TAXATION LAW

QUESTION 1:
John Jones is employed in” rel=”nofollow”>in a part time capacity as lecturer in” rel=”nofollow”>in accountin” rel=”nofollow”>ing at Central
University. His annual salary is $42,000 pa. Jones has arranged with his employer for
his salary to be paid on the 15th day of every month in” rel=”nofollow”>into his savin” rel=”nofollow”>ings account with the
State Bank Ltd. Jones uses the savin” rel=”nofollow”>ings account to meet household expenditure. Jones
also has a home mortgage loan with the State Bank.
Under a separate agreement with the bank Jones has arranged for a balance of $5,000
to be main” rel=”nofollow”>intain” rel=”nofollow”>ined in” rel=”nofollow”>in the savin” rel=”nofollow”>ings account and any balance to be transferred to his
mortgage. He has also arranged for any in” rel=”nofollow”>interest on the savin” rel=”nofollow”>ings account to be offset
again” rel=”nofollow”>inst the mortgage in” rel=”nofollow”>interest. For the year ended 30 June 2017 $300 was offset.
Jones also runs a small practice providin” rel=”nofollow”>ing accountin” rel=”nofollow”>ing and taxation services to local
busin” rel=”nofollow”>inesses. Durin” rel=”nofollow”>ing 2016/17 he billed fees of $35,000 of which $30,000 has been
received. An amount of $3,000 was also received from outstandin” rel=”nofollow”>ing accounts from the
2014/15 year. One of his clients is Travelco, a local motel. In March 2017 Travelco
provided Jones and his wife with free return air tickets to Bali. Equivalent fares would
cost $2,000.
Jones’s wife Joan is an IT expert. For several years John and Joan had been
developin” rel=”nofollow”>ing software for an accountin” rel=”nofollow”>ing package for use by small busin” rel=”nofollow”>inesses. The
system, ‘J-Accounts’, has been licensed and is used by 175 local busin” rel=”nofollow”>inesses at a cost
of $100 per year [$17,500]. A national software developer ‘Cashbooks’ has agreed to
pay the Joneses $25,000 in” rel=”nofollow”>in return for the exclusive rights to use the program for five
years after which time a new agreement for a further five years may be signed.
Jones has an in” rel=”nofollow”>interest in” rel=”nofollow”>in history, particularly commercial history. In 2005 he purchased
500 old share certificates from an acquain” rel=”nofollow”>intance who practised in” rel=”nofollow”>in the area of in” rel=”nofollow”>insolvency
and liquidation. The total cost was $500. The certificates related to old companies that
had been liquidated durin” rel=”nofollow”>ing the 1930s depression. They were very elaborate and ornate
and Jones thought that framed they could be marketable as a decorative feature to
hang in” rel=”nofollow”>in the offices of accountants and solicitors. In February 2017 he happened to
mention the matter to Herman, a local decorator and picture framer. Herman suggested
that if properly framed, numbered, and if an in” rel=”nofollow”>inscription was added, they could sell for
$1000 each. The cost to Jones would be $100 per certificate. Herman agreed to sell the
items on a commission basis of 10%.
A local television station runs a quiz show called ‘Who Wants to be Rich?’ Contestants
are selected randomly from the local telephone directory. Jones was lucky enough to be
selected and he appeared on the show for five nights, answerin” rel=”nofollow”>ing every question and
becomin” rel=”nofollow”>ing ‘Grand Champion’. He won $200,000 and a car valued at $30,000.
Required:
Advise John Jones of the tax consequences of the above receipts. You should discuss
what amounts would be in” rel=”nofollow”>included in” rel=”nofollow”>in his assessable in” rel=”nofollow”>income or, if any item is not
assessable in” rel=”nofollow”>income, why that is so. Your answer should in” rel=”nofollow”>include a discussion of the
followin” rel=”nofollow”>ing:

• Whether he return on a cash or accrual basis.
• Whether particular amounts are ordin” rel=”nofollow”>inary in” rel=”nofollow”>income or statutory in” rel=”nofollow”>income
(in” rel=”nofollow”>includin” rel=”nofollow”>ing capital).
• Under what sections of the Acts the particular amounts are assessable.
• How the quiz show win” rel=”nofollow”>innin” rel=”nofollow”>ings are to be treated.
• What are the tax consequences of the share certificate proposal, if he
was to proceed with the plan?
• What case law is relevant to the issues raised?
QUESTION 2:
Identify the types of taxes that apply to digital currencies (such as Bitcoin” rel=”nofollow”>in) in” rel=”nofollow”>in Australia at
the present time.
In your answer you should list relevant ATO Rulin” rel=”nofollow”>ings/Determin” rel=”nofollow”>inations and discuss their
application.
QUESTION 3:
Part A
Allan and Betty were livin” rel=”nofollow”>ing and workin” rel=”nofollow”>ing in” rel=”nofollow”>in Melbourne. They decided on a ‘tree change’,
sold their Melbourne home and purchased a large country house on a 10 hectare block
in” rel=”nofollow”>in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor.
Allan is popular with the elderly patients in” rel=”nofollow”>in the town and regularly is given home-made
cakes and scones, along with his fee. On one occasion he treated a local win” rel=”nofollow”>ine maker’s
dog for snake bite when the vet was unavailable and was given a dozen bottles of
Lonarch Brae Shiraz in” rel=”nofollow”>in appreciation. The win” rel=”nofollow”>ine had a retail value of $360.
Allan and Betty enjoy gardenin” rel=”nofollow”>ing. They plan to establish a few hectares of grape vin” rel=”nofollow”>ines
and begin” rel=”nofollow”>in growin” rel=”nofollow”>ing vegetables. They attend a contin” rel=”nofollow”>inuin” rel=”nofollow”>ing education course on organic
farmin” rel=”nofollow”>ing and fin” rel=”nofollow”>ind in” rel=”nofollow”>in their second year they have a surplus of produce. Betty started
makin” rel=”nofollow”>ing marmalade and relish usin” rel=”nofollow”>ing her mother’s recipes. Initially she gave them to
neighbours but they became so popular that she opened a stall at the Newtown
Growers Market held on the second Sunday of every month. Allan sold some of the
excess to a local supermarket and now regularly supplies three retailers with sweet
potatoes and pumpkin” rel=”nofollow”>in. They don’t keep records as they never in” rel=”nofollow”>intended to make a profit
but estimate that in” rel=”nofollow”>in a good month gross receipts could be $500 to $600.
Their neighbours have a citrus orchard and throughout the year vegetables are
swapped for oranges and mandarin” rel=”nofollow”>ins. This seems like such a good idea Allan and Betty
decide to set up a ‘barter’ system in” rel=”nofollow”>in the area. To join” rel=”nofollow”>in the system a person must pay an
up-front, one-off fee of $50 to Allan and Betty as a charge for the keepin” rel=”nofollow”>ing of
admin” rel=”nofollow”>inistrative records. Thereafter people register their goods or services to be bartered.
For example, Suzie is a retired hairdresser and will provide hairdressin” rel=”nofollow”>ing services at her
home. No money changes hands. Suzie would receive a credit to her account of 15 to
20 ‘barts’ that she can exchange for goods or services of equal value from other
registered participants in” rel=”nofollow”>in the scheme (fruit, vegetables, child min” rel=”nofollow”>indin” rel=”nofollow”>ing, lawn mowin” rel=”nofollow”>ing
etc.).
Required:
(a) Advise Allan of any in” rel=”nofollow”>income tax consequences of para 1, above.
(b) Citin” rel=”nofollow”>ing relevant case law, explain” rel=”nofollow”>in how a hobby is to be distin” rel=”nofollow”>inguished from a
busin” rel=”nofollow”>iness.
(c) Advise Allan and Betty of any in” rel=”nofollow”>income tax implications arisin” rel=”nofollow”>ing in” rel=”nofollow”>in paras 2 and 3
above.
(d) Advise the participants in” rel=”nofollow”>in the barter scheme of any in” rel=”nofollow”>income tax implications.
Part B
On 1 October 2010 Alex purchased a large block of land near the beach at a cost of
$250,000 fin” rel=”nofollow”>inanced by an in” rel=”nofollow”>interest-only loan. Other costs in” rel=”nofollow”>in respect of the land purchase
were:
Stamp duty 6,800
Legal costs of conveyance 2,500
Water rates – in” rel=”nofollow”>included in” rel=”nofollow”>in contract 380
Council rates – in” rel=”nofollow”>included in” rel=”nofollow”>in contract 900
Origin” rel=”nofollow”>inally Alex’s in” rel=”nofollow”>intention was to hold the land as an in” rel=”nofollow”>investment but in” rel=”nofollow”>in 2016 he decided
to take unpaid leave from his employment and build a house on the block. The plan was
to engage buildin” rel=”nofollow”>ing contractors and perform unskilled labourin” rel=”nofollow”>ing himself. On completion
the house would be rented.
The followin” rel=”nofollow”>ing costs were in” rel=”nofollow”>incurred:
• 1 April 2016 Establishment fee for in” rel=”nofollow”>interest-only bank loan 1,500
• 2 April 2016 Development application fee to local Council 4,200
• 20 April 2016 Legal fees arisin” rel=”nofollow”>ing out of an appeal again” rel=”nofollow”>inst the
• Council’s refusal of the development application 16,000
• 15 May 2016 Architectural fees 6,500
• May – July 2016 Buildin” rel=”nofollow”>ing materials 120,000
• Buildin” rel=”nofollow”>ing contractor’s payments 60,000
• Alex’s labour: based on Alex’s time at $25/hr over
• three months 13,000
The house was completed in” rel=”nofollow”>in September 2016 and rented out until 30 June 2017.
Interest paid over the period September 2016 to 30 June 2017 was $14,600. Total
in” rel=”nofollow”>interest paid however was $122,500.
On 15 July 2017 Alex obtain” rel=”nofollow”>ined a qualified valuer’s appraisal of the property which put
the value of the land at $350,000 and the house $350,000. The valuation cost $4,000.
In October 2017 Alex sold the property to his cousin” rel=”nofollow”>in Matthew for $650,000.
Required:
1. Advise Alex whether the amount of $650,000 is ordin” rel=”nofollow”>inary in” rel=”nofollow”>income, assessable
under s6-5 or whether any amount is assessable under s15-15.
2. Assumin” rel=”nofollow”>ing the proceeds of sale is not in” rel=”nofollow”>income by ordin” rel=”nofollow”>inary concepts (or s15-15
assessable), calculate the cost base of (a) the land and (b) the house for Capital
Gain” rel=”nofollow”>ins Tax purposes. Explain” rel=”nofollow”>in what amounts are in” rel=”nofollow”>included and excluded. Cite
relevant provisions of the legislation.
3. Assume the cost base of the property is $600,000. Calculate the Capital Gain” rel=”nofollow”>in.
Cite relevant legislation,
QUESTION 4
Part A:
Housin” rel=”nofollow”>ing affordability is a goal of governments and opposition parties in” rel=”nofollow”>in Australia. A
topic of discussion in” rel=”nofollow”>in the media is whether negative gearin” rel=”nofollow”>ing combin” rel=”nofollow”>ined with the capital
gain” rel=”nofollow”>ins tax discount (‘tax concessions’) in” rel=”nofollow”>increases speculative activity in” rel=”nofollow”>in the housin” rel=”nofollow”>ing
market – to the disadvantage of the first home buyer.
Required
Identify and evaluate key arguments both for and again” rel=”nofollow”>inst retain” rel=”nofollow”>inin” rel=”nofollow”>ing these tax
concessions if housin” rel=”nofollow”>ing affordability is to be achieved.
In your response you must explain” rel=”nofollow”>in what is meant by negative gearin” rel=”nofollow”>ing and how capital
gain” rel=”nofollow”>ins arisin” rel=”nofollow”>ing from property in” rel=”nofollow”>investment are treated. You should refer to sections of
legislation, tax rulin” rel=”nofollow”>ings and cases where relevant.
Part B:
Jai is 50 years old, currently employed and plannin” rel=”nofollow”>ing to retire when he is 70. As part of
his plans for retirement Jai recently sold the large home he has lived in” rel=”nofollow”>in for many years –
plannin” rel=”nofollow”>ing to purchase a smaller home to live in” rel=”nofollow”>in and also an in” rel=”nofollow”>investment property.
After payin” rel=”nofollow”>ing expenses associated with the sale and repayin” rel=”nofollow”>ing his home loan Jai was left
with $200,000 cash. Jai has placed an offer of $200,000 with a real estate agent to
purchase a home which will be Jai’s prin” rel=”nofollow”>incipal place of residence. Jai has also placed an
offer of $150,000 to purchase an in” rel=”nofollow”>investment property to be used for rental in” rel=”nofollow”>income.
Jai does not have enough funds to complete the sales on both properties, but his bank
manager has approved a loan for the shortfall of $150,000 at an in” rel=”nofollow”>interest rate of 5% per
annum.
In order to prepare loan documentation, the bank manager needs to know whether Jai
will:
a) use the $200,000 cash to pay for his new home and use the borrowed funds of
$150,000 to purchase the in” rel=”nofollow”>investment property;
b) use $150,000 of the cash to pay for the in” rel=”nofollow”>investment property and then pay for his new
home with the remain” rel=”nofollow”>inin” rel=”nofollow”>ing $50,000 cash and the borrowed funds of $150,000; or
c) pay for his new home by usin” rel=”nofollow”>ing $100,000 of the cash and $100,000 of the borrowed
funds; and pay for the in” rel=”nofollow”>investment property by usin” rel=”nofollow”>ing the remain” rel=”nofollow”>inin” rel=”nofollow”>ing $100,000 cash and
the balance of the borrowed funds ($50,000).
Required:
Assume Jai’s goal is to take advantage of negative gearin” rel=”nofollow”>ing opportunities and receive
the most favourable tax treatment. Advise Jai which of the three options – a), b) or c) –
would best achieve this goal. Give reasons for your answer

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