GOODS & SERVICES TAX

GOODS & SERVICES TAX

TAKE HOME-EXAMINATION

Friday, 23 April 1999 from 9.00 am

To be submitted: Monday, 26 April 1999 before 4.00 pm

INSTRUCTIONS FOR CANDIDATES

This examination represents 70% of your total assessment for this subject.

Candidates must answer ALL questions.

All questions are of equal value.

Begin your answer for each question on a new sheet.

Word limit for the exam: 6,000 words or 20 typed pages.

All papers must be submitted with a cover sheet.

Exams are to be submitted to c/ Rosemary Maltos.

For all questions, you should assume, unless you are given specific dates, that all events occur after the introduction of the GST

QUESTION 1 (10 marks)

The NSW government is proposing to commission the construction of the "Belt Project" — a new highway of ring roads to encircle Sydney. In order to build the new highway, the government expropriates several buildings from their current owners.

The owner of one building, which is part residence and part shop, decides to accept a payment of $200,000 and leaves the building voluntarily.

The owner of another building is a doctor who has only recently had the building renovated for use as a dwelling and as a surgery. He will not accept the government’s offer and seeks an injunction to restrain the resumption of his land. He loses and a court order is made under which the government is required to pay him $400,000.

The doctor also owns an adjoining building which he acquired in these circumstances. The former owner, who was a small time real estate developer, became concerned that he would shortly die and wanted to "give" the land to the doctor, who had cared for him assiduously over the least 10 yeas, although he wanted to stay in the house until he died. In order to do this, after receiving independent legal advice, the developer transferred title to the land and house to the doctor for the sum of $100,000. At the same time, in a collateral document, he agreed to pay $100,000 to the doctor for exclusive use of the land and house until he died. The developer died two years ago and the doctor has agreed to accept $300,000 for the land.

The government contracts with Worldwide Roads to builds the highway. At the opening ceremony, Worldwide Roads presents a specially commissioned painting of the Project to the Minister for Roads. (You can assume that the recipient of such a gift is permitted to retain it under Ministerial Ethics Guidelines after making appropriate disclosures).

What are the GST consequences of these transactions?

QUESTION 2 (10 marks)

Identify when GST is payable in the following situations:

A washing machine is sold on July 15 for $400 (before tax) which includes installation valued at $40. The purchaser signs a conditional sales contract which requires him to make 12 monthly payments of $36. The first payment is due on October 1. The washing machine is delivered to the purchaser on July 15.

An individual hires an artist to paint a portrait. The person has agreed to pay the artist $300 now, $600 when the portrait is complete and delivered to the individual and $400 six months after delivery of the portrait.

A company purchases a computer that will calculate its GST liability. The company will pay $500 when the computer is installed and $500 six months after installation. However, if it is not satisfied with the computer after one year, it may return it and receive all of its money back.

Company A promises to deliver a specified number of appliances to various stores owned by Company B. Company B will accept the appliance on a sale or return or consignment basis. The agreement provides that title to the appliances will automatically pass from Company A to Company B immediately before the sale by Company B to the ultimate customer. The consideration for the appliances will become payable by Company B at the time the ultimate consumer purchases the appliances.

QUESTION 3 (10 marks)

Company A is the owner of a number of commercial office buildings in Bourke. What are the GST consequences of the following clauses found in one of its leases?

(a) The lease is for a term of 5 years. The tenant agrees to pay rent of $500 a month in advance on the first day of each month.

(b) The tenant agrees to contribute, in addition, 1/12^th of the costs for cleaning, lighting and heating of common areas, garbage removal and maintenance costs of the lift system. This payment will be made to Company A for remittance to the other firms and will be made once each quarter upon presentation of a summary of the invoices received by the landlord.

(c) The tenant agrees to pay Company A an amount equal to 3 months rent in advance as a security deposit, returnable 60 days after the termination of the lease provided the tenant has complied with all conditions of the lease.

(d) If the leased premises are damaged as a result of fire, flood or other accident, the monthly rent will be abated until the premises have been restored to their original condition.

(e) If the tenant fails to pay any rent on the day appointed for payment and Company A evicts the tenant, then all future payments that the tenant was due to pay become due and payable immediately.

QUESTION 4 (10 marks)

Universal Insurance Agency has offices on three floors of a building in Collins Street, Melbourne. It negotiates policies of insurance with insurers from around the world on behalf of leading businesses with their headquarters in Australia and overseas. Common policies that is asked to negotiate are for risks of loss of corporate assets, key-employee insurance, disability and income protection cover, group health cover of employees, and life insurance policies for partnerships.

It typically operates by finding 2 or 3 insurers who are willing to write the kind of business being sought by Universal’s client, and prepares a report to the client comparing the respective prices, level of coverage, co-contributions and so on, that it has found. In preparing the report, it typically marks up the premium for its own profit margin — it recovers an amount from the client and remits a smaller amount to the insurer keeping the difference as its commission. Sometimes the insurer’s also provide cash incentive bonus payments to Universal (and to its individual employees) where the amount of business written with that insurer exceeds a stated level.

Universal is structured into 4 divisions — Corporate Risks, Corporate Health, Life and Non-resident Business. Of the 78 staff employed, 55 worked in the first 3 divisions assisting with all kinds of policies, 5 serviced exclusively non-resident clients. There were 18 secretarial/support staff.

During the last quarter, the agency incurred a total of $225,000 GST on its purchases.

(a) How much input tax credit can the agency recover?

(b) In general the staff working for non-residents work longer hours and use more resources (e.g. long distance phone calls etc.). Will this make a difference to your answer at (a)?

(c) There is a much larger client base and a higher staff turnover in the domestic divisions, staffing levels were as high as 63 and as low as 31, the non-resident division though, was much more stable and there were 4-6 staff throughout the year. Will this affect your answer at (a) and (b)?

(d) Assume the GST incurred related to depreciable equipment, luxury cars, other cars, lease payments for premises, staff entertainment costs and general overheads. Would the agency be able to include the whole $225,000 in their input tax credit calculation?

(e) How should it calculate its output tax liability?

QUESTION 5 (10 marks)

Miner Ltd is a mining company based in Western Australia. It has had to shut down its mine for at least two years to deal with problems of subsidence, water penetration and noxious gases. During this period it has decided to lease some of its heavy machinery to other firms in the industry in order to recoup some revenue during this period.

What are the Australian GST consequences if:

One item of machinery is moved from the WA mine to New Zealand. It will be used there in exploratory mining operations by a New Zealand company.

Another item of equipment, currently in Indonesia, will be leased to an Indonesian mining company which currently operates in Indonesia.

Another item of machinery is moved from the WA mine to Newcastle. It will be used there by a US company that is setting up operations in a disused milling plant.

Some equipment currently used by Miner in its ore crushing plant in Papua New Guinea will also be leased until the WA mine is fully operational. This equipment will be leased to another Australian mining company operating outside Lae in Papua New Guinea.

The on site installation and maintenance of all equipment will be undertaken by Miner and its staff in return for a fee.

Technical advice will also be provided from Australia on a fee for service basis in connection with the ongoing efficient operation of the equipment.

Miner will insure all the equipment with Australian Insurances Ltd. through its head office in Melbourne.

QUESTION 6 (10 marks)

In a recent issue of a GST journal, the author wrote:

"ABC Limited employs Dick as a sales representative and provides him with salary and an employer-maintained motor vehicle from ABC Ltd’s pool of vehicles which is used on weekends by Dick for private use.

There is no GST exposure for ABC Ltd on Dick’s use of the vehicle as the salary and the provision of the fringe benefit to Dick are excluded from the GST base as being the provisions of services by an employee which is not a taxable supply."

Evaluate the accuracy of this proposition.

QUESTION 7 (10 marks)

Commercial Ltd operates in Australia and wishes to use secret processes and information developed in the USA by USCo Inc. These processes and information are protected in the USA by a series of patents registered there. A draft agreement has been prepared to grant Commercial user rights which states the following:

USCo Inc will grant to Commercial the exclusive rights in Australia to use the process and information the subject of the patents for a period of 5 years from the date of execution of the Agreement.

Commercial will, at its own expense and as agent for USCo, seek to have patents registered in Australia covering the processes and information. These patents will be in the name of USCo Inc.

Commercial will pay to USCo Inc the following amounts:

$200,000 on signing the agreement

$2.00 for each item produced by Commercial using the processes and information. These amounts are payable quarterly in arrears.

USCo Inc will pay to $125,000 on the registration of the Australian patents. This is an estimate of the likely cost of the patent Australian application.

Commercial plans to execute the Agreement early next month and seeks your advice on their GST position.