TAXATION LAW EXAMINATION

SEMESTER ONE 2014

QUESTION 1
Juliet Tan and her partner Daniel Goode, have two businesses. First, is a business selling baby clothing and
second, is a hotel located in the Melbourne Central Business District.
Baby clothing business
In this business, Juliet and Daniel hold an exclusive distribution contract for Junior clothing. The agreement
was made in 2005 for a period of 20 years. Receipts from sale of Junior clothes account for 63% of the
business sales. Juliet and Daniel also have their own clothing brand, Adeline, which accounts for 37% of the
business sales.
In 2014, the company behind the Junior clothing brand decided to enter the retail market. It informed Juliet
and Daniel of its intention to cancel the distribution contract and made a cancellation payment of $670,000.
The cancellation of this contract actually came at a good time as they decided to exit the baby clothing business.
Juliet and Daniel sold the use of the Adeline name for 10 years to a competitor, Baby Bunting where Baby
Bunting is to pay Juliet and Daniel royalties of 8% of the net sales of clothing. The agreement requires the
competitor to pay the royalties into a bank account in the name of Juliets parents, who have now retired.
Hotel business
Juliet and Daniel are keen property enthusiasts and have invested in commercial properties over the years. In
2004, Juliet and Daniel acquired a deteriorating commercial building in Queen Street, Melbourne for
$1,300,000. At the time of purchase, the couple envisaged that the price of the building was below value and
there would be a substantial increase in property prices in this area over a ten-year period. Their business plan
involved using the building to run a hotel business.
The couple are very proud of their hotel business, however, they have received many complaints from hotel
guests describing poor experiences with using the lift. One guest had been stuck in the lift for four hours. The
lifts were supplied by Up and Down Lifts. After an investigation, Up and Down Lifts admitted its lifts
were defective. Juliet and Daniel sued Up and Down Lifts for losses suffered and made two claims. First,
for lost business income arising from the decrease in hotel bookings in the amount of $150,000. Second, for
ongoing lost income from its diminished reputation in the industry, as evidenced by negative reviews on travel
websites in the amount of $550,000. Up and Down Lifts settled the claim for $500,000.
Juliet and Daniel decided to sell the Queen Street building as they had planned ten years ago. This was an
opportune time as property prices were trending upwards. However, before the property went to market, the
couple received a letter from the State Government advising her that the building would be demolished to
make way for a new railway station to service a fast rail link to Melbourne airport. Consequently, the
Government proceeded to compulsorily acquire the property, for a sum of $18 million dollars.
Other disposal
A property located in South Melbourne was also sold during the 2013/14 income tax year for $600,000. The
property was purchased on 1 May 1985. At the time it was a vacant block of land. On 1 June 1990, the couple
built a house at a cost of $220,000. At the time of completion of the building, the land was valued at $200,000.
The property has been rented out since completion of the building.
Required:
Using legislation and case law to support your answer, advise Juliet and Daniel of the income tax treatment
arising from the above transactions, providing calculations where appropriate.
[ 35 marks ]

QUESTION 2
Bang and Olufsen manufactures and sells entertainment systems. The following advertisement was extracted
from their website.

*Offer only valid from 7th Nov to 31st July 2014, includes BeoVision 11-40, BeoVision
11-46 and BeoVision 11-55. Trade-in value will depend on the size of BeoVision 11 purchased.
Save up to $1,250 off BeoVision 11-40, $1,500 for BeoVision 11-46 or $1,750 for BeoVision
11-55. BeoVision 11 RRP starts at $9,880 inc Beo4 remote control. Trade-in can be any brand
TV, size or shape.
Required:
1. Advise the GST implications for Bang and Olufsen and a customer where the customer purchases a
BeoVision 11 using a trade-in transaction based on the advertised deal. Assume the customer is not
registered or required to register for GST.
2. How would your answer to (1) differ if the customer is registered for GST and was acquiring the TV in
the course of its enterprise.
[ 15 marks ]

QUESTION 3
The following article was recently published in the Financial Review:

Westfield on the Gold Coast

By Matthew Cranston
Westfield Group has launched legal action in a bid to block the development of a major new shopping
centre on the Gold Coast.
The centre, proposed by Simon Lees Lewani Springs Resort, was approved by the Gold Coast
Council last year with a 4000-square metre Coles supermarket, as well as fast food stores and offices.
Westfield appealed the approval on 12 separate grounds. Among them is the belief that there is no
demand in the area for the proposed development.
The shopping centre giant said Mr Lees new development would unduly impact on existing retail
centres.
However, Westfield has filed plans itself for $1 billion complex at Coomera with joint-venture partner
the Queensland Investment Corporation.
Westfield cause untold damage, Mr Lee said. I spent $3 million on legal fees fighting them on my
last development and I will probably end up spending another $650,000 on this, he said.
Westfield is well known for opposing rival retail developments that come too close to its existing or
planned shopping centres but does not always win.
It took on global retail giant Costco last year which was looking to build its first store in Queensland.
Westfield were defeated when the Newman government used its call in powers and gave approval to
Costco. The Productivity Commission has long been critical of the planning restrictions on retail
development and the way the system is gamed by rival retailers, investors and developers. Mr Lee
will continue the fight. Westfield have already agreed for me to go ahead with this development but
only if I open it in 2017, Mr Lee said. They just antagonise anyone who wants to do anything.

Required:
Advise Mr. Lee of whether the legal expenses of $650,000 will be deductible for income tax purposes. In your
analysis, ensure that you consider general deductions and any relevant specific deduction provision(s).
[ 15 marks ]

QUESTION 4
Michael is a Chief Financial Officer, earning a salary of $200,000 per annum. His brother George is a
successful cattle farmer. Seeking to follow in his brothers footsteps, Michael purchased a property near his
brothers farm on 1 July 2013 for $1,000,000 and paid stamp duty of $55,000 and legal fees of $2,000. The
property was partially funded by a loan of $800,000 from the Commonwealth Bank at an interest rate of 6.5%
per annum. To establish the loan account he incurred an establishment fee of $300 and brokers commission
of $300. The interest charges amounted to $52,000 for the 2013/14 income year.
For the month of July 2013, the property was tenanted and rent received was $1,800. Immediately after the
tenant vacated, Michael repainted the farmhouse and carried out minor repairs at a cost of $3,300. Realising
his lack of farming knowledge, he spent $2,200 on a TAFE course on how to manage beef cattle, which he
attended on several weekends in September 2013. The course made Michael realise that he would need to
invest a significant amount of time and resources to render the farm profitable. To ensure Michael could
maintain his position as a Chief Financial Officer, he entered into an agreement with his brother whereby his
brother agreed to:
1. Undertake all activities necessary to establish the farm; and
2. Once established, run the everyday operations of the farm.
Under the agreement, which commenced on 1 January 2014, Michael agreed to remunerate his brother with a
fixed cash sum of $15,000 per month, an amount which exceeds the market rate by $9,000. As at 30 June
2014, Michael owed his brother for June services (which was paid the next day on 1 July 2014). The following
assets were also purchased during the 2013/14 income year:
Asset
Tractor
Tools

Date Purchased
10 Mar 2014
15 Mar 2014

Cost (incl GST)

$66,000
$35,000

Effective Life
15 years
5 years

By 30 June 2014, George had established a small herd of beef cattle on the property but none of the stock was
yet ready for sale. After lengthy discussions with his brother, Michael decided that he wouldnt be able to
commit or offer any support to his brother in the foreseeable future in respect to the farm. Consequently,
Michael signed a contract to sell the property to his brother for $800,000 on 30 June 2014. The market value
of the property at the time was $1,050,000. Settlement is due on 1 August 2014. The tractor and tools were
sold to George for $60,000 and $30,000 respectively. The stock on hand (cattle) at 30 June had a market value
of $30,000 (cost was $20,000).
To provide cash-flow to support his farm venture, Michael disposed of the following other assets during the
2013/14 income tax year:
Item
BMW 323i Coupe (Vehicle)
Painting

Purchase Date
1 Oct 2012
1 Oct 1985

Purchase Price
$95,000
$80,000

Sale Price
$50,000
$155,000

Michael also had a carry forward capital loss from the sale of a stamp collection of $10,000.
Required:
Using relevant legislation and case law to support your answer, advise Michael of the income tax implications
arising from the above transactions. Show calculations where possible.
[ 35 marks ]
* END OF EXAMINATION *