Purpose

The purpose of this assignment is to enable you to explore and communicate your understanding of relevant aspects of taxation law.

Question 1

ABC Ltd. is an Australian company carrying on a diversified merchandising and financial business, including an agency arrangement with an Indian shipping company. This agency arrangement was documented by a contract which ABC Ltd. and the Indian shipping company signed on 1 August 1985. The period of the contract was for 30 years. 

As a result of the reorganisation of the Indian shipping company’s affairs, the agency contract was terminated after it had been in operation for 24 years. ABC Ltd. calculated the profits which it had expected to earn from the agency contract during the subsequent six years, and negotiated a cancellation of the contract in consideration of the payment by the Indian shipping company of $4 million. The Indian shipping company paid this amount, without questioning how it had been calculated. 

The contract with the Indian shipping company had provided ABC Ltd. with business which equated to 60% of its profits. When the contract was cancelled, other minor activities of ABC Ltd. which also related to shipping were terminated.

Part 1- Advise the directors of ABC Ltd. of the income tax consequences of the above arrangements. For the purpose of your answer to Part 1, you will be required to mainly refer to case law regarding income tax.

Part 2- What difference would it make if the agency agreement had been entered into on 1 August 1993? For the purposes of your answer to Part 2, you will be required to mainly refer to the Income Tax Assessment Act 1997 where relevant.