Paper , Order, or Assignment Requirements

2

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.

3

PROBLEM QUESTION 1A- THIS IS WORTH 5% OF YOUR

OVERALL MARK FOR THE UNIT (APPROX 400 WORDS)

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.

4

PROBLEM QUESTION 1B- THIS IS WORTH 15% OF YOUR

OVERALL MARK FOR THE UNIT (APPROX 1100 WORDS)

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 $600,000. 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.

5

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.

6

PART 2- POLICY

BASED ESSAY

QUESTION

POLICY BASED ESSAY QUESTION THIS IS WORTH 20% OF

YOUR OVERALL MARK FOR THE UNIT (APPROX 1500

WORDS)

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.