Entity is in the business of providing cleaning services.

If Entity were a resident taxpayer its receipts for the year ending 30 June 2007 would have been as follows:

$200,000gain on pre CGT asset

(shares in BHP Ltdacquired as an investment in August 1985)

$20,000gain on post CGT asset held for two years

(vacant land acquired by Entity in May 2005; assume that this was not an active asset of the business)

$400,000cleaning revenues

Its expenses would have been as follows:

$100,000Depreciation on cleaning equipment

$100,000Interest on borrowing to acquire a warehouse building

$100,000Tax Loss carry forward from YE 30/6/2006

Based on this information the accounting profit for YE 30/6/2007 is $420,000.

Consider the following alternative scenarios for the year ending 30 June 2007:

a) Entity carried on business as a partnership of two partners (Sally, an Australian resident, who is a top marginal rate taxpayer aged 35 and Wayne, an Australian resident, aged 18,whose income from other sources is nil) explain how the above receipts and expenses would be treated for tax purposes.Explain who would be liable to pay tax and calculate any tax payable.

b) Entity was a proprietarycompany that wastrustee of the Entity Unity Trust with Sallyand Wayne as the unitholders, each holding one unit.Neither Sally nor Wayne is under a legal disability. Explain how the above receipts and expenses would be treated for tax purposes. Assume that the excess of receipts over expenses is fully distributed.Explain who would be liable to pay tax and calculate any tax payable.Neither Sally nor Wayne has any capital losses from other CGT events.Explain the effects, if any, of the distribution on the cost base of units.

c) Entity wasa proprietarycompany that wasnot a trustee. Sally and Wayne were the onlyshareholders, each owning one share. Explain how the above receipts and expenses would be treated for tax purposes.Assume that the excess of receipts over expenses is fully distributed. Explain any relevant obligations that the dividend imputation system would impose on Entity Pty Ltd.Also explain the effect of any relevant rules affecting the extent to which dividends paid by Entity Pty Ltd could be franked.Explain the circumstances in which, given the facts stated above, a payment of a dividend could give rise to a franking deficit tax liability for Entity Pty Ltd.Explain any adverse tax consequences for the company that might arise for it if a franking deficit tax liability arose.Explain the percentage to which Entity Pty Ltd would need to frank the distribution if it wished to avoid paying franking deficit tax.Explain the tax effects for Sally and Wayne of a distribution franked to this percentage.