QUESTION ONE: Company Share Repurchases & Liquidations Data Sales Limited (Data Sales) was incorporated in January 2009. It has 180,000 shares on issue which are owned by 20 unrelated shareholders who each own 9,000 ordinary shares in the company. The balance sheet of the company as at 31 March 2018 is as follows: Issued Capital 220,000 Cash $200,000 $1,400,000 Realised Capital Profits 780,000 Investments Retained Earnings 600,000 $1.600.000 $1.600.000 Data Sales issued 120,000 ordinary shares at $1 each when it was incorporated in 2009. Since then, it has undergone the following changes to its issued share capital: May 2010 September 2011 The company issued a further 80,000 ordinary shares at $1.50 each. 40,000 ordinary shares were cancelled in consideration for a payment of $1.20 per share in an off-market repurchase. The amount paid for these shares was exempt from tax in the vending shareholders' hands. Data Sales declared a cash dividend of $1.00 per share. Some shareholders elected to take bonus shares instead of the cash dividend, resulting in 8,000 ordinary shares in lieu of cash dividends of $10,000. June 2012 February 2015 Non-taxable bonus issue of 12,000 shares from the capitalisation of realised capital gains of $18,000. The realised capital profits reported in the above balance sheet arose from sale of shares in a subsidiary company to a foreign company. The sale proceeds were invested in a portfolio of shares in companies listed on the New Zealand Stock Exchange. Required: (a) On 15 March 2018, Data Sales made an offer directly to 5 of the shareholders to repurchase 6,500 shares from each of them for $9.00 per share. By 31 March 2018, 4 of the 5 shareholders had accepted the offer. Determine whether the amounts received by these shareholders will be taxable to them as a dividend. (10 Marks) (b) Now assume that, instead of making the share repurchase offer to only 5 shareholders, Data Sales offered to purchase 1,000 of every shareholder's shares at $1.25 each, and acceptances were received from 14 of the 20 shareholders. The market value of the shares on 15 March 2018 was $1.15 per share. Determine whether the amounts received by these shareholders will be taxable to them as a dividend. (5 Marks) TAXN 301 Page 2 of 5 (c) Instead of undertaking the share repurchases and cancelations in (a) and (b) above, assume that on 31 March 2018 the company decides to liquidate and distribute the proceeds on liquidation to the shareholders. The investment portfolio was sold on the stock exchange to unrelated parties for $1,800,000 before the company was liquidated. (You can assume that the shares were held on capital account.) Determine how much the 20 shareholders will receive for each of their shares upon liquidation and how much of this amount will be taxable to them as a dividend. (10 Marks) [TOTAL OF 25 MARKS] QUESTION ONE: Company Share Repurchases & Liquidations Data Sales Limited (Data Sales) was incorporated in January 2009. It has 180,000 shares on issue which are owned by 20 unrelated shareholders who each own 9,000 ordinary shares in the company. The balance sheet of the company as at 31 March 2018 is as follows: Issued Capital 220,000 Cash $200,000 $1,400,000 Realised Capital Profits 780,000 Investments Retained Earnings 600,000 $1.600.000 $1.600.000 Data Sales issued 120,000 ordinary shares at $1 each when it was incorporated in 2009. Since then, it has undergone the following changes to its issued share capital: May 2010 September 2011 The company issued a further 80,000 ordinary shares at $1.50 each. 40,000 ordinary shares were cancelled in consideration for a payment of $1.20 per share in an off-market repurchase. The amount paid for these shares was exempt from tax in the vending shareholders' hands. Data Sales declared a cash dividend of $1.00 per share. Some shareholders elected to take bonus shares instead of the cash dividend, resulting in 8,000 ordinary shares in lieu of cash dividends of $10,000. June 2012 February 2015 Non-taxable bonus issue of 12,000 shares from the capitalisation of realised capital gains of $18,000. The realised capital profits reported in the above balance sheet arose from sale of shares in a subsidiary company to a foreign company. The sale proceeds were invested in a portfolio of shares in companies listed on the New Zealand Stock Exchange. Required: (a) On 15 March 2018, Data Sales made an offer directly to 5 of the shareholders to repurchase 6,500 shares from each of them for $9.00 per share. By 31 March 2018, 4 of the 5 shareholders had accepted the offer. Determine whether the amounts received by these shareholders will be taxable to them as a dividend. (10 Marks) (b) Now assume that, instead of making the share repurchase offer to only 5 shareholders, Data Sales offered to purchase 1,000 of every shareholder's shares at $1.25 each, and acceptances were received from 14 of the 20 shareholders. The market value of the shares on 15 March 2018 was $1.15 per share. Determine whether the amounts received by these shareholders will be taxable to them as a dividend. (5 Marks) TAXN 301 Page 2 of 5 (c) Instead of undertaking the share repurchases and cancelations in (a) and (b) above, assume that on 31 March 2018 the company decides to liquidate and distribute the proceeds on liquidation to the shareholders. The investment portfolio was sold on the stock exchange to unrelated parties for $1,800,000 before the company was liquidated. (You can assume that the shares were held on capital account.) Determine how much the 20 shareholders will receive for each of their shares upon liquidation and how much of this amount will be taxable to them as a dividend. (10 Marks) [TOTAL OF 25 MARKS]