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LAW303 Taxation Law 3

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  • Course Code: LAW303
  • University: Elite Education
  • Country: Australia

Questions:

Q 1.

Leo is a tax agent and tax accountant who has been involved in the creation of a range of tax avoidance arrangements concerning tree plantations.

Andrew, an ATO auditor, is particularly interested in the Pine Plantation Scheme and has served Leo with a notice under s. 353-10(1) of Schedule 1 of TAA, requiring him to provide:

a) a copy of any advice given to potential participants in relation to how the Pine Plantation Scheme was alleged to provide tax benefits;

b) a copy of any brochures or other advertising material published by Leo to promote the Pine Plantation Scheme;

c) an explanation of how the scheme is alleged to operate;

d) a list of every person who has entered into a Pine Plantation arrangement; and

e) a table showing when various steps in the implementation of the scheme were taken.

The notice allows 28 days for compliance with its requirements.

Leo does not wish to provide any of the information requested and notes that:

  • this is the busiest time of the year for him, and preparation of a response to the notice would require him to allocate a number of staff to this task for several days, which would have a severe impact on his business; and
  • he believes that all the information to which Andrew seeks access is protected by legal professional privilege and/or the ‘accountants’ concession’.

Advise Leo on the implications for him from the notice served by Andrew and the validity of his reasons for not providing the requested details. 

Q 2.

Part A:

Tom and his wife, Kelly, purchased an income-producing property as joint tenants, to secure greater financial independence for Kelly. They entered into a partnership agreement that stated that the net income from the property was to be apportioned 80 per cent to Kelly and 20 percent to Tom, but any losses were to be apportioned 20 per cent to Kate and 80 per cent to Tom.

What are the income tax implications of this arrangement?

Part B:

Jacky and Joe formed a partnership in which it was agreed to share profits and losses equally. As Jacky would be more active attending to the partnership business, it was agreed that she be paid an annual salary of $20 000.

The accountant has just finalised the partnership results for the 2018/19 tax year and has advised the partners that the partnership net result was a loss of $10 000 after paying Jacky’s salary.

Please answer the following questions,

a) For the purposes of completing the statement of distribution on the partnership tax return, what is the partnership net income or loss?

b) How is the partnership net income or loss as calculated in (a) to be distributed to each partner for tax purposes based on the partnership agreement?

Q 3.

Part A:

Judy and Tim Hill are the only two beneficiaries of a discretionary trust created by their grandfather during his lifetime — that is, it is not a testamentary trust. Julie resides in the United States and Tim is a resident of Australia. The beneficiaries are aged 22 and 17 respectively.

During the 2018/19 tax year the trustee received a dividend of AUD 3400 from a company resident in the United States, on which withholding tax at 15 per cent ($600) had been deducted at source, and the trustee also received a fully franked dividend of AUD 3300 from a resident Australian company.

The trustee resolves to distribute the income equally among the two beneficiaries.

Advise the trustee and the beneficiaries as to their Australian income tax liability on the distribution.

Part B:

Under a trust created by the Will of the late Robert French, the trust income of $200 000 for the year ended 30 June 2019 is to be dealt with as follows:

a) 50 per cent is to go to Robert’s widow;

b) 20 per cent is to go to Robert’s daughter Jane (aged 21), who is intellectually disabled; and

c) 30 per cent is to go Robert’s younger child, Jim currently aged 10

Jim—$60 000 is to be applied to the payment of school fees;

As trustee for the estate of the late Robert French, outline the income tax implications of the allocation of trust income for the 2018/19 tax year.

Q 4.

Part A:

The Lucy family needed funds from their private company, JWZ & Co Pty Ltd (JWZ & Co), to assist one of their daughters (Judy). JWS & Co is a private company for tax purposes and is equally owned by Mr and Mrs Lucy. Assume that JWZ & Co lent Judy $300 000 during the year ended 30 June 2019. The loan was for a term of six years, with interest payable at 4 per cent, and the loan was unsecured. Judy has no involvement in the company’s affairs (i.e. is not an employee).

The accounts of JWZ & Co for the year ended 30 June 2016 are as follows.

Assets                                                               $                                        Liabilities                             $

Current assets                                                   18,000                               Non-current liabilities         48,000

Non-current assets (loan to Frieda)                       300,000

                                                                                                                  Shareholders’ funds

                                                                                                                   Issued capital                         60,000

                                                                                                                   Retained profits                      210,000

                                                                          318,000                                                                          318,000

What are the tax consequences of the loan made by JWZ & Co to Judy for both parties? Your answer should consider references to Division 7A of ITAA36.

Part B:

On 1 July 2018, the secretary of Peter Pty Ltd (Peter), a resident private company for tax purposes, put forward the following proposals for the 2018/19 tax year:

a) Peter made a $50 000 loan to a shareholder as an interest-free advance. No loan agreement or repayment schedule was documented. This advance would not be repaid by the shareholder at the end of the financial year or prior to the lodgement of Peter’s 2018/19 income tax return.

b) Introduce a dividend reinvestment plan so that shareholders will have a choice of accepting either a cash dividend or additional shares.

Advise the secretary of Peter as to the income tax implications of each of these proposals.

 

Answers:

1: 

The commissioner might under the “sec 353-10 (1)” it may provide in writing where it may require a person to do any of the following

  1. To provide the commissioner with any type of information for administration purpose or operation of tax law
  2. To attend and provide evidence to commissioner for administration purpose or operation of tax law
  3. To provide the commissioner with any type of documents in their custody or under their control for administration purpose or operation of tax law.

According to the “sec 8-C (1)” Taxation Administration Act a person that simply refuses or fails when and as needed under or pursuant to the taxation law (Jones & Rhoades-Catanach, 2015).

  1. To provide any information or document to commissioner or any other person.
  2. To provide information to the commissioner in the manner based on which it is needed under the tax law to be provided
  3. To produce any kind of book, paper, records or other forms of document to the commissioner or any other person.

A person that fails or refuses to provide any document, information or records commits an offence under this Act. According to the “sec 8-C (1A)” an offence within the subsection (1) is regarded as the offence of absolute liability (Miller & Oats, 2016).

The case study of Leo provides that he did not wanted to give any information that was requested by the ATO auditor Andrew about a copy of any advice provided to the potential participants or the copy of any brochures used by Leo to promote the Pine Plantation Scheme. Leo has committed an offence of absolute liability under the sec 8C (1A). This is because Leo has simply failed under sec 8C to adhere with the requirements within the taxation law.

2: 

Partnership is not regarded as the separate legal company. A partnership can be existent for tax purpose with the companies or trusts as the partners. The general law partnership says that a contractual relationship is existent among the two or more people that wish to carry-out the business with the common view of operating a profit. While “sec 995-1 ITAA 1997” provides the definition regarding the partnership at tax law (De Preez & Stiglingh, 2018). The partnership for taxation law purpose involves the association of persons apart from the company or the limited partnership that is carrying the business as partners or they are in receipt of ordinary or statutory earnings equally.

The taxation law partnerships has certain types of implications. There are only two limbs of partnership, which implies that

  1. Sharing of profits or losses cannot be simply wide-ranging by the agreement
  2. It involves the distribution of profits or losses that is simply based on the ownership interest of the partners in the underlying profit

Reference to the case of “FCT v McDonald (1987)” can be considered to understand the tax law partnership. The taxpayer in this case were husband and wife that owned investment properties as the joint tenants (Frecknall-Hughes, 2014). The agreement of partnership stated that wife would be sharing a profits of 75% while the husband will be entitled to a profit of 25% and the will be shouldering 100% loss from the investment business. The court of law in its decision stated that it was not the partnership under the general law because the taxpayers were not carrying on the business. The court stated that the profit and loss should be split among the ownership interest of 50:50 since it was a tax law partnership and not the general law partnership.

The case study of Tom and his wife Kelly provides that they bought an income generating property as the joint tenants so that a greater financial resources are secured independently. A partnership agreement was formed between Tom and Kelly where 80% of the profits will be taken by Kelly and the remaining 20% will be taken by Tom. While for loss, 20% of the losses will be borne by Kelly and 80% by Tom.

The partnership between Tom and Kelly should be classified as partnership under the taxation law and not partnership under the general law. By quoting the case decisions made in “FCT v McDonald (1987)” both Tom and Kelly are not carrying on the business under general law and the profits or loss needs to be split between them based on the ownership interest (Gashenko et al. 2019). In other words the profits and losses needs to be apportioned between Tom and Kelly at a share of 50:50.

 

Part b:

Requirement A:

Computation of Partnership Net Income or Loss

Particulars

Amount ($)

Net Partnership Loss

 $   10,000

Add: Salary paid to Jacky

 $   20,000

Net Income of Partnership

 $   10,000

 

Requirement B:

When partners are paid with salary they are not treated as partnership expenditure instead the salaries are treated as the method through which the partnership distributes the profits (Woellner et al., 2016). As a result, the partnership salaries cannot be considered as the tax deductible expenditure while calculating the net income or loss from partnership for taxation purpose. The payment of salary to Jacky of $20,000 will be treated as distribution of profits originating from partnership in advance. As the net income of the partnership reported stands $10,000 that has been distributed to Jacky due to his entitlement associated to salary while the excess amount of $10,000 of available profits will be chargeable income Jacky in future years when the sufficient amount of profits are available.

3: 

A: 

Judy is presently considered as the beneficiary as she is presently entitled to get the trust income and it is not falling inside the legal disability. Being the non-resident Judy will be treated taxable for her income which she has earned from the Australian sources (Kotha & Jha, 2014). The distribution also comprises of the Australian-sourced fully franked dividends as well. Nevertheless, it must be noted that the dividends is paid to non-residents it will be treated as the subject of Australia’s tax withholding rules and it will be treated as not a taxable income and non-exempted income for Judy. As it is fully franked there is no tax withholding obligations.

B: 

Allocation of trust distribution

For the year ended 30th June 2019

Particulars

(Amount $)

Total Trust Income

200000

Robert's Widow

100000

Robert's Daughter

40000

Robert's younger child- Jim

60000

    

In order to advice the trustee regarding the net income of trust the total distribution has been distributed among the each trustee (Getman, 2015). The trust distribution that is made to Robert’s widow and the Robert’s daughter will be considered taxable. This is because the income derived by trustee from trust has been obtained in agreement with the trust deed and the overall amount that is received by trustee in the current income year is based on the assumption that the trustees are residents. In the meantime the younger child of Robert is presently a minor and hence he will not be held assessable for his trust distribution.

4: 

A: 

According to the “Division 7A” it is mainly viewed as the measure of anti-tax avoidance scheme which is designed to prevent the private companies from making any type of tax-free distribution of profits among the shareholders or their associations as payments, loans or debts that are forgiven (Barkoczy, 2016). If the “Division 7A” is applied then the amount which is paid, lent or forgiven by a private entity to shareholders or any of their associates are treated as dividends unless the payment falls under any certain form of exclusion. The income tax outcome relating to loan which is made by JWZ & Co to Judy must be viewed as dividends for Judy.

B:

Requirement A:

According to the application of provision “Division 7A” on Peter, the company has given its shareholder with a tax free loan (Sadiq, 2019). The total amount of tax free loan that is paid by Peter or loaned to shareholders that is forgiven will be treated as dividends up to the extent that Peter has made a distribution of profits.

Requirement B:

According to the dividend reinvestment plan the shareholders are provided with the offer of using dividend for purchasing the added shares inside the company or get a cash payment. With the respect to the provision of capital gains tax provision if the taxpayers takes part in the dividend reinvestment plan the taxpayer will considered as if they have got a cash dividend and then the shareholders uses the cash amount to purchase the added amount shares. Similarly in case of Peter if the company receives the dividend from the shareholders under the “Dividend re-investment plan” then it would result in additional capital for Peter to use in his business.

 

References:

Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.

de Preez, H., & Stiglingh, M. (2018). Confirming the fundamental principles of taxation using Interactive Qualitative Analysis. eJTR, 16, 139.

Frecknall-Hughes, J. (2014). The theory, principles and management of taxation: An introduction. Routledge.

Gashenko, I. V., Zima, Y. S., & Davidyan, A. V. (2019). Principles and Methods of Taxation. In Optimization of the Taxation System: Preconditions, Tendencies and Perspectives (pp. 33-39). Springer, Cham.

Getman, K. O. (2015). Principles of taxation as a means of implementing fiscal function of the tax. Probs. Legality, 129, 188.

Jones, S., & Rhoades-Catanach, S. (2015). Principles of taxation for business and investment planning. McGraw-Hill Higher Education.

Kotha, A., & Jha, K. (2014). Taxation Law-Fall 2014.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Sadiq, K. (2019). Australian Taxation Law Cases 2019. Thomson Reuters.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.

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