Kristie is 42 and decided to buy an investment property with a view to selling the land in the future to fund her retirement. She considered between buying an inner suburban house on a small piece of land or an outer suburban house on a larger piece of land. She eventually decided on the larger outer suburban house. Although her primary intention was to hold the house and sell it at her retirement, one of the factors that made her decide to buy the outer suburban house is that she wanted to be open to the possibility of developing the land in the future.
As it turned out, 12 months later Kristie got lucky in that her investment property was rezoned by her council, which meant that she was able to build a 5 storey apartment on its land (subject to local council approval). She went to a lot of work to get local council approval, which involved getting a professional planner to draft sketches and plans as to what the proposed apartments would look like. This cost her around $15,000. After gaining council approval, she decided that she did not want to be actively involved in the building process, and so paid a professional builder $7m to construct the apartment block (and demolish the existing house). When the apartments were complete rather than sell each unit individually, she sold the whole block herself to a rich investor for $12m.
Required: Ignoring Capital Gains Tax, discuss whether the sale of the apartment block generates ordinary income.
Where appropriate, support your answer with legislative and case authority.
Dave, on 1 February 2013, entered in a contract to purchase:
Dave after the purchase ran this door manufacturing business, and did so as a sole trader.
Dave’s sole customer of the doors was a retail outlet called DoorsRUs, which sold doors to the general public. Initially Dave did not have any long-term contract with DoorsRUs. However, this changed on 1 July 2016, at which time, Dave and DoorsRUs entered into an 8 year contract for DoorsRUs to purchase doors from Dave’s business at a set price.
During 2017, Dave suffered from ill health, and so looked at selling the door manufacturing business. At first he could not find any buyers and considered closing the business down. However, as DoorsRUs still wanted a supply of doors, it decided to purchase the business from Dave and continue to run it themselves. As a result, on 10 January 2018, DoorsRUs and Dave (who was 53 at the time) entered into the following agreement:
Dave estimates that for the time he owned and ran the business, annual revenue was between $3-$3.5 million.
Dave owned the following assets at the time of entering the January 2018 agreement:
Dave had previously, on 20 January 2013, purchased an apartment in Coburg as his main residence (for $380 000), and had paid stamp duty of $20 000 at the time. He had immediately moved into it and treated it as his main residence. However, on 20 January 2015 Dave bought the abovementioned house in Burwood to live in, moved into it immediately, and treated it as his main residence. At the time the Coburg apartment was worth $600 000. Dave entered into a contract to sell the Coburg apartment on 20 January 2018 for $650 000.
Required: Advise Dave on the Capital Gains Tax implications regarding the above transactions for the 2017/18 tax year – please ensure that your discussion includes advice on whether he can take advantage of the CGT Small Business Concessions to reduce the amount of tax payable on his Capital Gains.
Negative gearing is a feature of the Australian tax system where losses (including interest expenses) on investments can be used to reduce the tax payable on the taxpayer’s other income, such as their salary income.
Some have advocated for the removal of negative gearing. Discuss the arguments for and against the removal of negative gearing. In your discussion, please consider this in the context of fairness, efficiency, protection of government revenue and any other relevant considerations.
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