Case Study 1
Smith and Jones have been involved in property development for many years. Eight years ago Smith and Jones purchased two properties in an area where there was extensive real estate development. For six years the properties were used for sheep grazing and the properties were improved for that purpose.
Owing to drought conditions, the sheep grazing proved to be unpro?table. Furthermore there was an imminent zoning change whereby the properties could only be disposed of in 20-hectare lots instead of 5-hectare lots. Smith and Jones therefore quickly arranged to subdivide the land up into 5-hectare blocks and sold the whole property to one purchaser. At the 30th of June the amount is still unpaid. The Commissioner assessed Smith and Jones on the gross receipts in s 6-5 of ITAA 1997.
Discuss whether the sale of the property should be assessable under s 6-5 of the ITAA 1997 and what amounts are to be included in the year ending 30.06.2016. In your response ensure you state the appropriate legislation, tax rulings or common law cases to support your answer.
Case Study 2
Jenna is single and an Australian resident for tax purposes. She is 32 years of age and an experienced orthodontist. On 1 July 2015 she acquired “SmilesRG8” dentistry clinic in Sydney. Jenna has been operating as a sole trader but employs three orthodontists and six assistants in addition to nursing and administrative staff. She provide you the following records for the 2016 income year.
2, 400,000 Cash from Dentistry Fees (see note 1 & 3)
8,000 Bad debts recovered
500,000 Staff Salaries and Wages (see note 2 & 4)
15,000 Motor Vehicle Operating Expenses: fuel, repairs, registration and insurance
20,000 Fringe benefits tax
3,000 Jenna’s travelling expenses from home to work and return
2,000 Legal fees for the renewal of lease of the office building
1,500 Debt collection expenses paid to a solicitor
500 Council rates on business premises
200,000 Purchase of Dental Supplies
55,000 Rent and Council Rates – Rented Premises
20,000 Provision for doubtful debts (see Note 5)
Notes and Additional Information
- Outstanding Consulting Fees – On 30.06.2016 $55,000
- Outstanding Wages Owing to Staff – On 30.06.2016 $12,000
- On 1/2/ 2016 Jenna discovered that an employee had stolen $1,000 cash in respect of money received from fees.
- Staff salaries include $10,000 paid to Jenna’s niece Tamara for casual reception duties. The Commissioner considers $5,000 to be a reasonable commercial rate for this task.
- Jenna is owed $10,000 by a debtor who is bankrupt. It is very unlikely that she will recover any money from the debtor, and Jenna does not take any action to recover the money.
- Plant Equipment and Motor Vehicles acquired during the financial year includes:
Computers $100,000 acquired on 1 July 2015
Equipment and Furniture $150,000 acquired on 1 July 2015
Security System $30,000 acquired on 15 July 2015
Alfa Julietta (Car) $60,000 acquired on 1 July 2015
- Jenna wishes to minimise her tax liability for the income year.
- Assume Jenna does not qualify as a SBE.
Complete a Statement of Taxable Income for the year ending 30.06.2016 with appropriate schedules. Ensure you support your calculations and your arguments with appropriate legislation and common law cases.