Charlotte Harrison is an Australian resident taxpayer. The following information relates to the year ended 30 June 2017.
Charlotte is a lecturer in the medical faculty of a university based in Sydney. She receives a salary of $90,000 per year. She works full-time (5 days a week) but only teaches classes 3 days per week. On the other two week days, she chooses to work from home. Her employer allows her to do this.
Charlotte has a room in her home that she uses as her office, which takes up 10% of the floor area of her home. She spends approximately 20 hours per week working from this home office preparing for lectures and doing other university work. Charlotte occasionally uses her home office for activities not related to her employment with the university, but estimates this would be no more than 1 hour per week. Charlotte pays $600 per week in rent for the home, and her electricity bill is $500 each quarter. For the 2016-17 tax year, the costs incurred by Charlotte were $31,200 on rent and $2,000 on electricity.
In order to complete work at home, Charlotte uses a laptop which she purchased on 1 July 2015 at a cost of $3,100. Charlotte estimates she uses the laptop 70% for work purposes. She has been using the diminishing value method for calculating decline in value (depreciation). (It can be assumed that Charlotte will continue to use this method).
On 1 September 2016, Charlotte pays $180 to have the internal wireless card in the computer replaced as it stopped working, and she was unable to access the internet.
Other expenses Charlotte incurred during the year ended 30 June 2017 were: ï‚· $850: public transport costs to and from work. ï‚· $2,900: income protection insurance (insurance that gives Charlotte $1,500 per week if she is sick or injured). ï‚· $1,000: the cost of attending a series of seminars on educating children, as teaching children is on Charlotte’s personal agenda.
Charlotte owns a small share portfolio, with each shareholding having been acquired to obtain returns in the form of dividends. On 1 April 2017, she sold shares in Green & Gold Co Ltd (an Australian company) for $20,000. This shareholding was no more than a 1% shareholding interest in that company. Brokerage fees associated with the sale were $500. Charlotte had purchased the shares on 1 April 2006 for $16,000. During the years of ownership, she had received dividends from the shares totalling $4,500. For the year ended 30 June 2017, (prior to her selling the shares), she had received a dividend of $800 (you can assume this is unfranked and can ignore franking credits/dividend imputation system for the purpose of answering this question). Charlotte had borrowed from a bank to buy the shares, and the total interest paid to the bank on this loan during her period of ownership of the shares was $3,000. Of this, $300 was incurred from 1 July 2016 to 1 April 2017. On 1 April 2017, the loan was repaid in full from the sale proceeds.
Also during the 2016-17 year, Charlotte sold a painting for $2,000 having purchased it for $3,000. Both transactions i.e. purchase and sale were at auction, but Charlotte incurred no commission or brokerage costs on either transaction.
In the 2015-16 income year, Charlotte had a net capital loss (from the sale of shares) of $3,000.
On 1 August 2016, Charlotte’s mother died unexpectedly. Under her mother’s will, Charlotte received a property (a house) located on the south coast of New South Wales. The property was transferred to Charlotte on 1 October 2016. The property was valued at $520,000 on 1 August 2016 and $535,000 on 1 October 2016. Her mother had purchased the property on 1 August 2005 for $280,000. It had been her mother’s main residence (i.e. the only house where the mother resided) at all times from purchase up to her death on 1 August 2016.
Charlotte advertised the property for sale on 1 November 2016. She incurred $2,000 in advertising expenses. On 1 December 2016 a buyer offered her $530,000 for the property and a contract for sale was signed on that date. A deposit of $50,000 was paid on that day. Settlement (i.e. transfer of ownership) was due to occur on 31 December 2016. The buyer was delayed in obtaining finance, with the result being that 15 February 2017 was the earliest time that the buyer would be in a position to complete the purchase. To avoid losing the property through failure to settle on 31 December 2016, the buyer agreed to pay $15,000 to Charlotte for Charlotte’s agreement that she would not terminate the sale contract for breach until 15 February 2017. This non-refundable amount was paid to Charlotte on 5 January 2017. The remaining $480,000 for the property was paid on the date of settlement which occurred on 15 February 2017. On that day, Charlotte also received $39,000 from the real estate agent’s trust account, being the $50,000 deposit less the commission payable to the real estate agent in the amount of $11,000. Charlotte incurred no legal costs in relation to these property matters, as a lawyer friend acted for her and did not charge any fees.
On 1 July 2016, Charlotte signed a contract for purchase of a block of land, with Charlotte’s motivation being that the land would be used by Charlotte for her personal use and enjoyment as a future holiday retreat. The cost of the land was $100,000, and Charlotte borrowed this amount from the bank. After settlement of the purchase on 31 August 2016, Charlotte decided to transfer the land to her son for family reasons, and on 30 June 2017, she entered into a contract with her son for sale of the land to him for the nominal amount of $100, despite the market value of the property being $120,000. This sale settled on 1 July 2017, and using monies won on Aussie Big Lotto, Charlotte paid the bank the $100,000 that she had originally borrowed. The interest on the loan from inception up to the time of repayment amounted to $6,000. This interest was paid to the bank on or before 30 June 2017.
Required: Based on the above transactions, calculate what will be Charlotte’s taxable income for the year ended 30 June 2017. This includes calculating any ‘net capital gain’ based on the assumption that Charlotte makes any choice available to her under the capital gains tax rules in the income tax law which would have the effect of legitimately minimising the amount income tax payable by Charlotte for the year. Ensure that you fully explain your answer with reference to
appropriate legislation and cases. (I.e. you need to explain why a ‘receipt’ will/will not be assessable income, why any ‘outgoings’ will/will not be deductible and on what basis transactions are taken into account or not taken into account in calculating the net capital gain (if any).
You can ignore goods and services tax (GST) for the purposes of answering this question.
You can assume that Charlotte would be able to substantiate any deductions as required by the substantiation rules in the income tax law.