ASSIGNMENT ON PRINCIPLES OF INCOME TAX -
QUESTION 1 -
Kristie is 42 and decided to buy an investment property with the view to selling the land in the future to fund her retirement. She considered between buying an inner suburban house on a small piece of land or an outer suburban house on a larger piece of land. She eventually decided on the larger outer suburban house although her primary intention was to hold the house and sell it at her retirement, one of the factors that made her decide to buy the outer suburban house is that she wanted to be open to the possibility of developing the land in the future.
As it turned out, 12 months later, Kristie got lucky in that her investment property was rezoned by her council, which meant that she was able to build a 5 storey apartment on its land (subject to local council approval). She went into a lot of work to get local council approval, which involved getting a professional planner to draft sketches and plans as to what the proposed apartments would look like. This cost her around $15,000. After, gaining council approval, she decided that she did not want to be actively involved in the building process, and so paid a professional builder $7m to construct the apartment block (and demolish the existing house). When the apartments were complete rather than sell each unit individually, she sold the whole block herself to a rich investor for $12m.
REQUIRED;
a. Ignoring capital gains tax, with 400 words, discuss whether the sale of the apartment block generates ordinary income.
b. Where appropriate, support your answer with legislative and case authority.
Note: that the 400 words does not include references and case study.
QUESTION 2 - Dave, on 1 February 2013, entered in a contract to purchase:
a) A premises with a factory that manufactures doors, for $900,000 and
b) Goodwill relating to the door business for $100,000
Dave after the purchase ran this door manufacturing business and did so as a sole trader. Dave's sole customer of the doors was a retail outlet called DOORSRUS, which sold doors to the general public. Initially, Dave did not have any long term contract with DOORSRUS. However, this changed on 1 July 2016, at which time, Dave and DOORSRUS entered into an 8-year contract for DOORSRUS to purchase doors from Dave's business at a set price.
During 2017, Dave suffered from ill health and so looked at selling the door manufacturing business. At first, he could not find any buyers and considered closing the business down. However, as DOORSRUS still wanted a supply of doors, it decided to purchase the business from Dave and continue to run it themselves. As a result, on 10 January, 2018, DOORSRUS and Dave (who was 53 at the time) entered into the following agreement:
a. DOORSRUS would purchase the factory premises from Dave for $2,000,000
b. DOORSRUS would purchase the goodwill from Dave for $400,000
c. The balance of the 8-year agreement between Dave and DOORSRUS was to be cancelled. As compensation for this, DOORSRUS was to give Dave $80,000 as a lump sum.
d. DOORSRUS would pay Dave 3 lump sum annual payments of $10,000 each in exchange for Dave not competing with them in the door manufacturing business.
Dave estimates that for the time he owned and ran the business, annual revenue was between $3-$3.5 million.
Dave owned the following assets at the time of entering the January 2018 agreement:
i) A house he lived in (located in Burwood). This was worth $1.1million and had a $500,000 mortgage on it.
ii) A rental property (located in Coburg) with $650,000 (referred to below). This property had a $200,000 mortgage on it.
iii) A superannuation account with a balance of $400,000
iv) A life insurance policy worth $200,000
v) A 20 percent interest in a company called INVEST PTY LTD which Dave has owned for the last 5 years. This company owned various shares in publicly listed companies. This company had a market value of $800,000.
vi) A 60 percent interest in a company called PROPERTY PTY LTD, which is a property developer. The company had a total market value of $550,000.
Dave had previously, on 20 January 2013, purchased an apartment in Coburg as his main residence (for $380,000), and had paid stamp duty of $20,000 at the time. He had immediately moved into it and treated it as his main residence. However, on 20 January, 2015 Dave bought the above mentioned house in Burwood to live in, moved into it immediately, and treated it as his main residence. At the time the Coburg apartment was worth $600,000. Dave entered into a contract to sell the Coburg apartment on 20 January 2018 for $650,000.
REQUIRED;
With approximately 1100 words, advice Dave on the capital gains tax implications regarding the above transactions for the 2017/18 tax year- Please ensure that your discussion includes advice on whether he can take advantage of the CGT small business concessions to reduce the amount of tax payable on his capital gains.
Note: that the 1100 words does not include references and case study.
QUESTION 3 - POLICY BASED ESSAY) APPROXIMATELY
Negative gearing is a feature of the Australian tax system where loses (including interest expenses) on investments can be used to reduce the tax payable on the taxpayer's other income, such as their salary income.
Some have advocated for the removal of negative gearing. Discuss the arguments for and against the removal of negative gearing. In your discussion, please consider this in the context of fairness, efficiency, protection of government revenue and any other relevant considerations.