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Tax Law

In: Business and Management

Submitted By ELLEAL
Words 2902
Pages 12
Question 1
Michael Jones and his family reside on a small farm on the Mornington Peninsula outside Melbourne. Michael purchased the farm in 1984, and over the years developed the property into a successful dairy farm.
In September 2013, during a routine ‘controlled burn’ operation carried out by the Country Fire Authority, the fire got out of control and burned a significant part of the Jones’ property. The fire damaged fences, sheds and water tanks and also killed 25 dairy cows, as a result of which, Michael lodged a claim for $250,000 against the Country Fire Authority. Preferring to avoid bad publicity, the Country Fire Authority agreed to settle Michael’s claim for a lump sum of $200,000, which Michael accepted on 15 December 2013.
As a result of this experience, Michael and his family decided to give up farming and move to the city. He sold his remaining cows and dairy equipment to his neighbour for $140,000 and put the farm on the market for $2.5 million.
Despite much advertising, Michael received no offers for the property. On the advice of a friend in the real estate industry, Michael decided to subdivide and develop the property. To this end, he engaged surveyors, town planning consultants and lawyers to bring about a change in the zoning of the property. Having obtained permission from Council, he set about subdividing the property into 100 residential blocks and organized the water supply to each block. He then arranged the provision of roads, electricity, sewerage and other essential services, and organized extensive marketing of the properties in the local press and media.
By 30 June 2014, Michael had sold 60 of the 100 residential blocks for an average price of $300,000 each. A further 10 blocks were compulsorily acquired by the government at a cost of $350,000 each.
Advise Michael about the likely tax consequences of all of the above transactions, citing all relevant legislation and case law to support your answer.

* The lump sum of $200,000 is business compensation as Michael is carrying on a farming business [Ferguson]. * The compensation takes the character of what is being compensated [Dixon]. The lumps sum is a composite and undissected amount including for fences and sheds etc. which are profit making structure [California Oil; Glenboig] and for cow as a trading stock [Wade], the whole amount is treated as capital receipt [McLarin]. * Under CGT legislation, the end of these assets are categorised as C1 event [s 104-20], and the time of this event occurs is when Michael settle the claim on 15/12/13. The asset is a general CGT asset [s 108-5] and not in exemption. He makes a capital gain or loss depending on the cost of the asset. * The sale of cows-trading stocks [Wade] is normal proceeds of business [GP international], and thus is ordinary income [s 6-5, Brent]. The sale of dairy equipment is a depreciating asset which has limited life and depreciating over time [s 40-30] that Michael held [s 40-25]. Therefore, the transaction triggers balancing adjustment [s40-295] as the disposal of depreciating asset [s 40-25(7)]. If the termination value > adjustable value the difference is included in assessable income, and if not the diff included in deductions. * The sale of residential blocks forms extraordinary/isolated transactions which are not normal proceeds of business of farming. The development of farm land forms business activity itself [Whitfords Beach; California copper] because first, Michael substantially involved in the development and town planning and zoning, further, he organised water supply for the blocks and arranged road electricity and other services, he also organised marketing activities. Moreover, the development is extensive which included the entire farm. * Also under Myer strand one [Myer], the transaction is also business transaction as the sale of developed land, he had a profit intention when he decided to develop the farm [Cooling; August]; and the profit made matches his intention to develop and sell the land [Westfield]. * In conclusion, the sale of land blocks including 60 blocks for $300,000 each and sales to government of $350,000 each for 10 blocks is the normal proceeds of the business and is ordinary income and will be assessed under [s6-5, Brent]. It does not matter whether the government or other buyer acquires the land.

(If argue the capital) – Mere realisation of asset [Statham]: not extensive enough; and not enough self-involvement [Whitfords Beach]. Also argue for Myer two strands are not satisfied. Then because the land was acquired in 1984 before 20/09/1985, it is a pre-CGT asset and the land is exempt asset, however, the proceeds would be assessed under s15-15 as the profit made from profit-making undertaking or plan.

Question 2
Part A: Qantas domestic airfares include meal and other services for $110
Qantas is making a taxable supply of a domestic airfare [s 9-5] because the supply is the airfare service [s9-10; Qantas airway], with consideration of money [s9-15], it is made in the course of Qantas enterprise [s9-20] within Australia [s9-25], and Qantas is registered for GST [s23-5], also the supply is not GST-free [DIV 38] or input taxed [Div 40]. The supply is a composite supply that treated as a single supply, and the dominant part which is the airfare determining the GST consequence. (If mixed supply: s9-80). The value of the airfare is $100 [s 9-75] and GST is $10 [s 9-70].

Part B: Mercedes case
Manufacturer’s recommended price is a taxable supply as it is a supply of car [s9-10] with consideration of money [s9-15], is in form of retail business [s9-20] in Australia [s9-25], and Mercedes is registered for GST [s23-5]. Same applies to maximum dealer delivery. None of rest is taxable supply. The price $79240 of the car incl. GST [s9-40] and the value of the car 10/11 of the price which is *** [s9-75] and GST amount is 10% of the value which is ** [s9-70].
Advise Mercedes of a trade of $9240

Supply: New Car $79240 inc.gst


Consideration: Cash + old car$9240

Mercedes acquired the old car from customer. The acquisition is relating to carrying on a retail enterprise [s 11-15], and not a GST free or input taxed supply; the consideration is the new car to the customer [s9-15]; Mecedes make taxable supply of new car; however, the private customer is not registered for GST [s 9-5] so the customer is not making a taxable supply. Therefore, the acquisition is not a creditable acquisition [s11-5].

Question 3
Volkscar is an international motor vehicle manufacturer, with offices, manufacturing and distribution outlets in Australia. Volkscar produces and sells in Australia a car model called the ‘Journey’. The Journey has been one of the highest selling product lines in Australia.
On 1 March 2014, Anderson, an owner of the Volkcar Journey experienced technical difficulties with the vehicle while driving on a major Melbourne freeway. Anderson’s vehicle experienced rapid loss of power and loss of driver control. Anderson’s vehicle was the source of a major accident on the freeway, where two other vehicles collided with Anderson’s car when it suddenly stopped. At the risk of reputation damage, Volkscar immediately responded by placing an advertisement in all national newspapers defending the allegations. These advertisements cost $1,300,000 and were ordered on 1 April 2014.
The investigation uncovered that Volkscar was using a faulty gearbox in the Journey. Lobby groups called for the owners of Volkscar to be held personally responsible for the death of Anderson. Volkscar incurred legal fees in the amount of $44,000 for the defence of their owners from the potential prosecution charges.
In an attempt to maintain a revenue stream, in return for 10% of net sales of vehicles sold, Volkscar assigned the right for another car manufacturer to take over production and sale of the Journey vehicle. The revenue received from this assignment was paid directly to Volkscar’s owners and Volkscar described the payment as a ‘salary’ in its financial accounts. Volkscar annual staff salary costs the 2013/14 income year is $3 million, of which $250,000 was paid on 2 July 2014.
Advise Volkscar about the likely income tax consequences of all of the above transactions, citing all relevant legislation and case law to support your answer. * The advertisement cost of $1.3 million is an outgoing of the business and therefore, incurred in gaining assessable income [ss8-1]. However, in assessing the negative limb, as the expense can be capital in nature because it is used to defend Volkscar’s reputation. Following Sun Newspaper test, firstly, the expense is creating lasting benefit as in long term reputation; secondly, the benefit in regarding reputation that Volkscar can relyon once for all; and lastly, Volkscar pays the amount as a lump sum, and in conclusion the expense satisfies the negative limb of capital in nature [s8-1(2)(a)]. Therefore, the expense is more likely to establish a business structure and not deductible under s8-1. However, it may be deductible under Blackhole provision [Div 40I: s 40-880] that can be deducted in equal proportions over five years [s40-880(2)]. * The legal fee of $44,000 is a outgoing of the business, but the expense is not incurred in gaining assessable income [s8-1(1)(a)]. However, the nexus test of occasion of the expenditure test [Payne; Day; Magna Alloys] provided that legal expense is necessarily incurred in carrying on a business [s8-1(1)(b)], it is for Volkscar to determine whether the legal expense is necessary to the expense. * The 10% net sales forms a royalty to Volkscar [McCauley], and the physical payment goes to the business owner which forms the constructive income. In this case, Volkscar is still assessed regarding this sale [s6-5(4); Federal Coke]. Since Volkscar derive the royalty to the owners as salary expense which is outgoing to be incurred in gaining assessable income [8-1(1)(a)], it is not a capital expense as it is a temporary benefit and recurrent payment [sun newspapyer], not a private or domestic expense or incurred producing exempt/non-assessable income [s8-1(2)]. Therefore, it is deductible under s8-1. If the payment is unreasonable higher than what the normal amount should be, it forms excessive payment and the deduction maybe limited by commissioner [s109 ITAA36; S26-35].
Revenue Stream:Royalty(McCauley)
New Manufacture

Reality - payment

Salary: Constructive income

Business Owners

* The $250,000 from the $3million is not paid until 2/7/14, however, Volkscar has commit to this expense and is already occurred in 2013-14 income year, and does not have to be paid in that year [Nielsen Development; James Flood].

Question 4
Part A - June Shields is an economist and employed by UAS Ltd, a prominent investment banking firm based in Melbourne, Victoria. She sold an investment property on 1 September 2013 to her son for $350,000. The market value at the time was $500,000.
The property was purchased on 1 May 1985 for $20,000. At the time, it was a vacant block of land. On 1 June 1990, June built a house on the property at a cost of $220,000. It has been rented out since completion. At the time of completion of the building, the land was valued at $200,000. On 1 October 2011, June repaired the floor boards of the property. The repair cost $3,000. Rent received for the 2013/14 income tax year is $20,000.
Advise June of the income tax consequences arising from the above. * The sale of investment property constitutes a CGT event A1: disposal of CGT asset [s104-5]. The property is a CGT asset [s108-5]. As building is not depreciating asset [s40-45], it is not exempted under CGT. Although the sale to her son is only $350,000, the market substitution rule [s116-30] applies since the transaction is not dealt at arm length with the buyer. Thus the proceeds are deemed to be $500,000 [Spencer]. * The land was purchased before 20/09/1985 and the building was constructed after the date, therefore, the land is a separate CGT asset and pre-CGT land is exempt asset [s108-55]. As a result, apportionment rule [s116-40] applies as the proceeds are received in connection with a transaction that in relation to above assets. | Amount | % | Land value: 1/6/1990 | $200,000 | | Building value :1/6/1990 | $220,000 | 52.38% | Total Value | $420,000 | |
As a result the capital proceeds [s116-20] = $500,000 × 52.38% = $261,900 * Obviously the capital is held more 12 months and acquired before 21/9/1999, both indexation [subdiv 960M] and discount methods [s115-5] are available. Repair cost is not included in cost as it is deductible under s25-10 [ss110-40(2)~110-45(1B)]. | Indexation | Discount | Capital Proceeds [s116-20] | $261,900 | $261,900 | Indexed cost base [s110-25]: 68.7÷57.1=1.2031.203 × $220,000= | ($264,660) | | Cost base [s-110-25] | | $220,000 | Nominal gain | N/A | $41,900 | Less 50% discount | N/A | ($20,950) | | ($2,760) | $20,950 |
Indexation method is recommended as it produces less gain, and because there is no gain under this method, capital loss is calculated with reduced cost base [s110-55: $220,000 - $261,900 = ($41,900). As the result, the capital proceeds are less than the cost base but more than reduced cost base, there is no capital gain or capital loss [s100-45(7)]. * $20,000 rent income flows from the investment property and constitutes ordinary [s6-5; Adelaide fruit], and $3,000 repair can be deducted under s8-1 as it is incurred to produce rent income, however, specific deduction s25-10 is more appropriate to capture this deduction [s8-10] from the ordinary income.

Part B - During the 2013/14 tax year, Ken Moore, a share trader disposed of the following assets: * A rare postage stamp from Ken’s stamp collection for a selling price of $1,000. He had originally acquired the stamp in September 1997 at a cost of $550 (this was the market value of the stamp at the time of purchase); * A painting for a selling price of $10,000. The painting was originally purchased by Ken in March 1990 at a cost of $12,000; * A yacht for a selling price of $22,000. Ken had originally acquired the yacht in May 1994 at a cost of $31,000 for his own personal use; * A parcel of 10,000 Qantas shares for $10,000. Ken had purchased the shares less than 2 months ago for $9,500; * A computer for $1,000 on 30 June 2014. The computer was purchased on 1 July 2013 for $2,500 and had an effective life of 4 years.
Additional information: * Ken Moore also has a carry forward capital loss of $15,000 from the 2010/2011 tax year.
Advise Ken of the income tax consequences arising from the above. * All assets are considered under CGT A1 event [s104-5] as Ken disposed those assets. The stamp and painting are collectible [s108-10(2)], sale of Qantas share is normal business proceeds as Ken is a share trader, and the computer is depreciating asset [s40-30(1)] which is exempt from CGT [s118-24(1)]. * The stamp > $500. Held for more than 12 months and acquired pre 09/1999, both indexation [subdiv 960M] and discount methods [s115-5] are available. Option 1: Indexation Method | Amount | Capital Proceeds (s116-20) | $1,000 | Less Indexed Cost Base (s110-25):(68.7/66.6)=1.0321.032×$550= | $(567) | Capital Gain | $433 | Option 2 | Amount | Capital Proceeds (s116-20) | $1,000 | Less Cost Base (s110-25) | $(550) | Nominal Gain | $450 |
Capital gains of $433 is selected as producing less gains * The painting > $500, sold as loss: | Amount | Capital proceeds [s116-20] | $10,000 | Less Reduced cost base [s110-55] | ($12,000) | Capital loss [s104-10] | $2,000 |

* Collectable Net Capital Gains/Loss: | Option 1 | Option 2 | Gain from rare postage stamp | $433 | $450 | Loss from painting collectible | $(2,000) | $(2,000) | Capital Loss – Carry Forward | $1,567 | $1,550 | Capital Loss | Amount | Capital Proceeds (s116-20) | $22,000 | Less Reduced Cost Base (s110-55) | $(31,000) | Capital Loss (s108-20(1) – Disregarded | $9,000 | * Yacht > $10,000

* Shares Qantas shares | Amount | Sale proceeds: ordinary income (s 6-5) | $10,000 | Purchase: general deduction (s 8-1) | $(9,500) |
As Ken is a share trader thus the share is his trading stock [Wade] and treated revenue assets [GP international].

* Computer
Decline in value – Prime cost method: $2,500 x 365/365 x 200%/4 = $1,250
Closing adjustable value: $2,500 - $1,250 = $1,250
Balancing adjustment [s 40-285]: Termination value of $1,000 less < Adjustable value of $1,250, therefore $250 is deductible. * The prior year capital loss of $15,000 can be carried forward as it is not applicable in this income year. The collectible capital loss can only offset collectible capital gains in future years due to the quarantining rule.

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