THE UNIVERSITY OF NEW SOUTH WALES =] Hac a ca Australian School of Business School of Taxation and Business Law LEGT2751- Business Taxation Semester 1, 2012 End of Semester Examination Examination duration: 2 hours, plus 10 minutes reading time. Number of Answer Books: 2 Reading time conditions: DO NOT write in the answer book during the 10 minutes reading time. Examination conditions: THIS Is AN OPEN BOOK EXAMINATION. You are permitted to bring relevant printed or written materials, into the examination room. You may use a UNSW Approved calculator during the examination INSTRUCTIONS: 1 Answer BOTH questions. Each question is worth equal marks Answers must be written in INK in the answer book(s) Write your name, Student 1D number and the question number(s) attempted on the front of EVERY answer book used. ‘Answer each question in a separate book. Number each answer book ‘Book 1 of 2’, ‘Book 2 of 2’ as appropriate. Insert answer books inside each other. You may keep this examination paperANSWER BOTH QUESTION 1 AND QUESTION 2 QUESTION 1 Question 1 is worth 20 marks Oracle Pty Ltd (“Oracle”) is an Australian company. It conducts a business selling stem bolts. For accounting purposes, stock is valued at cost. The value of its opening stock (at cost) at 1 July 2010 was $1,200,000. Purchases during the 2010-2011 financial year were $800,000. Sales for the year were $1,500,000. Oracle sells stem bolts at cost plus 30%. Of the sales, $150,000 represented invoices issued in the month of June 2011 for which payment had not been received as at 30 June 2011. ed by Oracle for the year included: * A dividend of $100,000 received from Aus Bank Ltd (an Australian resident public company for tax purposes) franked to 50%, * An unfranked dividend of $50,000 from True Blue Ltd (an Australian resident public company for tax purposes) © A non portfolio dividend of $80,000 from Delphi Pty Ltd, its wholly owned subsidiary resident in Greeee. The non portfolio divided of $80,000 was non assessable non exempt income to Oracle Pty Ltd under ITAA 1936 s23AJ. * Oracle also holds 10 units in the Antiquities Unit Trust. Under the terms of the unit trust Oracle is entitled to distributions of 10% of the income of the unit trust. The income of the trust estate for the year ended 30 June 2011 was $180,000, and the net income of the trust estate was $200,000. Salaries for Oracle staff for the year were $120,000. In addition to this, Oracle has made a provision for accrued long service leave for $40,000. None of its employees were entitled to take long service leave in the year ending 30 June 2011 Other deductible expenses of the company for the year totalled $200,000. The company incurred a tax loss of $100,000 in the 2008-09 income year. During the 2008-09 income year, 90% of the shares in the company were owned by Zeus (an Australian resident individual), with the remaining 10% owned by Zena (an individual non-resident), On 1 September 2009, Zeus sold 60% of his shares to Hercules (an Australian resident individual). Once Hercules purchased the shares in September 2009, he started to look at ways to make the business more profitable, and from December 2009, Oracle has allowed customers to purchase products online from the company website. Prior to this, stem bolts were only sold through Oracle shops in various locations in Australia. Due to the online sales, 2 stores (out of a total of 10) were shut down in March 2010. For the year ending 30 June 2011 Oracle Pty Ltd paid a total of $160,000 in instalments of tax (you can assume these were made in equal instalments). Any final payment of tax required for the 2010-11 income year is paid on 31 October 2011 Assume all figures are GST exclusive Question I continues on the next pageREQUIRED * Calculate Oracles Pty Ltd’s income tax liability in respect of the income that it derived in the 2010-2011 year of income, 8 marks * Assume on I July 2010, the balance in Oracle Pty Lid’s franking account was zero, Construct Oracle's franking account for the 2010-11 financial year, and calculate the franking account balance as at 30 June 2011. 4 marks * On I November 2011, Oracle Pty Ltd declares a dividend of $500,000. Assume that apart from the transactions in this question, there have been no other transactions that affected the franking account. Calculate the maximum franking credit that Oracle Pty Ltd can attach to this dividend. Assuming Oracle Pty Ltd does not want the franking account to go into deficit at the time the dividend is declared, advise Oracle Pty Ltd of the percentage to which it should frank the dividend, 4 marks * Assume the dividend is distributed to Zeus, Xena and Hercules in accordance with their share ownership. Comment on the tax treatment of the dividend to each shareholder. You can assume Zeus and Hercules are both on the highest marginal tax rate. You can assume Xena is aresident of a country that Australia does not have a double tax agreement with, 4 marks, QUESTION 2 Question 2 is worth 20 marks Fred and Barney form a partnership (known as “Flinstone Printing”) and purchase a printing factory in Sydney from Redfern from George on | July 2010. The factory prints brochures, business cards, large advertising posters etc. Due to a downturn in business factory had been closed down for 3 months at the time Fred and Barney purchase it. When Fred and Barney inspect the factory, he finds that the machinery in the factory was still in good working order but would need normal oiling and greasing and replacement of a few minor worn out parts before it could be started up again. ‘The worn out parts were of a type which would normally be replaced each year as part of routine maintenance. All machines in the factory have been bolted to the floor to secure then and to reduce the risk of injury to workers. George had been depreciating all the machines in the factory under Income Tax Assessment Act 1997 Division 40. ‘The opening adjustable value for the various machines in the factory as at 1 July 2010 was as follows: 1. Printer 1 $40,000 2. Printer 2 $20,000 3. Printer 3 $50,000 George had estimated that all machines had a 5 year useful life and had depreciated all of them using the prime cost method since their date of installation on | July 2008 Question 2 continues on the next pageGeorge built the factory in 2008 for a cost of $500,000 and has been claiming deductions for the construction expenditure under Income Tax Assessment Act 1997 Division 43 since 1 July 2008 which was the date when construction was completed, d and Bamey pay $1,200,000 for the land, the factory, the machines, and for consumables such as printer ink, card stock etc. George does not transfer the goodwill of his business to Fred and Barney and Fred and Barney do not take any amount for goodwill into account in calculating the purchase price for the business. ‘The purchase price was allocated to the individual items of machinery at their adjustable values, $50,000 to the consumables (which was the cost value), and allocated the balance of the price to the land and buildings. Fred and Barney cach contribute $500,000 to the cost of purchasing the business. The remaining $200,000 is borrowed from Bedrock Bank Ltd (an Australian Bank) at a rate of 5% (fixed interest only loan). During the months of July and August 2010, Fred and Barney pay $2,000 for contractors to grease and oil the machines, $5,000 to a painter to repaint the external walls of the factory with colours that feature his business logo and $2,000 on the replacement of the worn out parts. They also spends $10,000 on modifications to Printer 3 so it can print on a thicker type of cardboard Unfortunately for Fred and Barney, on | September 2010, one of their employees thought it was Printer I that was modified, and attempted to use the thicker card in Printer 1. The cardboard jammed the printer and caused significant damage to the internal mechanics of the machine Fred and Barney are advised that to repair the printer would cast $15,000, and instead decide to purchase a new printer at a cost of $85,000. It has an effective life of 5 years and Fred and Bamey decide to use the prime cost method of depreciation. By 30 June 2011 Fred and Bamey have invoiced clients for $300,000, of which they have received $220,000, Of the $80,000 outstanding, $30,000 has not been received even though the invoice was issued on 1 March 2011 (invoices are due to be paid within 14 days). The $30,000 is owed by one client who is refusing to pay, arguing that Fred and Bamey printed advertisements for his store using the wrong colours. Salary costs to employees (excluding Fred and Bamey) are $60,000 for the 2010-11 year. Fred and Bamey also pay themselves $30,000 each. Required: 1. Giving reasons, advise Flinstone Printing of the deductions it can claim for the year ending 30 June 2011, indicate under which provision(s) Flinstone Printing can claim the relevant deductions, and calculate the deductions that Flinstone Printing can claim for that period. 15 marks 2. Calculate the taxable income of Fred and Bamey for the year ended 30 June 2011. You can assume they are both Australian residents who do not have any income outside of the printing business. 5 marks. @ 6 »— — END OF PAPER > PPP