Case study of Indiana a resident individual taxpayer

Question 1:

Indiana is a resident individual taxpayer. She owns 22 hectares of land which has always been used for producing assessable income. She decides there is no longer the return required from owning the land and so she has decided to develop the land into residential housing. She has thought about the three following scenarios:

  1. a) Indiana undertakes all the activities necessary and sub-divides the property into 80 lots in addition to her 2 hectare area personal use area where the family home is situated. She then sells all 80 undeveloped blocks to a property developer
  1. b) Indiana undertakes the same activities as above and holds an auction day to auction off all 80 blocks as separate packages to the highest bidders
  1. c) Indiana does not subdivide the land and sells the land as an entirety to a development company, and pays a fee to the development company of 65% of the total sale proceeds for carrying out the entire development on her behalf. All of the balance is to be paid to Indiana on the sale of the last block.

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Part 1

As Indiana’s tax advisor explains the potential assessable income issues involved for each scenario if:

  1. a) The property has been owned by Indiana since 1 November 1976
  2. b) The property has been owned by Indiana since 1 November 1986

Part 2

The land development project is likely to take place over at least two financial years. Discuss

when Indiana will derive any assessable income she receives from each of the three scenarios.

Question 2

Amity was looking for a lifestyle change. She tired of city life and decided she would like to develop an accommodation business in Adelaide Hills. So she sold her catering business three years ago and found the perfect tract of land for sale. She investigated the zoning requirements and was advised by the council zoning should not be an issue. As a result, she entered into a contract to purchase the land for $3m and paid a deposit and two installments whilst interest accrues on the unpaid amount. He also bought some cattle and alpacas to run on the land. She intended to sell alpaca wool and occasionally sell a couple of the animals. The animals would all be sold once development was underway.

She engaged a team of architects and developers to plan the development and when the plans are drawn up she applied to the council for zoning permits. The council refused the request.

2 years ago following discussions with the council a further modified proposal was submitted to the council who approved “in principle”. Amity decided to bring in a partner and 18 months ago sold a quarter of her interest to Archie. During all of this time horses had been agisted on the land, and along with small amounts from cattle and alpaca sales, this was the only income earned.

However, Amity and Archie had a disagreement over the development and in disgust, Amity sold her interest.

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With reference to applicable legislation and case law determine whether Amity is entitled to claim the interest on the loan as a deduction over the three-year period?

Question 3

Maurice is an individual tax resident of Australia for tax purposes. He has the following assets:

  • His home was acquired on 20 February 1989 for $140 000. The home was never used for an income-producing purpose. The estimated market value of the house on 1 March 2018 is $310 000
  • Shares in FUL Pty acquired on 10 April 1984 at a cost of $15 000.
  • Furniture acquired on 20 May 2010 for $9 500.
  • Block of vacant land acquired on 20 June 1997 at a cost of $100 000. The estimated market value of the vacant block on 15 May 2018 is $475 000.

Maurice subsequently sold the following assets:

  • His home was sold on 1 March 2018 for $325 000

The furniture was sold on 1 May 2018 for $5 000

  • The block of vacant land was sold on 15 May 2018 for $465 000.

Maurice also has a carry forward capital loss of $12 500 from the sale of an antique drumkit and a carry forward capital loss $5 000 from the sale of underperforming shares in an earlier income year. Maurice is not a share trader.

Maurice has also incurred interest expenses on the vacant block of land of $110 000 over the time he owned the vacant block. He never used the vacant block for any income-producing purpose.

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With reference to relevant legislation and cases calculate the net capital gain or loss as applicable for Maurice for the 2017/18 income year.

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