UNIVERSITY OF SYDNEY

FACULTY OF LAW

AUSTRALIAN INCOME TAX SYSTEM

EXAMINATION

JUNE 1999 TIME ALLOWED: TWO HOURS

(TWENTY MINUTES READING TIME)

CANDIDATES ARE REQUIRED TO ATTEMPT TWO QUESTIONS. ALL QUESTIONS ARE OF EQUAL VALUE. WHERE QUESTIONS HAVE PARTS EACH PART IS OF EQUAL VALUE. THIS IS AN OPEN BOOK EXAMINATION.

FOR THE PURPOSE OF ALL QUESTIONS ASSUME THAT THE INCOME TAX ASSESSMENT ACT 1997 HAS BEEN IN FORCE AT ALL RELEVANT TIMES

Part 1

What are the current problems in the interpretation and application of Part IVA? Should Part IVA be amended and, if so, how?

Part 2

Can the decision of the High Court of Australia about ordinary income in Orica Ltd (1998) be reconciled with the decision in Myer Emporium Ltd (1987)?

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Ajax Ltd is a manufacturer of Widgets. Under an agreement with the Australian Government to encourage the manufacture of Widgets, Ajax is entitled to be paid ten cents for each Widget that it manufactures and sells.

In the 19X1 income year, Ajax sells a million Widgets and an amount of $100,000 is paid by the Australian Government to Ajax. Ajax includes $100,000 in its assessable income for that year.

An action is then commenced by one of Widget’s competitors against Widget and the Australian Government alleging that the contract between Widget and the Australian Government is unconstitutional and therefore invalid.

In the 19X2 income year, Ajax sells a further million Widgets, entitling Ajax to a payment of a further $100,000. In this year, however, the amount is not paid to Ajax because of the pending litigation. Ajax nevertheless includes $100,000 in its assessable income for this year also.

In the 19X3 income year, Dishonest, an employee of Ajax, embezzles $50,000 from Ajax and places the money on deposit in a bank. Dishonest includes the amount of interest earned on the deposit in assessable income for each of the income years between 19X3 and 19X8. In 19X8, Dishonest leaves the employ of Ajax and embarks on a round the world trip, spending the whole of the $50,000 and all of the interest that has been earned on that amount.

In the 19X9 income year, the fraud is discovered. Dishonest is unable to make restitution and is gaoled for theft.

In 19X9, the High Court upholds the competitor’s claim and declares that the contract between Widget and the Australian Government invalid. Widget is forced to repay the Australian Government $100,000, being the amount originally received by it in 19X1.

What are the tax consequences for Widget and Dishonest? Could the law be improved in this area and, if so, how?

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Mining Leases Pty Ltd is a company whose business is dealing in mining tenaments. On l June l998, Mining Leases agreed to sell a mining lease to Big Mining Ltd. It had acquired the lease in the course of its business for $500,000 two years before. Big Mining agreed to pay the following for the lease: (a) $l million cash; (b) $1.00 per tonne of minerals recovered from the lease in the future and (c) options over 100,000 unissued shares in Big Mining, exercisable at any time within the next five years, at an exercise price of $3 per share - the market price obtaining on the date of the contract of sale.

When the sale was completed on l August l998 Big Mining paid the amount it had agreed to pay and issued the options. At this time the market price of shares in Big Mining was $3.50. On l5 January l999 Mining Leases exercised its option rights in respect of the 100,000 shares, paying $300,000 as the exercise price. On l5 January the market price of shares in Big Mining was $4.00. Mining Leases proposes to sell the parcel of shares in the near future under a current share for share takeover bid which values the shares in Big Mining at $5.00. Big Mining commenced mining operations on the mining lease in January 1999 and expects to recover 1 million tonnes of minerals each year.

Consider the income tax liabilities of Mining Leases and Big Mining in respect of years of income ending on 30 June 1998, 1999 and 2000 in relation to these transactions assuming that the takeover offer proceeds in July 1999. You may assume that Mining Leases has not entered into any transaction involving the acquisition of options or shares other than the one described.

END OF EXAM