Part A:
1. Allan and Betty were living and working in Melbourne. They decided on a ‘tree change', sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker's dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.
2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mother's recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They don't keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600.
3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter' system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home. No money changes hands. Suzie would receive a credit to her account of 15 to 20 ‘barts' that she can exchange for goods or services of equal value from other registered participants in the scheme (fruit, vegetables, child minding, lawn mowing etc.).
Required 1:
(a) Advise Allan of any income tax consequences of para 1, above.
(b) Citing relevant case law, explain how a hobby is to be distinguished from a business.
(c) Advise Allan and Betty of any income tax implications arising in paras 2 and 3 above.
(d) Advise the participants in the barter scheme of any income tax implications.
Part B:
On 1 October 2010 Alex purchased a large block of land near the beach at a cost of $250,000 financed by an interest-only loan. Other costs in respect of the land purchase were:
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Stamp duty
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6,800
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Legal costs of conveyance
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2,500
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Water rates - included in contract
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380
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Council rates - included in contract
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900
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Originally Alex's intention was to hold the land as an investment but in 2012 he decided to take unpaid leave from his employment and build a house on the block. The plan was to engage building contractors and perform unskilled labouring himself. On completion the house would be rented. The following costs were incurred:
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1 April 2014
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Establishment fee for interest-only bank loan
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1,500
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2 April 2014
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Development application fee to local Council
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4,200
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20 April 2014
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Legal fees arising out of an appeal against the
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Council's refusal of the development application
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16,000
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15 May 2012
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Architectural fees
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6,500
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May - July 2012
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Building materials
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120,000
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Building contractor's payments
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60,000
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Alex's labour: based on Alex's time at $25/hr over
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three months
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13,000
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The house was completed in September 2014 and rented out until 30 June 2015. Interest paid over the period September 2014 to 30 June 2015 was $14,600. Total interest was $122,500.
On 15 July 2015 Alex obtained a qualified valuer's appraisal of the property which put the value of the land at $350,000 and the house $350,000. The valuation cost $4,000.
In October 2013 Alex sold the property to his cousin Matthew for $650,000.
Required:
1. Advise Alex whether the amount of $650,000 is ordinary income, assessable under s6-5 or whether any amount is assessable under s15-15.
2. Assuming the proceeds of sale is not income by ordinary concepts (or s15-15 assessable), calculate the cost base of (a) the land and (b) the house for Capital Gains Tax purposes. Explain what amounts are included and excluded. Cite relevant provisions of the legislation.
3. Assume the cost base of the property is $600,000. Calculate the Capital Gain. Cite relevant legislation