Reference no: EM131670230

REVENUE LAW ASSIGNMENT

Learning Objectives:

• Identify tax issues and be able to apply the provisions of relevant tax legislation to simulated real life situations for the purposes of giving professional advice.
• Use, present and evaluate numerical or statistical information related to taxation.
• Undertake independent research on taxation issues through using electronic information retrieval systems.

Rainsmart Pty Ltd ('Rainsmart') is an Australian resident company that manufactures and sells weatherproof clothing to the Australian and international market. Rainsmart purchases raw materials from Indonesia and New Zealand and manufactures at their production facility and head office in Sydney. An administration office is located in each of the Australian capital cities, to support sales and customer service. Rainsmart's turnover is just over $20 million, net assets $12 million and permanent staff total 150 Australia wide as at 30 June 2017.

On 2 February 2017, Rainsmart entered a contact for the sale of its administration office in Melbourne for $4.5 million, as the office staff had moved to leased premises 2 months earlier. Rainsmart acquired the Melbourne office in January 2000 for $1.8 million (GST exclusive), and spent $430,000 (GST exclusive) in replacing the external windows and doors as well as painting the building, prior to the first use of the premises for its operations.

Rainsmart also acquired a strip of land adjacent to the Melbourne office for $360,000 (GST exclusive) in March 2010, with a view to constructing an access road and a parking lot for staff at the back of the premises. There had been some dispute with the neighbours as to the ownership of the relevant strip of land however after legal negotiations Rainsmart's ownership was upheld in June 2013. Legal costs incurred with respect to the ownership dispute totalled $25,000 (GST exclusive). The incidental costs of acquisition and disposal of the Melbourne office that was paid to the relevant real estate agent totalled $34,000 (GST exclusive). Rainsmart claimed an interest deduction of $22,000 in the relevant years in respect of a loan it had obtained to purchase the Melbourne office.

On 20 June 2017 Rainsmart also sold its shares in Hailsafe Pty Ltd ('Hailsafe') for $800,000. The decision to sell the shareholding in Hailsafe was made because Hailsafe had produced an income tax loss of $150,000 in 2016. The management of Rainsmart were of the view that without a substantial injection of additional capital, something they were not prepared to do, Hailsafe would continue to make losses. Rainsmart had acquired 100% of the shares in Hailsafe in 2012 for $2.2 million and incurred legal fees of $38,000 (GST exclusive) on acquisition and $18,000 (GST exclusive) on the disposal of the shares. Rainsmart also received a payment from Hailsafe (after the sale of the shares) of $280,000 (GST exclusive) for agreeing not to set up a similar business to Hailsafe for the next 6 years.

Also in June 2017 two paintings that hung in the foyer of the head office of Rainsmart were stolen. Although the stolen paintings were never recovered Rainsmart received a compensation payment from its insurers of $110,000 for one painting, originally acquired by Rainsmart for $100,000 in 2001 and $50,000 for the second painting, originally acquired by Rainsmart for $70,000 in 2006.

Required -

a) Based on the information provided calculate the net capital gain or loss derived by Rainsmart for the year ended 30 June 2017. Please show all workings and cite relevant legislation. You must cite relevant legislation and cases where relevant and explain your answers.

b) Rainsmart is considering the possibility of using the proceeds of the sale of shares in Hailsafe to purchase vacant land. The land would be subdivided into 20 individual lots and premises constructed on each lot. Rainsmart seeks your advice on whether the sale of each of the constructed premises would be assessable as ordinary income or as a capital transaction subject to the capital gains tax provisions in the ITAA 1997. You are required to explain why the sale would or would not be ordinary income or a capital gain and reach a conclusion, making assumptions if required.

You are required to apply a critical thinking approach to answering this part, in that you must explain why the sale would or would not constitute ordinary income or a capital gain or loss. Please refer to the video explaining the steps to critical thinking on ilearn in the section with this assessment as well as the recording of how critical thinking (and problem solving) is used in tax advising in practice.