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									                                  DIPLOMA IN LAW
       LEGAL PROFESSION                                                 LAW EXTENSION COMMITTEE
        ADMISSION BOARD


               LAW EXTENSION COMMITTEE SUBJECT GUIDE




               12 TAXATION AND REVENUE LAW
                           SUMMER SESSION 2010-11
This Guide includes the Law Extension Committee’s course information and teaching program and the
Legal Profession Admission Board’s syllabus. The syllabus is contained under the heading “Prescribed
Topics and Course Outline” and has been prepared in accordance with Rule 27H(a) of the Legal
Profession Admission Rules 2005.



Course Description and Objectives                                                                 1
Teacher                                                                                           1
Assessment                                                                                        1
March 2011 Examination                                                                            1
Lecture Program                                                                                   2
Weekend Schools 1 and 2                                                                           3
Texts and Materials                                                                               4
Compulsory Assignment                                                                             4
Assignment Questions                                                                              4
List of references to Australian Taxation Law – 18th ed.                                          5
Prescribed Topics and Course Outline                                                              6
Weekend School Questions                                                                         11
Course Materials                                                                                 20
                                                   1



LAW EXTENSION COMMITTEE                                                      SUMMER 2010-11
12 TAXATION AND REVENUE LAW

COURSE DESCRIPTION AND OBJECTIVES
The Taxation and Revenue Law course is an overview of the Income Tax Assessment Act and related
legislation. General principles concerning the assessability and deductibility of different types of
receipts and items of expenditure are considered, along with more recent developments in relation to
the tax treatment of fringe benefits and capital gains. The differing tax consequences in respect of
various legal entities, such as partnerships, trusts and companies, are also considered. The last part
of the course deals with the collection and recovery of tax, and the procedures to be followed by a
taxpayer in disputing a tax assessment with the Commissioner of Taxation.

The objective of the course is to provide an overview of the structure of the tax legislation which will
enable students to determine, at least in broad terms, the tax consequences that flow from particular
factual situations. This is achieved through a study of the legislation and decided cases, and the
consideration of hypothetical factual situations that would commonly be encountered in practice.


TEACHER
Mr A J O'Brien, BEc, LLM (Syd), CA

Tony O'Brien is a member of the New South Wales Bar practising in Sydney and a chartered
accountant. He holds the degrees of Bachelor of Laws, Bachelor of Economics and Master of Laws
from the University of Sydney. Mr O'Brien was previously a solicitor of the Supreme Court, and has
worked in the tax divisions of large law and accounting firms. He is a long-standing member of the
Law Extension Committee as a nominee of the NSW Bar Association. He also teaches Evidence for
the Committee.


ASSESSMENT

To be eligible to sit for the Board’s examinations, all students must complete the LEC teaching and
learning program, the first step of which is to ensure that you have registered online with the LEC in
each subject for which you have enrolled with the Board. This gives you access to the full range of
learning resources offered by the LEC.

Then, students must complete a compulsory assignment of 1200 words. A pass mark is 50%. Refer
to page 33 of the Course Information Handbook for the assignment grading and assessment criteria.

To register with the LEC, go to www.sydney.edu.au/lec and click on the WEBCAMPUS link and follow
the instructions. Detailed guides to the Webcampus are contained in the material distributed by the
LEC, in the Course Information Handbook, and on the Webcampus.


MARCH 2011 EXAMINATION

Candidates will be expected to have a detailed knowledge of the prescribed topics: General principles;
Income from personal services; Income from property; Income from a business; Capital gains tax;
Allowable deductions; Taxation of companies and shareholders; Taxation of partnerships; Taxation of
trusts; Returns, assessments, objections and appeals; Collection and recovery and General anti-
avoidance provisions.

Candidates will be expected to have studied the prescribed materials in relation to these topics, and to
have analysed the cases contained in the Law Extension Committee's course outline.

All enquiries in relation to examinations should be directed to the Legal Profession Admission Board.
                                                    2



Examination Prize
The "CCH Prize" ($100 publication voucher) has been donated by CCH Australia Ltd for the best
examination mark in Taxation.


LECTURE PROGRAM

Lectures in Taxation and Revenue Law will be given by Mr O'Brien and will be held on Tuesdays
commencing at 6.00pm. All lectures will be held in Old Law School Lecture Theatre 9 (Old LSLT 9), on
the corner of Phillip, King and Elizabeth Streets in the heart of the city.

Please note that this program is a general guide and may be varied according to need. Readings are
suggested to introduce you to the material to be covered in the lecture, to enhance your understanding
of the topic, and to encourage further reading. You should not rely on them alone.

 WEEK         DATE       TOPIC                                   KEY READING

    1       9 Nov        General principles                      Chapter 6: Australian Tax Law
                                                                 (“ATL”)

    2       16 Nov       General principles                      Chapter 6: ATL
                                                                 FCT v Cooke and Sherden

    3       23 Nov       Income from personal services           FCT v Dixon
                                                                 Smith v FCT

    4       30 Nov       Income from property                    IRC v Ramsay
                                                                 Stanton v FCT

    5       7 Dec        Income from business                    FCT v Whitfords Beach
                                                                 Westfield v FCT

    6       14 Dec       Income from business                    FCT v Whitfords Beach
                                                                 Westfield v FCT

           Study Break: Saturday 18 December 2010 – Sunday 9 January 2011


    7       11 Jan       Capital gains tax                       Chapter 10: ATL


    8       18 Jan       Capital gains tax                       Chapter 10: ATL

                                                                 Herald and Weekly Times v FCT
    9       25 Jan       Allowable deductions                    Sun Newspapers and Associated
                                                                 Newspapers v FCT

    10      1 Feb        Taxation of companies and               20-020 – 20-135 ATL
                         shareholders                            20-300 – 20-370 ATL
                                                                 20-600 – 20-630 ATL
                         Taxation of partnerships                18-010 – 18-300 ATL
    11      8 Feb        Taxation of trusts                      19-010 – 19-260 ATL
                                                                 19-400 – 19-490 ATL
                         Returns                                 DFCT v Richard Walter
    12      15 Feb       Collection and recovery                 FCT v Citibank
                         Anti-avoidance provisions               31-400 – 31-500 ATL
                                                3



WEEKEND SCHOOLS 1 AND 2

There are two weekend schools principally for external students. Lecture students may attend on the
understanding that weekend school classes aim to cover the same material provided in weekly
lectures and are primarily for the assistance of external students.

It may not be possible to cover the entire course at the weekend schools. These programs are a
general guide and may be varied according to need. Readings are suggested to introduce you to the
material to be covered in the lecture, to enhance your understanding of the topic and to encourage
further reading. You should not rely on them alone.

Weekend School 1

 TIME           MAJOR TOPICS             KEY READING
 Friday 26 November 2010: 5.00pm – 9.00pm in New Law School Lecture Theatre 104
 (New LSLT 104)
 5.10pm-6.20pm     General principles               Australian Tax Law (“ATL”): refer to p 5

 6.30pm-7.35pm     General principles               ATL: refer to p 5
                                                    FCT v Cooke and Sherden
 7.45pm-9.00pm     Income from personal             FCT v Dixon
                   services                         Smith v FCT
 Saturday 27 November 2010: 4.00pm – 8.00pm in New Law School Lecture Theatre
 104 (New LSLT 104)
 4.10pm-5.20pm     Income from property             IRC v Ramsay
                                                    Stanton v FCT
 5.30pm-6.35pm     Income from a business           FCT v Whitfords Beach
                                                    Westfield v FCT
 6.45pm-8.00pm     Capital gains tax                ATL: refer to p 5



Weekend School 2

 TIME           MAJOR TOPICS             KEY READING
 Friday 28 January 2011: 5.00pm – 9.00pm in New Law School Lecture Theatre 026
 (New LSLT 026)
 5.10pm-6.20pm     Capital gains tax                ATL: refer to p 5

 6.30pm-7.35pm     Allowable deductions             Herald and Weekly Times v FCT
                                                    Sun Newspapers and Associated Newspapers v
                                                    FCT
 7.45pm-9.00pm     Allowable deductions             Herald and Weekly Times v FCT
                                                    Sun Newspapers and Associated Newspapers v
                                                    FCT
 Saturday 29 January 2011: 4.00pm – 8.00pm in New Law School Lecture Theatre 026
 (New LSLT 026)
 4.10pm-5.20pm     Taxation of companies and        20-020 – 20-135 ATL
                   shareholders                     20-300 – 20-370 ATL
                                                    20-600 – 20-630 ATL
 5.30pm-6.35pm     Taxation of partnerships         18-010 – 18-300 ATL
                   Taxation of trusts               19-010 – 19-260 ATL
                                                    19-400 – 19-490 ATL
 6.45pm-8.00pm     Returns                          DFCT v Richard Walter
                   Collective and recovery          FCT v Citibank
                   Anti-avoidance provisions        31-400 – 31-500 ATL
                                                   4



TEXTS AND MATERIALS
Course Materials

   Guide to the Presentation and Submission of Assignments (available on the LEC Webcampus)

Prescribed Materials

   Barkoczy, Core Tax Legislation & Study Guide – most recent edition available
   Woellner, Barkoczy, Murphy & Evans, Australian Taxation Law – most recent edition available
   Cooper, Krever and Vann, Income Taxation – Commentary Materials, 4th ed. Thomson Reuters,
    ATP, 2005

Reference Materials

   Australian Tax Practice, Thomson Reuters ATP
   Australian Tax Handbook, Thomson Reuters ATP, 2005
   Australian Federal Tax Reporter, CCH
   Australian Master Tax Guide, CCH

LEC Webcampus

Once you have registered online with the LEC, you will have full access to the facilities on the LEC
Webcampus, including links to relevant cases and legislation in the Course Materials section.


COMPULSORY ASSIGNMENT
In Taxation and Revenue Law, there is only ONE ASSIGNMENT. This assignment is
compulsory and must be submitted by all students. Students must submit the assignment by
the due date (no extensions will be granted). A pass mark is 50%. Refer to page 33 of the
Course Information Handbook for the assignment grading and assessment criteria. Students
who fail to satisfy the compulsory requirements will be notified through the Results screen on
the Webcampus before the examination period of their ineligibility to sit the examination in this
subject. The maximum word limit for the assignment is 1200 words (inclusive of all footnotes
but not bibliography).

The rules regarding the presentation of assignments and instructions on how to submit an assignment
are set out in the LEC Guide to the Presentation and Submission of Assignments which can be
accessed on the LEC Webcampus. Please read this guide carefully before completing and submitting
an assignment.

The completed assignment should be lodged through the LEC Webcampus by 9.00am on the
following date:

Compulsory Assignment           Tuesday 11 January 2011                (Week 7)



ASSIGNMENT QUESTIONS
To obtain the Taxation and Revenue Law assignment question for the Summer Session 2010-
11, please follow the instructions below:

    1.   Register online with the LEC (see page 26 of the Course Information Handbook for detailed
         instructions). Once you have registered, you will have full access to all the facilities on the
         LEC Webcampus.

    2.   Then go into the Webcampus, select the Course Materials section and click on the link to
         the assignment question for this subject.
                                          5



LIST OF REFERENCES TO AUSTRALIAN TAXATION LAW – 18TH EDITION

TOPICS                                         REFERENCES

General Principles:
   - Legislation framework                     2-000 to 2-140
   - Concept of income                         3-000 to 3-300
   - Residence                                 24-040 to 24-066
   - Source                                    24-100 to 24-160
   - Derivation                                13-100 to 13-320

Income from Personal Services                  4-000 to 4-170
                                               26-000 to 26-330
                                               23-500 to 23-540

Income from Property                           5-000 to 5-215
                                               5-300 to 5-340
                                               5-400 to 5-420
                                               5-500 to 5-525

Income from Business                           6-000 to 6-560
                                               6-800 to 6-910
                                               14-000 to 14-160

Capital Gains Tax                              7-030 to 7-995
                                               8-500 to 8-510
                                               8-850 to 8-855

Deductions                                     10-000 to 10-320
                                               10-420 to 10-440
                                               10-475
                                               11-000 to 11-455
                                               11-500 to 11-520
                                               12-100 to 12-190
                                               12-400 to 12-440

Taxation of Companies and Shareholders         18-000 to 18-389
                                               18-500 to 18-520

Partnerships                                   16-000 to 16-300


Trusts and the Taxation of Children            17-000 to 17-220
                                               17-340
                                               21-800 to 21-870

Returns, Assessments, Objections and Appeals   30-000 to 30-640
                                               31-300 to 31-700

Collection and Recovery                        32-000 to 32-125
                                               32-400 to 32-510

General Anti-Avoidance Provisions              25-500 to 24-700
                                               1-310 to 1-480
                                                     6



PRESCRIBED TOPICS AND COURSE OUTLINE


1.    GENERAL PRINCIPLES                                       (a)   Sale of goods

(1)   Legislative framework                                    (b)   Provision of services

Income Tax Assessment Act 1997, Chapter 1                FCT v French (1957) 98 CLR 398
                                                         FCT v Mitchum (1965) 113 CLR 401
      (a)   Constitutional aspects of taxation
                                                               (c)   Interest
      (b)   Structure of the Income            Tax
            Assessment     Act   1997          and             (d)   Dividends
            relationship to the Income         Tax
            Assessment Act 1936                          Esquire Nominees v FCT (1973) 73 ATC 4114

      (c)   Direct versus indirect taxation                    (e)   Royalties

(2)   Concept of income                                  FCT v United Aircraft Corporation (1943) 68
                                                         CLR 525
Income Tax Assessment Act 1997, Division 6
Income Tax Assessment Act 1936, ss 6, 21,                (5)   Derivation
21A, 26(e)
                                                         Income Tax Assessment Act 1997, ss 6-5, 6-
      (a)   Common law concept of income                 10

      (b)   Receipt of money or money's worth                  (a)   Appropriate method of recognition of
                                                                     income: cash/accruals
Tennant v Smith [1892] AC 150
FCT v Cooke and Sherden (1980) 80 ATC                    C of T (SA) v Executor Trustee (Carden's
4140                                                     Case) (1938) 63 CLR 108

(3)   Residence                                                (b)   Salary and wages

Income Tax Assessment Act 1997, s 995-1                        (c)   Trading income
Income Tax Assessment Act 1936, s 6(1)
                                                         J Rowe and Sons v FCT (1971) 124 CLR 421
(a)   Individuals
                                                               (d)   Income from professional practice
      (aa) Ordinary meaning of "resident"
                                                         Henderson v FCT (1970) 119 CLR 412
IRC v Lysaght [1936] AC 234                              FCT v Firstenberg (1976) 76 ATC 4141
Gregory v DFCT (1937) 57 CLR 774
                                                               (e)   Prepaid income
      (ab) Extended definition of "resident"
                                                         Arthur Murray (NSW) v FCT (1965) 114 CLR
FCT v Applegate (1979) 79 ATC 4307                       314
FCT v Jenkins (1982) 82 ATC 4098
                                                         (6)   Exempt income
(b)   Companies
                                                         Income Tax Assessment Act 1997, Divisions
Koitaki Para Rubber Estates v FCT (1940) 64              11, 50, 51
CLR 15
Unit Construction Co v Bullock [1960] AC 351
Malayan Shipping Co v FCT (1946) 71 CLR                  2.    INCOME FROM PERSONAL SERVICES
156
                                                         (1)   Income according to ordinary concepts
(4)   Source
                                                         Income Tax Assessment Act 1997, s 6-5
Income Tax Assessment Act 1997, s 995-1
Income Tax Assessment Act 1936, s 6C                     FCT v Dixon (1952) 86 CLR 540
                                                  7



Hayes v FCT (1956) 96 CLR 47                                (b)   Extended definition of "royalty"
Scott v FCT (1966) 117 CLR 514
                                                      Murray v Imperial Chemical Industries [1967] 2
(2)   Relevant statutory provisions                   All ER 980

Income Tax Assessment Act 1997, ss 10-5,                    (c)   Deemed source of certain royalty
15-2, Division 82-83                                              payments

      (a)   Elements of s 15-2                        (3)   Interest

Smith v FCT (1988) 164 CLR 513                        Income Tax Assessment Act 1997, s 6-5

      (b)   Employment termination payments                 (a)   Nature of interest payments

Reseck v FCT (1975) 75 ATC 4213                             (b)   Disguised interest payments
McIntosh v FCT (1979) 79 ATC 4325
                                                      Lomax v Peter Dixon and Son [1943] 1 KB 671
(3)   Fringe Benefits Tax Assessment Act
                                                            (c)   Deemed       source     of    interest
      (a)   Heads of liability                                    payments

      (b)   Definition of "fringe benefit"            (4)   Lease and rental income

JNG Knowles & Associates Pty Ltd v FCT                Income Tax Assessment Act 1997, ss 6-5, 10-
2000 ATC 1451                                         5

      (c)   Inter-relationship between Fringe               (a)   Nature of lease/rental payments
            Benefits Tax Assessment Act and
            Income Tax Assessment Act                       (b)   Premiums


3.    INCOME FROM PROPERTY                            4.    INCOME FROM A BUSINESS

(1)   Annuities                                       (1)   Concept of a business

Income Tax Assessment Act 1997, s 10-5                Thomas v FCT (1972) 72 ATC 4094
Income Tax Assessment Act 1936, s 27H                 Ferguson v FCT (1979) 79 ATC 4261
                                                      FCT v Walker (1985) 85 ATC 4179
      (a)   What constitutes an annuity               Evans v FCT (1989) 89 ATC 4540

      (b)   Significance of "a fixed gross sum"       (2)   Taxation of business income

Egerton Warburton v DFCT (1934) 51 CLR                Income Tax Assessment Act 1997, ss 6-5, 10-
578                                                   5, 15-15
Just v FCT (1949) 8 ATD 419                           Income Tax Assessment Act 1936, s 21A
IRC v Ramsay [1935] 1 All ER 847
                                                            (a) Normal proceeds of business
(2)   Royalties
                                                      Kosciusko Thredbo v FCT (1984) 84 ATC
Income Tax Assessment Act 1997, ss 10-5,              4043
15-20                                                 Memorex v FCT (1987) 87 ATC 5034
Income Tax Assessment Act, ss 6, 6C                   FCT v Cyclone Scaffolding (1987) 87 ATC
                                                      5083
      (a)   Common law meaning of "royalty"           GP International Pipecoaters v FCT (1988) 88
                                                      ATC 4823
McCauley v FCT (1944) 69 CLR 235
Stanton v FCT (1955) 92 CLR 235                             (b)   Isolated transaction or undertaking
FCT v Sherritt Gordon Mines (1977) 137 CLR
612                                                   Scottish Australian Mining Co v FCT (1950) 81
                                                      CLR 188
                                                      FCT v Whitfords Beach (1982) 82 ATC 4031
                                                      8



      (c) "Extraordinary" transactions                          (f)   Apportionment     of   compensation
                                                                      payments
FCT v Myer Emporium (1987) 87 ATC 4363
FCT v Spedley Securities (1988) 88 ATC 4126               McLaurin v FCT (1961) 104 CLR 381
Westfield v FCT (1991) 91 ATC 4234                        Allsop v FCT (1965) 113 CLR 341
                                                          FCT v Spedley Securities (1988) 88 ATC 4126
      (d)   Realisation of investments by
            investment/ insurance companies
                                                          5.    CAPITAL GAINS TAX
London Australia Investment Co v FCT (1977)
138 CLR 106                                               (1) Structure of Income Tax Assessment Act
                                                              1997
      (e)   Non-cash business benefits
                                                          Income Tax Assessment Act 1997, Part 3-1
FCT v Cooke and Sherden (1980) 80 ATC
4140                                                      (2)   CGT events

(3)   Trading stock                                       Income Tax Assessment Act 1997, Divisions
                                                          103 and 104
Income Tax Assessment Act 1997, Division 70
                                                          (3)   Meaning of "CGT assets"
      (a)   Definition of "trading stock"
                                                          Income Tax Assessment Act 1997, Division
      (b)   Tax accounting for trading stock              108

      (c)   Value of trading stock                        (4)   Cost base

Australasian Jam Co v FCT (1953) 88 CLR 23                Income Tax Assessment Act 1997, Divisions
                                                          110, 112 and 114
(4)   Compensation
                                                          (5)   Capital proceeds
Income Tax Assessment Act 1997, ss 15-30,
20-20(2), 70-115                                          Income Tax Assessment Act 1997, Division
                                                          116
      (a)   Cancellation     of   a    "structural"
            agreement                                     (6)   Calculation of capital gain/loss

Van den Berghs v Clark [1935] AC 431                      Income Tax Assessment Act 1997, Division
Californian Oil Products Ltd v FCT (1934) 52              102
CLR 28
                                                          (7)   Exemptions
      (b)   Restriction on ability to carry on a
            business                                      Income Tax Assessment Act 1997, Division
                                                          118
Dickenson v FCT (1958) 98 CLR 460
                                                          (8)   Anti-avoidance provisions
      (c)   Cancellation of business contracts
                                                          Income Tax Assessment Act 1997, Division
Heavy Minerals v FCT (1966) 115 CLR 512                   149

      (d)   Termination  of    agency          and        (9)   Other provisions
            management contracts
                                                          Income Tax Assessment Act 1997, Division
Allied Mills Industries v FCT (1989) 89 ATC               109 and 128
4365

      (e)   Reimbursement    of         previously        6.    ALLOWABLE DEDUCTIONS
            deducted expense
                                                          (1)   General deductions
H R Sinclair v FCT (1966) 14 ATD 194
                                                          Income Tax Assessment Act 1997, s 8-1
                                                   9



      (a)   Determinative tests of deductibility       (4)   Bad debts

Ronpibon Tin v FCT (1949) 78 CLR 47                    Income Tax Assessment Act 1997, ss 20-20,
Herald and Weekly Times v FCT (1932) 48                20-30, 20-35, 25-35
CLR 113
Nevill v FCT (1937) 56 CLR 290                         (5)   Losses

      (b)   Relevance of purpose                       Income Tax Assessment Act 1997, Divisions
                                                       36, 165, 166
Magna Alloys and Research v FCT (1980) 80
ATC 4542                                               Avondale Motors (Parts) v FCT (1971) 71 ATC
FCT v Total Holdings (Aust) (1979) 79 ATC              4101
4279
Ure v FCT (1981) 81 ATC 4100
                                                       7.    TAXATION OF COMPANIES AND
      (c)   Apportionment                                    SHAREHOLDERS

Ronpibon Tin v FCT (1949) 78 CLR 47                    (1)   Definition of "dividend"
Ure v FCT (1981) 81 ATC 4100
                                                       Income Tax Assessment Act 1936, s 6(1)
      (d)   Meaning of "incurred"
                                                       (2)   Taxation of shareholders
FCT v James Flood (1953) 88 CLR 492
FCT v A G C (Advances) (1984) 84 ATC 4776              Income Tax Assessment Act 1936, s 44(1)

      (e)   Negative limbs: capital outgoings          (3)   Deemed dividends

Sun Newspapers and Associated Newspapers               Income Tax Assessment Act 1936, ss 108,
v FCT (1938) 61CLR 645                                 109, Division 7A
B P Australia v FCT (1965) 112 CLR 386
                                                       (4)   Operation of imputation
      (f)   Negative limbs: private outgoings
                                                       Income Tax Assessment Act 1997, Division
Lunney and Hayley v FCT (1958) 100 CLR                 200 to 205
478
FCT v Payne [2001] HCA 3                                     (a)   Franking a dividend
FCT v Finn (1961) 106 CLR 60
Handley v FCT (1981) 81 ATC 4165                             (b)   Maintaining a franking      account:
Forsyth v FCT (1981) 81 ATC 4157                                   debit/credit entries
Lodge v FCT (1972) 72 ATC 4174
                                                       [See also Income Tax Assessment Act 1997, s
(2)   Repairs                                          10-5]

Income Tax Assessment Act 1997, s 25-10
                                                       8.    PARTNERSHIPS
FCT v Western Suburbs Cinemas (1952) 86
CLR 102                                                (1)   Definition of "partnership"
W Thomas and Co v FCT (1965) 115 CLR 58
Lindsay v FCT (1960-1961) 106 CLR 377                  Income Tax Assessment Act 1936, s 6(1)
Law Shipping Co v IRC (1924) 12 TC 621
Odeon Associated Theatres v Jones [1972] 1             (2)   Creation, dissolution and variation of
All ER 681                                                   partnerships

(3)   Capital allowances                               FCT v Happ (1952) 9 ATD 447

Income Tax Assessment Act 1997, Divisions              (3)   Taxation of partnership income
40 and 43
                                                       Income Tax Assessment Act 1936, ss 90-93
Wangaratta Woollen Mills v FCT (1969) 119
CLR 1
                                               10



(4)   Taxation of "uncontrolled partnership         DFCT v Richard Walter (1995) 183 CLR 168
      income"
                                                    (4)   Appeals to the Administrative Appeals
Income Tax Assessment Act 1936, s 94                      Tribunal or Federal Court

Robert Coldstream Partnership v FCT (1943)          Taxation Administration Act, pt IVC
68 CLR 391

(5)   Assignment of partnership interest            11. COLLECTION AND RECOVERY

FCT v Everett (1980) 80 ATC 4076                    (1)   Powers of the Commissioner

(6)   Overview of the application of capital        Income Tax Assessment Act 1936, ss 263-264
      gains tax to partnerships
                                                    FCT v Citibank (1989) 89 ATC 4268
[See also Income Tax Assessment Act 1997, s
10-5]                                               (2)   Recovery of unpaid tax

                                                    Taxation Administration Act, ss 14ZZM, 14ZZR
9.    TRUSTS AND THE TAXATION OF                    Taxation Administration Act 1953, Schedule 1,
      CHILDREN                                      s 255-5

(1)   Concept of a trust                            (3)   Pay-as-you-go (PAYG)

(2)   Taxation of trust income                      Taxation Administration Act, Schedule 1 pt 2-5
                                                    and 2-10
Income Tax Assessment Act 1936, ss 95-101

FCT v Whiting (1943) 68 CLR 199                     12. GENERAL ANTI-AVOIDANCE
Taylor v FCT (1969) 119 CLR 444                         PROVISIONS

(3)   Revocable trusts and trusts for minors        (1)   Form versus substance in interpreting
                                                          legislation
Income Tax Assessment Act 1936, s 102
                                                    (2)   Income Tax Assessment Act 1936, pt IVA
Truesdale v FCT (1970) 120 CLR 353
Hobbs v FCT (1957) 98 CLR 151                             (a)   Scheme

(4)   Taxation of income of children                      (b)   Tax benefit

Income Tax Assessment Act 1936, pt III, div               (c)   Dominant purpose of obtaining a tax
6AA                                                             benefit

[See also Income Tax Assessment Act 1997, s         Peabody v FCT (1994) 94 ATC 4663
10-5]                                               FCT v Spotless Services Ltd (1996) 186 CLR
                                                    404
                                                    Commissioner of Taxation v Sleight [2004] 136
10. RETURNS, ASSESSMENTS,                           FCR 211
    OBJECTIONS AND APPEALS

(1)   Obligation to lodge tax return

Income Tax Assessment Act 1936, ss 161-164

(2)   Assessment/amended assessment

Income Tax Assessment Act 1936, ss 166-177

(3)   Objections

Taxation Administration Act, pt IVC
                                                   11

WEEKEND SCHOOL QUESTIONS
FIRST WEEKEND SCHOOL

1.   Micron Pty Ltd is a manufacturer and supplier of computer software. In July 1987 Micron Pty Ltd
     enters into a contract with Logic Ltd under which for a flat fee of $10,000 per year, Micron Pty Ltd
     will supply Logic Ltd with certain technical information relating to computer software. The
     contract was for 10 years. A second contract is entered into under which Logic Ltd agreed to sell
     to Micron Pty Ltd some of its own computer software for a total price of $100,000 (the "purchase
     price") payable by five annual instalments, each one being equivalent to five percent of the
     annual sales revenue derived by Micron Pty Ltd. If, after the fifth instalment, the total amount
     paid is less than or exceeds the purchase price, then the purchase price is to be adjusted
     accordingly.

     Advise both Micron Pty Ltd and Logic Ltd of the taxation consequences of these arrangements.

2.   Reginald works for Supa-Nova Ltd ("SN") as an employee electrician. He also works on
     weekends in his own business for a number of different companies, including Cosmo Pty Ltd,
     which is manufacturer of small electric products. He is married to Beatrice, and they have a 19
     year old daughter, Penelope.

     Advise generally as to the taxation implications of the following arrangements:

     (a)   In November 2004 SN makes an ex gratia payment of $1,000 to Penelope to help her
           defray her costs of studying at university. SN makes similar payments to the children of a
           number of other people who work for them.

     (b)   Cosmo is so pleased that Reginald is able to do emergency electrical repairs for them one
           weekend that, in addition to his cash remuneration, they allow him to choose two electric
           products which they will give to him for free – Reginald chooses an electric razor for himself
           and an electric kettle for Beatrice.

     (c)   Reginald leaves SN in January 2006 to work permanently for Cosmo. In appreciation of his
           services in the past, SN gives Reginald, in June 2006, an interest free loan of $500.

3.   The Astaire Dance Company offers a special deal if a student signs up for a series of 100
     dancing lessons. These lessons may be taken over a period of six years. The special deal is
     only available if a student pays for the 100 lessons before taking the second lesson.

     Anne pays for 100 lessons in advance in a lump sum. In the first year (1 July to June 30) she
     takes 20 lessons, in the second year 45 lessons and, in the third and fourth (the present) year,
     she has taken no lessons. Thus she still has available 35 lessons. When will the Astaire Dance
     Company have to bring the lump sum payment to account for tax purposes?

4.   Nicole is an electrician employed by International Electronics Ltd ("IE"). In September 1986 IE, in
     recognition of Nicole's marvellous abilities as an electrician, grant her a loan for 13 months at an
     interest rate of one percent per annum.

     In November 1986, Nicole retires from her employment with IE. In December 1986, IE gives her
     a further loan of $5,000 for a period of two years, interest free, to provide her with some
     assistance in her retirement.

     In January 1987, Nicole, to help pass her time during her retirement, gives her next door
     neighbour, Fred, some assistance in installing new electrical wiring in his fruit and vegetable
     shop. In return for this assistance, Fred gives Nicole a box of fruit and vegetables which he has
     grown on his land. Unfortunately, in February 1987, there is a short circuit in the wiring, and
     Fred's shop is damaged by fire. Nicole gives Fred, by way of recompense, a lump sum payment
     to cover the damage caused to the shop, together with profits which are lost to Fred by reason of
     the shop being closed for repairs.

     Explain the taxation implications of the loan and gift made to Nicole and the payment made to
     Fred.
                                                       12

5.   Until 30 April 1993, Robin carried on the business of selling lawn mowers in shop premises at
     Liverpool, and employed four persons. On that day she sold her business to Sharon. Robin now
     carries on business on her own account as a lawn mower repairer. She has no business
     premises, but travels from her home to the premises of customers with faulty lawn mowers, and
     carries out the repairs there.

     (a)   Advise Robin as to the proper basis of accounting for the preparation of her income tax
           returns for the year ending 30 June 1993.

     (b)   What are the consequences for Robin of a change in her basis of accounting? What would
           be the tax implications of Robin offering her clients one year lawn mower servicing contracts
           which are paid for by the clients in advance.

6.   Veronica, in December 1988, left her job as cosmetic consultant with a department store, and
     became a distributor of women's cosmetics manufactured by Nova Pty Ltd ("Nova"). Nova
     entered into an agreement with Veronica under which she was granted the right to distribute
     cosmetics from Nova at wholesale prices and sold those cosmetics on a door-to-door basis at
     prices recommended by Nova. Veronica did exceptionally well in selling cosmetics and, in June
     1989, Nova gave her a ticket for an all expenses paid holiday in Tasmania. Veronica,
     unfortunately, hates Tasmania and asked Nova whether she could have cash in lieu of the ticket,
     but Nova would not agree. Veronica thought that she should take the holiday anyway as a sign
     of good faith. As she expected, she did not enjoy the holiday at all.

     Advise Veronica as to the tax consequences, if any, of having taken the holiday.

7.   David is employed by Shonky Merchant Bank ("SMB"). In relation to the following matters,
       advise David and SMB of the relevant tax ramifications:

     (a)   So that David may work at home at night and on weekends from time to time, SMB gives
           David a personal computer. David and his wife and children are permitted to use the
           computer for their personal business.

     (b)   As part of the incentive offered by SMB to employees who have performed well, SMB offers
           to pay part of the private school fees in respect of the children of those employees. In the
           year ending 30 June 1991, David performed well, and SMB paid $2,000 of the school fees
           of David's son, Ben. The payment was made directly by SMB to Ben's school.

8.   Sally is a politician, being a Member of the House of Representatives in the Federal Parliament.
     While attending a public meeting in relation to a forthcoming Federal election, an egg was thrown
     at Sally. Sally had to have her clothes dry-cleaned at Fred's Dry Cleaners. Fred is a supporter of
     Sally's political party, and told Sally that she could have a 50 percent discount off the normal
     price for dry-cleaning her clothes.

     Advise Sally of the relevant tax ramifications.

9.   Jim has a one man business cleaning office building windows as an independent contractor. He
     has a five year contract to spend one day a week (either by himself or his agent) cleaning the
     windows of Office Ltd's four storey building for a fee of $20,000 per year. Jim has similar
     contracts with four other building owners. When the contract with Office Ltd has four years to
     run, Jim falls from the building and suffers injuries which prevent his ever working again as a
     window cleaner. Office Ltd immediately terminates Jim's contract and engages another window
     cleaner.

     Jim threatens legal proceedings against Office Ltd for termination of his contract and for the
     injuries he has suffered which are due, he alleges, to Office Ltd's negligence. Office Ltd offers
     Jim $100,000 for his injuries, and four annual payments of $18,000 each in respect of his
     contract.

     Jim is disposed to accept Office Ltd's offer, and seeks your advice as to the taxation
     consequences of doing so.

10. Advise as to the consequences (if any) under Pt IIIA of the Income Tax Assessment Act in
    respect of the following:
                                                 13


    (a)   Ben acquired shares in Acme Pty Ltd in 1980. At that time the company's assets consisted
          of a $100 deposit in a bank account. In 1987, Acme acquired a block of land for $100,000,
          which is now the major asset by the company. Ben has decided to sell his shares in Acme
          to Ken for a substantial profit.

    (b)   Anne is the managing director of Frazzle Ltd, a company which manufactures cutlery.
          Frazzle is successfully taken over in September 1988, and an agreement is reached with
          Anne under which she is paid $100,000 in return for her resigning from the office of
          managing director and entering into a restrictive covenant in which she agrees not to be
          engaged in any capacity in the business of manufacturing cutlery in Sydney for a period of
          five years.

    (c)   Penny, an avid stamp collector, acquired, in October 1986, a rare stamp for $50. She sold
          the stamp in February 1988 for $1,000. In the same month she sold a block of land for
          $50,000. She had acquired this land in January 1987 for $55,000.

    (d)   Brian acquired a cottage in 1967 for $20,000, which he rents to other persons. In 1991,
          Brian expended $100,000 in building an additional storey on to the cottage. He has now
          received an offer of $200,000 to sell the cottage.

    Brainstorm Ltd is a company incorporated in Singapore. A group of Australian resident
    companies control 49 percent of the voting power of Brainstorm. Brainstorm's business activities
    consist of constructing, for profit, high rise buildings in Singapore and other Asian cities.
    Brainstorm is taxed on its profits in the various Asian countries in which it carries on its
    construction business. Its activities are managed by three directors, Brown, Smith and Jones,
    none of whom is a resident of Australia. Brown is a resident of Singapore, Smith lives in Hong
    Kong, and Jones lives in Papua New Guinea. The directors make decisions and resolutions
    concerning the company by sending telexes to one another from the locations in which they live.
    Brown, Smith and Jones, although very expert in matters concerning the construction of
    buildings, do not have great expertise in the financial and other commercial affairs of the
    company. They rely on the expertise of Blanco White, who is retired, lives in Sydney, and was
    formerly the managing director of a large Australian company. White receives all the information
    concerning the business activities of the company, and advises each of Brown, Smith and Jones
    via telex concerning the business affairs of Brainstorm. Brown, Smith and Jones invariably rely
    on the expertise of White, and make directors' resolutions according to his recommendations.
    White owns one percent of the shares of Brainstorm, and is paid a yearly fee of $200,000 for his
    services.

    (a)   Advise whether Brainstorm is a resident of Australia for the purposes of the Income Tax
          Assessment Act.

    (b)   Irrespective of your answer to (a), assume that Brainstorm is treated as a resident for
          Australian tax purposes. Explain the Australian taxation treatment of Brainstorm's profits
          from construction projects.

11. Advise as to the consequences (if any) under pt IIIA of the Income Tax Assessment Act in
    respect of the following:

    (a)   In September 1991, Raymond borrowed funds from Big Bank Ltd to buy an undeveloped
          block of land as an investment. The cost of the land was $30,000. He pays interest to Big
          Bank in respect of the borrowings, as well as council rates in respect of the land. He has
          spent $200 in fixing the fences on the perimeter of the land, which were falling down. He
          has also been spending $100 per year to keep the land clear of refuse and long grass,
          which could otherwise be a fire hazard. He now plans to sell the land for $60,000.

    (b)   Beth is in partnership with Jan. The interests of each in the assets of the partnership are
          equal, and Beth and Jan agree to share profits and losses equally. In 1987, the partnership
          assets comprise 3,000 shares in A Ltd, which were acquired for $6,000. In 1989, the
          partners admit Sue to the partnership in consideration of her paying to each of them an
          amount of $6,000. It is agreed that each partner will have equal entitlements to assets,
          profits and losses of the partnership. The partnership now plans to sell the shares in A Ltd
                                                    14

           for $18,000. Jan is in need of money, and plans to sell a painting she bought for herself in
           1989 for $10,000. She expects however that she will only receive $8,000 from the sale.

     (c)   Bob was interested in sailing and, in July 1991, acquired a yacht for $8,000 which he sails
           on weekends.

           (ca)    Bob sold the yacht in 1991 for $6,000; alternatively
           (cb)    Bob sold the yacht in 1991 for $9,000; alternatively
           (cc)    Bob used the yacht extensively during the week to entertain and hold business
                   negotiations with persons with whom he did business, before selling it in 1991 for
                   $9,000.

     (d)   King Biscuit Inc ("KB") is a corporation incorporated and based in New York. Although the
           company is primarily involved in the manufacture of biscuits, its board of directors are
           always on the lookout for investment opportunities throughout the world. The directors
           decide that, because of the low price of units in various Australian property trusts, an
           acquisition of such units may prove a fruitful investment. KB acquires a small number of
           units in the Heinz Property Trust and 30 percent of the issued units in the Wide-Aust
           Property Trust. KB's directors expect the value of the real estate held by these property
           trusts to substantially increase by 1994, and they plan then to sell the units they have
           acquired at a substantial profit.

12. Advise as to the consequences (if any) under pt IIIA of the Income Tax Assessment Act in
    respect of the following:

     (a)   Digger Inc, a company in the United States, is in the mining business. In 1987 it acquired
           some excavation equipment in Texas for $500,000. An Australian company, X, is
           undertaking mining operations in Western Australia, and Digger ships the excavation
           equipment to Australia and rents it on a daily basis to X.

     Digger opens an office near the mining site, and employs a person to run the office, to collect the
     rent on the equipment, and to maintain the equipment. Digger ships the equipment back to the
     United States in 1991, where it is sold for $900,000.

     (b)   In 1986, Sally acquired an eighteenth century wooden cabinet for $5,000. She died in 1988,
           and in her will left the cabinet to Tom. At the date of her death, the market value of the
           cabinet was $8,000, and Sally at that time would have had an indexed cost base of $6,000
           in respect of the cabinet. Tom sells the cabinet in 1991 for $10,000.

     (c)   April was told by her employer, Apex Ltd, that her employment would be terminated. She
           commenced an action against Apex claiming inter alia wrongful dismissal. The action was
           settled by

    Apex paying April $50,000 in settlement of all actions which April may have had against Apex.

    (d)    Ben bought a block of land as an investment in 1988 for $50,000. In 1989, Ben's son, Bill,
           was married. In 1990, Ben, in an effort to assist Bill in starting a home, sold the land to Bill
           for $50,000, notwithstanding the rise in land values since Ben originally bought the block
           which valued the land at $70,000. Bill built a house on the land at a cost of $100,000 and
           lived in the house with his wife. In 1992, Bill sold the house for $250,000.

13. In March 1984, Felicity acquired an old motel on the beach at Byron Bay. Soon after
    commencing operations at the motel, she noticed that the beach front occasionally suffered from
    pollution. Upon making further investigation, she discovered that the cause of the pollution was
    an adjacent dwelling owned by William, which had been converted into a guesthouse without
    Council approval. The septic tank system of this dwelling was not able to cope with the additional
    effluent resulting from the use of the dwelling as a guesthouse, and as a result, sewage was
    seeping onto the beach near Felicity's motel. William was advised that he could cure the illegality
    by applying to the Council for a rezoning of the land, and accordingly did so. Felicity learnt of his
    application, and opposed the rezoning on the basis of the sewerage system on William's
    premises. Felicity was not only concerned about the health risk caused by the pollution, but also
    the adverse affect it might have on her business. She incurred legal expenses $3,000 in
    contesting the rezoning application, and was successful.
                                                  15


     In January 1989, Felicity learnt that a block of land adjoining her motel, on which was located an
     old grass tennis court, was to be auctioned. She thought the tennis court might improve the
     business of her motel, and successfully bid for the land. In March 1989, she replaced the grass
     court with a cement tennis court at a cost of $40,000, and in February 1990 replaced the
     dilapidated wooden fence surrounding the tennis court with one constructed of steel mesh. The
     steel mesh fence cost $5,000 and was, in fact, cheaper that a replacement wooden fence. She
     did not know if the steel mesh would last any longer than a wooden fence.

     Felicity, in March 1991, had health problems and so sold, at a substantial profit, the motel and
     adjoining block of land containing the tennis court to Raelene Ramanda.

     Advise Felicity of the implications under the Income Tax Assessment Act of her dealings
     involving the motel, the adjoining land and the $3,000 tennis court.

14. Jill Brown is employed by Amazon Ltd, which manufactures computers in Australia. Although Jill
    is employed in a senior management position in the company's manufacturing operations, she
    has an interest in computer programming and, to further her interests in this regard, she pays to
    attend part-time university courses on the subject. Unknown to Jill, the directors of Amazon Ltd
    have for some time been considering the diversification of the company's business into marketing
    computer programs. When they find out that Jill has passed all her university examinations, they
    decide to make her a director in a newly formed company, Piranha Ltd, which is a wholly owned
    subsidiary of Amazon Ltd, and which specialises in marketing computer programs. As a result of
    this appointment, Jill receives substantially more income than when she was employed by
    Amazon Ltd.

     By 1990, Piranha Ltd has become operational in the marketing of computer programs and, in that
     year, it purchases rights to a computer program which has been developed by Steve Software in
     consideration of:

     (a)   a lump sum payment of $1 million (which was in fact paid to Steve in 1990); and

     (b)   10 percent of the annual gross sales proceeds of any computer programs sold by Piranha
           Ltd which are based on the program developed by Steve.

     In 1991 Piranha Ltd pays Steve $100,000 pursuant to clause (b) of the agreement.

     What are the income tax consequences of these facts for Jill, Steve, Piranha Ltd and Amazon
     Ltd?

15. Mr Fu is currently a resident of Hong Kong, but decides to apply for Australian nationality under
    the Business Migration Program established by the Australian Government. Under the Program,
    an applicant and his immediate family are granted Australian nationality on condition that a
    certain sum of money is invested by the applicant in an Australian business. Mr Fu, in
    compliance with the Program, invests the requisite money in an Australian business. He and his
    family are thereafter granted Australian nationality. Mr Fu proposes to buy a house in Sydney,
    and to send his wife and children to live in Sydney. However Mr Fu owns a substantial business
    in Hong Kong and, because of adverse Australian tax consequences, does not want to become a
    resident of Australia.

     What are the adverse Australian tax consequences if Mr Fu becomes a resident of Australia? By
     reference to the statutory definition of resident and case law, advise Mr Fu whether he will be a
     resident of Australia and, in particular, what steps he may take to reduce the risk of becoming a
     resident.
                                                       16

SECOND WEEKEND SCHOOL

1.   Sam Spade is employed by Dinkertons, a private detective agency engaged in private
     investigations and protective security work. Sam becomes concerned about his personal safety
     and future career, so Dinkertons pay for him to undertake a self-defence course conducted by
     the Bruce Lee Martial Arts Centre. Dinkertons buys a pistol for Sam, which he can use in his
     work, and Sam himself pays to take an automatic weapons course run by a pistol club, to
     improve his experience and accuracy with automatic pistols. Dinkertons encourage employees
     to take such courses, and associate course experience with their more successful employees.
     One consequence is that more specialist and more highly paid work can be assigned to the
     employee. Sam acquires, at his own expense, a bulletproof vest for use on dangerous
     assignments.

     Dinkertons acquire a house at Burwood for use as office premises. Shortly after the purchase it
     is decided that the colour the house is painted is not suitable. The whole house is repainted in a
     more appropriate colour at a cost of $5,000.

     Discuss the deductibility of the expenditures incurred by Dinkertons and Sam.

2.   Narelle receives the following statement from Nova Pty Ltd together with a dividend cheque for
     $60.00:

       Shareholder dividend statement

       Name of company:                       Nova Pty Ltd
       Date of payment:                       9 June 1989
       Name of shareholder:                   Narelle Pappas
       Number of shares:                      1200
       Cents per share:                       5.00 cents

       Dividend Type                                                Imputed
                                                                      Credit
       Franked/Unfranked                                 $                $
       Franked amount:                               36.00            23.02
       Unfranked amount:                             24.00

       The dividend is 60 per cent franked.


       Note: you will need to retain the above information to assist you in preparing your tax return.

     Narelle seeks your advice as to the tax treatment of the $60.00 dividend.
     [Assume a company tax rate of 39 percent and individual rate of 50%.]

3.   Tom owns a large property on the south coast of New South Wales. Tom has experience in the
     forestry industry, and he acquired the land in 1984 because it had several fine stands of timber.
     The stands of timber are a long way from Tom's house on the property and so, in 1986, he
     acquired a caravan for $3,000 which he uses as a base camp when he is involved in logging.
     Tom uses the caravan to store equipment, prepare meals, shelter during bad weather and, on
     occasions, sleep in overnight. Tom drives a four-wheel drive vehicle from his home to the base
     camp and then drives from the base camp to the various stands of timber on his property. He
     spends approximately $150 per week on petrol. Tom has also entered into an agreement with
     Bob. Under the agreement Tom sold Bob 5,000 metres of timber for $20,000, payable in
     advance. Bob has the right to enter Tom's property to cut and remove the timber as he requires
     it.

     During 1988 Tom had difficulty with persons protesting about the environmental damage caused
     by his logging operations. On occasions the protesters actually entered his property and
     obstructed him in the cutting of timber. As a result, Tom spent amounts on erecting fences
     around his property and, from time to time, hired security guards to prevent protesters entering
     his property. By 1989, Tom had cut most of the timber on the property, and was facing
     increasing opposition from environmental groups. He therefore decided to sell the property. In
     expectation of the sale he spent $5,000 on upgrading several of the roads on the property. In
                                                   17

     1989, he sold the property at a substantial profit and also sold the caravan for $5,000.

     Advise Tom generally as to the income tax ramifications of these facts.

4.   On 1 July 1992, Bob Brown borrows $100,000 from Big Bank Ltd. The annual interest rate is 14
     percent. Bob then lends this amount to Brown Pty Ltd at an interest rate of three percent per
     annum. Brown Pty Ltd is Bob's family company, and it uses the money to buy a house which it
     then rents to Bob for $20.00 per week. In his return for the year ending 30 June 1993, Bob
     declares as income the interest payments he has received from Brown Pty Ltd and claims
     deductions for the amount of interest he has paid to Big Bank Ltd and the amount of rent paid to
     Brown Pty Ltd. On 1 October 1993, Bob receives a Notice of Assessment and an Adjustment
     Sheet indicating that the deductions claimed have been disallowed.

     (a)    Bob wishes to object to the assessment. Advise him of how he should do this, what
            arguments he may use in support of an objection and the issues involved.

     (ii)   Discuss the possible application of pt IVA of the Income Tax Assessment Act to the
            transactions entered into by Bob.

5.   Shoppers Ltd carries on the business of designing, constructing, letting and managing shopping
     centres. Its method of business generally involves identifying a suitable area for shopping centre
     development, acquiring land in the area, designing and constructing a shopping centre, leasing
     shops to retailers, and managing the general operation of the centre. Shoppers has been in
     business for 20 years, and currently manages 35 shopping centres in New South Wales and
     Victoria. Shoppers has only ever sold one shopping centre, when the returns fell below profitable
     levels and improvement in returns was expected due to changing demographics in the area
     where the centre was located.

     In 1986 Shoppers identified the outer north-west region of Sydney as a suitable area for a
     shopping centre development. It acquired substantial vacant land in the area with a view to
     constructing its largest shopping centre, North-West Plaza, with space to be leased to major
     department stores, electrical goods retailers and grocery chains. As Shoppers had some
     difficulties raising finance, construction did not start immediately. In the meantime, Shoppers
     arranged for the connection to the site of electricity, gas, water and sewerage, and for the
     construction of roads into and out of the site.

     In 1991, due to the recession, Shoppers decided not to go ahead with the construction of North-
     West Plaza. After receiving real estate advice as to the means of obtaining the best price for the
     land, Shoppers decided to sell it as a subdivision of residential blocks. As utilities had already
     been connected to the land, Shoppers did no more than "peg" out the lots for sale. The lots were
     sold for a substantial profit.

     When Shoppers has excess funds, it lends those funds to its wholly owned subsidiary, Finance
     Ltd. This company is an investment company, and uses the funds to acquire shares on the stock
     exchange. The investment policy of Finance is to purchase shares which yield a certain rate on
     the funds invested. However, under that policy, if the market price of the shares increases by
     more that 10 percent from their original purchase price, Finance sells the shares and reinvests
     the proceeds in other shares yielding the same rate of return.

     Advise Shoppers of the tax consequences of selling the land, and Finance on the tax
     consequences in respect of the sale of shares. In your advice do not deal with capital gains
     under pt IIIA of the Income Tax Assessment Act.

6.   Transport International Ltd ("TI") is a publicly listed company. TI pays a dividend to its
     shareholders, and declares that the dividend is franked to the extent of 60 percent. Payments
     are made as follows:

     (a)    a dividend of $1,000 to Sue;

     (b)    a dividend of $10,000 to XYZ Ltd, another public company; and

     (c)    a dividend of $5,000 to Brown Pty Ltd, a private company owned by the Brown family.
                                                   18

     Explain the tax consequences to each of the above shareholders, and the relevant entries in the
     franking accounts of the companies.

7.   David is the residuary beneficiary under his mother's will, of which his father is the sole executor
     and trustee. David's mother died on 1 January 1990, and the administration of the estate was
     completed on 30 June 1990. The residuary estate comprises an investment of $1,000,000 which
     yields an annual income of $120,000.

     David is left the income from the residuary estate which is to be paid to him by quarterly
     instalments commencing on his eighteenth birthday, and upon his twenty-first birthday he is to
     have the benefit of the residuary estate absolutely. In addition to this, his father as trustee is
     given a discretion to make advances from time to time for his maintenance, education and
     advancement.

     On 1 October 1990, David's father pays $12,000 from the income of the estate to finance a trip
     by David to Paris to undertake a holiday course in French at the Sorbonne. David returns in
     February 1991 to commence his final year at high school. He attains the age of 18 on 1 October
     1992. In what manner and by whom should the income from the investment be returned for the
     years ending on 30 June 1990, 1991, 1992 and 1993?

8.   Magna Pty Ltd ("Magna) is the trustee of the Smith family trust. The beneficiaries of the trust are
     the children of Sue Smith; John who is 19 years old, a paraplegic and living in the United States;
     James who is 14 years old; and Margaret who is 20 years old and married.

     For many years the property of the trust has consisted of a factory which had originally been
     acquired in 1965 and rented to various people. In July 1990, Magna sells the factory to Eva Pty
     Ltd ("Eva"). Under the terms of the sale, Eva will pay Magna an initial amount of $200,000 and
     thereafter will pay Magna $20,000 each year during the lifetime of John.

     Magna has complete discretion under the terms of the deed as to the distribution of the trust
     income. On 30 June 1993, Magna pays $5,000 to meet the medical costs of John; $4,000 to
     James; and $1,000 to Margaret.

     Advise Magna and the beneficiaries of the Smith family trust as to their liability under the Income
     Tax Assessment Act in respect of the year ended 30 June 1993.

9.   Max Martin forms a partnership with his wife, Jean, and their son, Jack, aged 13, to conduct a
     grocery business. Max also decides to employ his other son, Bill, aged 15, on a part-time basis in
     the business. Both Jack and Bill are still at school. The profits and losses of business are to be
     divided equally between Max, Jean and Jack. In addition, Jack and Jean are each paid a salary
     of $150 per week. Bill is to be paid a salary of $200 per week. Max spends about 60 hours per
     week working in the business. Jean spends approximately 30 hours per week. Bill and Jack
     assist in the business after school, and each spends about 10 hours per week doing so. Max
     wishes to encourage his sons to make provision for their future, and so requires Jack to put 75
     percent of his share of the partnership profits into a savings account in Jack's name, and Bill to
     put 50 percent of his salary into a savings account in Bill's name.

     Max decides that the taxation position of his family can be further improved if he assigns 50
     percent of his interest in the partnership to Bill.

     Advise Max, Jean, Jack and Bill generally as in their taxation positions.

10. Sam owns 60 percent of the shares of Nostra Pty Ltd ("N"), the remaining 40 percent being held
    by Jill. During the year, Sam sells all of his shares in N to Jill. N, a company engaged in
    manufacturing gearboxes for cars, has in prior years made a number of losses which it has been
    carrying forward. Jill hopes to make N's business more profitable by involving the company in
    the manufacture of carburettors.

     During the year of income ending 30 June 1993, N sells a property which was acquired by it prior
     to September 1985. It is not expected that N will be subject to tax on the profit it derives from
     that sale. For the year ending 30 June 1993, although N will derive a small amount of income, it
     is anticipated by the company's directors that the prior year losses will offset such amount.
                                                     19

     N desires to pay Jill a dividend out of the profit from the sale of the land.

     Advise Jill and N as to the tax consequences of the above facts.

11. Steel Company Ltd carries on business as a manufacturer and supplier of concrete and concrete
    products, including block and reinforced support columns. It owns and uses several old buildings
    which are in need of maintenance and painting. It also operates a railway to transport material
    and products to and from port facilities. The railway is functional, but 20 years old. Some
    sleepers need replacement and some rails are rusted. The company's electrical equipment is in
    good condition. As business is booming the company decides to expand its production and
    resolves to do the following:

     (a)   to repair a leaking roof in an old building, replace some old dangerous awnings and paint all
           existing buildings to prevent further damage to timber;

     (b)   to build a new production plant factory at the rear of the present buildings;

     (c)   either to make necessary repairs to the existing railway and extend it to the new buildings,
           or to scrap the old one and start again;

     (d)   to buy some additional rundown locomotives and, after repairing them, to use them on its
           railway to transport materials;

     (e)   to mechanise fully by installing computerised manufacturing equipment.

     Advise Steel Company Ltd of the deductibility of money spent in connection with items referred to
     above.
                                                                         20



         COURSE MATERIALS

         TAXATION OF TRUSTS


                                                   Legal disability                           s98(1)
                        actual                                                                trustee assessed on beneficiary's share
                        s101
                        s95A(2)


                 Presently entitled                                           s95A(2) deemed
                                                                                 natural person
                                                                                 not trustee           s98(2)
                                                                                                        trustee assessed on beneficiary's share

                                                   No legal disability
                                                                              resident                  s97(1)
                                                                                                        included in beneficiary's income



                                                                                                      company
                                                                                                         not trustee         s98(3)
                                                                                                                              trustee assessed

                                                                              Non -resident                                   s98A
                                                                                                                              beneficiary assessed


                                                                                                      person
                                                                                                          not trustee        s98(4)
                                                                                                                              trustee assessed

                                             deceased estate                                                                  s98A
                                                                                                                              beneficiary assessed


                                                                                         s101A
Net Income                                                                               trustee assessed
Trust Estate

               not presently entitled

                                                                                         s99
                                                                                         trustee assessed on normal
                                                                                         rates on aggregate                       resident trust estate


                                             Commissioner's discretion
                                             (ss 99A(2)-(3))
                                                                                                                                  non-resident trust
                                                                                         s99A                                     estate
                                                                                         trustee assessed on aggregate
                                                                                         and highest marginal tax




                 revocable trust                          s102(1)(a)
                                                          trustee assessed


                 Trust for unmarried child under          s102(1)(b)
                 18                                       trustee assessed
                                                             21



TAXATION OF CHILDREN - DIV 6AA




Is a person a prescribed person?


                     s 102AC(1)                        (a)   less than 18 years on last day of year of
                                                             income and
                                                       (b)   not an excepted person




                                                                                     See section 102AC(2) for classes of
                                                                                     excepted persons




 Is the income received subject to Division 6AA?                        YES                                    NO




                                                                                                         Div 6AA does not apply
              2 categories of income




           Income generally - s 102AE                                                      Trust income - s 102AG



Income will be subject to Div. 6AA unless within the                          Income will be subject to Div. 6AA unless within the
categories of excepted assessable income listed in                            categories of excepted trust income listed in s 102AG(2)
s102AE(2):

 Employment income - see s 102AE(6) & (7)
 Business income - see s 102AE(5)
 Income from certain types of investments
22

								
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