university of sydney
faculty of law
master of laws
master of taxation
master of international taxation
examination in CFCs, FIFs and Transferor trusts
take home examination
INSTRUCTIONS:
1. This examination is a take home examination. The examination paper will be made available at 9.30am Friday 5 November, 1999 and answers must be submitted by 9.30am Tuesday 9 November, 1999. Answers are to be submitted to Rosemary Maltos (fax: 93510290; e-mail:
2. The examination has a maximum word length of 6,000 words (i.e., 20 A4 pages).
3. Candidates must answer ALL questions. There is some internal choice in Question 2.
4. The examination is worth 70% of the marks for the course.
5. In each answer, state the further information (if any) that you may need to fully answer the question. Where necessary, state any assumptions that you have made in answering a question.
This examination paper consists of 6 pages, including this cover page. Please be sure that your examination paper is complete.
QUESTION ONE (twenty marks)
Rick, an Australian resident, is considering acquiring a portfolio of shares in publicly listed foreign companies. The companies will be resident in the United Kingdom, United States, Hong Kong, South Africa and Korea. The companies will be involved in manufacturing, real property development, mining, financial services and general insurance. In some cases, a company may carry on more than one such activity; while, in other cases, a company’s business may be investing in other companies carrying on such activities.
Advise Rick on the following options for the acquisition of the shares -
1. Rick acquires the shares on his own account. Would it make any difference if Rickco acquired the shares? Rickco is an Australian resident company. The shares in Rickco are held equally by Rick and his wife.
2. Rick establishes a wholly owned company in Singapore ("Singco") to acquire the shares. Would it make any difference if Rickco wholly owned the shares in Singco?
3. Rick establishes a discretionary trust in HK. The trustee of the trust acquires the shares with the funds settled on trust. Rick and his wife are potential beneficiaries under the trust. Would it make any difference if Rickco made the transfer?
4. Rick and his wife acquire an equal number of units in a unit trust established in HK. The trustee of the trust uses the proceeds from the issuing of the units to acquire the shares. Would it make any difference if one of the unitholders was Rickco?
QUESTION TWO (ANSWER TWO PARTS ONLY) (twenty marks)
1. Advisers Pty. Ltd., a company resident in Australia, has established a wholly owned subsidiary in the Turks & Caicos Islands ("T&C Co"). T&C Co has won a contract to provide advice to the Government of Lesotho on the sale of its government-owned corporations to private investors. T&C Co has money to invest in the project, but no expertise so its hires Merchant Banker Pty. Ltd., a company resident in Australia, to act as its agent in providing the advice to the Government of Lesotho. After paying Merchant Banker, T&C Co has a net profit for the current year of $100,000.
One of the government-owned corporations privatised under (a) above is Lesotho Bank. After the privatisation, the Government holds 75% of the shares in the form of a special class of share. The public holds the remaining 25% (issued as ordinary shares). The main shareholders are three South African banks, which hold between them 80% of the shares offered to the public. The remaining 20% are held by a total of 50 institutional, corporate and individual investors. The shares are traded on the stock market in Maseru, although daily turnover is generally small. One of the institutional investors is Aussiebank Pty Ltd., a resident of Australia.
Advise Advisers and Aussiebank of the Australian tax consequences of the above facts.
2. Critically analyse the control rule in the Australian CFC rules.
3. Critically analyse Australia's taxation of foreign discretionary trusts.
QUESTION THREE (thirty marks)
Medical Pte. Ltd., a resident of Singapore, sells medical equipment and provides technical assistance in the use of the equipment. It also holds a small portfolio of investments. The shareholding in Medical is as follows –
Instruments Pty. Ltd. 50%
Scalpel Pty. Ltd. 25%
Precision Pty. Ltd. 20%
Dr. Schwarz 5%
All shareholders are Australian residents. The companies are business associates, but there is no common shareholding. Dr. Schwarz does not hold any shares in the Australian companies, but is an employee of Instruments.
Medical’s profit and loss statement for the year ended 31 March 1999 is as follows (based on Singapore generally accepted accounting principles) –
Income $S
Sales of medical equipment 500,0001
Technical assistance fees 200,0002
Interest 20,0003
Dividend 5,0004
Gain on disposal of shares 25,0005
750,000
Cost of goods sold 200,000
Salaries - technical advisers 150,000 (350,000)
Gross profit 400,000
Expenses
Selling expenses 80,000
Entertainment 10,000
Rent 75,000
Accountancy fees 35,000
Bank fees 1,0006
Interest expense 50,0007
Total expenses 251,000
Net profit 149,000
Notes
1. Medical manufactures and assembles medical equipment in Singapore. The raw materials for products manufactured by Medical are acquired from unrelated suppliers in Singapore. The components for products assembled by Medical are acquired from Instruments, Scalpel and Precision. Other raw materials for the assembled products are acquired by Medical from unrelated suppliers in Singapore. Sales of manufactured products amount to one-third of Medical’s total sales value and the balance comprises the assembled products. All products are sold to unrelated persons in Singapore and Malaysia. The income from Singapore sales is taxable at the normal corporate rate (26%). The income from sales to purchasers in Malaysia is exempt from tax in Malaysia under the Singapore-Malaysia double tax agreement. This income is remitted to Singapore and taxed at the normal corporate rate. Medical conducts its operations from a factory it acquired new in 1996 at a cost of S$500,000.
2. The technical assistance fees are received from unrelated persons using Medical’s products in Singapore and Malaysia. Fees for services provided in Singapore are taxable at the normal corporate rate. 25% of the fees received relate to assistance provided to Malaysian purchasers. These fees are not taxable in Malaysia under the Singapore-Malaysia double tax agreement. Medical has instructed that the fees payable by Malaysian users of its products are to be paid in US$ directly into Medical’s Hong Kong bank account (see note 3 below). As a result, the fees are not taxable in Singapore.
3. Medical has two sources of interest income. S$5,000 is interest on Medical’s bank account in Singapore. This interest is taxable in Singapore at the normal corporate rate. Medical has a foreign currency deposit with a bank in Hong Kong. During the year ended 31 March 1999, US$10,000 in interest was earned on the account. This amount was translated to S$15,000 at the exchange rate applicable on 31 March 1999, the date that the interest was paid. The interest is exempt from tax in Hong Kong. The interest has been reinvested in Hong Kong. As the interest has not been remitted to Singapore, no Singapore tax is payable on the interest.
4. The dividend income is paid in respect of a 1% shareholding in a Singapore resident company listed on the Singapore Stock exchange. The company is engaged in real property development in Singapore. The dividend is taxable in Singapore at the normal corporate rate, but an imputation credit is allowed under the Singapore imputation system so that no tax is actually paid by Medical on the dividend.
5. The gain arose on the disposal of shares acquired in January 1990 for S$25,000 (exchange rate A$1:S$1.10) and sold in March 1999 for S$50,000 (exchange rate A$1:S$.1.20). The exchange rate at 30 June 1990 was A$1:S$1.08. The gain is not taxed in Singapore.
6. Bank fees relate to the Singapore account referred to in note 3 above.
7. 90% of the borrowed funds were used to finance Medical’s manufacturing and assembly operations in Singapore. The balance was used to finance the acquisition of the shares referred to in note 4 above.
Medical also holds all the issued shares (100 @ BAH $1) in Dive Pty. Ltd., a company resident in the Bahamas. Medical has also lent BAH$500,000 to Dive. Dive has used its equity and loan capital to establish a scuba dive business in the Bahamas. During the year ended 30 March 1999, Dive has gross revenues of BAH$300,000 (including $14,000 in interest paid by a Bahamas bank). After allowing for expenses in accordance with generally accepted accounting principles in the Bahamas, Dive has a net profit for the year of $40,000. The average exchange rates for the year are BAH$1:S$0.60 and BAH$1:A$0.65. On 31 March 1999, Dive paid BAH$20,000 to Medical as part repayment of the loan. The exchange rates on 31 March were BAH$1:S$0.58 and BAH$1:A$0.63.
Instruments, Scalpel and Precision have financial years ending on 30 June.
Advise Instruments, Scalpel, Precision and Dr. Schwarz on the Australian tax implications of the above facts. Would it make any difference if Medical was granted pioneer company status so as to be exempt from Singapore tax?