(Capital/Revenue Distinction) Facts DRP (DRP) sells refined petroleum products to retail distributors all over the South Island of New Zealand. In the South Island however, it sells refined petroleum products through a single, sole agent for the entire South Island- Hector Bright Ltd (HB). HB retails these products through its retail distributing branches in the South Island, all of which are based in the provinces of Otago and Southland. DRP has decided to increase the size of its distribution channel and geographic spread in the South Island by selling its products through a number of different retail distributors. It proposes to contract with these retailers using one of the three following classes of agreements: Class A For 'would be' petrol station retailers (i.e. people who want to open a petrol station), there will be an up-front payment of $2 million for retailers who are prepared to sign an exclusively agreement with DRP for 10 years. Under the agreement the retailer will not be able to sell any products which complete with DRP's refined petroleum products. The $2m amount to be paid by DRP to the retailer is stated to be "for outfitting costs. Class B Pre-existing (petrol station) retailers who would like to remain independent (and free to contract with DRP's competitors) will agree to purchase a certain minimum quantity of DRP products. In return, such retailers will receive a one-off 'signing bonus' of $50,000 for a 2-year contract. Hector Bright Ltd (HB) As a direct result of this new initiative by DRP, the existing exclusivity agreement (sole agency) with Hector Bright Ltd (HB) had to be terminated and renegotiated. The agreement had stood for 12 years and had 3 years left. DRP agreed to pay HB $253,200 to terminate the agency. The payment was described in the contract as "compensation for loss of the agency". The amount was calculated according to HB's expected loss of profit over the remaining term of the contract. There was no reduction in HB's staff following the loss of the agency. Following the termination of the pre-existing agency agreement, HB entered into a Class B agreement with DRP. Cars'r'Us Ltd (CRU) A motor vehicle distributor in Auckland, Cars'r'Us Ltd (CRU), decided to commence selling refined petroleum products and in doing so signed a Class A agreement with DRP. While CRU was permitted to keep their car servicing and repair business, they were obliged to sell-off the car sales business under the terms of the agreement. Question: Advise DRP, HB and CRU Ltd as to whether the various payments and receipts) are capital or revenue (income) receipts or capital or revenue outgoings. Support your argument with reference to the cases discussed in class. You can approach this by considering both sides of each transaction: ie. Payment made by DRP under a Class A agreement to CRU and the receipt of that same payment by CRU - eg. 1. Payments paid by DRP and received by HB $253,000 to terminate the sole agency agreement $50,000 Class B 'signing bonus' are the payments capital or revenue payments by DRP? (could both be the same or could be different) b. are the receipts capital or revenue receipts to HB? (could both be the same or could be different) 2. Payment paid by DRP and received by CRU $2m under Class A agreement 2. is the payment capital or revenue payment by DRP? b. is the receipt a capital or revenue receipt to CRU? (Capital/Revenue Distinction) Facts DRP (DRP) sells refined petroleum products to retail distributors all over the South Island of New Zealand. In the South Island however, it sells refined petroleum products through a single, sole agent for the entire South Island- Hector Bright Ltd (HB). HB retails these products through its retail distributing branches in the South Island, all of which are based in the provinces of Otago and Southland. DRP has decided to increase the size of its distribution channel and geographic spread in the South Island by selling its products through a number of different retail distributors. It proposes to contract with these retailers using one of the three following classes of agreements: Class A For 'would be' petrol station retailers (i.e. people who want to open a petrol station), there will be an up-front payment of $2 million for retailers who are prepared to sign an exclusively agreement with DRP for 10 years. Under the agreement the retailer will not be able to sell any products which complete with DRP's refined petroleum products. The $2m amount to be paid by DRP to the retailer is stated to be "for outfitting costs. Class B Pre-existing (petrol station) retailers who would like to remain independent (and free to contract with DRP's competitors) will agree to purchase a certain minimum quantity of DRP products. In return, such retailers will receive a one-off 'signing bonus' of $50,000 for a 2-year contract. Hector Bright Ltd (HB) As a direct result of this new initiative by DRP, the existing exclusivity agreement (sole agency) with Hector Bright Ltd (HB) had to be terminated and renegotiated. The agreement had stood for 12 years and had 3 years left. DRP agreed to pay HB $253,200 to terminate the agency. The payment was described in the contract as "compensation for loss of the agency". The amount was calculated according to HB's expected loss of profit over the remaining term of the contract. There was no reduction in HB's staff following the loss of the agency. Following the termination of the pre-existing agency agreement, HB entered into a Class B agreement with DRP. Cars'r'Us Ltd (CRU) A motor vehicle distributor in Auckland, Cars'r'Us Ltd (CRU), decided to commence selling refined petroleum products and in doing so signed a Class A agreement with DRP. While CRU was permitted to keep their car servicing and repair business, they were obliged to sell-off the car sales business under the terms of the agreement. Question: Advise DRP, HB and CRU Ltd as to whether the various payments and receipts) are capital or revenue (income) receipts or capital or revenue outgoings. Support your argument with reference to the cases discussed in class. You can approach this by considering both sides of each transaction: ie. Payment made by DRP under a Class A agreement to CRU and the receipt of that same payment by CRU - eg. 1. Payments paid by DRP and received by HB $253,000 to terminate the sole agency agreement $50,000 Class B 'signing bonus' are the payments capital or revenue payments by DRP? (could both be the same or could be different) b. are the receipts capital or revenue receipts to HB? (could both be the same or could be different) 2. Payment paid by DRP and received by CRU $2m under Class A agreement 2. is the payment capital or revenue payment by DRP? b. is the receipt a capital or revenue receipt to CRU
