MLC 703- INCOME TAX PRINCIPLES

MLC 703- INCOME TAX PRINCIPLES
INSTRUCTIONS
Please note that the following will not form part of the word count:
q References, including statute and cases;
q Diagrams;
q Tables;
q 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.

MLC 703- INCOME TAX PRINCIPLES

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.

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MLC 703- INCOME TAX PRINCIPLES
Regarding referencing, you will find the Australian Guide to Legal Citation (AGLC)
style of referencing in the following web site:
http://law.unimelb.edu.au/__data/assets/pdf_file/0007/1586203/FinalOnlinePDF-
2012Reprint.pdf
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.
The assignments must be completed individually.
MLC 703- INCOME TAX PRINCIPLES
PART 1-
PROBLEM
QUESTIONS
PROBLEM QUESTION A- WORTH 5% OF YOUR
OVERALL MARK FOR THIS UNIT SO YOU SHOULD
ALLOCATE APPROXIMATELY 400 WORDS ON
DISCUSSING THIS.
PROBLEM QUESTION B- WORTH 15% OF YOUR
OVERALL MARK FOR THIS UNIT SO YOU SHOULD
ALLOCATE APPROXIMATELY 1100 WORDS ON
DISCUSSING THIS.
3

MLC 703- INCOME TAX PRINCIPLES
PROBLEM QUESTION 1A- THIS IS WORTH 5% OF YOUR
OVERALL MARK FOR THE UNIT (APPROX 400 WORDS)
Required: Discuss whether the sale of the land generates ordinary income for
Karl due to laws relating to the assessability of extraordinary/isolated
transactions. Do not discuss Capital Gains Tax. Where appropriate, support
your answer with legislative and case authority.
Karl is a rich employee investment banker. His friend Petra ran a DVD store. Petra
owned the DVD store premises and land that it was located on. Petra needed some
money as her store was struggling financially, so Karl lent her business $100,000 at
8% annual interest. However, after a year it became apparent that her business could
not repay this. Consequently, they came to an agreement, where in exchange for Karl
forgiving the debt, he would take a one quarter interest on the land that the business
premises was located on. At the time of this arrangement it was agreed that the land
would be sold in the near future. Consequently, the store was demolished, and council
plans were obtained to build a 5 storey apartment in its place. Karl was the one who
organised the demolition and worked closely with the architects and lawyers to get the
council approval. This involved about $20,000 in fees for architects and lawyers.
Subsequently, the land with plans and council approval was sold through a real estate
agent for $800,000.

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MLC 703- INCOME TAX PRINCIPLES
4
PROBLEM QUESTION 1B- THIS IS WORTH 15% OF YOUR
OVERALL MARK FOR THE UNIT (APPROX 1100 WORDS)
On 1 June 1999 Cindy entered into a contract to buy two separate shop premises.
Settlement was on 1 October 1999. Cindy paid $200,000 for each shop premises.
There was stamp duty of $10,000 payable for each of the premises. Cindy used each
of these premises to runs shops that sold sports shoes.
On 10 August of 2016, Cindy decided to go into early retirement despite being only
52 years old. As a result, she entered into the two separate contracts with Di:
• The first sports shoe shop was to be sold to Di. Title to the actual shop
premises was to be sold for $600,000. The current shoes in the store were to
be sold for $60,000, and the goodwill attached to the store was to be sold for
$150,000.
• The second sports shoe shop was to be rented to Di for a three year term. The
terms of the lease set the rent at $15,000 per year, and there was an upfront
lease premium of $40,000.
Each of the stores consistently had an annual aggregate turnover of over $2.5m for the
years they were owned and run by Cindy.
When Cindy entered into the 10 August 2016 agreement in addition to the above she
also owned the following:
• 60% share of the house she lived in, which was valued at $1.5m.
• 45% interest in a company called Small Pty Ltd, which owns 4 investment
properties. 55% of this company is owned by Cindy’s friend Nathan. The total
value of this company is $2m.
• 65% share in an investment property with her friend Mike. This property is
valued at $500,000 but has a $200,000 mortgage on it.
• A life insurance policy worth $100,000.
• CBA shares, current market value of $300,000.
A few years ago on 1 July 2011, Cindy had purchased a Melbourne CBD
apartment to live in for $200,000 for which she also paid stamp duty of $10,000.
She immediately moved into it after she bought it and treated it as her main
residence. On 1 July 2012 Cindy purchased a suburban house to live in, which she
immediately moved into and treated as her main residence for tax purposes. She
immediately rented out her CBD apartment at this time, and had it valued at
$400,000. Cindy sold this CBD apartment for $500,000 on 20 August 2016.
5
Please focus upon the Capital Gains Tax implications for this
question.
Please refer to all of the relevant sections of the legislation, cases and
any other scholarly material when providing advice to Cindy. Advise
Cindy on:
• Any Capital Gains Tax liabilities for her in relation to her
activities.
• Specifically, make sure that your discussion includes advice on
whether Cindy can take advantage of the CGT small business
concessions to reduce the amount of tax payable.
• Also ensure that you calculate Cindy’s Net Capital Gain for
the current financial year.
6

MLC 703- INCOME TAX PRINCIPLES
PART 2- POLICY
BASED ESSAY
QUESTION
POLICY BASED ESSAY QUESTION THIS IS WORTH 20% OF
YOUR OVERALL MARK FOR THE UNIT (APPROX 1500
WORDS)
Under Division 115 of ITAA 97, many capital gains are subject to a 50% discount.
Critically discuss the whether capital gains should be subject to a 50% discount.
Please consider this in the context of fairness, economic efficiency, protection of
government revenue and any other relevant consideration

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