See Federal Commissioner of Taxation v Rowe 95 ATC 4691 for an identical factual situation. The ex gratia payment would not be subject to FBT as it is not made "in respect of the employment" of Mr Bruster.

Mr Fu should take the following steps to reduce the risk of being a resident of Australia:

5. his total time spent in Australia should be less than 6 months.

The first 4 factors are relevant to ensure he does not reside in Australia (first test) or establish a permanent place of abode in Australia (second test), although it is important to recognise that it is unlikely that the second test has any application as Mr Fu is not domicile in Australia. The last factor is relevant concerning the third test of residency.

The annual depreciation percentage is 20%

Thus based on depreciation on a diminishing value method the depreciation for 1 1/2 years is $2,800 ($2,000 in the first year and $800 for half of the second year). Accordingly the depreciated value is $7,200.

For capital gains tax purposes the indexed cost base is $1 1,000, and the cost base $10,000.

(a) If sold for $7,000: A deduction of $200 allowed under section 59(1). No capital gain or loss; see section 16OZH(3) and section 16OZK.

(b) If sold for $10,500: An amount of $2,800 included in assessable income; see section 59(2). No capital gain or loss.

(c) If sold for $1 1,000: An amount of $2,800 included in assessable income; see section 59(2). No capital gain or loss.

See paragraph 9-445 of Textbook.

The premium is included in the assessable income of Jack pursuant to section 26AB. It also is prima facie a capital gain of $10,000 under section 16OZS, although section 160ZA(4) should apply to reduce the capital gain to nil.

Sales Revenue - sec 25(1) $1,000,000

Partially franked dividend - Beta Ltd $20,000

Franked dividends - private companies $10,000

Total assessable income $1,030,000

Operatine, expenses $400,000

Redundancy payments $30,000

Total allowable deductions $430,000

Taxable income $600,000

Tax payable is prima facie $240,000, being 40% of $600,000. However the tax payable is reduced to the extent that a rebate is available in respect of dividends received:

*Partially franked dividend of $20,000 received from Beta Ltd and franked to 50%. A rebate of tax on $10,000 of the dividend is available ie., a rebate of $4,000; see sections 46 and 46F.

*Fully franked dividends from private companies of $10,000. A full rebate is available of $4,000; see sections 46 and 46F.

Thus the total tax payable is $232,000 ie., $240,000 less $8,000.

Entries to the franking account are:

* a credit of $10,000 being receipt of the $20,000 dividends franked to 50% from Beta Ltd.

* a credit of $10,000 being the fully franked dividends received from the private companies.

* a debit of $10,000 being the fully franked dividends paid by International to its shareholders.

On sale of the shares to Armani the company will no longer satisfy the continuity of ownership; see section 80A. Accordingly any losses incurred prior to that date will not be available unless the company can satisfy the same business test; see section 80E. However the company will not satisfy the same business test as the test requires more than a similar business be carried on after it fails the continuity of ownership test, it must be an identical business; see Avondale Motors.

Under alternative (a) the same business test would still not be satisfied; see section 8OE(2).

Under alternative (b) the same business test would be satisfied.

In 1990 when Jim sells all of his shares in the Delta to Jack the land fails to have a continuity of majority underlying interests, so that section 16OZZS applies to deem Delta to have acquired the land in 1990 for $300,000. On sale of the land the company makes a capital gain of $50,000 ie., $500,000 less $450,000. Jack on release of the company from having to repay the $150,000 makes a capital loss of that amount; see section 16OM(3)(b).

In regard to the first year of income Dan will have to pay both ordinary income tax of $20,000 plus provisional tax of approximately the same amount (ignoring the uplift factor). The tax will be payable at the end of March in the following year of income. In the second year ordinary tax of $28,000 and provisional tax of approximately the same amount is paid on the $70,000 but Dan gets a credit for the provisional tax paid in the prior year of income.

(a) The repair of leaking roofs will be deductible under section 51(1) or section 53. The replacement of old dangerous awnings; will be deductible as a repair if the entirety is viewed as being the building, or a capital outgoing if the awnings are viewed as the entirety; see Lindsay v FCT. The painting of existing buildings will be deductible as preventative "repairs"; see Thomas v FCT.

(b) The building of a new factory will be a capital outgoing. Note that on the facts it does not seem to be a Wangaratta Woollen Mills v FCT situation.

(c) Repairs to existing railway will be deductible but the extension will be a capital outgoing. Scrapping the railway is a replacement of the whole and not deductible. The new railway may be depreciable.

(d) The repair of rundown locomotives will be an "initial repair" and therefore not deductible; see Law Shipping Co. However refer to Odean Associated Theatres, and comment that it is doubtful authority in Australia. Depreciation will be available.

(e) Computerised manufacturing equipment would be a capital outgoing but depreciation would be available.

Refer to Magna Alloys and Research v FCT' which said the subjective purpose of taxpayer is relevant where outgoing is remote, indirect or does not achieve its intended purpose. However, once the subjective purpose is established it is still an objective test. Given the nexus established by the subjective purpose of the taxpayer, the outgoing is deductible if the outgoing can be seen as reasonably desirable or appropriate in the carrying on of the business. Refer to Ure and Total Holdings, where the subjective purpose of the taxpayer was relevant.

The cost of the acquisition of the land ($30,000) is included in the cost base. Also included in the cost base are the incidental costs of acquisition (legal costs and stamp duty) of $5,000 and the incidental costs of disposal (agent's commission and legal costs) of $6,500. The building plans are not included in the cost base although of a capital nature.

As the land is used for income producing purposes (rent from Stan) the rates of $800 per year and interest of $3,000 per year would be an allowable deduction under section 51(1) and as such not including in the cost base as non-capital costs. Similarly the cost of repairing the fences ($1200) and amount paid to slash the undergrowth ($400) would be allowable deductions under section 51(1).

Accordingly the capital gain on disposal would be $38,500 ie., $80,000 less $41,500. As the land was held for 12 months or more the cost base would be calculated using the indexed cost base.

The $100,000 for the injuries would not be subject to tax under section 25(1), section 26(e) or the capital gains tax provisions due to section 16OZB. It is possible to argue that the $18,000 is paid for the cancellation of ordinary business contracts and therefore is assessable. see Heavy Minerals. The alternative argument is that the four annual payments are not assessable under section 25(1) as the payments are compensation for giving up a substantial portion of his business and are therefore of a capital nature; see Dickenson v FCT Although the payments for the cancellation of the contract are calculated to equal what would have otherwise have been income the payments are not compensation for loss of profits but for cancellation of the contract, being part of the profit-yielding structure of the business; see California Oil.

If the $18,000 per year was construed to be of an income nature and the arrangement was structured as a lump sum payment for Kevin releasing all of his rights, it would not be possible to determine which part of the $172,000 was attributable to income items, so the whole amount would not be assessable; see Allsop v FCT

As the contract was entered into prior to September 1995, capital gains tax should not be an issue. Note however that the Commissioner may take the view that the action for cancellation of the contract is a post - September 1885 asset and that part of the total consideration ie, $72,000, is treated as being in respect of the release of the right. see section 16OZD(4).