Exam 11 October 2017, questions PDF

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MLL406 – Taxation, Final Examination 2017, Trimester

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MLL406 – Taxation Law Trimester 2: 2017 Final examination Instructions for Candidates: Examination time: 2 hours Reading time: 15 minutes Candidates should attempt all questions. Total Marks 60.

For all questions please note that: • • • • • • • •

This exam accounts for 60% of the marks for this unit. All written answers should be presented as complete sentences. ITAA 1997 should be applied where the ITAA 1936 legislation has been rewritten regardless of when the transaction took place. Where appropriate, support your answer with legislative and case authority. All transactions are for the tax year 2017/2018 unless otherwise stated. GST should be disregarded unless specifically mentioned. Calculations are not required but can be undertaken. If you need further information, state precisely what it is and why it is required.

Materials permitted: Students may take into this examination any materials (including a dictionary and calculator that does not allow access to data outside the exam venue) provided it does not interfere with the comfort of other students. Materials NOT permitted: Personal computers of any description, including electronic tablets or smart phones.

MLL406 – Taxation, Final Examination 2017, Trimester

QUESTION ONE Required: Discuss separately the CGT consequences for:

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(total 22 marks)

A. Susan in relation to the Kew Apartment (10 marks); B. Both Jane and Greg in relation to the Lorne House (6 marks); and C. Both Jane and Harold in relation to the Accounting Agreement (6 marks). Jane and her daughter Susan wanted to expand and grow their property portfolio. They decided to restructure their current finances to free up some money for a new development – the transactions they undertook are detailed below. A. Kew Apartment Susan owned a small apartment in Kew (‘Kew Apartment’) that she purchased from her mother Jane on 3 August 1999. Settlement occurred on 3 October 1999. Market value at the time of purchase was $400,000 however Jane felt bad about asking her daughter to pay too much money for the house so she sold the Kew Apartment to Susan at the reduced price of $150,000. Susan incurred stamp duty of $30,000 and solicitor’s fees of $10,000 on purchase of the Kew Apartment. Susan immediately rented out the Kew Apartment and over the years, she incurred the following costs in relation to the property: • •

Legal fees for a dispute over the boundary between Susan and her neighbour’s property $20,000. Fixing a broken glass window which was damaged in a recent storm - $5,000

Susan sold the Kew Apartment on 21 July 2017 for $800,000 and the purchaser also gave her a new gold Rolex watch valued at $50,000.

B. Lorne House On 1 October 2015 Jane’s dad Greg died, leaving Jane a small beach house in Lorne by the ocean (Lorne House). Greg had lived in the Lorne House since he initially purchased it for $58,000 on 21 September 1987. Greg incurred $2,000 in legal fees when he purchased the property and in 2001 spent $40,000 on a kitchen renovation. Jane was surprised to hear that the Lorne House had a market value of $500,000 at the date of Greg’s death, so she decided she would sell the property to make some money. Jane rented out the Lorne House until 1 September 2017 when she then sold it for $700,000.

C. Accounting Agreement On 1 March 2016 Jane decided that she would need to downsize her accountancy business to save more money for her impending property developments. She decided that the best way to do this would be to make redundant one of her employees called Harold. She was nervous that Harold knew a lot of trade secrets about her business so she entered into an agreement with Harold to protect her trade. The agreement provided that Harold could not work as an accountant for 3 years within 100km of Jane’s business and she paid Harold $100,000 for entering into the agreement.

MLL406 – Taxation, Final Examination 2017, Trimester

QUESTION TWO

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(total 24 marks)

Discuss the consequences for CC in relation to the following transactions: A. Payment of $1,500,000 to Qantax Airlines (7 marks); B. Payment of both the $3,000 or $50,000 for the Broken Chip Machine (7 marks); C. Receipt of $100,000 from the arrangement with Snack Pty Ltd (4 marks); and D. Payment of $50,000 for the feasibility study (6 marks).

Master Chips Pty Ltd (‘MC’) manufacture salted chips for distribution to supermarkets across Australia. CC are worried that their business may have to close if they do not take action to increase business profits. This year they have reported that their sales are down as a result of some unexpected expenses. MC recorded the following transactions: A. Qantax Airlines

CC spent $1,500,000 paying Qantax Airlines so that the company could be the preferred chip provider on all domestic flights. The agreement with Qantax provided that they would only sell CC brand of chips for the next 3 years in exchange for the $1,500,000 payment. CC anticipated that they would again make this payment in 3 years, and they also considered they may pay other airlines on similar terms if this arrangement was successful. By the end of the year, CC had entered into 3-year arrangements with two separate airlines: Qantax and Gurana. B. Broken Chip Machine

CC had a major technical fault in one of their chip manufacturing machines. They had used the same machine for the past 5 years, and part of the motor had broken. CC was advised that a replacement part would cost $3,000 but that they were hard to source as the machine was quite old. Another option for CC was that they could replace the whole manufacturing machine with a newer and better one. The new machine would cost $50,000 but would have an effective life of 10 years. C. Agreement with Snack Pty Ltd

In a further attempt to raise revenue, CC entered into an agreement with another chip manufacturing company, Snack Pty Ltd. Pursuant to that agreement, CC would receive a lump sum of $100,000 and in return they would assign their right to receive royalties from their salt and vinegar chips, to Snack Pty Ltd.

MLL406 – Taxation, Final Examination 2017, Trimester

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D. Feasibility Study

In an attempt to reduce costs, CC commissions a company to undertake a feasibility study to investigate other factory sites for production of their chips. This company charged CC $50,000 for the feasibility study that recommended that a new subsidiary production company be formed, and a new factory site obtained, to manufacture chips at a reduced price.

QUESTION THREEE

(total 14 marks)

Required: Discuss the tax implications for the following transactions: A. The distributions from the Clive Family Trust to Mary and Lida (5 marks); and B.

The possible application of Part IVA ITAA 36, to the arrangements (house swap) between Lida and her friend Steph (9 marks).

A. Clive Family Trust Clive was trustee of the Clive Family Trust which was a discretionary trust established to help support his wife and two younger daughters.

B. Lida and Steph house swap Lida had been best friends with Steph since high school. A few years ago they decided to house-swap to reduce the amount of tax they may have to pay. As both Lida and Steph had approximately $300,000 left on their mortgage, they decided to move into and rent each other’s houses, so they could then make a deduction for part of the interest payments on the mortgage. Lida was particularly eager to go ahead with this plan, as Steph’s house was much closer to the physiotherapy centre that she had to take her daughter Mary to 3 times a week. The house swap was successful and both Lida and Steph moved into each other’s houses....