MLC 703- PRINCIPLES OF INCOME TAX LAW
INSTRUCTIONS
Please note that the following will not form part of the word count:
? References, including statute and cases;
? Diagrams; ? Tables; ? Calculations.
You must complete both parts of the assignment. Please complete both parts of the assignment separately. You should allocate approximately 1500 words on both Part A and approximately 1500 words on the policy-based essay question in Part B. There is a strict word limit of 3000 words for this assignment.
For both parts of the assignment you will be required to go beyond the study materials for this unit and you will be expected to conduct your own research of cases and other academic material upon which you should base your answer.
You are encouraged to use headings for purposes of clarity and presentation of your assignment. It is however essential that your assignment is written in full sentences and not dot point form. If you use any equations in solving the problem question please make sure that you cite the correct sections of the relevant legislation and that you outline your entire working.
You must begin each question separately. It is however essential that you place your name and student number and the question number on each question which you complete.
Regarding referencing, you will find the Australian Guide to Legal Citation (AGLC) style of referencing in the following web site:
http://law.unimelb.edu.au/__data/assets/pdf_file/0007/1586203/FinalOnlineP
DF-2012Reprint.pdf
Please note that this AGLC style is intended for Law students and although it would be great if you followed it, marks will not be deducted for not citing cases etc exactly as described. In other words, whilst you must reference, you can choose to use other referencing styles (ie not necessarily the AGLC style) if you wish.
The assignments must be completed individually.
DUE DATE: 11:59pm Monday 10 September 2018.
PART 1- PROBLEM QUESTIONS
PROBLEM QUESTION A- WORTH 5% OF YOUR
OVERALL MARK FOR THIS UNIT SO YOU SHOULD ALLOCATE APPROXIMATELY 400 WORDS ON DISCUSSING THIS.
PROBLEM QUESTION B- WORTH 15% OF YOUR OVERALL MARK FOR THIS UNIT SO YOU SHOULD ALLOCATE APPROXIMATELY 1100 WORDS ON
DISCUSSING THIS.
PROBLEM QUESTION 1A- THIS IS WORTH 5% OF YOUR OVERALL MARK FOR THE UNIT (APPROX 400 WORDS)
Kristie is 42 and decided to buy an investment property with a 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 to 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: Ignoring Capital Gains Tax, discuss whether the sale of the apartment block generates ordinary income.
Where appropriate, support your answer with legislative and case authority.
PROBLEM QUESTION 1B- THIS IS WORTH 15% OF YOUR OVERALL MARK FOR THE UNIT (APPROX 1100 WORDS)
Dave, on 1 February 2013, entered in a contract to purchase:
• A premises with a factory that manufactures doors, for $900 000; and
• 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:
• DoorsRUs would purchase the factory premises from Dave for $2 000 000.
• DoorsRUs would purchase the goodwill from Dave for $400 000.
• 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.
• 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:
• A house he lived in (located in Burwood). This was worth $1.1 million, and had a $500 000 mortgage on it.
• A rental property (located in Coburg) worth $650 000 (referred to below). This property had a $200 000 mortgage on it.
• A superannuation account with a balance of $400 000.
• A life insurance policy worth $200 000.
• A 20 per cent 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.
• A 60 per cent 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 abovementioned 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: Advise 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.
PART 2- POLICY
BASED ESSAY QUESTION
POLICY BASED ESSAY QUESTION THIS IS WORTH 20% OF
YOUR OVERALL MARK FOR THE UNIT (APPROX 1,500 WORDS)
Negative gearing is a feature of the Australian tax system where losses (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.