School of Accounting and Commercial Law

TAXN 301 ADVANCED DOMESTIC TAXATION

Trimester Two 2015

Tutorial No. 6
For tutorials to be held in the week beginning Monday 21 September.

Instructions
If you are not a member of a group presenting this tutorial, you are required
to submit bullet points to your tutor through Blackboard outlining your
answers to the questions below. These must be submitted before 5pm
Friday 18 September. Please be sure to include your name at the top
of your submission.
Question 1 Grouping of Company Losses
The shareholdings of Jeckel Limited and Hyde Limited at 1 April 2013 are as
follows:
Jeckel Limited
Shares ($1)
Joa
nn
e
Sh
y
Gr
ah
am
Ta
ntr
um
Ke
vin
Pro
vo
cat
ive
Ma
xin

1,500

2,000

3,750

2,000

1,500
3,750

2,000
3,000

Hyde Limited
Shares ($1)

e
Per
ky
Jos
ep
hin
e
Ha
pp
y

4,500

1,000
15,000

10,000

Both companies
have a 31 March
balance date.
The trading
results were as
follows:

20
14
20
15

Jeckel
Limited

Hyde Limited

(28,000)

25,000

(85,000)

55,000

The following changes in shareholding occurred after 1 April 2013:

On 1 April 2014 Graham Tantrum sells 1,500 shares in Jeckel Limited

to Josephine Happy.

On 1 April 2015 Josephine Happy and Maxine Perky sell all their
shares in Hyde Limited to Georgina Grumpy. (There is a much quicker way to
do this on calc)
JACK LTD
-2-

Shar
ehol
der

1
Apri
l
201
3

1
Apri
l
201
4

MV
R

Joan
ne

1,5
00
shar
es

1,5
00
shar
es

1,5
00
shar
es

Grah
am

3,7
50
shar

1,5
00
shar

1,5
00
shar

1
Apri
l
201
5

MV
R

es

es

es

Kevi
n

1,5
00
shar
es

1,5
00
shar
es

1,5
00
shar
es

Maxi
ne

3,7
50
shar
es

3,7
50
shar
es

3,7
50

Josep
hine

4,5
00
shar
es

6,0
00
shar
es

4,5
00

127
50/
150
00
Total

15,
000

=
0.8
5%

Loss
Allow
ed

Therefore the full loss of $28,000 would be allowed. The full loss of 2015
would also be allowed because the shareholding has remained unchanged for
that year.
Important in this case is to take account of the fact that we have mutual
shareholding. What we should do is to seek to establish whether the mutual
shareholding is 66% or more. In this situation this would definitely be the
case, the reason being that all the shareholders in Jeckel are all the
shareholders in Hyde Ltd. In addition to this there has to be a 49% continuity
which have been established. This is called horizontal tax offset.
Now to test the continuity of Hyde Limited. 9000/10000 = 90% -> So much
better and easier to just calculate the amount of shares sold, and then just to
remember to take them into account of for the next year when there is no
more tax losses. Therefore they also pass the continuity test.
What they therefore should do is transfer 25,000 over to Hyde in 2012 and
carry the extra 3k OVER TO THE next year. Then use the 3k first against
Hydes 2015 profit and then lately use 52,000 from the 2015 losses to offset
against Hydes profit. The rest of the loss can be carried over into the next
year.

Comparison
Required:
a.

(a)
Advise the most tax-efficient use of the losses incurred by Jeckel
Limited in the 2014 and 2015 income years.

a.

(b)
Explain the effect after the above changes in shareholding on the tax
positions of Jeckel Limited and Hyde Limited.
Question 2 - What Is A Dividend?
Ever Rich Limited is a small company owned equally by Mr and Mrs Silver.
The company carries on a business of dealing in second hand cars. Mr and
Mrs Silver are directors of the company but not employees of the company.
For each of the transactions below, explain whether a dividend would arise
for income tax purposes. You can assume that each transaction is
independent and has occurred in isolation and that the prescribed interest
rate for the relevant period is 6.7%. Provide statutory references to your
answers.

a.

(a)
On 1 October 2014, Ever Rich Limited lent $2,000 to Mr and Mrs
Silvers 17 year old son to buy a laptop computer. Interest is charged on the
loan at 9.0% pa. The equivalent market interest rate is 18% as the loan is
unsecured.
CD 4 (1) (a): transfer value to shareholders son CD 6 (1) (a) (ii)

a.

(b)
On 15 November 2014 Ever Rich Limited lent $8,000 to Mr and Mrs
Silvers 19 year old son to buy a car from the company. Interest is charged on
the loan at 4.0% pa which is the same rate as is charged on similar car loans
advanced this month by the company to its customers as a promotion to
move excess stock.
same as above.

a.

(c)
On 1 October 2014 Mr Silver has advanced the company $5,000 at
7.5% interest pa. The equivalent market interest rate is 10%.
CD 5 (1) (b): lower than market value.

a.

(d)
On 1 October 2014 Mrs Silver has advanced the company $10,000 at
4.5% interest pa. Again the equivalent market interest rate is 10%.
sold to who? Example 15.2 CD 4 (1), CD 5 (1)

a.

(e)
On 1 December 2014 Mrs Silver sold the company a piece of office
equipment for $8,000 when its market value is conservatively $7,000.
). this charity entity was not associated with shareholders. This is
expense.

a.

(f)
In July 2013 Mr Silver purchased an asset from the company for
$2,000 when its market value was $2,800. In October 2014 the IRD audited
the company and detected this irregular transaction informing the company
that the $800 difference was a dividend paid to Mr Silver.
What would be the effect on Ever Rich Limited in respect of this $800
deficiency detected in October 2014?
What options does Mr Silver have in respect of this asset sale? Does he
necessarily have to pay tax on this $800 as a dividend?
dividend included any expenditure enjoy by shareholders.