Zero Pty Ltd (Zero) has 20 shareholders each owning 100,000 ordinary shares. Adam has been a shareholder of Zero since its incorporation in 2010. Both Adam and Zero are residents of Australia. Zero’s balance sheet shows net assets of $5,150,000 represented by shareholders’ equity comprising a share capital account of $2,150,000 and retained earnings of $3,000,000. The share capital account was established when Zero was incorporated and comprises amounts received from shareholders for the issue of shares by Zero. Zero pays franked dividends on 1 December and 1 June each year. On 1 December 2013 Zero paid a dividend of $70,000 and allocated franking credits of $21,000 to the dividend. Zero currently has a franking account surplus of $80,000. Zero is considering distributing $250,000 to its shareholders on 1 June 2014 as follows: ? $100,000 from retained earnings (5c per share), which is consistent with the quantum of distributions paid by Zero for the last 5 years; and ? $150,000 from the share capital account (7.5c per share). This is the first time that Zero has considered such a distribution. The proposed distribution has resulted from Zero’s determination of excess capital for future business needs. Zero is proposing to allocate franking credits of either $21,000 or $42,857 to the distribution from retained earnings and to allocate no franking credits to the distribution from the share capital account. You should ignore the potential application of section 45B ITAA36. Required (1) Advise Zero and Adam how the proposed distributions will be treated for income tax purposes. You do not need to quantify your advice. [6 marks] (2) Advise Zero and Adam of the consequences of Zero’s proposals for: (a) allocating franking credits of: (i) $21,000 (ii) $42,857 to the distribution from retained earnings (b) allocating no franking credits to the distribution from the share capital account. Provide reasons for your advice and quantify, showing all workings, where possible. [9 marks] At the end of the current year of income further analysis determined that Zero’s share capital account comprised the following entries: Date Details Entry Balance 01.07.2006 Amount received from subscriptions for shares 2,000,000 Credit 2,000,000 Credit 10.07.2012 Transfer under debt/equity swap 100,000 Credit 2,100,000 Credit 10.07.2013 Transfer from asset revaluation reserve 50,000 Credit 2,150,000 Credit 01.06.2014 Return of capital 150,000 Debit 2,000,000 Credit Required Advise Zero and Adam of the income tax consequences of the entries made during the year ended 30 June 2014 in Zero’s share capital account. Quantify your advice showing all workings. [5 marks] ASSIGNMENT BOOKLET Question 2 [20 marks] Maddie Pty Limited (Maddie) operates a small retail shop specialising in kitchen equipment and dining accessories. Maddie has a turnover of approximately $9,000 per week and employs 2 sales staff. Maddie currently leases shop premises in a complex of 20 similar sized shops from Loaded Pty Limited (Loaded) for $2,000 per week. Loaded acquired and developed the shopping complex in approximately 1995 and is now selling part of the complex. Loaded has offered Maddie the opportunity to buy the shop for $2,000,000. Maddie will need to borrow from the bank to fund the acquisition of the shop. In an endeavour to continuously offer new and innovative products, Maddie has: ? sourced 100 handmade coffee cups from Sandy. Sandy is a mechanic who has recently taken up pottery on his weekends. One of Maddie’s sales staff saw one of Sandy’s coffee cups and asked if he could make more for the shop. This will be Sandy’s first order and whilst he is happy being an occasional potter on the weekends he isn’t interested in giving up his job as a mechanic. Maddie will acquire the coffee cups from Sandy at $5.00 each and is intending to sell the coffee cups at $25.00 each; ? acquired 100 miniature hour glasses from a large Australian wholesaler for $3.00 each. Maddie is proposing to sell 50 of the hour glasses for $15.00 each and use the remaining 50 hour glasses for a promotion which rewards customers who spend more than $200.00 in a single purchase; and ? created a special catering pack, comprising a cheese board, cheese knife and a block of locally produced cheese. Maddie normally sells the cheese board for $55.00 and the cheese knife for $35.00. Maddie does not sell the blocks of cheese separately. The special catering pack sells for $70.00. Required (1) Explain whether Maddie, Loaded and Sandy are required to be registered for GST. [6 marks] (2) Advise Maddie how the lease of the shop and the acquisition of the shop including any borrowings would be treated for GST purposes. Include in your advice any options that may be available to Maddie and Loaded in respect of the acquisition of the shop. [8 marks] (3) Advise Maddie how the acquisition of the miniature hour glasses should be treated for GST purposes. [2 marks] (4) Explain to Maddie how GST on the supply of the special catering pack should be calculated. [4 marks] ASSIGNMENT BOOKLET Question 3 [20 marks] Patrick is a high wealth individual who has a wide range of investments. Patrick wants to restructure his affairs to enable the transfer of his accumulated wealth to his three sons and to ensure that the accumulated wealth is protected from liabilities. Patrick states that he wants inventive solutions, is adamant that he does not want any unnecessary tax liabilities to result from the restructuring and wants to be absolutely sure of the tax treatment of any proposed transactions before implementation. Required (1) Outline your key duties in advising Patrick of the income tax consequences and considerations of any proposed transactions. [4 marks] (2) What action would you propose to address Patrick’s statement that he wants to be absolutely sure of the tax treatment of the proposed transactions before implementation. [2 marks] Simon is a management consultant. Having worked for large corporate entities for most of his professional life Simon recently resigned from his employment to set up a partnership with his wife Helen. Simon and Helen are equal partners in the partnership. The partnership provides consulting services specialising in mergers and acquisitions. Simon uses his extensive experience and expertise in providing the consulting services and Helen undertakes the administration such as issuing invoices and keeping the books and records. The partnership operates from a study in their family home. Simon has used his network of contacts to secure engagements and therefore the partnership has not needed to advertise its services in any way. The partnership’s standard engagement letter requires the partnership to provide assistance and advice as and when required which is determined by an individual designated by the client. The partnership is required to supply all telephone and computers used in providing the services. Fees are calculated on an agreed rate per hour basis and vary depending on the hours actually provided by Simon. For the year ended 30 June 2014, income and expenses of the partnership were as follows: Income Notes Fees Big Co Limited (Big Co) $168,000 1 Massive Co Limited $ 40,000 Little Pty Limited $5,000 Interest $1,000 Dividends $2,000 Expenses Travel $2,925 2 Telephone $960 Stationery $240 Net income $211,875 Notes 1. Big Co provided office space which Simon used for the term of the engagement. 2. Travel comprises car expenses for travelling from Simon’s home to Big Co’s offices. Required (1) Briefly explain whether Part IVA would apply to the formation of the partnership by Simon and Helen. [2 marks] (2) Provide Simon and Helen with a detailed explanation of the income tax treatment of the partnership’s income and expenses for the year ended 30 June 2014. [12 marks]

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