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LEGL602 Taxation Law

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Question:

1: John Jones is employed in a part time capacity as lecturer in accounting at Central University. His annual salary is $42,000 pa. Jones has arranged with his employer for his salary to be paid on the 15th day of every month into his savings account with the State Bank Ltd. Jones uses the savings account to meet household expenditure. Jones also has a home mortgage loan with the State Bank.

Under a separate agreement with the bank Jones has arranged for a balance of $5,000 to be maintained in the savings account and any balance to be transferred to his mortgage. He has also arranged for any interest on the savings account to be offset against the mortgage interest. For the year ended 30 June 2017 $300 was offset.Jones also runs a small practice providing accounting and taxation services to local businesses. During 2016/17 he billed fees of $35,000 of which $30,000 has been received. An amount of $3,000 was also received from outstanding accounts from the 2014/15 year. One of his clients is Travelco, a local motel. In March 2017 Travelco provided Jones and his wife with free return air tickets to Bali. Equivalent fares would cost $2,000.

Jones’s wife Joan is an IT expert. For several years John and Joan had been developing software for an accounting package for use by small businesses. The system, ‘J-Accounts’, has been licensed and is used by 175 local businesses at a cost of $100 per year [$17,500]. A national software developer ‘Cashbooks’ has agreed to pay the Joneses $25,000 in return for the exclusive rights to use the program for five years after which time a new agreement for a further five years may be signed.

Jones has an interest in history, particularly commercial history. In 2005 he purchased 500 old share certificates from an acquaintance who practised in the area of insolvency and liquidation. The total cost was $500. The certificates related to old companies that had been liquidated during the 1930s  depression. They were very elaborate and ornat and Jones thought that framed they could be marketable as a decorative feature to hang in the offices of accountants and solicitors. In February 2017 he happened to mention the matter to Herman, a local decorator and picture framer. Herman suggested that if properly framed, numbered, and if an inscription was added, they could sell for $1000 each. The cost to Jones would be $100 per certificate. Herman agreed to sell the items on a commission basis of 10%.

A local television station runs a quiz show called ‘Who Wants to be Rich?’ Contestants are selected randomly from the local telephone directory. Jones was lucky enough to be selected and he appeared on the show for five nights, answering every question and becoming ‘Grand Champion’. He won $200,000 and a car valued at $30,000. 

Required:
Advise John Jones of the tax consequences of the above receipts. You should discuss what amounts would be included in his assessable income or, if any item is not assessable income, why that is so. Your answer should include a discussion of the following:
 
• Whether he return on a cash or accrual basis.
• Whether particular amounts are ordinary income or statutory income (including capital).
• Under what sections of the Acts the particular amounts are assessable.
• How the quiz show winnings are to be treated.
• What are the tax consequences of the share certificate proposal, if he was to proceed with the plan?
• What case law is relevant to the issues raised?
 
2: Identify the types of taxes that apply to digital currencies (such as Bitcoin) in Australia at the present time.
In your answer you should list relevant ATO Rulings/Determinations and discuss their application.

3: Part A

Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker’s dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae Shiraz in appreciation. The wine had a retail value of $360. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mother’s recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the
excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They don’t keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600. 

Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter’ system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered.

Required:
(a) Advise Allan of any income tax consequences of para 1, above.
(b) Citing relevant case law, explain how a hobby is to be distinguished from a business.
(c) Advise Allan and Betty of any income tax implications arising in paras 2 and 3 above.
(d) Advise the participants in the barter scheme of any income tax implications.
 
Part B
On 1 October 2010 Alex purchased a large block of land near the beach at a cost of $250,000 financed by an interest-only loan. Other costs in respect of the land purchase were:
Stamp duty 6,800
Legal costs of conveyance 2,500
Water rates – included in contract 380
Council rates – included in contract 900
Originally Alex’s intention was to hold the land as an investment but in 2016 he decided to take unpaid leave from his employment and build a house on the block. The plan was to engage building contractors and perform unskilled labouring himself. On completion the house would be rented.

The following costs were incurred:
• 1 April 2016 Establishment fee for interest-only bank loan 1,500
• 2 April 2016 Development application fee to local Council 4,200
• 20 April 2016 Legal fees arising out of an appeal against the
• Council’s refusal of the development application 16,000
• 15 May 2016 Architectural fees 6,500
• May – July 2016 Building materials 120,000
• Building contractor’s payments 60,000
• Alex’s labour: based on Alex’s time at $25/hr over
• three months 13,000
The house was completed in September 2016 and rented out until 30 June 2017.
Interest paid over the period September 2016 to 30 June 2017 was $14,600. Total interest paid however was $122,500. 

On 15 July 2017 Alex obtained a qualified valuer’s appraisal of the property which put the value of the land at $350,000 and the house $350,000. The valuation cost $4,000.
In October 2017 Alex sold the property to his cousin Matthew for $650,000.

Part A:

Housing affordability is a goal of governments and opposition parties in Australia. A topic of discussion in the media is whether negative gearing combined with the capital gains tax discount (‘tax concessions’) increases speculative activity in the housing – to the disadvantage of the first home buyer.

Part B:

Jai is 50 years old, currently employed and planning to retire when he is 70. As part of his plans for retirement Jai recently sold the large home he has lived in for many years – planning to purchase a smaller home to live in and also an investment property. After paying expenses associated with the sale and repaying his home loan Jai was left with $200,000 cash. Jai has placed an offer of $200,000 with a real estate agent to purchase a home which will be Jai’s principal place of residence. Jai has also placed an of $150,000 to purchase an investment property to be used for rental income.

Jai does not have enough funds to complete the sales on both properties, but his bank manager has approved a loan for the shortfall of $150,000 at an interest rate of 5% per annum. 
In order to prepare loan documentation, the bank manager needs to know whether Jai will:
a) use the $200,000 cash to pay for his new home and use the borrowed funds of $150,000 to purchase the investment property;
b) use $150,000 of the cash to pay for the investment property and then pay for his new home with the remaining $50,000 cash and the borrowed funds of $150,000; or
c) pay for his new home by using $100,000 of the cash and $100,000 of the borrowed funds; and pay for the investment property by using the remaining $100,000 cash and the balance of the borrowed funds ($50,000).
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