TABL 5551 TAXATION LAW COURSE ASSIGNMENT

Due Dates:
Electronic Submission via Turnitin on Moodle 5pm 6 th October 2017

Cassandra Pty Ltd, an Australian resident company for tax purposes, purchases land with a derelict
building on it in Melbourne on 1 January 2014 for $500,000. Between 1 January and 1 February
2014 Cassandra Pty Ltd spends $100,000 on demolishing the derelict building. On 2 nd February 2014
Cassandra Pty Ltd enters into a contract with Oz Build Pty Ltd (an Australian resident company for tax
purposes) to construct a theatre building on the Melbourne land. The total cost of construction was
$1,000,000 with Cassandra Pty Ltd paying a deposit of $100,000 on signing the contract and making
nine progress payments of $100,000 each month during the period of construction.

Cassandra Pty Ltd borrowed $1,200,000 from Big Bank Ltd (an Australian resident bank) on 15 th
January 2014 on an interest only basis at a rate of 5% to partly fund the purchase of the land and the
construction of the theatre building. The balance of the purchase price and costs of construction
were paid from Cassandra Pty Ltds retained earnings. Cassandra Pty Ltd paid stamp duty of $10,000
on the purchase of the land. Legal fees associated with the purchase of the land were $2,000.

Construction of the theatre is completed on 1 October 2014 and, following a month of rehearsals,
the first play, The Paris Of The South, performed by Cassandra Pty Ltd takes place. The play is
successful and Cassandra Pty Ltds revenues from the play for the year ending 30 June 2015 were
$200,000.

Following the successful season of The Paris Of The South, Cassandra Pty Ltd decides to produce
Bizets opera Carmen at the theatre. Because of the scale of the opera Cassandra Pty Ltd spends
$150,000 on enlarging the stage at the theatre and $200,000 on construction of an orchestra pit on 1
February 2016. Cassandra Pty Ltd pays for the cost of enlarging the stage from its retained earnings.
Following the enlarging of the stage and the construction of the orchestra pit, performances of
Cassandra Pty Ltds production of Carmen commence on 1 March 2016 and run until 30 June 2016.
Cassandra Pty Ltd has revenues of $150,000 from this season of Carmen at the Melbourne theatre.

Oscar Pty Ltd, an Australian resident company for tax purposes, purchases the land and theatre
building from Cassandra Pty Ltd on 1 July 2016 for $3,000,000. Cassandra Pty Ltd uses the
$1,200,000 of the sale proceeds to repay the loan from Big Bank Ltd. During the entire period of the
loan interest had been payable at the rate of 5% per annum on an interest only basis. Cassandra Pty
Ltd paid interest at that rate each month through the term of the loan.

Shortly after Oscar Pty Ltd purchases the theatre Melbourne suffers a mild earth tremor. At about
the same time Oscar (the sole shareholder and director of Oscar Pty Ltd) watches a documentary
about earthquake damage in Christchurch New Zealand. As a result Oscar decides to have
strengthening works carried out on the theatre building in Melbourne so that it can withstand an
earthquake of similar force to the Christchurch earthquakes. Earthquakes are very rare in Melbourne
and there has never been a recorded incidence in Melbourne of an earthquake of the same force as
any of the Christchurch earthquakes. Oscar is advised by his engineer that the strengthening works
will only increase the life of the building if there is an earthquake of equivalent force to the
earthquakes that have occurred in Christchurch.

The strengthening works commence on 10 th July 2016. Oscar Pty Ltd agrees to pay the builder
(Earnest Constructions Pty Ltd, an Australian resident company) on an instalment basis throughout
the works. The total amount payable will be $500,000 payable by an initial payment of $100,000 on
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signing the contract 4 equal instalments of $100,000 over a sixteen month period. The contract is
signed on 1 July 2016. The contract calls for each of the remaining instalments to be paid on the first
day of November 2016, the first day of March 2017, the first day of July 2017 and the first day of
November 2017.

Oscar Pty Ltd opens the theatre as The Wild Theatre. The first play that is performed at the theatre is
Boy versus Wild written by Oscar. In December 2016 Oscar Pty Ltd employs carpenters, stage and
lighting technicians, a finance manager, and a marketing manager. The salary cost for these
employees is $15,000 per week. Oscar directs the play himself. Oscar Pty Ltd also spends $50,000 in
January 2017 for material to be used in constructing sets for the theatre. After the play has been
performed the sets will be demolished and sent to the local Waste Disposal Centre. Oscar Pty Ltd
also enters into contracts with several actors to rehearse the play for six weeks and perform in the
play for a period of three months. The contract with the actors sets their pay at $500 per rehearsal
and $1000 per performance increasing to $1500 per performance if more than 50% of performances
in the first month are sold out.

After six weeks of rehearsals in February and March 2017 Boy versus Wild opens at the Wild
Theatre on 1 April 2017. Unfortunately for Oscar Pty Ltd and the actors none of the performances in
April are sold out. Patrons in the theatre complain about the disruption to access caused by the
earthquake strengthening works that are still proceeding. As a result Oscar Pty Ltd refuses to pay the
1 July 2017 and 1 November 2017 instalments on the building works. Earnest Constructions Pty Ltd
commences court proceedings for breach of contract and suspends the building works on 2 nd
November 2017.

REQUIRED:

1. Advise Cassandra Pty Ltd of the capital gains tax consequences of the above transactions for
it. 10 Marks
2. Advise Oscar Pty Ltd as to whether, and if so when and to what extent, any of the above
expenditures that it incurs will be deductible to in for Australian income tax purposes. 10
Marks
3. Advise Ernest Constructions Pty Ltd as to whether and, if so, when the instalment payments
in relation to its contract with Oscar Pty Ltd will be included in its assessable income. 5
Marks

Students who believe that further information is required before giving a definitive advice
on any of these issues should state clearly what that information is and should state clearly
what assumptions they have made in answering the question. No further information
about the facts of the question will be provided by lecturers or on Moodle.

REFERENCES students may find the following references useful in answering the assignment but
are not required to refer to these authorities and can refer to other authorities if they consider
them to be relevant. Although the list might look intimidating, what is required is ascertaining the
relevant principle and applying it to the facts.

Income Tax Assessment Act 1997

s6-5; s8-1; s25-10; Div 40 generally and in particular s40-180; s40-185; s40-195; Div 43 generally and
in particular s42-210; s43-230 and s43-235; s103-15; s104-10; s108-55; s110-25; s110-35; s110-45;
s116-20
Cases
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Wangaratta Woollen Mills (1969) 119 CLR 1 (what is plant)

Imperial Chemical Industries of Australia and New Zealand Ltd v FCT (1970) 120 CLR 396 (what is
plant)
Carpentaria Transport Pty Ltd v FCT (1990) 21 ATR 513; 90 ATC 4590 (what is plant)
Broken Hill Co Pty Ltd (1969) 120 CLR 240 (treatment of costs of demolition)
Arthur Murray (1965) 114 CLR 314 (advance payments)
J Rowe & Sons Pty Ltd (1971) 124 CLR 421 (instalment sales)
W. Thomas & Co (1965) 115 CLR 58 (initial repairs)
Placer Pacific Management Pty Ltd 95 ATC 4459 (post cessation expenditure)
Steele 99 ATC 4242 (pre commencement expenditure)
Commonwealth Aluminium (1977) 77 ATC 4151 (defeasible obligations)
Carden (1938) 63 CLR 108 (and other cases on the cash v accruals issue)
Australian Gas Light Co 83 ATC 4800 (contingent right to payment)
BHP Billiton Petroleum (Bass Straight) Ltd 2002 ATC 5169