The University of the South Pacific

Serving the Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

School of Accounting and Finance

AF308 Taxation Law

Final Examination - Semester 1, 2015

Time Allowed 3 hours plus 10 minutes reading

INSTRUCTIONS
There are 5 questions.
Answer all questions.
Marks total 45.

Students may use copies of the Fiji Income Tax Act, Tax
Administration Decree, Fringe Benefit Tax Decree, Dividend
Regulations, Depreciation Instructions and amendments.
Legislation etc. may be underlined and contain marginal notes.

Note: in all answers supply reasons in support of your answer and

refer to any relevant statutory provision unless stated otherwise.

Note: if in any question you think further facts are required, state
what facts and why they are required.

Note: the facts supplied in questions in this paper may contain

irrelevant information.

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Question One (7 marks)

All facts concern the year 2014. The taxpayer is a Fiji resident.

Sam is a single father. He has a son aged 17 studying at Marist Brothers High School and a
daughter aged 22 studying at USP. Both the son and daughter live at home.

Sam has a full-time job with Blueco. In addition to an annual salary, Blueco provides Sam
with free use of a company car after hours.

Being a single dad, Sam has to work hard. Starting in March, Sam obtained a part-time job
with his friend Jone, cooking at Jone's BBQ stand. (Jone is a sole trader.) Working two jobs,
however, proved to be too exhausting and in June Sam resigned from his part-time cooking
job.

Sam owns shares (inherited from his mother) in FMF, Familyco and Samoaco. FMF is a
public company listed on the SPSE. Familyco is a private company incorporated in Fiji and
carrying on business in Viti Levu. Samoaco is a private company incorporated in Samoa and
carrying on business in Samoa and American Samoa.

Sam has a current account with Bank of Baroda that pays a very small rate of interest.

More particular details concerning Sam's income for 2014 appear below.

Employment
- Annual salary from Blueco 36,000
- Annual value of free use of co car 1,600
- Wages received from Jone 1,500
Property
- Interest on current account with Baroda 110
- Dividends from FMF (P value 85%) 2,000
- Dividends from Familyco (P value 75%) 3,000
- Dividends from Samoaco* 4,000
Other
- Maintenance from ex-wife no.1 1,200

*Sam in fact received a dividend cheque from Samoaco for FJD 3,600. A covering letter
stated the dividend had been subject to a 10% withholding tax in Samoa.

Sam's private and domestic expenditure for 2014 include the following.
- monthly rent on family home $400.
- monthly pledge to All Saints Church $100.
- monthly maintenance to ex-wife no.2 $100.
In November, Sam made a donation of$250 to the St. John's Ambulance Brigade.

Required: Calculate Sam's Fiji income tax liability for the year 2014.
Important: Provide headings to the calculation and where appropriate provide statutory
references in brackets to explain the calculation.

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 Question Two (total 10 marks)

(A) Journalism 101 teaches students how to write a news item for a newspaper. Students are
taught that the opening sentence of a news item must address the four 'w's.
Here is an example.
"A young man was shot in Suva yesterday."
Here is the analysis.
What? A person was shot. Who? A young man. When? Yesterday. Where? In Suva.

Income Tax 101 also makes the point that in designing an income tax one must attend to the
four 'w's.
Looking at the general tax on income established by the IT A, where do we find each of the
four 'w's being addressed?
(2 marks)

(B) Here are three references from the Fiji ITA: s.122(2)(a); s.17(37); s.102(b).
All of these provisions deal with a double tax problem.
Each deals with a different double tax problem.
Required: Deal with each of the three provisions in tum. In relation to each provision,
identify and describe the double tax problem being dealt with.
(3 marks)

(C) Is tax avoidance wrongful?

Provide reasons in support of your answer.
(Some advice. Take a few minutes to think about this question and your answer before
starting to write.)
(4 marks)

(D) Read s.20(3)&(4). This provision is an example of a specific anti-avoidance rule.

The rule aims to defeat/frustrate a specific tax minimisation tactic.
What feature of the Fiji income tax does the tactic seek to exploit (i.e. take advantage of)?
(1 mark)

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 Question Three (total 12 marks)

(A) In the Fiji case Fiji Sugar Corporation v CIR the court held that a gift of $100,000 by the
company was a deductible expense. The CIR did not appeal the decision by the Court of
Review.
Do you think the case was correctly decided?
Provide reasons in support of your answer.
(3 marks)

(B) In the House of Lords case Mallalieu v Drummond the taxpayer stated that her only purpose
in purchasing the clothing was to satisfy the court's dress rules and that the clothing had only
ever in fact been used for court appearances. The court accepted this evidence.
(i) Why then did the taxpayer lose the case?
(li) The court also stated that a different result might be reached if the case had concerned a
nurse's uniform. How is this logically possible?
(3 marks)

(C) In 2010 Mango Co Ltd ('Mco') acquires a 60 year lease of agricultural land. The company
plants 250 mango seedlings on the land. The seedlings develop into young mango trees and
produce their first crop of mangoes in 2015.
Over the five years from the planting, Mco incurs expenditure in caring for the developing
mango tress. This involves applying mulch around the young trees, occasionally spraying for
bugs and diseases, watering the young trees during dry weather, and annual pruning of the
trees.
There is now a tax dispute between the CIR and Mco concerning the expenditure incurred in
caring for the growing trees up to 2015 when the trees first produced mangoes. The CIR rules
this is capital expenditure. Mco disagrees.
- What argument/s may be put in favour of the CIR's position?
- What argumentls maybe put in favour ofMco's position?
- Who do you think should win this dispute?
(3 marks)

(D) For the purposes of this question, presume there is no s.9A and no s.17(72).
X, a worker, has a savings account with Bankco. The account earns interest at advertised
rates paid every six months. At the end of June the account is in credit in the amount of
$10,000. On July 1, Bankco credits the account with $250, being interest calculated on the
daily balance for the last six months. On July 2, Bankco collapses. The bank's liquidator
announces creditors are likely to receive only 10 cents in the dollar.

(i) Is the interest of $250 to be included in X's total income?

(li) In calculating total income/chargeable income, may X deduct any sum/s for bad debts?
Explain your answers fully.
(3 marks)

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 Question Four (total 10 marks)

(A) The year is 2014. All parties are Fiji residents.

Sco is a wholly owned subsidiary ofPco. Pco is in tum wholly owned by X. Each of Sco and
Pco have chargeable income of $10,000. Sco pays a dividend of $6,000 to Pco. Pco pays a
dividend of $26,000 to X.

Calculate what percentage of the dividend received by X will be a qualifying dividend.

(2 marks)

(B) What is the tax treatment for the dividend received in each of the following cases?
Explain your answers with reference to any relevant sections.
Your answer should include dollar values.

(i) X and Xco are residents of Fiji. Tco is a Tongan company and a non-resident of Fiji.
X and Tco are shareholders in Xco.
X and Tco each receive a dividend of $500 with a P value of 60%.

(li) Aco and Bco are Fiji companies. Both Aco and Bco are listed on the SPSE. C is a
resident of Fiji.
Bco and C are shareholders in Aco.
Bco and C each receive a dividend of$800 with a P value of25%.
(4 marks)

(C) Fco is a Fiji company. The information below concerns Fco and covers a three year period.
Presume the corporate tax rate is 30%. X, an individual and resident of Fiji, owns 50% ofFco
and receives a dividend of $20,000 in Year Three. Calculate the value of the s.21A deduction
available to X in Year Three.
Round off all figures to the nearest whole number.

Year One chargeable income 30,000

tax paid 9,000
dividends paid (aggregate) 9,000

Year Two chargeable income 20,000

tax paid 6,000
dividends paid (aggregate) zero

Year Three chargeable income 10,000

tax paid 3,000
dividends paid (aggregate) 40,000
(3 marks)

(D) The Fiji ITA in s.2 adopts an extended definition of the word 'company'. 'Company' IS
defined to include a unit trust.
Section 21 (1)(k) provides:
"In determining total income, the following deductions shall be allowed: -

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 (k) in the case of a unit trust, a dividend declared, paid or credited by it, ... "
This is a very unusual rule. The trustee in detennining total income can deduct the value of
income of the trustee distributed to members.
What do you suggest might be the rationale for this rule?
(1 mark)

Question Five (6 marks)

For the purPoses of this question a compressor has an effective life 60f years and a van has
an effective life of 7 years.

Suva Motor Repairs Ltd ('Sco') conducts a business maintaining and repamng motor
vehicles. On February 15, Sco acquires a second hand compressor for $15,000 for use in its
business. (The compressor is in fact five years old.) Sco quickly comes to regret the purchase
since the compressor perfonns very badly. On April 15, Sco sells the compressor to a trade
competitor for $12,000.

A few years ago Sco purchased a van for $28,500 for use in its business. Sco has been
depreciating the van at the maximum pennitted rate. At the beginning of the year the van has
a written down value for tax purposes of $12,900. In July Sco purchases a new van from
Dealer for $35,000 for use in its business. Dealer agrees to accept the old van as part payment
for the new van. For this purpose the old van is valued at $16,000. Sco uses the new van for
the remainder of the year.

Reguired: What is the value of any allowances/charges for Sco under the Depreciation
Instructions for the year? Clearly label all parts of your calculation/so
If Sco needs to make any choices, presume Sco wishes to minimize its tax liability in the
present year.

THE END