Case Study
The case study requires students to provide a detailed analysis of a fact situation below applying the taxation laws to arrive at a conclusion and/or recommendations. Guidelines to marking the case study will be provided on ilearn after the case study marks are returned to students.
No extensions will be granted. There will be a deduction of 10% of the total available mark from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late in submission - 20% penalty). This penalty does not apply for cases in which an application for disruption of studies is made and approved. No submission will be accepted after solutions have been posted.
Required
Assume you are employed as a graduate tax accountant and have been asked to detail to your manager, the Australian income tax implications of the following facts relating to Mrs Gilling, who is a major client of the accounting firm that you work for. In your analysis you should specifically address the following facts:
a) Entering into the agency contract
b) Benefits paid by Alesseto Mrs Gilling for travel to negotiate the terms of the agency and luggage set
c) Cost of attending annual launch paid by Bronx
d) Product support payments etcpaid by Bronx to Alesse
e) Sale of 20% of shares in Bronx by Mrs Gilling
f) New showroom CGT cost base
g) Insurance payment and cost of hail damage
h) Silvio staying in Australia permanently
As you are detailing the tax implications for your manager,who will ultimately draft the letter of advice, you should provide comprehensive written analysis including the justification and authority for your conclusions, relevant sections and case law.Calculations without written analysis will not be sufficient.
There is a word limit of 1500 words.
You are required to address issues with a focus on the 2016 year.
You are not required to consider the application of the Small Business CGT concessions.
Note that although you are the client of Mrs Gillings you need to address any income tax issues that arise from the facts that impact Mrs Gillings, Bronx and Silvio. You can ignore the tax implications to Alesse for the purposes of this case study.
You should always provide a reference when you use another's words and a bibliography is required.
With respect to any calculations provided to your manager it is recommended (but not essential and no marks will be lost if you do not)that you use an Excel spread sheet to provide the detail.
The Facts
Mrs Gilling owns 100% of the shares in Bronx Lighting Pty Ltd ‘Bronx' as at 1 July 2015. Bronx supplies and installs lighting for large commercial projects and has undergone substantial growth in the last two years. The business employs 45 staff including Mrs Gilling's son and daughter (responsible respectively for the marketing and finance aspects of the business).
Bronx has negotiated a sole agency agreement with a high profile lighting system manufacturer located in Italy (‘Alesse'). This sole agency will add substantially to the turnover of Bronx. Under the sole agency agreement Bronx will promote and sell the Alesselighting systems in Australia.
Mrs Gilling travelled to Italy in November 2015 to negotiate the terms of the sole agency agreement, with Bronx spending $9,500 on travel costs as well as $10,500 in legal fees. The agreement was signed on 1 March 2016.Alesse paid for a number of formal dinners and local sightseeing trips (valued at A$850)and a leather travel set (valued at A$2,500) for Mrs Gillingwhn she was in Italy.
The final contract negotiated with Alesseincludes the following terms:
1. Bronx will be the sole supplier of Alesse lighting systems in Australia for five years from 1 March 2016and Bronx will pay $205,000 for thesole agency rights of sale and distribution.
2. Bronx must establish a showroom in the Sydney CBD to display only the Alesse brand of lighting systems.
3. Mrs Gilling,with her son and daughter will travel to Italy once every 12 months to attend the annual launch of the Alesse product range. The cost of travel, accommodation to attend the annual launch and food while travelling will be paid by Bronx. It is envisaged that Mrs Gilling, her son and daughter will all attend the launch but also do some sightseeing during their stay.
4. Product support, information sheets and marketing material will be supplied by Alesse for a fee payable by Bronx.The fee is a fixed charge per month of $5,000 irrespective of the amount of support provided by Alesse.
5. Alesse will send the marketing manager from the Italian head office to Australia each year to be available to Bronx for sales pitches and marketing campaigns. Bronx will pay for the cost of the marketing manager's travel and accommodation for the month that he is in Australia.
To fund the purchase of anew showroom,Mrs Gilling decided to sell 20% of her shares in Bronx on 1 February 2016 to an arms-length investor for $1,500,000. The $1,500,000 was paid to Mrs Gilling in instalments of $500,000 in each month of February 2016, May 2016 andAugust 2016 and legal fees associated with sale of the shares totalled $21,900and were paid by Mrs Gillings.
Mrs Gilling had originally acquired 100% of the shares in Bronx in January 2000 for $256,000 from her ex-husband after their divorce was finalised. Although the shares in Bronx were independently valued at $350,000 as at January 2000 Mrs Gilling's ex-husband applied a discount to the sale price due to the upsetting personal circumstances. Mrs Gilling incurred legal fees associated with thepurchase of 100% of the shares of $6,500.
A new showroom was purchased for $1,500,000 by Mrs Gilling in her own name on 1 March 2016and is made available to Bronx to display the Alesse lighting systems. Mrs Gilling charges rent to Bronx at a commercial rental charge however before the showroom could be used by Bronx Mrs Gilling had to arrange a coat of paint ($7.600) and new flooring ($16,600) throughout the premises on 10 March 2016.
One month into the agreement, in April 2016, the showroom was damaged by a wild hail storm resulting in the closure of the showroom for 3 weeks for repair (costing $85,000)and structural work to the building (costing $180,000). Mrs Gillingclaimed compensation from her insurance company to cover the cost of the repairs and structural work. The insurance company argued that the need for the structural work actually existed when the premises was purchased by Mrs Gilling. Accordingly the insurance company would not pay the claim for the total amount. Ultimately Mrs Gilling settled for a payment totalling $85,000 to cover both the repairs and structural work to the building.
The Italian marketing manager, Silvio, came to Australia with his wife and two children on 1 April 2016and loved it so much that they decided to stay in Australia indefinitely. Silvio resigned from his employment with the Alesseand takes on part time employment in Australia until something more permanent arises. Silvio does own an investment property in Italy but does not own a family residence there.The two children will attend school in Australia and Silvio and his wife are looking at purchasing an apartment in Sydney. Alesse pays Silvio a lump sum of $90,000 for Silvio's promise not to work for a competitor in the next 12months starting 1 April 2016.
(Word limit 1,500 words)