On 16 September 1985 John Clark purchased a 100 hectare farm for $100,000 approximately one hour’s drive north of Melbourne. The purpose for purchasing the farm was to give his family the opportunity to grow up in a rural environment. During the week he continued to conduct his Medical Practice in the city. In the weekends ha and the family would drive to the farm, staying in the homestead on the property. In his absence he employed a farm manager to supervise and manage the property.
By 2004 Clark’s family had grown up and were losing interest in the farm. At the same time as the city of Melbourne expanded the land was increasingly surrounded by suburban housing developments. Real estate agents informed him that the land alone was worth $1 million. Clark decided it would be easier to sell the land. However he was advised that the best way to get the most profit from the land was to subdivide it. As a result the land was subdivided and sewerage, drainage gas and electricity were installed. He hired contractors to carry out all the subdivision and improvements and borrowed $1million for this purpose. The total cost of the subdivision and improvements was $10,000 per hectare. He engaged a real estate agent to help sell the property. All of the lots were sold during the 2015/2016 income year for a total of $2.5 million realising a profit of $500,000.
REQUIRED: Advise John if he is assessed on the profit of $500,000. In your answer please refer to relevant case law and legislation.
QUESTION 2: On 4 April 2016, Anthony disposed of the following assets:
(a) A holiday house. The house was purchased on 1 March 2005 for $200,000 and was sold for $610,000. At the time of acquisition Anthony spent $2,000 on surveyor’s cost, $7,000 on stamp duty and $3,000 on valuer’s costs. On 1 February 2006, Anthony spent $100,000 adding a second floor to the house. On 15 June 2010 he spent $20,000 in a successful court action to establish that his neighbour’s new fence had encroached on Anthony’s property by 15 centimetres. In the previous income year he had rented the property out to tenants for a total of six months during school holiday periods. At all other times he used the holiday house personally. During the period that he owned the holiday house he had paid a total of $80,000 in interest, rates and insurance. He had claimed $10,000 of the $80,000 in respect of interest, rates and insurance as a tax deduction in his personal tax return in respect of the six months that he had rented the holiday house. When Anthony sold the holiday house, he incurred $8,000 in stamp duty, advertising expenses and legal expenses.
On 1 January 2016 Anthony had granted an $11,000 three month option to purchase the property for $570,000 to a local property developer. The option lapsed on 31 March 2016. Anthony retained the $11,000. His solicitor charged Anthony $1,000 legal fees in respect of the creation of the option. (b) Shares in ABC Ltd. The shares were purchased on 20 January 2015 for $30,000 and sold for $50,000. (c) A painting. He had bought the painting on 1 October 2008 for $8,000. Anthony gave it to his daughter on her wedding day 4 April 2016. The painting was valued at that date as being worth $20,000. (d) A boat. The boat was purchased for $100,000 on 1 July 2012 and sold for $60,000. He did not live on the boat.
Anthony has an unabsorbed carry forward capital loss from the sale of shares 4 years ago of $40,000. He also has an unabsorbed carry forward loss from the sale of a rare coin 3 years ago of $20,000. REQUIRED: Calculate Anthony’s net capital gain or net capital loss for the income year ending 30 June 2016. Refer to relevant legislation. (12 marks)