Advanced Corporate Taxation Assessment 2 Sem 2 2024
Assessment 2 – Client Advice
You are required to provide advice to your client on all FOUR tax matters that are separate and independent of each other.
1. Distributions & Integrity Measures
Are the following distributions by a company assessable income in the hands of the shareholders? Give reasons.
a) A company reduces the value of its fully paid shares from $1 to 60 cents and distributes the difference of 40 cents to shareholders in cash.
b) Assume the same facts as in (a), except that the company distributes 80 cents to shareholders in cash, the extra 40 cents coming from the Asset Revaluation Reserve in relation to a pre-CGT asset.
2. Tax loss calculations
Campbell Pty Ltd is engaged in the business of manufacturing sporting trophies. It was incorporated with 1m $1 shares, divided evenly between Bronte and Cate equally. The trading results for the last 5 years are:
Y1 (50,000)
Y2 (75,000)
Y3 25,000
Y4 5,000
Y5 100,000
Because of the losses, the company raised additional capital. On 1/7/Y2 $500,000 $1 shares were issued to Rings Pty Ltd, with an option to purchase an additional 1 shares for each share issued. The shares in Rings are owned 50% by Emma and 50% by Cate
Rings exercised the option on 1/7/Y3.
You have been asked to advise how much of the accrued loss can be claimed in each year in each of the following scenarios (treat each part independently):
a) Assume that the company made a profit of $100,000 in Y5.
b) Assume that from 1/7/Y3 the company expanded into the manufacture and sale of swimming goggles, which resulted in a loss of $10,000 in Y4 and a profit of $100,000 in Y5.
c) Cate sold her shares in Rings to Brittany on 31/12/Y4. The company accounts at that date showed the company had a half year loss of ($20,000).
3. Distribution of capital
RT Ltd, a listed Australian resident company, entered into an arrangement to buyback shares from its shareholders through a tender process. The price that was set for the buyback was $48.44. Under the Buy-Back, $9.44 per share was debited to Rio Tinto's untainted share capital account, and the balance of the Buy-Back Price was debited to Rio Tinto's retained profits. The tender process specified that the buy back would be at 14% below the market price, which was $55.78 when the buyback price was announced.
There are sufficient franking credits to fully frank any dividend.
Discuss the consequences for the following two shareholders. Both are resident individuals and have held the shares on capital account for more than a year:
a) R purchased shares at a price of $50 each
b) T purchased shares at a price of $5 each
4. Capital gains tax
Gone Bust Pty. Ltd. is owned by Mr and Mrs X as to 50% each. The shares in the company were acquired prior to 20/9/85. The company is engaged in the manufacture and wholesale of stuffed quokkas. Mr and Mrs X wish to dispose of the business and then liquidate the company. The company's balance sheet immediately prior to the sale of the business was as follows:
Assets $
Cash 10,000
Trading stock (at cost) 20,000
Plant and equipment 10,000
Goodwill 25,000
Liabilities
Creditors 49,998
Net assets 15,002
Shareholders' Funds
Paid up capital 2
Capital reserve 8,000 (from pre-CGT asset sale)
Accumulated profits 7,000
15,002
The capital reserve consists of the profit on sale of another business purchased on 1/7/84 and sold 30/12/2007.
The sale of the business realises $110,000 as follows:
Sale price ICB Cost WDV
Trading stock 20,000 - 20,000 -
Plant and equipment 40,000 35,000 30,000 10,000
Goodwill 50,000 30,000 25,000 -
Advise Mr and Mrs X as to their tax liability as a result of the liquidation and discuss the matters necessary for a liquidator to consider in respect of minimising the shareholders' tax exposure.