BULAW 3731 INCOME TAXATION – Law & Practice
Assignment
Semester 2 - 2013
INSTRUCTIONS
1. See the Instructions and Assessment Criteria in the Course Description and make sure you follow them!
2. Please answer all parts of the question
3. Attached to this document is a Checklist to be filled in by you and attached to your essay/assignment. Read this now before you start your research. If you have followed this checklist, there is a good chance you will do well.
4. All work presented for assessment in this course must comply with the
format outlined in the University's Presentation of Academic Work
publication, available from the bookshop or on-line at
www.ballarat.edu.au/generalguide.
5. All essays must be accompanied by a signed official cover sheet ('Plagiarism Declaration Form'), available at www.ballarat.edu.au/ard/business/student_info_webct.shtml and lodged as appropriate for your campus.
6. You MUST reference in the body of the essay every time you use information from other people. This requires you to keep a track of where you are taking information from and then writing the reference up. You should use the Harvard/APA style; and use the University’s new Presentation of Academic Work. The Library’s website also has a citation style guide site. If you plagiarise (intentionally OR unintentionally) you will be given zero: see Regulation 6.1.1 for more details.
7. DUE DATE: You will be advised by your Lecturer but Week 9 should be taken as a guide. Please check with the Course Description for details of where and when to submit your assignment. If you need an extension you must ask for one BEFORE the due date (unless this is impossible).
8. The assignment should not exceed approximately 2000 words.
9. The assignment is worth 25%.
Assignment
Part A [Approx 50%]
Explain why the payment to the taxpayer in FCT v Dixon (1952) 86 CLR 540 was assessable income but the payment in Scott v FCT (1966) 117 CLR 514 was not.
In your answer you should include (but not necessarily be limited to) the following:
i) A brief statement in your own words of the facts of the cases.
ii) Identify the issues raised and the relevant legislation in the context of ITAA97.
iii) Identify any cases and other sources of information relevant to the issues and legislation.
iv) Apply the law to the facts stating clearly why one taxpayer was assessable and the other was not.
Part B [Approx 50%]
Nigel is a professional percussionist and performs with a number of bands and orchestras. In order to practice, he set aside a special room in his house that is soundproof and contains a variety of electronic sound equipment. The room is used only for practice or performance related purposes. He pays council rates, interest on the house mortgage, repairs and maintenance, electricity and telephone expenses in connection with the house. He believes he should be able to claim tax deductions for all these costs together with depreciation on the room and equipment.
Explain the tax position to Nigel. In you answer you should:
i) Identify the tax issues that are raised and the relevant sections of the legislation.
ii) Identify any cases and other sources of law or information that apply.
iii) Apply the law to the facts.
iv) Express a conclusion in regard to the issues identified and indicate any other information required.
University of Ballarat – The Business School
CHECKLIST TO BE ATTACHED TO ASSIGNMENT IN BULAW 3731
Name: ……………………………………………………………..
Student No. ………………………………..
Please check that you have done the following. Tick the boxes to show you have!
? Submitted an assignment that is your own work. (You may discuss the essay topics with others but you cannot copy another’s work, give your work to someone else to copy, or work closely with another student on how to structure or write the essay.)
? The assignment is no more than 2000 words long (excluding abstract, references, bibliography).
? Read and tried to address the criteria in the Course Description.
? Read and addressed the issues raised in the University’s Presentation of Academic Work
? Read Regulation 6.1.1, Plagiarism and asked questions if you are unsure about what it means.
? Referenced direct quotes (use quotation marks or indent) AND summarising from another person’s work in the body of the essay. (This includes internet sources).
? Indicated what referencing style you have chosen Harvard/APA and USED IT.
? Answered all parts to the question.
? Used headings (even though this is not a report, headings are encouraged to assist structure and flow).
? Proof read the assignment for spelling, punctuation and grammar errors.
? Where required, used relevant sections of legislation, legal rules/principles
? Where required, used cases to support your points or arguments. These cases can be obtained from textbooks, or the CCH online libraries, articles found via AGIS PLUS TEXT database etc.
? Put case citations in the body of the work as well as listing the case in the List of References.
? Discussed the issues as required and put arguments and gave your view.
? Used a range of resources.
? Included a title page with your name, student number, course code and name and lecturer’s name.
? Have a margin so comments can be added; put page numbers and your name and student number on each page.
Thursday, January 17, 2019
ASSIGNMENT This assignment is to be completed in groups of three and carries thirty per-cent of the marks in this unit. Assessment
ASSIGNMENT
This assignment is to be completed in groups of three and carries thirty per-cent of the marks in this unit.
Assessment Criteria:
Student work will generally be assessed in terms of the following criteria:
1. Effectiveness of communication - ie readability, legibility, grammar, spelling, neatness, completeness and presentation will be a minimum threshold requirement for all written work submitted for assessment. Work that is illegible or incomprehensible and does not meet the minimum requirement will be awarded a fail grade.
2. Accuracy - This will be the primary criterion for assessing the computational and procedural tasks.
3. Demonstrated understanding - This will be evidenced by the student's ability to be dialectical in the discussion of contentious issues. Few, if any, accounting concepts are scientific facts and stereotype answers will demonstrate poor understanding on the part of the student.
4. Evidence of research - This will be evidenced by the references made to the statutes, accounting standards, books, journal articles and inclusion of a bibliography.
Note:
1. All written work must conform with the University of Ballarat General Guide for the Presentation of Academic Work.
2. For all written work students must ensure that they submit their own original work. Any act of plagiarism will be severely penalised.
PART A. (10 marks)
You have been asked to analyse Grand Plomp Ltd, a maker of rocket widgets used by NASA. The owners are wondering whether the return received is sufficient to justify the risks taken in each division. You are to consider both divisional risk and return in your analysis and the following information has been collected from the past fifteen years to use in your n your analysis.
Percent Risk Measure % Average
Division of Rocket Standard Beta Annual Rate
Widgets Deviation of Return (%)
A 10 12 1.1 10
B 20 36 1.2 20
C 30 14 0.8 8
D 40 15 0.9 15
• Average annual market return: 12 per cent
• Average annual risk-free rate: 8 per cent
Using standard deviation and beta measures of risk, you are to rank projects in terms of their risk-adjusted return. Those divisions providing the lowest risk per unit of return would be preferred. An analysis can be conducted using a 'total' definition of risk, or standard deviation, and an ’undiversifiable’ definition or risk, or beta.
Given the beta, it is possible to measure the required rate of return. Furthermore, given the proportion of each division within Global Gears, it is possible to calculate the firm beta, return and risk-adjusted return. With this information, it is possible to determine whether Global Gears, as a whole, provides a sufficient return to justify the risks taken by its investors.
You are required to:
• Locate the relevant information
• Select the proper tool or equation
• Organise and manipulate the data
• Explain the solution
PART B (12.5 marks)
Misty Ltd wishes to determine its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:
Source of Capital Target Range of Financing After-Tax
Proportion $ $ Cost
Long-Term Debt 0.4 0 to 300,000 0.065
300,001 to 600,000 0.075
600,001 and above 0.090
Preference Shares 0.1 0 to 100,000 0.095
100,001 and above 0.100
Ordinary Shares 0.5 0 to 500,000 0.11
500,001 to 1,000,000 0.125
1,000,001 and above 0.14
a) Determine the breaking points and ranges of total financing associated with each source of capital;
b) Using the data developed determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change;
c) Calculate the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing
d) Using the results along with the information on the available investment opportunities shown below, compile the firm's investment opportunities schedule (IOS), plot this schedule and plot the weighted marginal cost of capital schedule
Investment Opportunities Schedule
Investment IRR Initial
Opportunity Investment
A 0.14 200,000
B 0.12 300,000
C 0.11 500,000
D 0.1 300,000
E 0.09 600,000
F 0.08 100,000
e) Which, if any of the available investments would you recommend that the firm accept? Explain your answer.
PART C. (7.5 marks)
Traditional project evaluation/capital budgeting analysis assumes a firm’s only choice is accept or reject a program. In a real business situation, firms face many choices with respect to how to operate a project, both before it starts and after it is underway. Any time a firm has the ability to make choices, there is value added to the project in question – Traditional NPV analysis ignores this value. The study of real options attempts to put a dollar value on the ability to make choices.
a) What are real options and how are they valued.
b) Discuss the following
Locate the following article
IRREVERSIBILITY, UNCERTAINTY, AND INVESTMENT
(Robert S Pindyck – Massachusetts Institute of Technology March – 1990 – old but gold)
Most major investment expenditures have two important characteristics which together can dramatically affect the decision to invest. First, the expenditures are largely irreversible; the firm cannot disinvest, so the expenditures must be viewed as sunk costs. Second, the investments can be delayed, giving the firm an opportunity to wait for new information about prices, costs, and other market conditions before it commits resources.
c) Calculate the following
Pindyck supplies a simple two-period example to illustrate how irreversibility can affect an investment decision and how option pricing methods can be used to value a firm’s investment opportunity, and determine whether or not the firm should invest.
Using the following example replicate Pyndick’s two-period example.
Consider a firm's decision to irreversibly invest in a widget factory. The factory can be built instantly, at a cost of $7m, and will produce 1000 widgets per year forever, with zero operating cost. Currently the price of widgets is $700, but next year the price will change. With probability .6 it will rise to $800, and with probability (l-q) it will fall to $600. The price will then remain at this new level forever. Assume that this risk is fully diversifiable, so that the firm can discount future cash flows using the risk-free rate, which we will take to be 10 percent.
This assignment is to be completed in groups of three and carries thirty per-cent of the marks in this unit.
Assessment Criteria:
Student work will generally be assessed in terms of the following criteria:
1. Effectiveness of communication - ie readability, legibility, grammar, spelling, neatness, completeness and presentation will be a minimum threshold requirement for all written work submitted for assessment. Work that is illegible or incomprehensible and does not meet the minimum requirement will be awarded a fail grade.
2. Accuracy - This will be the primary criterion for assessing the computational and procedural tasks.
3. Demonstrated understanding - This will be evidenced by the student's ability to be dialectical in the discussion of contentious issues. Few, if any, accounting concepts are scientific facts and stereotype answers will demonstrate poor understanding on the part of the student.
4. Evidence of research - This will be evidenced by the references made to the statutes, accounting standards, books, journal articles and inclusion of a bibliography.
Note:
1. All written work must conform with the University of Ballarat General Guide for the Presentation of Academic Work.
2. For all written work students must ensure that they submit their own original work. Any act of plagiarism will be severely penalised.
PART A. (10 marks)
You have been asked to analyse Grand Plomp Ltd, a maker of rocket widgets used by NASA. The owners are wondering whether the return received is sufficient to justify the risks taken in each division. You are to consider both divisional risk and return in your analysis and the following information has been collected from the past fifteen years to use in your n your analysis.
Percent Risk Measure % Average
Division of Rocket Standard Beta Annual Rate
Widgets Deviation of Return (%)
A 10 12 1.1 10
B 20 36 1.2 20
C 30 14 0.8 8
D 40 15 0.9 15
• Average annual market return: 12 per cent
• Average annual risk-free rate: 8 per cent
Using standard deviation and beta measures of risk, you are to rank projects in terms of their risk-adjusted return. Those divisions providing the lowest risk per unit of return would be preferred. An analysis can be conducted using a 'total' definition of risk, or standard deviation, and an ’undiversifiable’ definition or risk, or beta.
Given the beta, it is possible to measure the required rate of return. Furthermore, given the proportion of each division within Global Gears, it is possible to calculate the firm beta, return and risk-adjusted return. With this information, it is possible to determine whether Global Gears, as a whole, provides a sufficient return to justify the risks taken by its investors.
You are required to:
• Locate the relevant information
• Select the proper tool or equation
• Organise and manipulate the data
• Explain the solution
PART B (12.5 marks)
Misty Ltd wishes to determine its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:
Source of Capital Target Range of Financing After-Tax
Proportion $ $ Cost
Long-Term Debt 0.4 0 to 300,000 0.065
300,001 to 600,000 0.075
600,001 and above 0.090
Preference Shares 0.1 0 to 100,000 0.095
100,001 and above 0.100
Ordinary Shares 0.5 0 to 500,000 0.11
500,001 to 1,000,000 0.125
1,000,001 and above 0.14
a) Determine the breaking points and ranges of total financing associated with each source of capital;
b) Using the data developed determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change;
c) Calculate the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing
d) Using the results along with the information on the available investment opportunities shown below, compile the firm's investment opportunities schedule (IOS), plot this schedule and plot the weighted marginal cost of capital schedule
Investment Opportunities Schedule
Investment IRR Initial
Opportunity Investment
A 0.14 200,000
B 0.12 300,000
C 0.11 500,000
D 0.1 300,000
E 0.09 600,000
F 0.08 100,000
e) Which, if any of the available investments would you recommend that the firm accept? Explain your answer.
PART C. (7.5 marks)
Traditional project evaluation/capital budgeting analysis assumes a firm’s only choice is accept or reject a program. In a real business situation, firms face many choices with respect to how to operate a project, both before it starts and after it is underway. Any time a firm has the ability to make choices, there is value added to the project in question – Traditional NPV analysis ignores this value. The study of real options attempts to put a dollar value on the ability to make choices.
a) What are real options and how are they valued.
b) Discuss the following
Locate the following article
IRREVERSIBILITY, UNCERTAINTY, AND INVESTMENT
(Robert S Pindyck – Massachusetts Institute of Technology March – 1990 – old but gold)
Most major investment expenditures have two important characteristics which together can dramatically affect the decision to invest. First, the expenditures are largely irreversible; the firm cannot disinvest, so the expenditures must be viewed as sunk costs. Second, the investments can be delayed, giving the firm an opportunity to wait for new information about prices, costs, and other market conditions before it commits resources.
c) Calculate the following
Pindyck supplies a simple two-period example to illustrate how irreversibility can affect an investment decision and how option pricing methods can be used to value a firm’s investment opportunity, and determine whether or not the firm should invest.
Using the following example replicate Pyndick’s two-period example.
Consider a firm's decision to irreversibly invest in a widget factory. The factory can be built instantly, at a cost of $7m, and will produce 1000 widgets per year forever, with zero operating cost. Currently the price of widgets is $700, but next year the price will change. With probability .6 it will rise to $800, and with probability (l-q) it will fall to $600. The price will then remain at this new level forever. Assume that this risk is fully diversifiable, so that the firm can discount future cash flows using the risk-free rate, which we will take to be 10 percent.
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