Reference no: EM133062467

Tutorial

Question 1. Axis Holdings Ltd was founded eight years ago by Lucas and Tait, who were the initial shareholders and directors. Lucas and Tait had for many years been involved in property development. Seven years ago Axis purchased two properties in an area where there was extensive real estate development. For six years the properties were used for cattle breeding and the properties were improved for that purpose.

Owing to unforeseen circumstances, the cattle breeding proved to be unpro?table and there was an imminent zoning change whereby the properties could only be disposed of in 100-hectare lots instead of 25-hectare lots. Axis therefore arranged to subdivide the land up into 25-hectare blocks and sold the whole property to one purchaser. The Commissioner assessed Axis on the gross receipts in s 6-5 of ITAA 1997.

Discuss.

Question 2. Peter is a farmer with 15 hectares of land on which he has grown oranges since 1970. He inherited the land from his father in that year. The farm has gradually been surrounded by urban development and, three years ago, following complaints from the neighbours about pesticides, he decided to sell the land.

Two years ago Peter contracted with a consulting engineer and surveyor who prepared a subdivision plan and who applied to the local council for rezoning. Peter was not directly involved in the plan or the rezoning, which was granted by the council later that year. Nearly all expenses were paid by Peter, although he had to borrow $120,000 to cover some incidental expenses.

Following completion of the development the land went on sale through a real estate firm and to date 150 of the 200 blocks have now been sold for residential housing. Blocks sell for an average of
$150,000 each.

Advise Peter as to his tax liability, if any.

Question 3. Five years ago Bruce purchases 10 hectares of land for $1 million in an area that was ripe for subdivision. At the time of purchase he intended to get planning permission from the local council to develop the land by subdivision and then resell it at a pro?t, but instead he leased it for grazing horses. Three years ago Bruce attempted to get planning permission to subdivide his 10 hectares, but it proved very difficult, and finally in March of the current tax year the local council refused permission to subdivide. Bruce reluctantly sold the land in May for $3 million.

What are the tax consequences of Bruce's sale?

Question 4. Your client has purchased an investment apartment that has a rent guarantee from the developer of 5% pa for a period of four years. During the current financial year your client has been unable to rent the apartment, so she is relying on the rent guarantee payment to compensate her for not being able to find a tenant. The developer is due to pay the amount as a lump sum and your client is not sure whether the amount is income. Advise her.

Question 5. Your client was injured in a work-related accident and has received damages of $300,000 for the loss of his ability to work. In the final judgment the Court awarded $12,000 in pre-judgment interest and $5,000 in post-judgment interest. Which amounts, if any, are assessable income?

Question 6. Your client makes most of her income from writing hit songs for various performing artists and receives a large amount of royalties from overseas record companies. Is this assessable income and how will it be taxed?

Question 7. Your client has just written his first book of his experience as a hostage of a terrorist group. He spent the last two years writing the book and he has received two offers from a publishing company that wished to publish his book. The first offer is to purchase the copyright for a lump-sum payment of $10,000 provided your client gives up future claims to the copyright and royalties. The second offer is to pay 10% of the sale price of each book sold provided your client agrees to assign the copyright in the book to the publisher for 10 years.

Question 8. Your client is a parent who lent $40,000 to her son to provide a short-term housing loan. The agreement is that the son will repay $50,000 at the end of five years.

Reconsider this question in light of the following facts. The loan was made to the son without any formal agreement and without any security provided for the sum lent. In addition, the client (the mother) has informed you that she told her son that he need not pay interest. However, the son repaid the full amount after two years and included in his payment an additional amount which was equal to 5% pa on the amount borrowed. Only one cheque was presented for the total amount.

Discuss the effect on the assessable income of the parent.