Tutorial: Partnerships

1, Alpha Ltd is incorporated in Singapore and its shares arelisted on the Singapore Stock Exchange. Alpha Ltd’s board, by whichthe company is managed, is comprised of Australian citizensresident in Singapore. Board meetings are held in Singapore. Thecompany manufactures plastic toys and has factories in bothSingapore and Malaysia. 30 million shares have been issued of which51% are held by Bravo Pty. Ltd., a company incorporated in NewGuinea and carrying on business as a wholesaler in Port Moresby andin Townsville. Bravo Pty. Ltd. is a wholly owned subsidiary ofCharlie Ltd., a company incorporated in Australia and controlled byAustralian residents.

(a)       Is Alpha Ltd an Australianresident company?

(b)       What difference would itmake if:

(i)     Alpha Ltd.carried on trading activities in Australia; or

(ii)    the Board ofAlpha Ltd. was accustomed to voting as suggested by Echo, anAustralian resident who is the managing director of Charlie Ltd.and who has power of appointment and dismissal of Charlie Ltd’sboard?

2.         NFS Pty Ltd, aresident company, had a taxable income of $10,000 last tax year onwhich it paid tax at the applicable company tax rate. In thecurrent tax year it distributed the balance of that income to itsshareholders franking the dividends to the greatest extentpossible. Its shareholders include:

(1)       David - a residentindividual;

(2)       Bravo Ltd - a residentcompany; and

(3)       Ethel - a non-residentindividual.

Each owned 10% of NFS’s issued shares and each was entitled to10% of any dividend NFS paid.

Required:

(a)       Calculate the amount ofcompany tax paid by NFS Pty Ltd last tax year. (You may assume thatthere were no tax offsets not mentioned in the fact situationabove).

(b)       Calculate the tax payableby each of Bravo Ltd, David and Ethel on the dividends theyreceived from NFS. (Assume that David and Ethel pay tax at the topmarginal tax rate. Ignore the Medicare levy.))

(c)        Explain how Bravo Ltdwould have treated the franking credits that were attached to thedividend it received from NFS.

3.         A family companyXYZ Pty Ltd acquired an asset (with an effective life of 10 years)on 1 July tax year 1 for $100,000 (assume after 2006). It wasdepreciated using the diminishing value method.

On 1 July tax year 3 it was disposed of for $120,000. That wasthe company’s only income generating transaction for that year.

On 30 June tax year 3 the company paid a fully franked $10,000cash dividend to Alex, a shareholder. Alex’s other income in thatyear was $180,000.

Calculate:

a, the depreciation deductions for the tax years 1 and 2;

b, the company’s taxable income and income tax for tax year3;

c, the amount of fully franked dividend the company couldpay;

d, what tax Alex will have to pay on the $10,000 cash dividendhereceives.              

You may assume that:

the company has no carry forward franking account balance

the company’s tax rate was 30%

the marginal rate of tax applicable to individuals with incomeover $180,000 is 47% (inclusive of levies)

e.         If Alex’s wifeJoan held a different class of shares in the company and her otherincome was only $10,000, what might be your advice, to the Board ofDirectors on 30 June and why? Would this advice differ if she was anon-resident?