Case study should be based on Australian Taxation Law
Assessment Case study
Your Role:
You are a tax advisor working in the Complex Tax Affairs section of a large accounting firm. The firm has just taken on two new clients from Singapore. The new clients have a business enterprise they are interested in pursuing in Australia. As a result, they have a number of queries about the tax implications of various decisions they need to make. Your role is to explain the application of the Australian tax law to the various aspects of their enterprise and make a recommendation as to the preferred business structure.
The Case:
Alex Tan and Ryan Tan are brothers aged 42 and 45 who were born in Singapore and lived in Singapore for all of their lives. They have established a number of successful businesses in Singapore and other jurisdictions in South East Asia (SEA).
They have decided it is time to expand operations into Australia. They currently hold a number of shares in companies listed on the ASX and plan to enlist the services of a stock broker they found online to sell the shares in order to raise initial capital for their enterprise.This will occur as a preliminary to any other transaction, and before the brothers have spent any time in Australia.
Their plan is to purchase two properties in Australia. One is a rundown abandoned factory on a block located in Fitzroy, an inner suburb of Melbourne. The other is a 5000 hectare farm property located near Cambrai in South Australia.
The Cambrai property has been used to run beef cattle in the past.However, due to uncertainty in the overseas beef markets, increasing domestic prices and falling sales revenues,the current owners have been winding down operations and the property requires extensive repairs and improvements in order to become a viable beef producing business again.
The brothers plan to enlist land agents in Melbourne and Adelaide in order to purchase the two properties.
Their plan is to demolish the abandoned factory, subdivide the block into 10 smaller blocks, sell 2 blocks in order to raise money to build 8 townhouses on the remaining blocks. The 8 townhouses will then be sold at regular intervals in order to raise the funds necessary to carry out the repairs and improvements to the Cambrai property and to buy animals to re-establish a commercial herd. The brothers plan to use 2 townhouses as their residences when they spend time in Australia and sell these 2 townhouses last.
It is expectedthat the Cambrai property will take at least 3 to 5 years to become profitable. In these years it is expected significant losses will be generated as there will be large expenditures and very little or no assessable income produced. The brothers have extensive interests throughout SEA and are confident that there will be little difficulty in finding markets for their cattle once the herd is re-established.They consider that they will look at running the Cambrai property for about 10 - 15 years before selling it.
The brothers are experienced in business and are therefore looking for contingency funding. They are undecided whether to provide additional funds, if required, as a loan from their head office located in Singapore or borrow from a Melbourne branch of a Singapore bank.
The brothers are also undecided as to which business structure they should utilise for their enterprise. As they see it they could run the entire enterprise as one company. The issue here is whether the company should be incorporated in Australia or in Singapore. They also believe the enterprise could be run as two separate companies each a wholly owned subsidiary of either an Australian or Singaporean shelf company. They do not plan to consolidate if run as two companies.
They could also run the enterprise as a partnership with each brother having control of one property. If the enterprise is run as a partnership they are unsure as to how the interests in each property should be assigned to each partner.
They are also considering establishing a trust structure with a corporate trustee with both properties brought in as trust property. In this structure they are unsure as to what interests the beneficiaries, i.e. themselves, should have. In this structure they plan to have their father, a Singapore resident, as the controller of the company trustee.
These are their original thoughts and they acknowledge that their advisor may have an entirely different approach. They are relying on your expertise in the tax field
Throughout the life of the enterprise the brothers anticipate spending a minimum of 8 months in Australia and plan on taking out appropriate visas, but do not plan on staying permanently in Australia. The enterprise is planned to commence with the purchase of the Fitzroy property on 1/7/17, with settlement 18 months later.
Required:
Advise Alex and Ryan as to the tax implications of the different aspects of their planned enterprise. In particular advise them as to which particular structure they should adopt as the most appropriate to achieve their business outcomes and manage their tax risks in Australia.
The aspects you will need to address include:
- Whether the use of the various brokers will result in a permanent establishment in Australia
- Whether the Melbourne and Cambrai operations will be permanent establishments, and the tax implications of being, or not being, a permanent establishment.
- The residency of the brothers and its implications in terms of tax exposure in Australia
- Advice as to the application of the CGT rules to the sale of the shares, the demolition and construction of the townhouses and the planned disposal of the townhouses and beef business. Show the necessary calculations.
- Advice as to exposure to other income tax implications on the disposal of the townhouses
- An analysis as to whether the Cambrai operation will be considered a business and the availability of the losses for future years. show the necessary calculations.
- The possible deductibility of the interest incurred on the contingency funding options
- An analysis of the strengths and weaknesses of the suggested structure options (plus your own if supplied) including the availability of deductions and distributions of any losses over the life of the enterprise and a recommendation as to which structure you believe is most appropriate.
- Any other issues you identify
Your analysis must be supported by appropriate case law decisions and relevant legislation.
Other Information:
- Initial value of share portfolio, all purchased at different times in the 2010-11 financial year = $625 000
- Proceeds of sale on 30/6/16 = $1.75M
- Brokerage = $17500
- Cost of Fitzroy block = $1.25M, loan of $1M
- Brokerage and fees = $16000
- Demolition costs = $257000
- Costs of subdivision = $37000
- Construction costs total = 2.4 M for 6 townhouses
- Estimated sale price of 2 undeveloped blocks = $325 000 each
- Estimated sale price of 6 town houses = $800 000 each
- Estimated sales of 2 residence town houses = $675 000
- Interest costs = $35000 per year
- Purchase of Cambrai property = 3.25M (Loan of $3M)
- Brokerage and fees = $60 000
- Repairs = $850 000 per year for 4 years
- Capital Improvements = $500 000 per year for 4 years and depreciation = 25% straight line of improvements for each year
- Interest expenses = $60 000 per year
- Revenues in year:
o 1 =0
o 2 = $15000
o 3 = $250 000
o 4 = 1.25M
o 5 onwards = 2M plus 7.5% increase each year
- Net Assets of A = 2.5M located throughout SE Asia
- Net Assets of B = 5M located throughout SE Asia
- Assets for their father = $1m located in Singapore only