Assignment One for Taxation of Corporations custom essay

Lynne, and her husband Geoff, both aged 55 are medical practitioners. They each operate their own medical practice, Lynne in partnership and Geoff as a sole trader. In addition to their medical practices, Lynne and Geoff are always on the look out for good investment opportunities. Indeed, in 1989 they incorporated a company (Avon Pty Ltd (Avon)) to operate their first venture (i.e. a small corner-shop milk bar). Since then, Avon has owned and operated businesses such as a retail bakery, amusement parlor, ice-skating rink, a fast-food outlet and a two-dollar shop. Avon has also owned shares in public companies (up to 1997) and residential rental properties (up to 2003), but the company does not have these anymore.

 

From a very early stage, Avon employed a manager (Tim, who is still with the company) to oversee all of the company’s operations. Tim has been central to the success of Avon over the years.

 

There are two hundred shares (each a $10 share) in the company. Lynne holds 120 and Geoff holds 80. All of the shares are ordinary shares (i.e. they all carry the same rights). Lynne, Geoff and Tim are the directors of the company.

 

For the income year ending 30 June 2013, for the first time ever, the company made losses. For that year, the company’s assessable income was $5,800,000 and deductions were $6,300,000. During the year ending 30 June 2013, Avon operated an ice rink, a fast food outlet and an independent coffee shop (not franchise) and had a term deposit with a bank.

 

Early on during the year ending 30 June 2014, Tim advised Lynne and Geoff that poor trading conditions continued to exist. Indeed, as at 30 November 2013, Tim advised that: “we are sitting on losses of around $280,000 already.”

 

Lynne and Geoff were a bit shocked by this. Lynne and Geoff had already been thinking of scaling back their entrepreneurial efforts, and this news from Tim convinced them that they should think of selling out soon.

 

Avon’s accountant (Tran) (who was also Lynne and Geoff’s accountant) advised that he might have a buyer who is interested in some of the businesses of Avon. The buyer is reluctant to buy shares in a company, but he is prepared to do so on certain terms (especially if it has usable tax losses). The main ones are that Avon closes down at least one of its businesses before a purchase, and that Avon and its shareholders provide indemnities for “contingent liabilities”. The buyer also insists that Tim’s employment is terminated.

 

The buyer purchased all the shares in Avon by contract dated 31 March 2014 (settlement was 30 April 2014).

 

 

 

 

 

The businesses operated by Avon, both before and after the share sale, along with their tax performance (taxable income or tax loss) for the years ending 30 June 2014 and 30 June 2015 was (are) as follows:

 

 

Business

1 July 2013 to 30 April 2014 1 May 2014 to 30 June 2014 1 July 2014 to 30 June 2015
Ice skating rink ($100,000) (1) ($25,000) (2) $320,000
Coffee shop ($80,000) (3)
Fast food outlet (4) $20,000 $1,000 (4) $80,000
Rental properties $120,000 (5)
Term deposit $20,000 $4,000 $26,000

 

Notes in Table

 

  1. Brackets indicate a tax loss as defined in the ITAA 1997.
  2. Immediately after purchase of the shares, the new buyer became the sole director of Avon and he immediately made a number of changes at the ice skating rink. The main ones were: (i) trading hours were extended significantly (ii) more aggressive marketing was directed at local schools with the aim of getting greater use out of the rink in low peak times (iii) a small gymnasium was added to the ice rink and (iv) a member-based fee structure was introduced, with discounts for longer term memberships. Most of the staff remained at the ice skating rink after the ownership change, but some new staff were employed at the gymnasium.
  3. The buyer insisted that this business be closed down before contracts were exchanged. The business ceased operating on 26 February 2014.
  4. The fast food outlet operated within the food court of a major shopping centre. Immediately after the share purchase, Avon negotiated to relinquish its lease in the food court, and instead, take up a lease in another area in the shopping centre where it commenced to operate a Thai food (sit-in only) restaurant. No take away meals were sold at this restaurant. Most of the staff from the food outlet worked in the restaurant.
  5. These comprised two residential rental properties and one small commercial property (i.e. shop on outer suburban retail strip) previously owned by the buyer of the shares in Avon as sole owner. They were transferred to Avon on 28 July 2014.

 

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Fully advise Avon on whether it can use its tax losses as deductions in the future (Note, there is no need to advise on other transactions, unless those transactions have relevance to the tax loss usage question). Explain your advice by reference to tax legislation, cases, tax principles, etc.

 

 

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