X, aged 42 and a qualified lawyer, is in the process of completing his income tax return for the income year ending 30 June 2020. He seeks your assistance/advice on how to deal with the following transactions in his tax return:
On 15 October 2019, X sold all his shares in X1 Ltd, a company listed on the Australian Stock Exchange. He bought the shares on 7 July 2010 for $50,000 and sold them for $150,000. X purchased the shares with the purpose of making a profit from their sale. (X did receive dividends during the time he owned the shares). X advised his stockbroker to place the sale proceeds in a cash management trust that had its headquarters in Hong Kong. This trust was paying 15% interest per annum on short-term deposits and many Australian investors were using the trust. X thinking was to hold the money temporarily in the cash management trust while he decides what to do with the funds in the long-term. Unfortunately, on 30 December 2019, X’s stockbroker (Y) advises X that the proprietors of the cash management trust were professional fraudsters and that they had defrauded numerous investors of millions of dollars. In short, X’s $150,000 has also been stolen and there is no chance of getting any of the money back . Between 2009 and 2020, X only bought and sold other shares around five times. As at 30 December 2019, X was still thinking about the long-term use of the $150,000. X received an interest payment from the fund of $5,500 on 15 November 2019. X has a net capital loss of $20,000 from the 2015-16 income year.
Q2 X is a beneficiary
X is a beneficiary in a family discretionary trust (Happy Family Trusts (HPT) that X’s parents established 30 -years ago. The HPT owns three investment properties and two small businesses. Like many discretionary trusts, the trustee of the HPT has an absolute discretion to pay profits to any beneficiary listed in the schedule to the trust deed. X is listed as one of the beneficiaries in the schedule. The HPT had an accounting profit of $250,000 for the financial year ending 30 June 2020. The net income (taxable income) under s 95(1) of the ITAA 1936 for the income year ending 30 June 2020 was $300, ,000. The difference was mainly attributable to lower tax depreciation (compared to accounting) on depreciating assets. The difference was not due to any capital gains/capital profits. The trustee exercised his discretion on 29 June 2020 in favour of X (and other beneficiaries). X was allocated $50,000 out of the profits for the year. This amount was paid into X’s bank account on 29 August 2020.
Q3 X has always worked
X has always worked during his adult years. For the last 20 -years, he has worked in the Finance and Banking law for a major law firm Freeheels. X decides to change his career path and now wants to work in taxation law. His employer Freeheels agrees to transfer him to the Taxation Law division but only on strict conditions as the company does not normally allow an established employee lawyer with considerable expertise in an area to change their area of specialty, and effectively start from “scratch”. One of the conditions is that X must immediately enrol in the Master of Taxation degree at the University of Sydney and that he undertakes four taxation law subjects over the next two years. X agrees. Unfortunately for X , the firm insists that X meets all his own costs of the degree, aside from textbooks. For the income year ending 30 June 2020, the course fees (both courses were undertaken in the last semester 2019 and Semester One, 2020) came to $25,000 and the textbooks came to $1000. Another condition imposed by the firm is that X’s salary will decrease by 20% when he starts in the Tax Division (i.e. Ron’s salary will drop from $200,000 to $160,000). X started in the Tax division in February 2020. If X should fail any course in his Master of Taxation, he will take a further salary drop of 10%. After two years in the Tax division, X’s salary will return to its normal level (i.e. $200,000).
On 25 May 2020, X presents his receipts for the textbooks he purchased ($1000 to the accounts department of Freeheels, and that department paid the amount ($1000) on the receipts into X’s normal bank account (where salary is deposited).
X also advises that he had $50,000 in net capital losses for the 2018-19 income year (from a sale of shares). These are the only losses available to X.
Advise X on the income tax consequences of the above transactions, events, etc. Your advice must be supported by relevant tax legislation, tax cases and/or tax rulings, tax principles and examples.
PART B (8 Marks).
Q1. Y is an Australian Resident
Y, an Australian resident, is the sole shareholder of ABC Pty Ltd, an Australian resident company. In this income year, ABC Pty Ltd made an interest free loan of $100,000 to Y. By the income year end, the company waived 40% of the loan. The balance of the loan remains outstanding by the company’s lodgement date. The company’s distributable surplus for the income year is $50,000.
Advise the tax implications of the above transaction for Y. How will your answer be different if the shareholder of ABC Pty Ltd is a wholly owned subsidiary of another company incorporated in Australia? Provide examples.
Q2. (5 Marks).
Explain ATO Tax Termination TD 2007/28 Div 7A: “present legal obligation” for ITAA 1936 s. 109Y (2): Income Tax: What is a “present legal obligation” of a private company for the purposes of Subsection 109Y (2) of Division 7A of Part III of the Income Tax Assessment Act 1936? Refer to the relevant legislation, explanatory memorandum and cases.