Certificate in Applied Tax Assignment Booklet Study Period 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

2011 Taxation Institute of Australia. These materials are copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Disclaimer Unless otherwise stated, the opinions published in these materials do not express the official opinion of the Taxation Institute of Australia. The Taxation Institute accepts no responsibility for accuracy of information contained herein. Readers should rely on their own enquiries before making decisions that touch on their own interests. All activities should be conducted in adherence to the Federal Privacy Act and the National Privacy Principles.

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

ii

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

Introduction
This booklet details the assignment requirements for Applied Tax and the relevant administration procedures. The Applied Tax assignment commences on page 4.

Assessment requirements for Applied Tax

Assessment for Applied Tax comprises: Assessment task Assignment Examination (3 hour) Participation and attendance Weighting 40%* (required 70% pass) 50% 10% (required 50% pass) (required 100% pass)

*Note: The assignment is marked out of 60 marks and carries 40% of the total final marks. Your mark out of 60 will be converted to a mark out of 40. You are required to pass all assessment components to pass Applied Tax. The assignment for Applied Tax offers you the opportunity to demonstrate and consolidate the knowledge you have already gained in the course and other prior studies and to deepen your understanding of the topics and related issues. Since tax professionals are expected to demonstrate knowledge of current legislation and regulations, better responses show the evidence of current research which is then incorporated in your answers. While the course itself applies a six-month rule, the assignment is your chance to show that you regularly read tax updates and you are aware of Bills, amendments and the proclamation of Acts and their application to the assignment scenarios. Note that, while you are encouraged to discuss issues relating to the assignment questions with others, you are expected to produce your own answers. Collusion and plagiarism are not permitted in your assignment. If it is demonstrated that you have engaged in plagiarism or colluded with others in producing your answers to the assignment you will be subject to disciplinary action. (Refer to Structured Education Program Policies on the Education website.) The Applied Tax assignment takes a case study approach. The questions are intended to raise issues and stimulate thoughtful responses. The assignment will cover a selection of topics taught across the Applied Tax course and to achieve a pass grade a deeper level of research is required. For this reason the Tax Research Session is mandated and must be viewed prior to commencing your assignment (refer to assignment procedures and conditions).

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

There is no one correct answer and the marking of your responses will be based on: identification and analysis of relevant issues development of the response to effectively and compliantly deal with those issues. You need to address all the required sections in your assignment. As a guide, your response should have a maximum word count of 2,500 words. (There is no minimum word limit indicated.)

Tax Research Session

After viewing this session on tax research via the web and attempting the activities you will be able to:

locate specific tax information and research commentary and analysis to assist your clients (and to complete your assignments) effectively utilise the Internet as a research tool and apply best practice techniques for searching tax related websites implement effective web browsing through applying advanced search tips and traps recall the list of a tax professionals key website addresses and have insight into searching each of these to get the best search results.

In addition to this session candidates of Applied Tax will also have complementary access to the Effective Business Writing Skills for Tax Professionals podcast and presentation. Access to this resource is available through the secure Education website under Assessment.

Applied Tax Assignment Study Period 1, 2011

Due date: Due time: Word count guide: Weighting of assignment: Tuesday 12th April 2011 5:00 pm (your local time) 2,500 words 40%

Questions and marks structure

PART A PART B PART C [29 marks] [18 marks] [13 marks] TOTAL [60 marks]

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

Assignment procedures and conditions: The assignment is to be emailed to the Taxation Institute by 5.00 pm on the due date. The email address for submission is assignments@taxinstitute.com.au Tax Research Session Please note candidates studying the Certificate in Applied Tax are required to view this research session before commencing their assignments. A candidate declaration is required to be submitted with the assignment listing the date of viewing (refer to assignment cover sheet). The Institute reserves the right to refuse to mark assignments for candidates where the declaration is not submitted or is found to be false. To view this session candidates must refer to the instructions listed on the secure section of the Education website under Assessment. The assignment must be provided as a word document and candidates must attach the Taxation Institute of Australia cover sheet to their assignment. (A word version of the cover sheet is provided with the assignment. This cover sheet needs to be inserted at the first page of your assignment document.) Candidates must not reference their name in the assignment (eg. at footers etc). All assignments are issued to markers with candidate ID numbers only. If you are unsure of your candidate ID number please check with Taxation Institute staff. If an assignment exceeds the prescribed word limit, it will be left to the discretion of the marker as to whether to penalise the candidate. This will be based on the extent of the breach of the word limit. Figures, footnotes and bibliographies are not included in the word limit. Note you must indicate the total word count of your assignment on the assignment cover sheet (this can be obtained through Microsoft word toolbar: Tools>Word Count). Please note: Your course lecturer will not provide you with advice on completing the assignment. All queries in relation to the assignment should be directed to the Course Convenor. Assignments are not returned to candidates. Candidates should keep a copy of their assignment on file for their record. Final marks for this assignment will be released approximately four weeks after the due date. Please see the Program Policies on the website to find out about the consequences of failing the assignment www.taxeducation.com.au

Note: All candidates should refer to the Assignment Techniques resource provided under the Course Materials on the website. This resource will help you develop effective writing techniques and assist with your approach to answering the assignment questions.

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

Assignment
PART A [29 marks] Big Dipper Ltd (Big Dipper) is a large Australian incorporated property developer listed on the Australian Securities Exchange. It has a property development division and a finance division. The property development division develops commercial and residential properties. The finance division provides vendor finance to residential property purchasers acquiring Big Dippers properties who are unable to obtain finance from banks. Big Dipper recently sold a large development project in Australia which released a substantial amount of excess cash. This project was known as the Ginger Project and is comprised wholly of commercial units (i.e. non-residential). The project has been very profitable for Big Dipper. The land in the Ginger Project was acquired in 1998 from a private investor. Big Dipper usually sells all its properties brand new. However, due to the downturn in the property sector in the past two years, sales were slow and Big Dipper was forced to lease out 25% of the commercial units in the Ginger Project on short-term leases. Some of these units were sold to buyers on vacant possession after expiry of the short-term leases, while the others were sold to investors subject to the existing short-term leases. All purchasers are registered for GST. Big Dipper also recently sold a vacant block of land in China which it acquired in 2007. The land which was acquired for $2m was sold for $5m when Big Dipper could not obtain the necessary government approval to develop the land. Big Dipper is currently considering how it should return the excess cash from the recent sales to its shareholders. Options currently under consideration are the declaration of a $0.90 special dividend per ordinary share, off-market share buyback or a return of capital of $0.90 per ordinary share. The board of directors of Big Dipper has proposed that the companys share capital account will be debited if a return of capital is undertaken. If a share buyback is undertaken, it is expected that only 20% of the purchase price will be debited against the share capital account. Big Dipper is registered for GST. Required: (a) Advise Big Dipper of the key GST implications in relation to its Ginger Project. [8 marks] (b) Advise Big Dipper of the key GST implications of selling the block of land in China. [3 marks]

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

(c) To assist in making a final decision in relation to the return of cash to its shareholders, the Big Dipper board has asked you to outline the key income tax consequences for its shareholders of each option (note there are three options). You may assume that all the shares are post-CGT shares and there are resident and non-resident shareholders. [18 marks] Hint: In relation to the off-market share buyback, you will need to consider the possibility of a dividend component in the buyback price. PART B [18 marks] Big Dipper has formed a tax consolidated group. It is currently considering raising additional finance via its finance company which is a wholly owned Australian resident subsidiary. The Big Dipper board has decided that the finance company will raise money by issuing preference shares. Each preference share issued by the finance company will have the following terms and conditions: Issue price: Dividend rate: Term: Voting rights: $100 7% p.a. Five years None

The preference shares will convert into $100 worth of ordinary shares in Big Dipper at maturity. It is expected that the shares will be issued to resident and non-resident investors outside the group. Required: (a) Advise the Big Dipper board whether the preference shares would be characterised as debt or equity for income tax purposes. [ 8 marks] (b) Assume that the Big Dipper board has insisted that the preference shares to be issued by the finance company are structured so that they qualify as equity for income tax purposes. Advise the board of the key income tax consequences for the finance company of such a decision. [4 marks] (c) Assume that the preference shares were issued and treated as equity by the finance company. A review conducted by the Big Dipper tax team three years down the track discovered that the company had been incorrectly treating the preference shares as equity. The preference shares should have been treated as debt. Advise the Big Dipper board of three (3) key income tax consequences for the finance company as a result of this error. [6 marks]

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011

TAXATION INSTITUTE OF AUSTRALIA

APPLIED TAX

PART C [13 marks] Big Dipper recently acquired 100% of Small Dip Inc. (Small Dip). Small Dip is a company incorporated in the US that carries on a shopping centre development business in the US. Big Dipper has financed this acquisition with bank debt at an interest rate of 9.85% p.a. Upon acquisition, Big Dipper replaced the entire Small Dip board of directors (who resided in the US and held all board meetings in the US) with its own Australian-based directors. Since the acquisition, only one meeting has been held by Small Dips new board of directors, in Melbourne. Required: (a) Advise the board of Big Dipper whether Small Dip is a resident company for income tax purposes. [8 marks] (b) Advise on the Australian income tax treatment for Small Dip of any income derived and expenses incurred by Small Dip. Your advice will need to consider the possibility that Small Dip may or may not be an Australian resident company. Cite relevant legislative references to support your advice. You may assume that the only income derived by Small Dip is from its development business. [5 marks]

END OF ASSIGNMENT

ASSIGNMENT BOOKLET STUDY PERIOD 1, 2011