Question 4 (Taxation of Companies) (Total 10 Marks, Part A & B)

Part A: (5 marks)

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

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

Assets $ Liabilities $

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

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

Shareholders' funds

Issued capital 60,000

Retained profits 210,000

318,000 318,000

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

Part B: (5 marks)

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

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

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

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