Question 1:
In a move by the Australian government to encourage more Australians to invest in their own country, rather than going overseas to invest their money, any investments above $2,000,000 will be made wholly tax deductible. This tax incentive would only be available for those investments made between 1 July 2016 and 1 July 2017. The necessary amendments to the Income Tax Assessment Act 1997 (Cth) had already been made.
James and Laurel are a New Zealand couple and owners of two established tourist hotels in the wine regions of New Zealands South Island. A company, Kiwi Ltd, has been registered in New Zealand which had purchased their hotel business from them. Both James and Laurels are the sole shareholders and directors of the company. James is also Kiwi Ltds Chief Executive Officer. For some time, they have been interested in expanding their business into the Yarra Valley of Victoria. They have identified a similar-style business in Yarra Glen and commenced negotiations with the existing owners for Kiwi Ltd to purchase the hotel. Arrangements are made for James brother, Leon, who is an Australian citizen, to run the hotel. Leon has little business experience in the hospitality industry but James and Laurel have assured him that they will give him all the support that he needs.
Before the sale is finalised, Leon informs James and Laurel about the Australian governments investment incentive that all investments above $2,000,000 will be wholly tax deductable. James and Laurel, then, make the decision to register a company in Australia to purchase the hotel for them so that they can gain a large tax rebate. Accordingly, James and Laurel, as directors of Kiwi Ltd, promote a company, Tasman Pty Ltd, which became registered in the state of Victoria under the Corporations Act 2001. The issued shares of $1 per share in Tasman Pty Ltd are held as follows:
1. James (Director): 1 share
2. Laurel (Director): 1 share
3. Leon (Managing Director): 1 share
4. Kiwi Ltd: 2,000,000 shares
The purchase of the hotel by Tasman Pty Ltd goes ahead at the agreed contract price of $2,300,000 on the 2 July 2014. The hotel, following its purchased by Tasman Pty Ltd, is a huge success and this is reflected in the companys profits.
Gordon also owns a similar business in Yarra Glen as a sole proprietor. His business has dropped off since the change of ownership of the competing hotel to Tasman Pty Ltd. He has heard that the real owners of Tasman Pty Ltd are, in fact, from New Zealand, and that they were able to gain the tax advantage, whereas Gordon, a British citizen, was not. He is furious at this and reports them to the Australian Taxation Office (ATO), which in turns begins its own investigations.
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