AVAILABLE 12.00 NOON FRIDAY 10 SEPTEMBER 1999

DUE 5.00 PM MONDAY 13 SEPTEMBER 1999 (by delivery to the Law School , Level 12, fax to Rosemary Maltos 02 9351 0290 or email rosemarym@law.usyd.edu.au)

ANSWER ALL PARTS

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

All Business Pty Ltd is a private company jointly owned by Pippa and Charlie. It seeks your advice on the tax consequences in relation to the following issues as concerns the company and its shareholders.

A. One activity of All Business is dealing in mining tenaments. On l June l998 All Business agreed to sell a mining lease to Mining Ltd, a company listed on the stock exchange. It had acquired the lease in the course of its business for $500,000 two years before. 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 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 All Business paid the initial $1 million amount it had agreed to pay and issued the options. At this time the market price of shares in Mining was $3.l0. On l5 January l999 All Business 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 Mining was $4.00. All Business proposes to sell the parcel of shares in the near future under a current share for share takeover bid which values the shares in Mining at $5.00. Mining commenced mining operations on the mining lease in January 1999 and expects to recover 1 million tonnes of minerals each year, paying $250,000 to All Business at the end of each quarter.

Consider the income tax liabilities of All Business in respect of years of income ending on 30 June 1998, 1999 and 2000 assuming that the takeover offer proceeds in September 1999. You may assume that All Business has not entered into any transaction involving the acquisition of options or shares other than the one described.

B. All Business has recently refurbished its offices. As a result, the offices are quite stark. All Business has decided to remedy the situation by providing a 50% contribution to paintings, potted plants or other decorations purchased by its employees for its offices, up to a maximum of $1,000 per employee. If the employee remains in the employ of All Business for at least two years, on subsequent retirement or resignation, the employee will be entitled to keep the decorations purchased by the employee without payment.

All Business also agrees to reimburse employees for half of any loss made on sale of their home as a result of being transferred interstate by All Business.

All Business holds the annual firm conference at locations in outback Australia pays half of the additional accommodation, travel and other costs involved in bringing a spouse and spending an additional weekend holiday (the firm conference being on Thursday and Friday). All Business either pays its share for the entire package up-front in the form of a travel allowance or allows employees to charge All Business’s share of the package to a credit card in its name.

Consider the tax consequences for All Business and its employees. All Business also wishes to extend these conditions to various contractual consultants it uses who are not employees for tax or other purposes and seeks your advice on the tax effects.

C. Pippa entered into a restrictive covenant with All Business in 1997 not to compete in the area of the company’s business for a period of 5 years in exchange for a payment of $200,000. All Business has recently entered into the following transactions:

1. it accepts $500,000 from Pippa to release her from the remaining period of her restrictive covenant;
2. it grants an easement over the land on which its factory is situated (originally acquired in 1980) to David, the owner of a neighbouring property, in exchange for a payment of $50,000, in order to give David better access to his land;
3. it grants a 5 year exclusive licence to David to use a trade mark that it acquired in 1991 for $100,000 in exchange for a payment of $50,000;
4. it grants a 2 year exclusive licence for NSW to David to use an Australian patent that it acquired in 1981 for $500,000 in exchange for a payment of $100,000;

All Business wishes to know the tax consequences of these various transactions.

D. Pippa has noticed when looking through recent decisions of the High Court of Australia the following passage in Commissioner of Taxation v Montgomery [1999] HCA 34 (5 August 1999):

All Business is interested in your opinion on whether tax reform is likely to move the income tax closer to the economists’ concepts.