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BUSN3014 Principles Of Taxation Law

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  • Course Code: BUSN3014
  • University: Australian National University
  • Country: Australia

Question

1. Your client Tony and Hub run a building partnership called Cedars Building Partners (CBP).

  • CBP has an ABN.
  • CBP usually build residential houses for other people as contract builders.
  • CBP are not property developers and have never sold property.

Tony and Hub inherited a property at 35 Bright Street valued at $1,000,000 from their father Joe who passed away eighteen months ago.

  • The house at 35 Bright Street was built in 1974 on a block of land Joe already owned. Joe paid $70,000 to the builder for the house. Joe used the house as the family home and his principle place of residence up until he passed away.
  • Tony and Hub have leased the house out to residential tenants from for the past eight months and have received $12,000 rent.
  • The house at 35 Bright Street in the middle of a big block of land. The land is zone R2 meaning two dwellings may be built on the one block of land.

Tony and Hub request your advice as to the income and/or CGT consequences in relation to the following:                 

  1. Keep renting out the property and leave everything as it is. 
  2. Sell the house now and invest the money into either another development or into shares or an investment property. 
  3. Relocate the existing house to the back of the block, and then strip and completely renovate the house to a 'like new' status for an estimated cost of $200,000; and build a completely new house at the front of the block costing $250,000.
  4. Tony and Hub then plan to either:
  • Divide the title and sell both houses, when the project is finished, each house is expected to sell for $1,200,000 each: OR
  • Retain both house on one title to rent out – maybe to sell some time in the future. It is predicted that in 5 years the houses would sell for $2,400,000 each

Tony and Hub would like to do the work themselves using CBP builder, to save money, as the total development cost cited above of $200,000 and $250,000 would likely double if they had to pay a builder to do it. Advise Tony and Hub on the consequences of doing the work themselves. 

Required:  Answer the above questions with reference to relevant cases, legislation and/or rulings.  Show any relevant calculations.

2. You run a tax practice and a client, Monica, a financial advisor, comes to ask your advice in respect to a number of outgoings she incurred in this financial year:
 
a. Purchase of a rental property for $500,000. 
 
b. Obtained a principle & interest investment loan of $450,000, repaid over 25 years, to finance the rental property purchase and in relation to the loan:
    1. Paid $5,000 establishment fee that she paid before the loan was granted 
    2. Paid loan payments of $11,250 Interest and $10,000 principle on the above loan .
c. Paid $45,000 expenditure to repairs and repaint the property prior to renting 
 
d. During the year, her sister had asked for advice in managing her financial affairs. Monica gave her advice and charged her $500. She believes that her sister will not pay the bill and so, she has raised a provision for doubtful debts for $500 .
 
e. After work Monica teaches at the local University on one day per week. Monica expended $500 to travel between the financial advising work and her work as a lecturer. 
 
f. Monica paid $450 for her membership to the Australian Financial Planners Association and $600 to her local golf club. Monica is a keen golfer and also uses the club to entertain clients. 

Required: Answer the following questions with reference to relevant cases, legislation and/or rulings. Show any relevant calculations.

Advise Monica of the tax deductibility of the above outgoings. You must refer to legislation and/or case law in your answer.

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