1. Advise on the consequences for company and shareholders in the following situations:

2. The Australian Fund is an unlimited company under the Corporations Law. It is an open ended investment company that raises funds by issuing shares to investors and is managed under a management agreement with another company. Dividends are declared from time to time and under the special article relating to dividends set out below are retained by the Fund for further investment. Investors who require a regular cash return can use a periodic sale of shares privilege whereby a company which is associated with the management company has entered into an agreement with the Fund to purchase or arrange for the purchase of its shares from such shareholders (this company has also agreed to purchase shares generally subject to various conditions).

In other relevant respects the articles with respect to dividends are in common form. The Fund sends a dividend statement to shareholders each time it uses the procedure set out in the article above.

You are asked to advise on the treatment of both final and interim dividends declared under this procedure and of any subsequent distributions from the Members' Dividend Reserve Account.

1. A was the sole beneficial shareholder in a company, X Co Ltd, which was a private company for tax purposes. X Co had accumulated profits and liquid assets. A sold all her shares in the company to B Co Ltd, a public company for tax purposes, during the last year of income for $10,000. X Co in the same year of income, paid a dividend to B Co of $10,000. In the current year of income B Co sold all its shares in X Co to C for $2,000. Consider:

(a) the tax consequences of these transactions for A;

(e) as for (b) except that Z class shares are issued not to B Co but to S Co.

3. A Ltd acquired all the shares in B Pty Ltd in 1990 for $20m. The accounts of B at the time disclosed profit reserves of $15m and share capital of $5m. Since its acquisition the assets of B have either been sold or transferred to other companies owned by A so that all B’s assets are now loans of $25m to other members of the corporate group controlled by A. A wishes to liquidate or otherwise dispose of B but to ensure that it will not suffer any unexpected tax consequences. Advise A especially as to any issues arising for dividend stripping and rebatable dividend adjustments.

4. How may these issues be affected by the Review of Business Taxation?

(1) to change the name of the Company to Chainstores (Grafton) Pty Ltd;

(2) to add new lines to the lines heretofore carried by the company;

(3) to sell on extended instalment sale terms - until now Hardware has sold only for cash or on monthly invoice; and

(4) to arrange with Wholesalers Pty Ltd, a subsidiary of Chainstores Ltd, to provide stock, revenue assets, depreciable assets and capital assets and interest free loans for Hardware at especially advantageous discounts.