Reference no: EM131165000 , Length: word count:2500
PART 1
PRINCIPLES OF INCOME TAX LAW
Required: Discuss whether the sale of the land generates ordinary income for Karl due to laws relating to the assessability of extraordinary/isolated transactions.
Do not discuss Capital Gains Tax. Where appropriate, support your answer with legislative and case authority.
Karl is a rich employee investment banker. His friend Petra ran a DVD store. Petra owned the DVD store premises and land that it was located on. Petra needed some money as her store was struggling financially, so Karl lent her business $100,000 at 8% annual interest. However, after a year it became apparent that her business could not repay this. Consequently, they came to an agreement, where in exchange for Karl forgiving the debt, he would take a one quarter interest on the land that the business premises was located on. At the time of this arrangement it was agreed that the land would be sold in the near future. Consequently, the store was demolished, and council plans were obtained to build a 5 storey apartment in its place. Karl was the one who organised the demolition and worked closely with the architects and lawyers to get the council approval. This involved about $20,000 in fees for architects and lawyers. Subsequently, the land with plans and council approval was sold through a real estate agent for $800,000.
On 1 June 1999 Cindy entered into a contract to buy two separate shop premises. Settlement was on 1 October 1999. Cindy paid $200,000 for each shop premises.
There was stamp duty of $10,000 payable for each of the premises. Cindy used each of these premises to runs shops that sold sports shoes.
On 10 August of 2016, Cindy decided to go into early retirement despite being only 52 years old. As a result, she entered into the two separate contracts with Di:
- The first sports shoe shop was to be sold to Di. Title to the actual shop premises was to be sold for $600,0000. The current shoes in the store were to be sold for $60,000, and the goodwill attached to the store was to be sold for $150,000.
- The second sports shoe shop was to be rented to Di for a three year term. The terms of the lease set the rent at $15,000 per year, and there was an upfront lease premium of $40,000.
Each of the stores consistently had an annual aggregate turnover of over $2.5m for the years they were owned and run by Cindy.
When Cindy entered into the 10 August 2016 agreement in addition to the above she also owned the following:
- 60% share of the house she lived in, which was valued at $1.5m.
- 45% interest in a company called Small Pty Ltd, which owns 4 investment properties. 55% of this company is owned by Cindy's friend Nathan. The total value of this company is $2m.
- 65% share in an investment property with her friend Mike. This property is valued at $500,000 but has a $200,000 mortgage on it.
- A life insurance policy worth $100,000.
- CBA shares, current market value of $300,000.
A few years ago on 1 July 2011, Cindy had purchased a Melbourne CBD apartment to live in for $200,000 for which she also paid stamp duty of $10,000. She immediately moved into it after she bought it and treated it as her main residence.
On 1 July 2012 Cindy purchased a suburban house to live in, which she immediately moved into and treated as her main residence for tax purposes. She immediately rented out her CBD apartment at this time, and had it valued at
$400,000. Cindy sold this CBD apartment for $500,000 on 20 August 2016.
Please focus upon the Capital Gains Tax implications for this question.
Please refer to all of the relevant sections of the legislation, cases and any other scholarly material when providing advice to Cindy. Advise Cindy on:
- Any Capital Gains Tax liabilities for her in relation to her activities.
- Specifically, make sure that your discussion includes advice on whether Cindy can take advantage of the CGT small business concessions to reduce the amount of tax payable.
- Also ensure that you calculate Cindy's Net Capital Gain for the current financial year.
PART 2- POLICY
BASED ESSAY QUESTION
Under Division 115 of ITAA 97, many capital gains are subject to a 50% discount.
Critically discuss the whether capital gains should be subject to a 50% discount. Please consider this in the context of fairness, economic efficiency, protection of government revenue and any other relevant considerations.