THE UNIVERSITY OF ADELAIDE LAW SCHOOL
COMMLAW 3501 (104969)
BUSINESS TAXATION & GST III
Tutorial Questions – Tax Entity Issues
RAPID FINANCE Pty Ltd has a Balance Sheet as follows:
Paid-up capital 10,000
Capital Gain 60,000
Capital Loss (20,000) 40,000
Cash on Hand 50,000
Advise, using the principle from the Archer Brothers case, how the liquidator could best distribute the available assets of the company to minimise the tax payable by the shareholders.
Dax Pty Ltd (an Australian resident private company) makes an interest free loan of $120,000 to it shareholder on 30 June 2017. The loan remains outstanding at the time the company’s 2017 tax return is due to be lodged.
Dax Pty Ltd’s Balance Sheet for the Year Ended 30 June 2017 shows the following:
Cash $220,000 Equity
Loan to Shareholder $120,000 Capital $230,000
Retained earnings $110,000
Total Assets $340,000 Total Equity $340,000
Do any Division 7A issues arise in respect of this loan?
Dodgy Brothers Pty Ltd is a beneficiary of the Dodgy Brothers Trust along with Arthur and Wayne Dodgy. Each has a fixed entitlement to 1/3rd of the net income of the trust.
For the income year ended 30 June 2017, the Dodgy Brothers Trust had net income of $270,000. The Trustee of the Dodgy Brothers Trust did not pay the $90,000 entitlement to Dodgy Brothers Pty Ltd but rather the trustee decided to loan $60,000 to each of Arthur and Wayne Dodgy directly. This is in addition to the $90,000 trust distribution made to each of Arthur and Wayne out of their present entitlement.
Arthur and Wayne are the only 2 shareholders of Dodgy Brothers Pty Ltd.
The distributable surplus in Dodgy Brothers Pty Ltd for the year ended 30 June 2017 is $100,000.
Do any Division 7A issues arise from this loan by the Dodgy Brothers Trust?
Copy Cats Pty Ltd is a resident private company that was incorporated on 1 July 2012. From 1 July 2012 until 30 June 2016, it conducted a trucking business (freight operation).
During this time, the company’s trading results were as follows:
• $50,000 profit for the year ended 30 June 2013;
• $40,000 profit for the year ended 30 June 2014;
• $30,000 loss for the year ended 30 June 2015; and
• $15,000 loss for the year ended 30 June 2016.
In July 2016, the company discontinued its trucking business, restructured and acquired a public hotel in the country. The company’s shareholdings of ordinary shares at the close of each financial year were:
Shareholders 2013 2014 2015 2016 2017
$ $ $ $ $
A 50 50 50 50 50
B 150 150 200 200 200
C - - - 100 100
D - - - - 160
$200 $200 $250 $350 $510
In the year ended 30 June 2017, the company reported taxable income of $85,000.
Can Copy Cats Pty Ltd claim a deduction for any of its prior year losses in the year ended 30 June 2017?
BigCo has a market value of $80,000 and a carry forward loss of $20,000 (from a prior year). BigCo owns 100% of the issued shares in LittleCo and 100% of the issued shares in SmallCo.
LittleCo has a market value of $20,000 and losses of $6,000 and SmallCo has a market value of $20,000 and losses of $1,000.
Before any adjustment for prior year losses, BigCo has a taxable income of $30,000 in 2017.
If Big Co forms a consolidated group with LittleCo and SmallCo in the 2017 income tax year what is BigCo’s taxable income in 2017 after consolidation?
Delta Company issued 8- year convertible notes for $8.50 each. The notes have a coupon interest payable of 12% and repayment is not subject to any contingency and so payment cannot be deferred under any circumstances.
The ordinary shares of Delta Co were valued at $3 on the issue date. Delta Co used the proceeds of the note issue to satisfy working capital requirements of its business.
Are the payments on the notes deductible for tax purposes? Explain.
The Greenfields Trust has had the same trustee for many years (Bob Green) and it is mainly a discretionary trust, but not a family trust, except that Bob Green holds a 20% fixed interest in the income and capital of the trust.
The trust has always had net income every year since it was established except in 2016 when a loss of $30,000 was realised.
Bob advises that the income distributions made by the trust since 2014 and
proposed for 2017 are shown below.
YE 30 June 2014 30 June 2015 30 June 2017
Bob 20% 20% 20%
(from fixed portion)
Gary 30% 5% 15%
Heather 20% 5% 65%
James 15% 40% 15%
Eric 15% 20% 0%
Bob wants to know whether the Greenfields Trust can utilise the $30,000 loss from the 2016 year in the 2017 year when the trust (before applying this loss) has $80,000 in net income. Please advise Bob.