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MLC703 Principles Of Income Tax Law

tag 0 Download 5 Pages / 1,249 Words tag 03-07-2021


Melissa is a tax accountant at the head office of a major retail store called RetailCo. Melissa’s contract entitles her to an annual bonus of up to $15,000 depending on her performance rating. She has worked for RetailCo for 6 years and each year has received annual bonuses of $10,000-$15,000.

RetailCo offers Melissa and some other similar employees $50,000 in exchange for her agreeing to modify her contract, so that she no longer has the right to a bonus.

In recent months RetailCo has had negative media coverage regarding the fact that it had underpaid some of its employees’ wages and superannuation (Melissa had not been underpaid). RetailCo offers to give all of its professional head office employees (including Melissa) $4,000 in exchange for them not saying anything negative to the media about their employer.

Required: Ignoring capital gains tax, discuss whether:

  • the $50,000 received by Melissa constitutes ordinary and/or statutory income; and
  • the $4000 constitutes ordinary income.

In May 2016 it became increasingly uneconomical to run the factory due to high labour costs. As a result, Julie, who was 52 at the time, decided to no longer continue running her business. Approximately a year later, she entered into the following contracts on 15 May 2017:

  • Bill would purchase the goodwill of her business for $500 000. However, Bill did not purchase the factory premises as he intended to have the suits sold by the business manufactured in a lower cost country.
  • The factory premises were to be sold to a property developer for $1.5m. The property developer intended to demolish the factory premises and build high rise residential apartments in its place.
  • Bill was to pay Julie $15 000 a year for the next 3 years in return for Julie agreeing to not operate a competing business for that time.

For the full period that Julie had owned her business annual revenue was over $3m.

In June 2017 Julie wanted a new challenge so purchased all the shares in a company called CLR Pty Ltd for $1m. CLR’s assets consisted of:

  • A rural residential rental property valued at $250,000; and
  • A small shoe manufacturing factory worth $750,000.

At the time of entering the various contracts on May 2017 Julie’s assets also included:

  • Her main residence in Altona worth $1m, which had no mortgage on it.
  • An investment property in Footscray worth $700 000 with a $600 000mortgage.
  • $200 000 in her superannuation account.
  • A holiday unit on the Gold Coast worth $250 000 (unmortgaged). Julie stayed there every year for a few months. Over the Christmas period she would also rent it out for 3 weeks to friends at $500 per week, which was lower than the typical market value rent of $800 per week.
  • A holiday house in Ballarat worth $300 000 (unmortgaged). Julie used this solely as a weekend getaway for herself.
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