1. Kopee, aged 50, is planning to buy a reputable health food franchise as he ha
ID: 2814092 • Letter: 1
Question
1. Kopee, aged 50, is planning to buy a reputable health food franchise as he has recently been made redundant from his previous employment. The franchise can be operated under any form of business structure and is estimated to produce a net income of around $50,000-$80,000 p.a. Kopee is asking your advice on the most appropriate business structure to use. If another person is to be employed in the business, it will be either his wife or his sister.
a) List four possible types of business structures he could use.
b) Which one of the four business structures listed in (a) would you suggest to Kopee is most suitable for his business (give three reasons), and which one of the four business structures listed in (a) is least suitable (give three reasons)? (8 marks)
2. Briefly explain (and provide an example) of what is meant by:
a) Tax evasion;
b) Tax avoidance; and
c) the “parliamentary contemplation test” used by the Courts in deciding if an arrangement is a tax avoidance arrangement. (6 marks) [
Explanation / Answer
1.
a) He can use the following business structures:-
Proprietorship
Partnership
LLC - Limited Liability Company
LLP - Limited Liability Partnership
b) The following business structure is most suitable:-
LLC - Limited Liability Company. This is because,
He can get more capital to start his business.
He will not be personally liable for the losses of the company.
Company will continue to function even if he retires or dies.
Least Suitable:-
Proprietorship. Because,
He will get less capital to start his business
He will be personally liable for all the losses
His company will close down once he retires or dies.
2.
a) Tax Evasion - Tax evasion means using illegal means to avoid paying taxes. Tax evasion schemes are generally those schemes which are not allowed legally by the IRS. For example, Deducting the charges from income which is not legally allowed.
b) Tax Avoidance - Tax evasion means using legal means to avoid paying taxes. Tax evasion schemes are generally those schemes which are allowed legally by the IRS. For example, 100% depreciation for certain capital expenditure under certain section.
c) The Parliamentary contemplation test asks whether the arrangement, viewed in a commercially and economically realistic way, makes use of the Act in a manner that is consistent with what Parliament would have intended for the provisions that apply (or do not apply) to the arrangement. Applying this test involves identifying:
1) Parliament’s purpose regarding the relevant provisions,
2) the commercial reality and economic effects of the arrangement.
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