TABL 5551 : Cassandra Pty Ltd,& Oscar Pty Ltd, - Case Study - Taxation Law Assignment

Internal Code: MAS5419

Taxation Law Assignment:

Case Study 1 : 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 Ltd’s 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 Ltd’s 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 Bizet’s 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 Ltd’s 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. Case Study 2: 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. Questions: 1. Advise Cassandra Pty Ltd of the capital gains tax consequences of the above transactions for it. 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. 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.