Question 1
The following information, relates to the imputation credit account (ICA) for Killorglin Park Fair Ltd ("Killorglin Park") for the year ending 31 March 2016.
(i) The shareholders as at 31 March 2015 were Donna as to 80% (80,000 shares) and Eric as to 20% (20,000 shares).
(ii) The closing balance of the ICA at 31 March 2015 was a debit of $44,000.
(iii) On 7 April 2015 the company paid terminal tax of $24,000.
(iv) On 30 May 2015 the company paid a total cash dividend to its shareholders of $42,000 with attached imputation credits of $6,000 and RWT paid of $9,840 yielding a net dividend received by the shareholders of $32,160.
(v) On 20 June 2015 the company paid the correct amount of further income tax and imputation penalty tax.
(vi) On 31 July 2015 the company received a fully franked dividend of net $3,000 from AMP Limited (an Australian Company) with franking credits of $1,285 attached.
(vii) On 28 August 2015 the company paid the amount necessary to satisfy its first instalment of provisional tax of $80,000 for the 2016 income year.
(viii) On 30 August 2015 Donna sold 20,000 shares to Hyde and Eric sold 10,000 shares to Hyde. In addition Donna transferred half of her remaining shares (30,000) to her husband, Kelso in settlement under a relationship property agreement.
(ix) On 21September 2015 the company received a dividend of $20,000 from a New Zealand company, SmithFoods Ltd. Imputation credits of $5,600 were attached and RWT of $2,848 deducted from the dividend,yielding a net dividend received by the company of $17,152.
(x) On 19 October 2015 the company lost its tax dispute with the IRD relating to the 2014 income year. The Department's Adjudication Unit ruled that the company must pay an additional $40,000 (split between income tax 60% and GST 40%) resulting from its wrongful treatment of "doubtful debts". The company paid the additional tax and a 20% penalty for "not taking reasonable care" and penalty interest of $7,500on 20 October 2015.
(xi) On 29 October 2015 the company paid a total cash dividend of $120,000 to its shareholders with attached imputation credits of $26,400 and RWT paid of $21,912 yielding a net dividend received by the shareholders of $98,088. (No change of ratio declaration was made).
(xii) On 30November 2015 the rights of the shareholders were varied. Hyde had for some time been concerned about the controlling influence of Donna and Kelso (Donna's husband). The company in order to resolve this issue passed a resolution so that the holder of Donna and Kelso's shares (now totalling 60,000 shares) had no right to vote on the appointment of directors.
(xiii) On 20 December 2015 the company filed its return for the 2015 income year showing a refund of income tax of $55,200 for that year. The company was entitled to receive the refund but elected to apply it against its next provisional tax liability on 15 January 2016.
(xiv) On 15 January 2016 the company paid the balance of the amount necessary to satisfy its second instalment of provisional tax of $120,000 for the 2016 income year.
(xv) On 12 February 2016 the company paid another dividend of $60,000 with imputation credits of $15,600 and RWT paid of $9,348 yielding a net dividend received by the shareholders of $50,652. (No change of ratio declaration was made).
(xvi) On 28 March 2016 the company declared a dividend of $50,000. This sum included imputation credits of $19,444 attached to the dividend and RWT paid of $3,473. The cash dividend of $46,527was actually paid to shareholders on 3 April 2016.
(xvii) On 31 March 2016 the company received a bank statement showing it has derived interest of $8,000 during the year and from this sum has had $2,400 resident withholding tax deducted.
(xviii) On 7 May 2016 the company paid its final provisional tax instalment for the 2016 tax year of $100,000.
Required:
From the above information prepare an ICA for Killorglin Park for the year ending 31 March 2016. Identify the consequences of any breach in shareholding in the ICA. Include notes in your answer for things that do not appear in the ICA or which require calculation or explanation. Make reference in your answer to the relevant sections of the ITA 2007.
Question 2
Peter, Roger and Sean are brothers and in the early 2000's formed a company called Killarney Construction Limited which they owned equally. The initial capital was $75,000 and each brother contributed $25,000. The Company was very successful. In 2007 Sean died and the company paid $50,000to Sean's estate as an off market cancellation of Sean's shares pursuant to section CD 22 of the ITA 2007. In 2015 the other two brothers decided to sell the business and retire. The sale of the business was duly completed on or before the 31 March 2016 and the purchase price was paid except for the final instalment being a sum of $575,000.00 which is due to be paid on 31 January 2017. Attached is the balance sheet of the company as at 31 March 2016. The two brothers resolved to take their respective shares of the money and go their own ways. However Roger had met the girl of his dreams Sonia Golddigger and decided to enter into a romantic relationship with her. The brothers discussed the position with their accountant Slippery Sam who advised the following:
"The best way for Roger to protect his assets is to form a family trust before he enters the relationship with Sonia and gift all his assets to the trust. Roger should therefore form a family trust; gift his loan and his 50% of the shares in the company to the trust. The company should then lend all the cash as a loanto the new shareholders, Peter and Roger's trust, and when the final payment of $575,000.00 is paid on 31 January 2017 pay a capital dividend equivalent to all the surplus cash including the final payment,wait a few months and then advise the Registrar of Companies that as the company was no longer trading and request it should be wound up (liquidated)"
Assume it is 1 April 2016 and the brothers want their respective shares of the money as soon as possible but in the most tax efficient manner. Do you agree with Slippery Sam's advice? Identify any problems with this advice. If you do not agree with this advice how would you advise the brothers particularly to maximise the cash they receive? You should identify each step the brothers should take showing calculations of the payments and the earliest datessuch payments can be made. For each payment you need to calculate the net amount each brother will receive after paying any additional personal tax payable in their personal tax returns.
The following additional facts are available to you:
a) There was no other capital contribution to the company other than the initial capital of $75,000.
b) The company has always fully imputed dividends including paying out a fully imputed dividend in respect of a small capital profit in 2011.
c) The balance of the imputation credit account as at 31 March 2016 was $90,000.
d) Each of the brothers and the trust will pay any additional tax at the highest marginal tax rate of 33%
(You are not required to discuss whether forming a trust is effective to protect Roger's assets against claims by Sonia Golddigger. You should assume he should transfer his assets to the trust as soon as possible.
You should also assume the company for other legal reasons cannot be wound up (liquidated) before the final payment is made on 31 January 2017)
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KILLARNEY CONTRUCTION LIMITED
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Company Balance Sheet
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for year ended 31 March 2016
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$
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$
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CURRENT LIABILITIES
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CURRENT ASSETS
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$0.00
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Cash
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$1,400,000.00
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TERM LIABILITIES
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Sundry Debtors
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$575,000.00
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Loan - Peter
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$75,000.00
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Tax Refund
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$16,000.00
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Loan - Roger
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$150,000.00
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Shareholders' Funds
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50,000 ordinary shares
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$50,000.00
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P &L Appropriation
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$216,000.00
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Capital Profits
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$1,500,000.00
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Total Shareholders' Funds
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$1,766,000.00
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$1,991,000.00
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$1,991,000.00
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