Business Letter Advice
2 ASSESSMENT 3: CLIENT ADVICE LETTER* (Individual assessment, worth 25%) Due: 5 October 2020 at 11:59pm SUPPLEMENTARY INFORMATION FROM SCROOGE AND MICKEY (To be read in conjunction with your Assessment 2 Scenario) Following up on your previous request for further information about their legal and tax arrangements, Scrooge and Mickey meet with you together and provide you with the following information. The FP coy was established in 2005, a few years before the Global Financial Crisis struck. At the time, the trustee companies of both the Scrooge and Mickey Family Trusts were issued shares in Scrooge Financial Planning Pty Ltd, so that they now own 80% and 20% respectively of the shares of the that financial planning company. Both trustees of these Trusts have made Family Trust elections. The trustee of the Scrooge Family Trust provided all furniture, fittings and equipment to the financial planning company Scrooge Financial Planning Pty Ltd, and it is these assets that are fully written off. The Scrooge Family Trust also contributed the office space which it leases out, though its management company Scrooge Management Pty Ltd, to the financial planning practice company Scrooge Financial Planning Pty Ltd. This office space is the ground floor of a three-story commercial office building owned by the trustee of the Scrooge Family Trust, which Scrooge inherited via the trust from his parents in August 1985. While Scrooge Financial Planning Pty Ltd leases the ground floor, the remaining office space in the building is leased out to a solicitors’ practice (which, apart from its normal legal work, acts as migration agents), a firm of accountants, a small tax agent’s practice, a conveyancer, a firm of patent attorneys, a town planning practice, a property surveyors’ practice, and a real estate agency. The trustee of the Mickey Family Trust on behalf of Mickey provided a substantial cash injection to Scrooge Financial Planning Pty Ltd as its consideration for its equity in the financial planning practice company. Mrs Scrooge’s proposal going forward is to combine all of the other practices in the building with the financial planning practice, either contractually or by way of equity buyouts, into a multi-disciplinary ‘one stop’ shop for commercial advice tailored to the needs of high net wealth individuals. Based on revised figures for the current income year, the financial planning company Scrooge Financial Planning Pty Ltd is projected to earn $460,000 in revenue; Scrooge is expected to earn a gross salary of $100,000, as well as Director’s fees of $20,000; Mickey is expected to earn a gross salary of $80,000, as well as Director’s fees of $20,000; and the company’s fee to Scrooge Management Pty Ltd is expected to be $220,000, leaving a taxable income of some $20,000. Scrooge Management Pty Ltd’s revenue for the current fiscal year is expected to be $220,000, with its expenses limited to Mrs Scrooge’s Practice Manager salary of $20,000, and a secretary’s wage of $20,000 (the secretary is not related to Scrooge or Mickey in any way); and lease premia of $160,000 payable to the Scrooge Family Trust in respect of furniture, fittings and equipment leased by the trust to Scrooge Management Pty Ltd. On current estimates, this leaves a taxable income for Scrooge Management Pty Ltd of $20,000. Scrooge and Mickey have stressed to you, however, that all of these figures are likely to be subject to heavy revision, given current uncertainty about the likely fee revenue from clients, dividend income or any capital gains or losses. The cash flows in the Mickey family trust are not all 80% of those in Scrooge Family Trust (Scrooge didn’t know, and wrongly assumed all Mickey’s cash flows, and those of his trust, were in proportion to the difference in their salaries from the financial planning practice). The Mickey Family Trust’s assets, valued at some $3M currently, are comprised of a share portfolio left to Mickey by his parents, both of whom tragically died in a plane crash in July 1985. Mickey was their sole child, and all their shares, as well as the substantial family home, were left to him. To date, Mickey’s family has lived in the old family home, surviving on his Financial Planning salary and the dividend income from the share portfolio (he has kept all of his parents’ share portfolio intact for sentimental reasons – it is one of his last ties to his parents). The Mickey Family Trust is expected to incur $150,000 in current year losses as a result of reduced dividends because companies have preferred to reduce dividend payouts during the COVID crisis. Minnie is wanting the family to move out of the old family home, though Mickey wants to check with you whether there are any adverse tax consequences of doing so. Mickey’s biggest concern is how to reduce the amount of tax he has to pay, at the same time as maintaining an effective level of asset protection. The financial planning practice company, Scrooge Financial Planning Pty Ltd, has capital losses of $500,000 dating back to 1 July 2015. Scrooge and Mrs Scrooge both desperately want to take advantage of these capital losses to lower their current taxable income, but their previous accounts of and unable to advise them how they might be able to do this legally. This is one of the reasons why Scrooge has come to you for advice, as he has heard of your reputation from some of the other professional advisors in his building. In addition, the Scrooge Family Trust has capital losses from property transactions which turned sour in the Global Financial Crisis (GFC). The trustee of the family trust bought commercial properties on 1 July 2007 for $3M and, when the GFC hit and all their lessees went into liquidation, the trustee of Scrooge Family Trust was forced to sell the properties on 30 June 2015 for a mere $2.5M. Scrooge and Mickey are seeking high-level advice and recommendations describing the architecture of a combination of legal structures, contractual and trust arrangements, with indicative numerical examples, which would best: · Minimise their overall tax, while ensuring asset protection for their key assets (their respective family homes). Both Scrooge and Mickey have expressed interest in whether you think there is any scope for either or both of them to salary-package through Scrooge Financial Planning Pty Ltd, particularly in respect of a leased vehicle for their personal use under a ‘novated lease’ arrangement, or perhaps personal use of a company car (whatever will minimise their overall tax payable); car park under the building; discounted loans to either or both of them; private health insurance; discounted gym/health memberships; or even (in another of Mrs Scrooge’s ideas) a coffee bar in the office where they could sit with clients on the roof of the building, which could be renovated in a café-style with views of the city. Mrs Scrooge has also suggested allowing the children to do minor office work in the financial planning practice in order to help them ‘learn the business’ in case they want to become financial planners later on in life; and Mickey and Scrooge are both open to this idea, particularly if it helps to minimise their overall tax position; · Take advantage of any or all income and capital losses in each of the trusts or other entities; · Leverage the tax advantages, if any, of adopting Mrs Scrooge’s proposal to form a multidisciplinary ‘one-stop’ shop with all the other businesses and advisory practices in the building, all of whom are apparently open to any ideas you have. As part of this aspect of the advice, you should specifically address whether the Scrooge Family Trust, the Mickey Family Trust or the financial planning company Scrooge Financial Planning Pty Ltd should acquire, or form a joint venture or partnership with each other or any or all of these other businesses and practices, or whether this would involve them in significant capital gains tax, GST or stamp duty liability; and in what circumstances, if any, Scrooge and Mickey (or their respective trusts and/or other entities) should simply sell the financial planning practice to a third party private equity firm, Advisius Pty Ltd, which has offered to buy it for a price which both Scrooge and Mickey estimate is substantially below the total replacement cost of all the financial planning company’s assets. Provide detailed evidence of your conclusions, and where possible, diagrams and specific examples supporting your argument. Be careful to outline your reasons, specifying all relevant provisions of relevant legislation or regulations (and any particularly important and relevant cases, where you consider this necessary). In addition, state - explicitly and specifically - any factual assumptions you need to make in answering the clients’ questions, provided they are consistent with the broad parameters set out by your clients. Where Scrooge and Mickey have not provided sufficient information for you to definitively answer an aspect of the problem, you’ll recall from our workshops that you should use a “If this, then that”; “if something else, then xyz’ approach to answering their questions. Remember that Mickey and Scrooge have come to you because of your expertise and your ‘can do’ attitude to tax planning. Above all, as clients paying your considerable fee, they want answers on what they can do legally, not what they can’t do. In this scenario, ignore any COVID-related government assistance such as JobKeeper payments. A marking rubric in respect of the assignment will be released shortly. ASSESSMENT 3: CLIENT ADVICE LETTER * (Individual assessment, worth 25%) Due: 5 October 2020 at 11:59pm SUPPLEMENTARY INFORMATION FROM SCROOGE AND MICKEY ( To be read in conjunction with your Assessment 2 Scenario ) F ollowing up on your previous request for further information about their legal and tax arrangements, Scrooge and Mickey meet with you together and provide you with the following information. The FP coy was established in 200 5 , a few years before the Global Financial Crisis struck. At the time, the trustee companies of both the Scrooge and M ickey Family Trusts were issued shares in Scrooge Financial Planning Pty Ltd, so that they now own 8 0% and 2 0% respectively of the shares of the that financial planning company . Both trustees of these Trusts have made Family Trust elections. The trustee of the Scrooge Family Trust provided all furniture , fittings and equipment to the financial planning company Scrooge Financial Planning Pty Ltd , and it is these assets that are fully written off. The Scrooge Family Trust also contributed the office space which it leases out , though