LAWS 7012 – Business TaxationSemester 1 – 2014

Question 1 | 20 MarksYour client was born in Sydney on 23 June 1949 but completed all his schooling and university studies in Brisbane. Your client graduated from the University of Queensland with a Bachelor of Commerce in 1970 and then worked as an accountant for several major accounting firms, until he commenced employment as a lecturer in accounting on 1 January 1992 with the Queensland Institute of Technology, now the Queensland University of Technology (QUT). After nearly 22 years employment with the university your client is considering a change of career as QUT is currently offering a generous early retirement package to academic staff at the university. Your client would be eligible for a maximum 40 weeks’ pay under QUT’s early retirement scheme and based on your client’s current salary,their gross payment under this scheme is approximately $140,000.
QUT’s Human Resources area has advised your client of the following information:1. Year to date gross salary paid as at 1 April 2014 = $140,0002. Projected full year gross salary as at 30 June 2014 = $160,0003. Unused Annual Leave = $5,0004. Unused Long Service Leave = $8,0005. If your client was to resign rather than accept early retirement , they will only be entitled to payments relating to any unused annual leave and long service leave. 6. To be eligible to participate in the early retirement scheme all relevant staff must terminate their employment with the university on or before 4 July 2014.
In addition to the above information you have ascertained your client h as been on university approved study leave and long service leave since early 2013, travelling around Europe and the Americas on a working holiday researching material for a new Accounting and Finance textbook he is writing. He is currently in Seville, Spa in but will return to Brisbane if he decides to accept the early retirement offer from the university.
As part of your client’s research into their new textbook they have participated in several financial spread betting activities offered by a company operating in Australia. This company holds an Australian Financial Service Licence. Since 1 July 2013, as a result of these betting activities, your client has managed to make a small profit of $3,000.
You have also ascertained your client received $2,000 in royalties from Thomson Reuters, publishers of his current textbook on accounting and $1,000 in interest on a Term Deposit with the Commonwealth Bank. You do not anticipate your client receiving any additional income other than that detailed above, between now and 30 June 2014.
Based on all of the information provided determine which receipts, if any, are assessable income for your client. In particular, your client is seeking your advice as to the taxation consequences of participating in QUT’s Early Retirement Scheme. Your answer should include exact dollar amounts and where applicable any relevant rates of taxation that will be applied to this income. Calculations of tax payable are not required. Your answer should reference all applicable sections of the Income Tax Assessment Act 1936 and/or the Income Tax Assessment Act 1997, related cases and or rulings of the Australian Taxation Office.
Question 2 | 20 MarksYour client is a wealthy investor and property owner. Your client provides you with information (as detailed below) on various transactions between 1 July 2013 and 30 June 2014. Many of these transactions were undertaken to raise funds for the purchase of a large industrial complex, which is to be finalised in October 2014.
Your client seeks advice as to what amount(s), if any, must be returned as assessable income for the year ended 30 June 2014. In particular, you are required to discuss the capital gains tax consequences of these transactions and determine your client’s net capital gain or net capital loss, if any, for the year ended 30 June 2014.
Your advice should include all calculations and references to applicable sections of the Income Tax Assessment Act 1997 and if applicable related cases and or rulings of the Australian Taxation Office.
1 | Holiday House in Blue Mountains. On 3 June 2014 your client signs a contract to sell their holiday house in the Blue Mountains of New South Wales for $400,000. Your client acquired this property on 8 January 1991 for $100,000. The property is used solely by your client for holidays and family gatherings. They incur $120,000 in local council rates and land taxes during the period of ownership. The contract of sale stipulates that a deposit of $40,000 is payable to your client when the contract of sale is signed and the balance is payable in three equal instalments on 3 September 2014, 3 December 2014and 3 March 2015. On 4 June 2014 your client incurs $3,400 in real estate agent fees in respect of the sale of the house.
2 | Rental Property | Your client purchased an investment property for $520,000 in April 2007. The property was rented during the entire period of ownership through a local real estate agency. Your client incurs the following costs since purchasing the property:a) $10,000 in stamp duty when acquiring the property. b) $3,000 in legal costs and search fees when acquiring the property. c) $750 in repairs to lighting and plumbing.d) $10,000 to the real estate agency to collect rent and organise regular maintenance of the property.e) $3,000 to the local council as a levy to have overhead mains power converted to underground power. This was the result of a joint state government andlocal council project to remove power poles and power lines from certain suburbs in the local council area.f) $7,000 to construct a new concrete retaining wall on the property to prevent erosion.g) $1,500 to the local council for a fine for failing to obtain the required council approval for construction of the retaining wall on the property.
In October 2012 your client was advised by the State Government they intended to resume his investment property to make way for a new transport corridor for buses. Your client incurs $7,000 in legal fees seeking advice about his legal options to resist the property resumption. In November 2013, after significant negotiations between your client, his legal representatives and the government, it was agreed the property would be resumed for a price of $750,000. It was also agreed that the government would pay interest at a prescribed rate between the original notified date of the resumption in 2012 until the date compensation is finally paid. On April 2014 your client receives the $750,000 compensation payment and an additional $20,000 representing the agreed interest payment.
3 | Land (#1) – Gold Coast Hinterland. In September 1984 your client purchased a 2 hectare block of land in the Gold Coast hinterland at a cost of $50,000. In July 2013 your client received approval from the Gold Cost City Council to subdivide this land into two 1 hectare blocks. The costs associated with obtaining this approval and subsequent works to subdivide the land amounted to $50,000. The titles to the new subdivided blocks were registered on 15 April 2014. During your client’s period of ownership of the land they incurred $30,000 in council rates. Both blocks of land went to auction in May 2014 with one block selling for $300,000 and the other block for $400,000. The auction costs totalled $7,000.6|Page
3 | Land (#2) – Gold Coast Hinterland. Your client also acquired an adjoining 5 hectare block of land in November 2001 for $150,000. Your client constructed a house on this land during 2002 at a cost of $250,000 and used the house as his main residence from January 2003. In July 2013 your client received approval from the Gold Cost City Council to subdivide the 5 hectares of land into four separate blocks, a two hectare block on which his house and surrounding land were situated and three 1 hectare blocks. The costs associated with obtaining this approval and subsequent works to subdivide the land amounted to $200,000. The titles to the new subdivided blocks were registered on 15 April 2014. During your client’s period of ownership of the land they incurred $50,000in council rates. The three one hectare blocks of land went to auction in May 2014 with each block selling for $300,000. The auction costs totalled $9,000.
4 | Shares ABN Ltd. In June 2007 your client acquired 5,000 shares in ABN Ltd at a cost of $15.00 each. On 31 May 2014 these shares were sold for $16.00 each. Your client incurred $1,500 in stamp duty on the purchase and $500 in stockbroker’s fees on the sale. The company has paid no dividend since the shares were purchased which was the major reason for selling the shares. Your client borrowed $50,000 to help fund the purchase of these shares, incurring $6,000 in interest between 2007 and 2014 . The ATO has advised that this interest cannot be claimed as a tax deduction.
5 | Inheritance. In June 2001 your client’s mother passed away and her will bequeathed a family heirloom to your client. The item was a painting by Australia’s prominent landscape painter Arthur Boyd. Your client’s mother was a close friend of Boyd and she told her family Boyd gave her the painting in 1951. Your client had the painting valued by a local art gallery for insurance purposes when their mother died. The valuation indicated the painting was worth $700,000. In December 2013 your client decided to gift the painting to the Queensland Art Gallery under the Cultural Gifts Program. Your client had the painting expertly examined for valuation purposes by two approved valuers recommended by the Gallery and the agreed average value of the painting was$1,200,000. During your client’s period of ownership, they paid $30,000 in insurance on the painting and $1,000 to have the painting valued in 2001 and $9,000 to have it valued in 2013.