Principles of Taxation - Ch 21 - Companies & Shareholders PDF

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Questions and solutions from Principles of Taxation 2014/15....

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Pr i nci pl esofTax at i on–Compani es&Shar ehol der s

Pr i nci pl esofTaxat i onLaw 2015 Answer st oQuest i ons CHAPTER21— COMPANI ESANDSHAREHOLDERS Quest i on21. 1 Ar esi dentcompanypay saf ul l yf r ank eddi v i dendof$700t oar esi dents har ehol der .Adv i set hei ncomet axi mpl i cat i ons oft hes har ehol deri fi ti s: ( a)ani ndi vi dual s ubj ec tt ot het opmar gi nal t axr at e; ( b)ani ndi v i dualwi t hmar gi nalt axr at eof15%; ( c)acompanywi t hot herass essabl ei ncomeof$8, 000,andacar r i edf or war dl os sof$12, 000; ( d)acompanywi t hot heras sess abl ei ncomeof$9, 000anddeduc t i onsof$16, 000;and ( e)apar t ner s hi pwi t ht wor esi denti ndi v i dual par t ner ss har i ngequal l ypar t ner shi ppr ofit sorl os ses . Answer I mput at i ons y st em:t axi mpl i cat i onsofr esi dents har ehol der s : ( a)Resi denti ndi vi dualatt opmar gi nal r at e: as sess abl ei ncome=$700( s44I T AA36)+$300( gr ossup)=$1, 000 t ax@ 47% =$470 t axoffs et=$300 nett axpay abl eont hedi vi dend=$170 ( b)Resi denti ndi v i dual wi t hmar gi nal t axr at eof15%: s ameamountofass es sabl ei ncomeasi n( a) t ax@ 15% =$150 e xc es st axoffset=$150whi c hi sr ef undabl ef r om t heATO ( c )Res i dentcompanywi t hcar r i edf or war dl os s : as sess abl ei ncome=$700+300+8, 000=$9, 000 t hec ompanyc anc hoos et heamountofcar r i edf or war dl os sest ousei nt hi si ncomey ear t her angeofl ossest ochoosei s$0t oamax i mum of$8, 000 i fchoose$0:t ax@ 30% =$2, 700;nett axpay abl e=$2, 700–300( t axoffs et )=$2, 400 i fchoose$8, 000:t ax=$1, 000x30% =$300whi c hi sf ul l yoffs etbyt hei mput at i oncr edi t c r edi tt ot hef r anki ngaccountoft hecompany=$300 ( d)Resi dentcompanywi t hcur r enty earl oss : t axl oss=$700+300+9, 000–16, 000=( $6, 000) addi t i onal t axl os sconv er t edf r om exc esst axoffs et=$300/30% =$1, 000 t ot al t axl osscar r yf or war dt onex ty ear=$7, 000

( e)Par t ner shi pwi t hr es i dentpar t ner s : neti ncomeofpar t ner s hi pf r om t hedi vi dend=$700+300=$1, 000 eachpar t nershar es( i )as sess abl ei ncomeof$500;and( i i )t axoffsetof$150

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Pr i nci pl esofTax at i on–Compani es&Shar ehol der s

Quest i on21. 2 Ar es i dentc ompanypay sadi vi dendof$1, 400( f r ank edt o60%)t oanonr es i dents har ehol der .Advi set heAust r al i an i ncomet axi mpl i cat i onsoft hes har ehol deri fi ti s: ( a)ani ndi vi dual l i v i ngi nt heUS; ( b)aUSc ompanyhol di ng20% shar esi nt her esi dentcompany;and ( c)aUScompanyhol di ngal l t heshar esi nt her esi dentcompany . Answer I mput at i ons ys t em:t axi mpl i cat i onsofnonr esi dentshar ehol der s : ( a)Nonr es i denti ndi vi dual :  nogr ossuport axoffs et  di vi dend:nonasses sabl enonex empti ncome  f r ank edpor t i on:ex emptf r om wi t hhol di ngt ax  unf r ank edpor t i on( $1, 400x40%,i e$560) :s ubj ectt owi t hhol di ngt axat15% as sumi ngt heAust r al i aUSt r eat yi s appl i cabl e ( b)UScompanyhol di ng20%:  s ameas( a) ,ex ceptwi t hhol di ngr at e=5% ( assumi ngt hec ompanys at i s f y i ngt hecondi t i onsf ort hi sr educedr at e undert het r eat y) ( c )USc ompanyhol di ng100%:  s ameas( b) ,ex ceptwi t hhol di ngr at e=0% ( as sumi ngt hecompanys at i sf y i ngt hecondi t i onsst i pul at edi nt het r eat y ) Quest i on21. 3 Ar esi dentcompany ,ownedbyt wor es i denti ndi vi dual s,hasanopeni ngcr edi tbal anceof$7, 000i ni t sf r ank i ngac count i nt hi si ncomeyear .I thast hef ol l owi ngt r ansac t i onsi nt hey ear : on18J ul y ,i tpai daPAYG i nst al mentof$30, 000; on29August ,i tpai da$35, 000cas hdi v i dendf r ank edt o80%; on3Sept ember ,i tr ec ei v eda$28, 000cashdi vi dendf r ank edt o90%; on21Sept ember ,i tpai da$7, 000cashdi vi dendwi t hf r anki ngcr edi t sof$1, 800at t ached; on5Oc t ober ,sal ar i espai dt ooneofi t ss har ehol der swer edeemedt obedi v i dendsunderDi v7AofI T AA36. Theamountofdeemeddi vi dendwas$21, 000; % on2Febr uar y ,i tr ec ei v edani ncomet axr ef undof$18, 000f r om t heATO; % on10Mar c h,i tpai da$20, 000cashdi vi dendf r ank edt o95%;and % i thada$90, 000PAYG i ns t al mentdueon21Apr i l ,butdi dnotpayi tunt i l 3Jul yi nt hef ol l owi ngi ncomey ear .

% % % % %

Pr epar et hecompany' sf r ank i ngac countf ort hi si ncomeyear .

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Pr i nci pl esofT ax at i on–Compani es&Shar ehol der s

Answer Fr anki ngac count Dat e

Tr ansact i on

1J ul

Openi ngBal ance

18Jul 29Aug

PAYG Payment Pai dFr ank edDi vi dend:$35, 000x30/ 70x 80%

3Sep

Rec ei v edFr ank edDi vi dend:$28, 000x30/ 70x 90%

21Sep

21Sep 2Feb

Pai dFr ank edDi vi dend:$7, 000( wi t h$1, 800 f r anki ngcr edi t sat t ached) .Fr anki ng% i s60%. Fr anki ngDebi t-Br eachoft heBenchmar k Rul e( s20350( 1) ( b) ;s 20530( 3) ) :Benc hmar k i s80%.Fr anki ngDi ffer ent i al :20% x7, 000x 30/ 70

10Mar

T axRe f und Pai dFr ank edDi vi dend:$20, 000x30/ 70x 95%

30Jun

Cl osi ngBal ance

Debi t

Cr edi t

Bal ance 7, 000

30, 000 12, 000

37, 000 25, 000

10, 800

35, 800

1, 800

34, 000

600

33, 400

18, 000

15, 400

8, 143

7, 257 7, 257

Quest i on21. 4 AnAust r al i ani ncor por at edcompanyr unsal ocals uper mar ket .I n201314,i tder i v ed$320, 000pr ofitf r om i t sr et ai l bus i nes sand$26, 000ex empti ncome.Thec ompanyhast hef ol l owi ngcar r i edf or war dl osses : % I n201112,i thadacapi t all ossof$70, 000andar ev enuel ossof$220, 000. % I n201213,al lt hes har esi nt hec ompanywer es ol dt oanew owner .Thec ompanyt henacqui r edashop sel l i ng f r ui t sand v eget abl est os uppl ementi t ss uper mar k etbusi ness .I nt hati ncome y ear ,i ti ncur r ed a r ev enuel ossof$90, 000. % Cal cul at et hecompany' st ax abl ei nc ome/ l ossf or201314. Answer Tr eat mentofl oss es % Capi t al l os s$70, 000i n201112:quar ant i nedt ooffs etcapi t algai ns % New owneri n201213:t hec ompanyf ai l edCOTandt huscanut i l i secar r i edf or war dl ossesonl yi fi tsat i sfies SBT;s t udent ss houl dc onsi derr el ev antc as esandATO r ul i ng,andi dent i f yr el evantf ac t or st oconsi der . % I fi tsat i sfiesSBT:car r i edf or war dl oss est o201314=$220, 000+90, 000=$310, 000;t her ef or et het axl ossi s offsetagai nstt he$26, 000ofex empti ncome,l eavi ngar emai ni ngl os sof$284, 000.T ax abl ei ncomef or201314=$320, 000–284, 000=$36, 000.

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Pr i nci pl esofT ax at i on–Compani es&Shar ehol der s

Quest i on21. 5 Phast hr eewhol l y o wnedsubs i di ar i esS1,S2andS3.Al lt hef ourcompani esar ei ncor por at edi nAust r al i a.P hol ds di r ect l yal lt he s har es i n S1 and S2.Shar es i n S3 ar e hel dt hr ough S4,anot herwhol l y owned s ubs i di ar yofP i ncor por at edi nBer muda.I nt hi si ncomey ear ,Phasat ax abl ei nc omeof$2mi l l i on.S1hasat axl os sof$10mi l l i on,i n addi t i ont oi t sbr oughtf or war dl oss esof$80mi l l i on.S2hasat ax abl ei ncomeof$60mi l l i on.S3hasat ax abl ei ncome of$10mi l l i on.S4hasnoi nc omeorl oss . Thegr oups eeksy ouradvi c eoni t sel i gi bi l i t yt ocons ol i dat ef ori nc omet axpur pos esandt het axi mpl i c at i onsofs uchan el ect i on.Adv i set hegr oupoft hei nc omet axi mpl i cat i onswi t hr espec tt oconsol i dat i on,i ncl udi ng: ( a)I st hi scor por at egr oupel i gi bl et oc ons ol i dat e? ( b)I fso,wi l ly our ecommendt hegr oupt oc ons ol i dat eandwhy ? ( c)I ft heel ect i ont oc ons ol i dat ei smade,whatar et het axi mpl i c at i onsf ort hegr oup,i nc l udi ngt hecos tbasesof as s et si nt hegr oupandt heacc umul at edl oss esi nS1? ( d)Whatwi l lbet het axcons equencesi fPsel l sal lshar esi nS1ay earl at erf or$20mi l l i on? Answer Cons ol i dat i onofdomes t i cgr oups ( a) ( b) ( c )

( d)

Pcanconsol i dat ewi t hS1andS2,butnotS3( hel dt hr oughanonr es i dentc ompany ) . Advant agesofc onsol i dat i oni nc l ude( 1)offsetofpr ofi t sandl ossesamonggr oupmember s ;( 2)t axf r eet r ans f er ofasset sbet weengr oupmember s;( 3)onet axr et ur nf ort hewhol egr oup. Undert hesi ngl eent i t yr ul e,S1andS2wi l lbedeemedt ohav ebecomedi vi si onsofP.Al lt hei rass et swi l lbe deemedt obehel ddi r ect l ybyP.Cos tbasesoft heas set si nt hes ubsi di ar i eswi l lber es etundert het axcos t s et t i ngr ul es .St epupbas i si spossi bl e. Thecar r i edf or war dl oss esof$80M i nS1maybet r ansf er r edt oPuponconsol i dat i on,pr ovi dedi twoul dhav e s at i sfi edt hemodi fi edCOTandSBTatt hatt i me.I nt hatc ase,t heuser at eoft hepr econsol i dat i onl ossesbyP i ssubj ectt ot he“ av ai l abl ef r act i on”cal c ul at i ons. Thec ostbasesoft hes har esi nS1wi l l ber econst r uct edundert het axcosts et t i ngr ul es ,pr i mar i l ybas edont he r esetcostbas esofi t sunder l y i ngasset s.Thegai norl ossoft hes al eofS1wi l l t henbedet er mi nedaccor di ngl y . Thepr econs ol i dat i onl ossesofS1t r ans f er r edt oPuponcons ol i dat i on( i fany)wi l l st aywi t hP.

Quest i on21. 6 Pi sanonr esi dentcompanyandownsal lt heshar esi nt hr eeAust r al i anr esi dentcompani es ,A,BandC.Bownsal l t heshar esi nD,anot herr esi dentcompany .Aowns90% oft hes har esi nE,ar esi dentc ompany .Theot her10% i shel d di r ect l ybyP.Howmanydi ffer entc ons ol i dat edgr oupsmaybef or medundert heAus t r al i anc ons ol i dat i onr egi me? Howwi l l y ouranswerbedi ffer enti fPi sar esi dentofAust r al i a?Doy out hi nkt hedi ffer entt r eat ment sbet weendomest i c andov er s eascor por at egr oupsar ej ust i fied?

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Pr i nci pl esofT ax at i on–Compani es&Shar ehol der s

Answer Cons ol i dat i onoff or ei gnownedgr oup A,BandCar et i er 1compani es.Ei snotel i gi bl et oconsol i dat easi ti snotwhol l yownedbyA. AmongA,BandC( wi t hD) ,anyt wocanf or m aMECgr oup,oral lt hr eecanf or m oneMECgr oup.CandDc anf or ma nor malc ons ol i dat edgr oupwhi l eAandBf or m aMECgr oup. I fPi sar esi dentcompany ,t heal l i nr ul eappl i es .I nt hatcase,i fPel ec t st oc ons ol i dat e,al lel i gi bl esubsi di ar i es( At oE) mustj oi nandt her ef or eonl yonec onsol i dat edgr oupc anbef or med. Quest i on21. 7 Gar y ,anAus t r al i anr es i dent ,i st hes ol eshar ehol derofMCPt yLt d,acompanyi nc or por at edi nAus t r al i a.I nt hi si ncome y ear ,MCPt yLt dmadeani nt er estf r eel oanof$80, 000t oGar y .Byt hei ncomey earend,t hecompanywai v ed30% of t hel oan.Thebal anceoft hel oanr emai nsout st andi ngbyt hecompany’ sl odgementdat e.Thecompany ’ sdi st r i but abl e s ur pl usf ort hei nc omey eari s$60, 000. Adv i s et het axi mpl i cat i onsoft heabov et r ansact i onf orGar y .Howwi l ly ouranswerbedi ffer enti ft heshar ehol derofMC Pt yLt di sawhol l yownedsubsi di ar yofanot herc ompanyi nc or por at edi nAus t r al i a? Answer Di vi si on7Adeemeddi vi dends MCi sapr i v at ecompany :s103A( 1)I T AA36. Di vi si on7A deemst heamountofout st andi ngl oanof$56, 000asunf r ank eddi v i dendt oGar yf ort hei ncomey ear :s 109D I TAA36.Di v i si on7A al sodeemst hel oanwai v edasunf r ankeddi v i dendt oGar yf ort hei nc omey ear :s109F I T AA36.Howev er ,t het ot alamountofdeemeddi vi dendi scappedat$60, 000,t hedi st r i but abl es ur pl usoft hecompany : s109YI T AA36. Ther ef or e,t he$60, 000deemeddi vi dendi si nc l udedasas sess abl ei ncomeofGar yunders44I T AA36. I ft heshar ehol deri sac ompany ,t her ewi l lbenodeemeddi vi dendunl esst hepar entcompanyact si nt hecapaci t yof t r ust ee:ss109G &109KI TAA36.

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