MLC 703- PRINCIPLES OF INCOME TAX LAW
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 (note that there is no 10% leeway).
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: https://drive.google.com/file/d/14fRQZ-U68Zwe6UQEBXykR5o8Xbo1jTTI/
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 13 September 2022.
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.
Required: Ignoring capital gains tax, discuss whether the sale of the land has generated ordinary income.
Imp Pty Ltd is an importer of quality electrical goods. It purchased its current premises in Brunswick 20 years ago. It chose the premises location primarily because it would be a convenient location for its workers. Although Imp’s plan was to hold on to the premises long-term, it also chose the location because it considered the possibility that if it did sell the property, the location was likely to benefit from a substantial capital gain.
Since the COVID-19 pandemic, working from home has become more common. As a result, Imp wishes to sell the car park, which is a portion of its Brunswick premises. To do so it demolishes the multi-level car park, gets council building approval for a multi townhouse development, and subdivides the total land it owns into two lots (one for what was previously the car park, one for the remaining portion which Imp intended to keep). Using a real estate agent, Imp then sells this portion of the land to a developer for $6 million.
Kayla in 2015 had quit her job and decided she wanted to run a business. Subsequently, on 8 September 2015, Kayla entered into a contract to purchase vacant land for the amount of $600,000. She paid stamp duty and legal fees of $50,000 for the purchase. Settlement occurred on 8 October 2015.
Kayla then on 1 November 2015 entered into another contract to have a retail store built on the vacant land, as well as a small garage (that could store a car) built on the rear of the same land. The contract involved Kayla paying the builder $550,000 to construct these. The construction was completed by 15 January 2016.
After construction was completed, Kayla immediately started running a furniture retail business (as a sole trader) in her recently built retail store. To earn extra income, Kayla rented out the garage in the rear of the land to a car enthusiast for rent of $10,000 a year.
Kayla’s furniture business was successful, and for the time she owned it, the business consistently had annual aggregated turnover of over $4 million.
On 15 February 2022, Kayla entered into a contract to sell her business assets. Although she enjoyed running a business, she felt that the price she was able to sell the business for was too good an opportunity to not take up. Kayla was 52 years of age at the time. Under this contract (entered into with Jake, who planned to continue running the business), she was to be paid the following:
- $1,600,000 for the sale of the land with the shop premises and garage on it.
- $300,000 for the sale of goodwill attached to the store.
- $60,000 for the trading stock in the store
- $100,000 to not compete with Jake for 3 years.
At the time Kayla entered into the contract in February 2022, she owned the following assets:
- Her main residence located in Kew, worth $2.5 million (unmortgaged)
- An investment property located in Burwood worth $1.2 million (with a
$500,000 mortgage)
- Shares in BHP, worth $200,000.
- A van that had previously been used by Kayla purely for business purposes (her furniture business) — but she intends to use it after the sale of her business for personal use only. This was worth $20,000.
- 54% share in a company called SDE Pty Ltd – the company had a market value of $300 000.
- 25% share in a company called UII Pty Ltd – the company had a market value of $200,000.
On 1 March 2022, Kayla bought all the shares in a small company called AUL Pty Ltd for $200,000. The underlying assets of AUL Pty Ltd are a 30% interest in an investment property (this 30% interest is worth $90,000) and a 50% share in the assets of a small accounting firm (worth $110,000).
Advise Kayla as to the Capital Gains Tax implications for this question. Specifically, advise Kayla regarding any CGT payable due to the above events. Ensure that this includes a discussion on whether Kayla can utilise the CGT Small Business Concessions (in Division 152 ITAA97), including the CGT small business rollover concession.
PART 2- POLICY BASED ESSAY QUESTION
| POLICY BASED ESSAY QUESTION THIS IS WORTH 20% OF YOUR OVERALL MARK FOR THE UNIT (APPROX 1500 WORDS) |
Australia’s CGT system in the past utilised indexation to ensure that only after-inflation gains were subject to CGT. Currently, newly acquired assets are generally subject to discounting rather than indexation.
In the context of an emerging higher inflation rate, should consideration be given to replacing the 50% discount with indexation?
Discuss what would be the advantages or disadvantages of such a policy change. Include in your discussions the impact on such a change on
- the simplicity of the tax system;
- economic efficiency;
- equity/fairness.
Your answer should briefly include a discussion of the history and operation of CGT indexation and discounting.
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