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THE UNIVERSITY OF NEW SOUTH WALES

Australian School of Business

School of Business Law and Taxation LEGT2751 BUSINESS TAXATION


SEMESTER TWO - 2009 FINAL EXAMINATION
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Time Allowed: 2 hours


Reading Time: 10 minutes

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This examination paper has: 5 pages Total Number of Questions: 3 Total Marks Available: 40
Answer TWO Questions

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All Questions are of Equal Value


All answers must be Written in Ink This paper MAY be retained by the candidate

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SPECIAL INSTRUCTIONS
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Each question must be answered in a separate booklet Answers must be clearly written. Answers that cannot be read will not be marked Candidates are permitted to bring electronic calculators into the examination room. UNSW approved There are no restrictions on materials you can bring into the examination room. It is an open book examination
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QUESTION ONE

(20 Marks)

Martin purchases a derelict buifding on 1 January Yl in Surry Hills for $500,000. To finance the purchase Martin borrows $500,000 at 10% from Big Bank Ltd. Prior to Martin's purchase the building had been leased by a charitable organisation to a women's refuge at a nominal rental of $1 00 per week. At the time of Martin's purchase the lease to the women's refuge has a year to run. He buys the building subject to that lease. Once Martin purchases the building he shouts, "I have a dream!" Martin's dream is that one day the building will be a multiculturaJ cafe, the JlWorld Community Cafe", where all will be able to come and eat Its logo will be a globe of the world inside a coffee cup. On 14 Februal)' Yl Martin applies to the local council for permission to redevelop the building as a cafe. On 14 February Y1 Martin also gives the women's refuge one month's notice to vacate the premises. The women's refuge refuses to vacate and Martin incurs $10,000 in legal fees associated with ejecting the women's refuge. The women's refuge finally vacates on 1 June Y1. The local council gives consent to the redevelopment on 1 May Yl. On 1 May Y1 Martin, to fully redevelop the building, borrows a further $700,000 at 10% from Big Bank Ltd. Martin redevelops the building so that, in external appearance, its roof looks like a globe of the world inside a coffee cup. Inside the building a system of pipes connects a central coffee making machine located in the globe shaped roof with individual nozzles on each table. The total cost of the redevelopment is $700,000 which includes $100,000 being spent on the central coffee making machine and the individual nozzles and the balance being spent on changes to the external appearance of the building. Martin estimates the effective life of the coffee making machine and nozzles to be 10 years and estimates the effective life of the changes to the external appearance of the building to be 30 years. The cafe opens on 1 November Y3. On lS lh November Y3 Martin incurs $50,000 in unsuccessfully opposing an application for a registered design by a competitor, World Cup Coffee. The design used by World Cup Coffee depicts a cup of coffee inside a globe of the world. Required: 1. Advise Martin whether the interest payments on each loan from Big Bank Ltd are deductible under s8-1. 2. Advise Martin whether capital allowances under Division 40 can be obtained for the redevelopment of the external appearance of the building and/or the installation of the coffee making machine and pipes. 3. Regardless of your answer to 2, assume that Martin is able to claim Division 40 capital allowances. Calculate the Division 40 capital allowances that will be available to him in Y1 using the prime cost method. 4. Regardless of your answer to 2, assume that Martin is not able to claim Division 40 allowances. Advise him of whether he can claim other deductions in respect of any of the items referred to in 2 above and, if so, calculate the deductions that he may claim. 5. Advise Martin whether the expenses of unsuccessfully opposing the application for the registered design are deductible under s8-1.

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QUESTION TWO

(20 Marks)

Trusty Unit Trust is an Australian resident trust estate. It conducts a business of selling teapots. The value of its opening stock (at cost) at 1 July 2008 was $1,000,000. Its purchases through the year ending 30 June 2009 have been $700,000 while its sales (excluding expenses associated with sale) have been $660,000. It sells its teapots at cost plus 10%. Assume that the expenses associated with each sale are 2% of the cost of each item sold. Of the sales, $110,000 represents invoices issued in the month of June 2009 for which payment had not been received as at 281h June 2009. Trusty Unit Trust advises its customers that it will give a 5% discount if they pay outstanding invoices within 30 days of the issue of theinvoic. In practice customers only rarely pay within 30 days of the issue of the invoice and, as this is such an unusual occurrence/ the accounts section of Trusty Unit Trust often forgets to give the discount. The only occasions in the past 3 years when a discount for prompt payment was given were after customers who had initially not received the discount made complaints to the Trusty Unit Trust accounts section. On 1 May 2009 Trusty Unit Trust hears a rumour that/ to fund Australia/s ongoing military commitments/ an increase in income tax rates will be announced effective from 1 July 2009. Advise Trusty Unit Trust as to what adjustments it can make to the valuation of its trading stock as at 30 June 2009 so that more of its income is recognised for tax purposes in the year ending 30 June 2009. In the year ending 30 June 2009 Trusty Unit Trust also made a provIsion of $30/000 for accrued long service leave for its employees. In fact/ none of its employees were entitled to take long service leave in the year ending 30 June 2009. Assume that after making the adjustments you suggest to the valuation of its trading stock for the year ending 30 June 2009, Trusty Unit Trust makes a distribution of its net profit for trust law and financial accounting purposes to its unit holders. The distribution is made on 30 June 2009. Calculate the net income of the trust estate and the income of the trust estate of the Trusty Unit Trust. There are 10 unit holders in Trusty Unit Trust. Each unit holder owns one unit and is equally entitled to a distribution of the trust income of the Trusty Unit Trust. One of the unit holders is the Cline Discretionary Trust, an Australian resident trust estate. The trustee of the Cline Discretionary Trust is Cline PtyUd. The objects of the trustee's discretion are Alpha (a resident minorl, Beta (an adult resident whose income from other sources is $100/000) and Peter (an adult resident whose income from other sources is zero). Assume that the only income of the C1ine Discretionary Trust for the year ending 30 June 2009 is the distribution that it receives from the Trusty Unit Trust on 30 June 2009. Cline Pty Ltd as trustee wants to make a distribution of the income of the trust estate on 30 June 2009 in a manner which minimises the tax liabilities of the trust and the objects of the trustee's discretion. Advise the trustee as what distributions it should make to achieve this result.

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QUESTION TWO

(Cont'd)

Another unit in Trusty Unit Trust is held by Tracy and Doug who conduct a cleaning business together as partners. Under the partnership agreement, partnership losses are to be divided equally but Tracy is entitled to 70% of the net income of the partnership while Doug is entitled to 30% of the net income. The partnership agreement also provides that Tracy will be paid a st salary of $24,000. The salary is paid to Tracy by $2000 instalments on the 1 day of each
month throughout the year ending 30 June 2009.. Doug, a qualified accountant who has been

unemployed since 1 July 2008 due to the global financial crisis, sends an invoice to the partnership on 1 June 2009 for $5000 in respect of accounting services that he provided to the partnership during the year. The partnership's receipts from the cleaning services that it provided during the year ending 30 June 2009 are $100,000. In the year ending 30 June 2009 the partnership incurs $10,000 on cleaning products that it used in the business. Tracyand Doug have no other income for the year ending 30 June 2009. Calculate Tracy and Doug's assessable income for the year ending 30lh June 2009. Your answer should show all relevant calculations and should make reference to relevant legislative provisions and principles of taxation law. All calculations are to be made on a GST exclusive basis.

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QUESTION THREE

(20 Marks)

For the income year 2008-2009 Alpha Pty Ltd, an Australian resident private company for tax

purposes, makes a profit of $3,000,000 made up as follows: a profit of $1,000,000 on the sale of a pre-CGT asset a trading profit of $950,000 a dividend of $50,000 received from Maxi Ltd (an Australian resident public company for tax purposes) franked to 50% a dividend of $1,000,000 from Offshore Pty Ltd (Alpha Pty Ltd's 100% subsidiary resident in New Zealand) which is non assessable non exempt income to Alpha Pty Ltd under ITAA 1936s23AJ

Calculate Alpha Pty Ltd's income tax liability in respect of the income that it derived in the 2008-2009 year of income. Assume that Alpha Pty Ltd had no allowable deductions other than expenses which have been taken into account in determining its trading profit.
During the year ending 30 June 2009 Alpha Pty Ltd paid a total of $60,000 in instalments of tax. On 1/7/2008 the balance in Alpha Pty Ltd's franking account was zero. Comment on how, if at all, the payment of the instalments of tax, the receipt of the dividends and the sale of the preCGT asset will affect Alpha Pty Ltd's franking account. Assuming that no other events occur which affect Alpha Pty Ltd's franking account, calculate the balance in Alpha Pty Ltd's franking account as at 30 June 2009. On 1 July 2009 Alpha Pty Ltd declares a dividend of $1.2 million. Calculate the maximum franking credit that Alpha Pty Ltd can attach to this dividend. Comment on the consequences for Alpha Pty Ltd if it attaches the maximum franking credit to this dividend. Having regard to these consequences advise Alpha Pty Ltd of the amount to which it should frank the dividend. Two of Alpha Pty Ltd's shareholders are Rebecca, a resident natural person whose marginal tax rate is 30%, and Alien, a non-resident natural person. Both Rebecca and Alien have a 1% shareholding in Alpha Pty Ltd. Assuming that the dividend from Alpha Pty Ltd is franked to the extent that you recommend, advise Rebecca and Alien of the tax effects of the payment of the dividend from Alpha Ply Ltd to them.

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