Aus tax law questions relating to companies. Instructions in file.

TAXATION LAW TUTORIAL QUESTIONS WEEK COMMENCING 26 SEPTEMBER 2016 WEEK 10: COMPANIES 1. Your client has come to you for advice on buying shares in ABC Bank Ltd. The company has made a record profit and has indicated that it will be paying a record dividend that will be fully franked. Your client needs to know whether they should buy the shares in their private company name, their own individual name, in partnership with their spouse or the family trust. The specifically want to know answers to the following questions: What is meant by dividend imputation and what are franking credits? Is there a specific time in which shares must be held before the investor can use the franking credits? If the bank paid a dividend of $3,500 and it was fully franked, how much would need to be included in the taxpayer's assessable income? What if the $3,500 was franked to 30%? How much assessable income does the taxpayer include? How would the partnership, company and trust treat the receipt of the dividend? Would the amount of assessable income differ? QUESTION 2: (SEMESTER 2 2015 EXAM) XYZ Pty. Ltd. is a small Australian Insurance Company operating in Melbourne. It is an Australian Resident Private Company for tax purposes. The Accounting Profit and Loss Statement for the year ended 30 June 2015 is as follows: Income $ Fees 3,000,000 Less Operating Expenses $ Accounting fees 15,000 Advertising 12,000 Accounting Depreciation (note 1) 15,000 Fringe benefits tax Gifts (note 2) 15,000 10,000 Light, power and heating Provision for Long Service Leave (note 3) Provision for Doubtful Debts (note 4) Provision for Unreported Claims (note 5) Rent Repairs (note 6) 30,000 20,000 10,000 8,000 50,000 20,000 Stationary 5,000 Wages 400,000 610,000 Net Profit $2,390,000 Additional Information (1) The Tax Depreciation Schedule shows depreciation for the year as $20,000 (2) The Gifts were as follows: Royal Melbourne Hospital $5,000 Melbourne Football Club $5,000 (3) The long service leave paid in cash during the year was $10,000. (4) The bad debts written off during the year were $15,000. (5) The provision for unreported claims was based on an estimate of accidents that had occurred before the end of the financial year, but had not yet been reported to the company. The company anticipated making the payments of $8,000 during the months of July and August 2015 in respect of these claims. (6) The repairs of $20,000 consisted of painting the company premises for $5,000 and replacing the old rotting wooden office window frames with new steel window frames for $15,000. The cost of replacing the old wooden office window frames with new wooden window frames would have been $16,000. The new steel window frames had the advantage of not being subject to rotting but had the disadvantage, unlike the old wooden frames, of being subject to rust. (7) On the 30 June 2015, the Company also received a dividend of $100,000 (franked to 80%) from a resident public company. This dividend is not recorded in the Profit and Loss Statement. The accounting net profit of $2,390,000 included $60,000 of net exempt income. (8) (9) The company has an unabsorbed income loss of $80,000 from the 2014 income year. The Company satisfies the continuity of ownership and continuity of business tests. REQUIRED: Calculate the Company's Tax Liability for the year ended 30 June 2015. PRACTICE QUESTIONS TO HAND IN Question 21.3 (Textbook) A resident company, owned by two resident individuals, has an opening credit balance of $7,000 in its franking account in this income year. It has the following transactions in the year: on 18 July, it paid a PAYG instalment of $30,000; on 29 August, it paid a $35,000 cash dividend franked to 80%; on 3 September, it received a $28,000 cash dividend franked to 90%; on 21 September, it paid a $7,000 cash dividend with franking credits of $1,800 attached; on 5 October, salaries paid to one of its shareholders were deemed to be dividends under Div 7A of ITAA36. The amount of deemed dividend was $21,000; on 2 February, it received an income tax refund of $18,000 from the ATO; on 10 March, it paid a $20,000 cash dividend franked to 95%; and it had a $90,000 PAYG instalment due on 21 April, but did not pay it until 3 July in the following income year. Prepare the company's franking account for this income year. 3. The net profit of Eva Nup Ltd, a resident public company for corporate law purposes for the year ended 30 June 2013 comprised:- Net income from trading in computer parts $ 81,500 Exempt income 24,000 Rental income 18,000 Net dividends (see below) 45,500 Interest 31,000 Net profit $200,000 In determining the net trading profit, expenses included:- Salaries - Directors $ 21,000 Provision for Doubtful Debts 5,500 Provision for Long Service Leave 6,500 Fines in connection with charges for contempt of court 600 Legal expenses in connection with charges for contempt of court Depreciation 400 6,200 The following additional information is available:- (a) Capital allowance allowable for tax purposes: (b) Provision - Doubtful Debts account shows: Balance - 01/07/2012 Amount provided for year $7,500 $21,200 5,500 $26,700 (c) Bad Debts written off 4,000 Balance - 30/06/2013 $22,700 Provision - L.S.L account shows: Balance 01/07/2012 Amount provided for year $32,600 6,500 $39,100 L.S.L paid Balance 30/06/2013 (d) 4,600 $34,500 Shareholding: Eva Nup Ltd has 15 different shareholders who own 100% of the company's shares. What difference would it have made if 20 shareholders owned 80% of the shares in the company? (e) Directors' Salaries: The Commissioner considers that $16,000 is a reasonable amount for salaries paid to directors. (f) Prior year income loss: The company has unabsorbed losses of $34,000 from the income year ending 30 June 2011. Its shareholding has not changed since that date. On 30 May 2012 the company acquired a number of new insurance and finance businesses. (g) Net dividends received; details thereof: Dividends 100% franked from resident companies $13,000 Dividends 50% franked from resident companies $17,000 Unfranked dividends received from a resident company $7,000 Net dividend of $8,500 received from French company in respect of which $1,500 had been withheld in France. (h) Purchases of Trading Stock: The taxpayer has claimed as an expense the purchase of goods for resale which were on board a container ship in the Pacific Ocean as at 30 June 2013. The taxpayer's tax manager confirms that the stocktake as at that date does not include that $8,000 shipment. The taxpayer has received the bill of lading for the goods. What difference would it have made if the taxpayer had not received the bill of lading? (i) Unpaid debts: On 1 August 2012 the company sold stock to a client for $10,000 to which it has forwarded an account and remains unpaid and has not been included in its net income from trading. Required Calculate the company's net tax payable, in respect of the year of income ended 30 June 2013