ending 30 June 2007 were paid in the year ending 30 June 2008.
On 1 January 2008 Aztec Pty Ltd received a non portfolio dividend of $70,000 from Inca Pty
Ltd its wholly owned subsidiary resident in Peru. The non portfolio divided of $70,000 was
non assessable non exempt income to Aztec Pty Ltd under IT AA 1936 s23AJ.
On I July 2007 Aztec Pty Ltd sold for $70,000 a parcel of shares in No News Ltd (an
Australian resident company). Aztec Pty Ltd purchased the shares on 1 December 2000 for
$50,000. On I July 2007 Aztec Pty Ltd also sold a vacant block of land that it had purchased
on 1 December 2002 for $100,000. The sale price of the land was $200,000. The legal costs
and stamp duty associated with the purchase were $5,000. The legal costs associated with the
sale were $2,000. Aztec Pty Ltd financed the purchase by borrowing the whole of the
purchase price from That Bank Ltd (an Australian resident company and a bank). Simple
interest at a fixed rate of 8% per annum was payable on the loan from That Bank Ltd.
Originally Aztec Pty Ltd had intended to mine the land for stone for its pyramids but
geological research that Aztec Pty Ltd had conducted in 2003 found that the stone on the land
was unsuitable for pyramids so Aztec Pty Ltd decided to sell the land. On 1sI February 2008
Aztec Pty Ltd received a dividend of $7000 franked to 100% from Cortez Ltd (an Australian
resident company). On 1 June 2008 Aztec Pty Ltd received a dividend of$14,000 franked to
50% from Nostra Pty Ltd (an Australian resident company and a private company for tax
purposes).
Aztec Pty Ltd's taxable income from its construction activities for the year ending 30 June
2008 was $200,000.
Calculate the balance in Aztec Pty Ltd's franking account as at 30 June 2008.
Assume that the only events which affect the franking account occurring between 30 June
2008 and 1 September 2008 are the payment of the 28 th July 2008 instalment of tax of
$10,000 and the final payment of tax on 20th August 2008 for the year ending 30 June 2008.
Calculate the balance in Aztec Pty Ltd's franking account as at 1 September 2008.
On 1 September 2008 Aztec Pty Ltd distributes all of its after tax distributable profits from
the year ending 30 June 2008 as a dividend. Calculate the maximum franking credit that
Aztec Pty Ltd can attach to this dividend. Comment on what the consequences will be for
Aztec Pty Ltd if the dividend is franked to this amount. Recommend a percentage to which
Aztec Pty Ltd should frank the dividend.
QUESTION THREE
You must answer either this question or question two.
question and question two.
Part B (8 marks)
Dixon, Latham and Starke are in partnership as solicitors. Each has a 113 interest in the
partnership. The partnership accounts for its income on a cash basis. The partnership uses a
I July - 30 June tax year.
On 25 th December 2008 Latham assigns 50% of his interest in the partnership to his sister
Carol. As at the 25th December 2008 the partnership's records disclosed the following
information:
Receipts for accounts rendered
Accounts rendered but unpaid
Salary paid to Starke*
Other expenses
$300,000
$200,000
$ 50,000
$100,000
As at 30 June 2009 the records for the partnership disclosed the following information:
Receipts for accounts rendered
Accounts rendered but unpaid
Salary paid to Starke*
Expenses paid
$500,000
$ 50,000
$100,000
$200,000
*Starke is also a qualified valuer and in that capacity is employed by the partnership to value
properties that clients offer to mortgagees as security.
Comment on the income tax position for the year ending 30 June 2009 of each of the
following persons: Dixon, Latham, Carol and Starke. Include in your advice a statement of
any further information you would require before giving definitive advice. Do not consider
CGT issues.
END OF PAPER