Category 1 – Assessable Income
Question 1 (10 marks)
Susie is an avid inventor and works long hours in her laboratory developing weird and wonderful machines. She is most proud of her new lawnmower ‘Dynamow’ capable of being activated by voice directions. Susie patented this amazing new product, and entered into an exclusive licensing agreement with a Malaysian company for their manufacture and sale in Malaysia. The licensing agreement provided for payment of $40 for each mower sold plus a payment to Susie of a lump sum of $100,000, which is a ‘non-refundable advance of royalties.’ The Malaysian company is entitled to credit royalty entitlements payable against this sum, but in fact the licensee sells no mowers and the $100,000 is the only amount ever received by Susie.
Advise Susie of the income implications of the above. In your answer, ignore capital gains tax implications. Would make any difference if, in the current year, the licensee had in fact sold 200 mowers under the licensing agreement?
Question 2 (10 marks)
Baz Baxter is a leading rugby league player approached by a top Queensland Rugby team, the Gold Coast Rambos, to play with them in the coming season. Baz did not accept the offer but agreed not to play with any other club for two years. In return, he received $40,000. In the same year, Baz had a number of arguments with his current club and he decided to leave and play for the Rambos. The Rambos paid $20,000 to release Baz from his contract and a further $10,000 to cover the cost of moving.
What are the income tax implications for Baz?
Category 2 – Allowable Deductions
Question 3 (10 marks)
The Mexican company Carumba Ltd is the parent company of an Australian subsidiary Gonzales Ltd. The latter company imports component parts for their new racing bike called the Speedy Gonzales. The parent company produces the parts imported by Gonzales Ltd, who are enjoying considerable success and was gaining a large portion of the racing bike market. Since this posed a threat to local employment, the federal government announced it would impose a quota on the annual number of components imported into Australia for bikes of this type. In response to this, and in the current financial year, Gonzales Ltd spent $750,000 on placing advertisements in the Australian media attacking the quota system and demanding its repeal. The amount spent was five times the company’s normal annual advertising expenditure.
Discuss the deductibility of this expenditure.
Question 4 (10 marks)
Waterside Pty Ltd operates a shipbuilding business in Brisbane. Due to a downturn in business, it ceased operations shortly prior to Christmas. Shortly after this, all the company’s assets had been disposed of and Waterside Investments Pty Ltd was incorporated as a subsidiary company to invest the proceeds of sale. Since there was a close connection between the two companies, Waterside Investments Pty Ltd paid workers compensation claims, which arose, for settlement after the parent company had been wound up.
Is Waterside Investments entitled to a deduction for these amounts?