AVAILABLE 12.00 NOON FRIDAY 28 MAY 1999

DUE 5.00 PM MONDAY 31 MAY 1998 (by delivery to the Law School, fax to Rosemary Maltos 02 9351 0290 or email rosemarym@law.usyd.edu.au)

YOUR ANSWER MUST BE YOUR OWN WORK AND MUST NOT EXCEED 20 PAGES (6,000 WORDS) IN LENGTH

Conglomerate has a number of subsidiaries, mainly acquired through takeover activity in the late 1980s and early 1990s. Its main business is retailing. The Board of Directors of Conglomerate is reviewing a number of issues in the Conglomerate group and has sought your taxation advice. In each case it also wishes to know whether you can suggest an alternative proposal that improves its tax position and whether there are any official proposals existing or in prospect that may affect the proposals now or in the future.

1. Conglomerate acquired a subsidiary Motor Listed Ltd in a takeover four years ago for $50 million. Motor Listed had acquired its only asset, all the shares in Motor Leasing Pty Ltd, in 1990 for $50 million while Motor Leasing in turn had acquired a leasing business carried on in various parts of Australia for $50 million in 1986 (these being the only assets of the company). Following recent competition in the leasing industry, Conglomerate has decided that the leasing business is next to worthless and wishes to dipose of it. It has been suggested to Conglomerate that it can realise three capital losses of up to $50million each and Conglomerate wishes to know how this may be achieved, especially in light of recent amendments to Part IVA and possible changes to the law arising out of the Ralph Review of Business Taxation.

2. Conglomerate acquired a strategic 19% stake in Brewer Ltd in 1993 for $50 million as a launching pad for a takeover but for various reasons did not proceed with the takeover. The stake is held in Special Purpose Pty Ltd as its only asset which in turn is 100% owned by Operating Ltd which is a 100% subsidiary of Conglomerate. The funds for the purchase of the stake were loaned to Special Purpose by Conglomerate. Foreign Beer Inc has recently become interested in acquiring Brewer and has offered Conglomerate $100 million for its stake. Conglomerate is only prepared to accept this proposal if it receives a $50 million profit free of tax (or Foreign Beer increases its offer to produce that profit after-tax). Foreign Beer has suggested that Special Purpose incorporate a 100% subsidiary, roll the shares in Brewer over to that subsidiary tax free in exchange for $100 million and then pay a dividend of $50 million to Operating out of the profit booked on the transfer and repay the loan to Conglomerate. Foreign Beer will provide the necessary funds by way of loans and then purchase Special Purpose for $2. As it may take some time to implement any sale, your advice is specifically sought on the potential effects on the transaction of the Ralph Review of Business Taxation.

3. Conglomerate has had difficulties in maintaining fully franked dividends in recent years. It wishes to improve the after tax return of its shareholders. Its shareholders consist one half of pre CGT resident shareholders, one eighth post CGT resident corporate shareholders, one eighth post CGT resident super funds and one quarter post CGT non-resident portfolio shareholders. It asks you to consider the effect of the following proposals:

4. Conglomerate conducts regular buyback programs for its shares on the stock exchange, debiting its share capital for this purpose. It wishes to know how its buybacks will be affected by recent changes to the law and by the Review of Business Taxation.

5. Conglomerate sells goods to its shareholders at a 10% discount; it also forgives (up to a maximum of $500 per employee annually) lay-by debts of employees who are shareholders under its employee share acquisition scheme. Conglomerate has taken the view in the past that no taxation consequences arose from these types of transactions but requests you to review the matter.

6. Conglomerate acquired all the shares in Baker Pty Ltd in 1990 for $20m. The accounts of Baker at the time disclosed profit reserves of $15m and share capital of $5m. Since its acquisition the assets of Baker have either been sold or transferred to other companies in the Conglomerate group so that all Baker’s assets are now loans of $25m to other members of the group. A wishes to liquidate or otherwise dispose of Baker but to ensure that it will not suffer any unexpected tax consequences. Conglomerate seeks you advice especially as to any issues arising for dividend stripping and rebatable dividend adjustments, and the possible effect of changes arising from the Review of Business Taxation.