Question 1

Sophie Jones, an Australian resident, owns and operates a beauty clinic specialising in laser cosmetic procedures.  She has a reputation as being competent and trustworthy and obtains much of her business by word-of-mouth. In August 2018 she ordered a new laser machine from FracPro Pty Ltd which had just come on to the market.  The company sales representative assured Sophie that it was the latest technology in laser treatment and would result in very little downtime to the client. After attending a one-day training session by the supplier in Sydney, she undertook her first procedure using the new machine in September.  

Whilst Sophie followed the instructions and applied the technique she had learned, her first client Kate suffered severe blistering which later led to some permanent scarring. Sophie ceased using the machine immediately and contacted FracPro.  

Following investigation by the manufacturer, it was discovered that the settings had not been calibrated correctly in the factory, resulting in excessive heat distribution on the skin.  

Sophie and Kate both sued FracPro for compensation and the matter was settled out of court in January 2019. The following amounts were received:

Sophie

Lump sum damages for potential loss of reputation                                                     $100,000

Compensation for loss of income whilst the machine was being replaced            $20,000

Reimbursement of legal fees                                                                                                         $7,000

Kate

A lump sum payment for pain and suffering                                                                     $120,000

Payment of ongoing medical and cosmetic surgery costs                                             $50,000

Interest on the lump sum payment                                                                                            $8,000

Required:

Advise both Kate and Sophie of the taxation consequences of receiving the above amounts (20 marks).

Question 2

Bob Wilson, an Australian resident, passed away on 23 May 2015.  He was survived by his two children, Amy and Joe. The only asset owned by Bob was the family home which he had originally purchased for $110,000 with his late wife Kath in January 1982. A market valuation obtained at the date of Bob’s death reported that the property was worth $560,000.

From April 2006, Joe had lived in the property with his father to act as his full-time carer for which he received a government allowance.  Joe had no other residence during this period. The solicitor acting for Bob advised Joe and his sister that the most recent will left the house to the two siblings in equal shares. 

As neither of the children wanted to sell the family home, Joe continued to live in the property at no cost for a number of years.  However, following a divorce in 2018, Amy, now a single mother raising three children on her own, felt she needed to sell her share in the house.  As Joe could not afford to buy Amy’s half share, they made the difficult decision to list the property on the market in March 2019.  As luck would have it, property prices were on the increase and Joe and Amy received an offer of $680,000. The contracts for sale were signed by all parties on 28 May 2019 and settlement took place on 4 July 2019.

Required

Advise both Joe and Amy of the taxation consequences of selling their respective shares in the house (15 marks). 

This assessment task will assess the following learning outcome/s:

be able to identify and explain the rules of law relating to taxation law topics covered in the subject.

be able demonstrate a capacity to engage in legal research.

be able to use legal research skills to apply the law to legal problems relating to taxation so as to reach a solution.

be able to analyse legal rules so as to differentiate between possible outcomes to the legal issues arising from novel fact situations.

Covering topics 5 to 9, this assignment has been designed to ensure that students are able to identify and apply legislation, rulings and case law to the issues identified as well as demonstrate the ability to analyse the issues fully and apply this knowledge to a hypothetical, practical situation.

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