Reference no: EM132375927

Assessment : Case Study

In answering the question students are required to refer to relevant case law, sections of the Income Tax Assessment Act 1936 and 1997 and Tax Rulings issued by the Tax Office. An analysis of the key issues is required.

Question 1

Dr Lobo is a medical doctor working as a sole practitioner from consulting rooms he owns in the Brunswick Victoria. In July 2018 he was sued by a former patient for negligence. His lawyer advised him not to contest the case, however the matter was widely publicised in the local paper. Unfortunately, the publicity led to a significant downturn in the number of patients attending his surgery. He therefore decided to defend the case and in the course of doing so incurred legal expenses of $40,000. Nonetheless, he was extremely pleased when a Supreme Court jury found there was no negligence on his part. Since the case was decided there has been a steady increase in the number of patients attending his surgery.

He also spent $40,000 updating and modifying the bathroom and toilet in his surgery. He also spent $5,000 replacing the carpets caused by wear and tear in the reception area and $1,000 replacing the glass in a window broken by a patient’s young child with double glazing glass. Dr Lobo had also bought a second-hand video game machine for $2,000 to entertain children in the waiting room. When he first tried to use it he discovered that it would not operate as the screen was broken and needed replacing. He spent $1,000 on a new screen.

REQUIRED:

Advise Dr Lobo on the income tax implications of the above facts, referring to appropriate legislation and case law.

Question 2

On 30 June 2019, Mary, aged 50, disposed of the following assets that she owned.

(a) A holiday house that was purchased on 1 March 2011 for $300,000 and sold for $640,000. On 1 February 2014, Mary spent $35,000 adding an extension to the holiday house. She had built the extension after winning a legal dispute with the local council, which had alleged the extension would contravene council planning regulations. The dispute cost her $25,000 in legal fees. During the period of her ownership of the holiday house, she had rented it out for a total of six months during school holiday periods and used it herself for holidays at other times. During the period that she owned the holiday house she had paid a total of $80,000 in interest, rates and insurance.

She had claimed $20,000, of the $80,000, in respect of the interest, rates and insurance, as a tax deduction in her personal tax returns in respect of the six months that she had rented the property. Previously, in November 2018, Mary had entered into negotiations to sell the holiday house for $600,000 to a prospective purchaser, who paid her a three month non-refundable holding deposit of $31,000. Mary’s lawyer charged her $1,000 for advice in respect of the prospective sale. The prospective purchaser was unable to find finance and was unable to proceed. Mary retained the deposit.

(b) On 1 July 2009, Mary had bought a family home. She lived in it until 30 June 2011, when she left Australia to go backpacking through Europe. She rented the house to a tenant for 7 years and returned to live in the house on 1 July 2018, where she lived until she sold the house on 30 September 2018. She made a capital gain of $950,000 on the house. She had not acquired another main residence since she purchased the house in 2009 and has continued to regard the house as her main residence while overseas.

REQUIRED:

Calculate Mary’s Total Net Capital Gain for the year ending 30 June 2019. Your answer should include references to appropriate sections of the Income Tax Assessment Act 1997 (Cth).