QUESTION TWO-DIVIDENDS Camborne Limited is a small company owned equally by Mr and Mrs Garfield which carries on a business of dealing in second hand appliances. Mr and Mrs Garfield are directors of the company but not employees of the company. (a) For each of the transactions below, explain whether a dividend would arise for income tax purposes. You can assume that each transaction is independent and that the prescribed interest rate for the period 1 October 2015 to 31 December 2015 is 5.99%. Provide statutory references to your answers. (i) On 1 October 2015 Mr Garfield has advanced the company $10,000 at 7.5% interest pa. The equivalent market interest rate is 10%. (ii) On 15 November 2015 Camborne Limited lent $8,000 to Mr and Mrs Garfield's 20 daughter old son to buy a second-hand washing machine (at the normal retail price) from the company. Interest is charged on the loan at 4.0% pa which is the same rate as is charged on similar loans advanced this month by the company to its customers as a promotion to move excess stock. (iii) On 1 December 2015 Mrs Garfield sold the company a piece of office equipment for $8,000 when its market value was $7,000. (12 marks) (b) In July 2013 Mr Garfield purchased an asset from the company for $2,000 when its market value was $2,800. In October 2015 the IRD audited the company and detected this irregular transaction informing the company that the $800 difference was a dividend paid to Mr Garfield. (i) Explain what would be the effect on Camborne Limited in respect of this $800 deficiency detected in October 2015. (ii) Explain what options Mr Garfield would have in respect of this adjustment. Does he necessarily have to pay tax on this $800 as a dividend? Provide statutory references to your answers. (8 marks) QUESTION TWO-DIVIDENDS Camborne Limited is a small company owned equally by Mr and Mrs Garfield which carries on a business of dealing in second hand appliances. Mr and Mrs Garfield are directors of the company but not employees of the company. (a) For each of the transactions below, explain whether a dividend would arise for income tax purposes. You can assume that each transaction is independent and that the prescribed interest rate for the period 1 October 2015 to 31 December 2015 is 5.99%. Provide statutory references to your answers. (i) On 1 October 2015 Mr Garfield has advanced the company $10,000 at 7.5% interest pa. The equivalent market interest rate is 10%. (ii) On 15 November 2015 Camborne Limited lent $8,000 to Mr and Mrs Garfield's 20 daughter old son to buy a second-hand washing machine (at the normal retail price) from the company. Interest is charged on the loan at 4.0% pa which is the same rate as is charged on similar loans advanced this month by the company to its customers as a promotion to move excess stock. (iii) On 1 December 2015 Mrs Garfield sold the company a piece of office equipment for $8,000 when its market value was $7,000. (12 marks) (b) In July 2013 Mr Garfield purchased an asset from the company for $2,000 when its market value was $2,800. In October 2015 the IRD audited the company and detected this irregular transaction informing the company that the $800 difference was a dividend paid to Mr Garfield. (i) Explain what would be the effect on Camborne Limited in respect of this $800 deficiency detected in October 2015. (ii) Explain what options Mr Garfield would have in respect of this adjustment. Does he necessarily have to pay tax on this $800 as a dividend? Provide statutory references to your answers. (8 marks)
