Principle of income tax law
Please note that the following will not form part of the word count: ❑ References, including statute and cases; ❑ Diagrams; ❑ Tables; ❑ Calculations. You must complete both parts of the assignment. Please complete both parts of the assignment separately. You should allocate approximately 1500 words on both Part A and approximately 1500 words on the policy-based essay question in Part B. There is a strict word limit of 3000 words for this assignment. For both parts of the assignment you will be required to go beyond the study materials for this unit and you will be expected to conduct your own research of cases and other academic material upon which you should base your answer. You are encouraged to use headings for purposes of clarity and presentation of your assignment. It is however essential that your assignment is written in full sentences and not dot point form. If you use any equations in solving the problem question please make sure that you cite the correct sections of the relevant legislation and that you outline your entire working. You must begin each question separately. It is however essential that you place your name and student number and the question number on each question which you complete. Regarding referencing, you will find the Australian Guide to Legal Citation (AGLC) style of referencing in the following web site: https://drive.google.com/file/d/14fRQZ-U68Zwe6UQEBXykR5o8Xbo1jTTI/ Please note that this AGLC style is intended for Law students and although it would be great if you followed it, marks will not be deducted for not citing cases etc exactly as described. In other words, whilst you must reference, you can choose to use other referencing styles (ie not necessarily the AGLC style) if you wish.
PROBLEM QUESTION 1A- THIS IS WORTH 5% OF YOUR OVERALL MARK FOR THE UNIT (APPROX 400 WORDS) Nikki owns and carries on a chain of clothing stores. So far she has 7 of such stores. When she chooses a premises to open a new store on, the most important criterion is where she can maximise the sales of clothes. However, she is also influenced by the potential for the land on which each of the shop premises is located on to grow in capital value. In late 2019, Nikki decides to develop one of the shop premises, because real estate in the area which it is located on had appreciated markedly in recent years. This involved Nikki obtaining a building approval from the local council, demolishing the shop, and building a 6 storey apartment building on the land. As Nikki did not know much about building, this consisted of contracting a major builder to be in charge of the process of building the apartment. These apartments are sold individually to the public through a leading real estate agent. Ignoring Capital Gains Tax, discuss whether the sales proceeds from the apartments generate ordinary income.
PROBLEM QUESTION 1B- THIS IS WORTH 15% OF YOUR OVERALL MARK FOR THE UNIT (APPROX 1100 WORDS) Ken entered into a contract to purchase two retail store premises in June 2003. The cost of each was $300,000, with stamp duty of $20,000 each. Settlement was during August 2003. He used these retail premises (which had been previously unoccupied) to commence a business that sold furniture to the public. During the time that Ken owned the store, they each had an annual aggregated turnover of approximately $3 million. During November 2019, Ken, who was 53 at the time, wanted to have more spare time and not carry on a business anymore. He had found that although his turnover was high, after costs his profits were very modest. As a result, he entered into the following contract with Jane: • The first of the two furniture premises was to be sold to Jane for $1,200,000, and the goodwill attached to it sold to Jane for $400,000. • The second store was to be rented to Jane for a two year lease (with an option to renew for another two year period). Rent was set at $2,000 a month, with an upfront lease premium of $25,000 payable. • Jane was to pay Ken $200,000 to not compete with her for the following 3 years. At the time of the November 2019 contract, Ken owned the following assets: • Full ownership of a main residence in Hawthorn, worth $3 million. • 42% ownership of a company called PI Pty Ltd, which invests in rural properties. The total market value of PI Pty Ltd was $300,000. • 80% share on an investment property (Ken’s cousin owns the other 20%). The total value of the property was $500,000. It had a $300,000 mortgage over it. • Superannuation worth $1.5 million. • Shares in BHP worth $200,000. • An apartment in Kew (see below) On 1 December 2015 Ken had bought an apartment in Kew to live in. This cost him $400,000. After living in it for 2 years, on 1 December 2017, Ken bought and moved into his Hawthorn house (mentioned above), which he from that point on claimed as his main residence. At the time, his apartment in Kew was worth $500,000, which he immediately rented out. The Kew apartment was sold for $510,000 in December 2019.
Q1. (4 Marks)
X, aged 42 and a qualified lawyer, is in the process of completing his income tax return for the income year ending 30 June 2020. He seeks your assistance/advice on how to deal with the following transactions in his tax return:
On 15 October 2019, X sold all his shares in X1 Ltd, a company listed on the Australian Stock Exchange. He bought the shares on 7 July 2010 for $50,000 and sold them for $150,000. X purchased the shares with the purpose of making a profit from their sale. (X did receive dividends during the time he owned the shares). X advised his stockbroker to place the sale proceeds in a cash management trust that had its headquarters in Hong Kong. This trust was paying 15% interest per annum on short-term deposits and many Australian investors were using the trust. X thinking was to hold the money temporarily in the cash management trust while he decides what to do with the funds in the long-term. Unfortunately, on 30 December 2019, X’s stockbroker (Y) advises X that the proprietors of the cash management trust were professional fraudsters and that they had defrauded numerous investors of millions of dollars. In short, X’s $150,000 has also been stolen and there is no chance of getting any of the money back . Between 2009 and 2020, X only bought and sold other shares around five times. As at 30 December 2019, X was still thinking about the long-term use of the $150,000. X received an interest payment from the fund of $5,500 on 15 November 2019. X has a net capital loss of $20,000 from the 2015-16 income year.
Q2 (4 Marks).
X is a beneficiary in a family discretionary trust (Happy Family Trusts (HPT) that X’s parents established 30 -years ago. The HPT owns three investment properties and two small businesses. Like many discretionary trusts, the trustee of the HPT has an absolute discretion to pay profits to any beneficiary listed in the schedule to the trust deed. X is listed as one of the beneficiaries in the schedule. The HPT had an accounting profit of $250,000 for the financial year ending 30 June 2020. The net income (taxable income) under s 95(1) of the ITAA 1936 for the income year ending 30 June 2020 was $300, ,000. The difference was mainly attributable to lower tax depreciation (compared to accounting) on depreciating assets. The difference was not due to any capital gains/capital profits. The trustee exercised his discretion on 29 June 2020 in favour of X (and other beneficiaries). X was allocated $50,000 out of the profits for the year. This amount was paid into X’s bank account on 29 August 2020.
Q3 (4 Marks).
X has always worked during his adult years. For the last 20 -years, he has worked in the Finance and Banking law for a major law firm Freeheels. X decides to change his career path and now wants to work in taxation law. His employer Freeheels agrees to transfer him to the Taxation Law division but only on strict conditions as the company does not normally allow an established employee lawyer with considerable expertise in an area to change their area of specialty, and effectively start from “scratch”. One of the conditions is that X must immediately enrol in the Master of Taxation degree at the University of Sydney and that he undertakes four
Scenario
Fact Scenario
Stan is a regular visitor to a local MacBig restaurant that provides a self-service facility where customers have the option of selecting drink and food items from a menu displayed on a touch screen located just inside the entrance. To select a product, a customer only has to touch an image or icon showing the desired product or products they wish to consume, and then touch a virtual ‘OK’ button to submit an order. The order is relayed to the food preparation area where the customer’s order is prepared. Once prepared MacBig’s front counter staff are made aware the order is ready and the customer’s ticket number is displayed on a large screen which symbolises their order is ready for collection.
Customers using the touch screen are immediately issued with a printed ticket containing an order number and the price payable at the front counter.
Customers present these tickets to the cashiers who confirm the relayed order appearing on their screens. At this point, the customers pay for their purchases and await delivery.
This system is designed to save time during peak periods and is very popular. Some customers place their orders as takeaways, while others, like Stan, prefer to be seated and consume them on the premises. The customers preselect these preferences when they use the touch screen.
When Stan reached the cashier, he paid $10 for the hamburger and drink, collected his order located a vacant table and enjoyed a leisurely meal.
A couple of days later, Stan returned and instead of his normal meal decided to order the new gourmet burger and hand cut chips. The order was placed through the self-service ordering system. The total cost was $17.50 which he duly paid. Following the payment being processed Stan received the normal printed ticket which included his order number, order and price.
Stan’s order number appeared on the screen, and after collecting the order Stan found a vacant table and started to eat his meal. As Stan took a second bite of his gourmet burger he struck something hard and broke a tooth. Stan examined the chewed remains and found a piece of metal that had somehow been lodged in the burger.
Stan alerted management to this incident and demanded compensation for his anticipated dental repair. The store claimed that they would refund the price of the burger but would not pay anything more.
In response, Stan exclaimed, ‘I’m a consumer and I have rights!’
Required
Please prepare a memorandum of advice that covers the following:
Part A
Explain how the contracts Stan made with the café were formed.
- You will need to address all the essential elements of a contract (including consideration) as well as analyse the legal status of each step or event that led to the café supplying Stan with its products. Refer to relevant case law. In this part, do not discuss the impact, if any, of consumer protection laws.
Part B
Explain what consumer guarantees may be available to Stan.
- For the purposes of this part you should consider both common law as well as consumer protection legislation (confirming whether Stan qualifies as a ‘consumer’).