QUESTION 1:
Alice Franko is a young television presenter who currently rents a small apartment in Geelong. Her dream is to buy a large family home in South Yarra so she can live in Melbourne near her work and friends. She needs more money to do this, so she decides to find herself a new job, and sell some existing property to make some money.
Employment Contract
Alice has worked for Channel 11 for the past few years. She loves presenting the news but does not like working for Channel 11 (she is not paid much money for her job). This year, Alice applies for a new job with Channel 8 and is successful in her application. She cannot wait to start her new job and in March 2020 she resigns from her current position with Channel 11 and receives the below employment engagement letter from Channel 8 which she signs and returns:
Employment Terms – Alice Franko
Dear Alice,
Channel 8 are delighted to make the following fixed term offer of employment for work commencing 1 April 2020 until 1 April 2023. Please read the below terms and return to us a signed copy of this letter:
Your employment contract is as follows:
Item 1: Annual remuneration of $100,000 with an additional lump sum bonus payment of $50,000 if Channel 8 viewings increase by 10% in the first three months.
Item 2: A lump sum payment of $70,000 payable on signing the agreement, for agreeing to not work for any other television network for the next three years while employed by Channel 8.
Richmond House
Alice still needs more money for her new house so she decides to sell her investment property in Richmond (‘Richmond House’). She bought the Richmond House on 1 September 2000 for $350,000. When Alice purchased the Richmond House in 2000, she incurred $5,000 of legal expenses. In 2005 she incurred further legal expenses when her neighbours filed a legal boundary dispute against Alice stating that part of her land was actually theirs. In 2010 the tenants accidentally broke part of a pipe in the bathroom. This small part of the pipe was fixed with similar material for a cost of $1,000. Alice entered into a contract of sale for the Richmond House on 3 May 2020 for $700,000. The purchaser Tom also agreed to take over the remaining debt of $100,000 on the Richmond House (a loan amount held with Alice’s bank) on transfer of the property to him.
Keilor Townhouses Development
In July 2016 Alice received three adjacent vacant blocks of land in Keilor from the estate of her late Grandmother who passed away in 2015. In August 2017 Alice decided that she wanted to build a medium sized apartment building (15 units) on the blocks of land so that she could make the maximum amount of money from the sale. She sought the services of an architect and builder to put together a proposal for the development. In December 2017 the Victorian Civil and Administrative Tribunal (VCAT) refused to grant a planning permit for the 15-unit development proposed by Alice. Alice did not appeal the decision but instead decided to design three separate townhouses for each of the three blocks (creating 9 townhouses in total). VCAT approved this plan. Alice used the same architect and builder to construct the homes for $200,000 each. She incurred some additional planning costs of $5,000 in total. She knew a lot of locals in Keilor so she decided to do all the marketing of the townhouses herself. She was quite involved in advertising the properties for sale and in liaising with the potential purchasers. Alice sold the 9 townhouses during July 2020 at $400,000 each.
Required: For Alice consider the effect on her assessable income of the following.
Support your answers with case and legislative authority. If you conclude that a receipt is capital, then you should proceed to calculate Alice’s net capital gain or loss for that transaction. You can consider each of the 4 questions below in isolation from each other.
a) Discuss Alice’s agreed employment contract terms of (Item 1) the $100,000 and $50,000 amounts and (Item 2) the $70,000 amount (6 marks).
b) Would your answer regarding Item 2 (the $70,000) be different if instead of being paid the amount in 2020, she was paid the amount at the end of 2023 (at the expiration of her employment with Channel 8) for agreeing not to work for another television station in Victoria for a period of 12 months? (4 marks).
c) Discuss the CGT consequences for Alice in relation to the sale of the Richmond House (6 marks).
d) Discuss whether the sale of the Keilor Townhouses Development is ordinary income under s. 6-5 for Alice (6 marks).
QUESTION 2:
Channel 8 is a television station operating in South Yarra in Victoria. They employ over 1,000 workers to broadcast various shows nationally across Australia. As a result of a reduction in their profits they decide they need to make some changes to increase their turnover.
Feasibility study
This year, they have considered purchasing a new type of technology called the ‘8box’ which will house all of Channel 8’s digital and analogue stations and can be used in households to replace the current free-to-air system. This would be implemented under a new branch of Channel 8’s existing business which they would create to manage and install the 8box across Australia. Before spending millions of dollars on the new technology, Channel 8 pay a business valuation firm $50,000 to prepare a feasibility study to decide whether the new technology would be a profitable business venture.
Payment to Victorian Government Telecommunications Department
Since 2019, Channel 8 have seen a steady decline in engagement with their nightly news segment which airs at 7pm nationally. This year, they decide to try to increase profits by entering into an agreement with the Victorian Government Telecommunications Department (VGTD) to be the sole television station on which Victorian state politicians will conduct media releases and briefings. This means that no other Victorian television station can broadcast appearances of Victorian state politicians.
Channel 8 hope that this agreement will increase their viewing engagement and in turn lead to more profits. The agreement with VGTD is for a period of 5 years and cost Channel 8 an amount of $1,200,000. Channel 8 hope that by the end of 2021 they will have entered into similar agreements with the other States and Territories in Australia.
Stock in the merchandise store
Channel 8 has a merchandise store which sells promotional clothing and novelty items relating to the television shows that they produce. Their merchandise store is reconciling their stock and undertaking a stocktake in anticipation of their mid-year sale. They note the following three entries in relation to their stock in their store:
2,000 unsold t-shirts from their ‘BestCook’ program which are awaiting sale;
500 Channel 8 sports branded backpacks which are paid for and awaiting collection by a local sporting club; and
30 novelty news microphones that were destroyed by a water leak in the store. The leak damaged the electrics and they no longer work.
Required: Discuss the tax implications for Channel 8 for the following transactions.
Support your answers with case and legislative authority.
a) The feasibility study (7 marks).
b) The $1,200,000 payment to the Victorian Government Telecommunications Department (7 marks).
c) The three items regarding the stock in their merchandise store (6 marks).
QUESTION 3:
Edith McKinnon is 40 years old. Edith is an Australian resident with a marginal tax rate of 32% (including any levies) who works as a freelance photographer. This year the following transactions occur for Edith.
Dividend receipts
Edith holds shares with various Australian public companies who have a tax rate of 30%. This year Edith receives the following dividends:
• A $7,000 dividend franked to 80%.
• An unfranked dividend of $5,000.
Edith receives the money into her bank account.
McKinnon Family Trust
Edith decides that she wants to be able to distribute income to her family based on how much money they have made each year. She decides to set up a discretionary trust called the McKinnon Family Trust. The trustee of the trust is a corporate trustee called McKinnon Holdings Pty Ltd. Edith decided to use a corporate trustee for asset protection purposes.
This year, the trust has income from property of $50,000 and expenses (repairs and agent fees on property) of $25,000.
The corporate trustee passes the following resolutions to distribute the net income of the trust as follows:
- $15,000 to Edith;
- $5,000 to Edith’s son Gary who is 5 years old.
No further resolutions are made by the trustee regarding the net income of the trust.
House swap
Edith has always lived by the ocean in Torquay but due to medical treatments that she is undergoing this year Edith is required to travel to Melbourne 4 times a week to see her specialist. She is exhausted by all the travel and she approaches her friend Joe who lives in Caulfield (near the hospital) to see if he would like to ‘house swap’. Joe had always wanted to live by the ocean.
Edith told Joe that apart from the reduced travel for her, it would mean they can both pay less tax. Joe and Edith both had approximately $500,000 left on their mortgage and their house sizes were similar. They decided to move into and rent each other’s houses. That is, Joe would pay Edith $500 a week in rent and Edith would pay Joe the same amount. This allowed them each to take a deduction for part of the interest payments on the mortgage (now that they could say their houses were rented out).
The house swap was successful and both Edith and Joe moved into each other’s houses in March 2020.
Required: Discuss the tax implications for the following transactions.
Support your answers with case and legislative authority. Show calculations where appropriate.
a) The assessable amount to be included in Edith’s tax return resulting from the receipt of the above dividends (6 marks).
b) The income tax implications regarding the McKinnon Family Trust (6 marks).
c) The possible application of ITAA 36, Part IVA to the house swap arrangement between Edith and her friend Joe (6 marks).
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