ACC$80012-$ Practice Test Questions

Question $1$ Income v Capital

Brian Bart had owned a farm for $24$ years. On $1$ July $2002$ he sold the farm and retired to the north coast of New South Wales. On $1$ September $2002$ he purchased an acre of land on the waterfront for $$500,000.$ In order to provide funds for his retirement and by way of investment, Bart commissioned a builder in October $2020$ to design and build eight townhouses at a cost of $$250,000$ each. Bart also consulted his accountant and asked her to provide details of the expected rental return from the lease of seven of the units.

The units were completed in May $2023.$ One of the units was retained as Bart$$s main residence; the others were leased on a short$-$term basis. In October $2023$ Bart successfully applied to have the units separated by means of strata titles and in November $2023$ four of the units had been sold for $$500,000$ each. With the proceeds Bart purchased an adjoining block of land for $$1,200,000,$ with the intention of building more units.

Required:

Advise Bart of the income tax implications, for the $2023-24$ tax year, citing relevant legislation and case law to support your answer. Please ignore any CGT implications

Question $2$ Assessable income$-$ Compensation

On $5$ January $2024$ Rothbank, a merchant bank, received $$1,500,000$ from Gypsum Ltd after a finance agreement between them was terminated. The agreement, which had been entered into on $1$ October $2023,$ was that Rothbank would raise $$10,000,000$ by way of secured loans for Gypsum Ltd to finance the development of a mining lease near Kalgoorlie.

The terms of the release agreement provided that the amount of compensation was paid as a release from the contract and for all claims arising from the agreement. The amount of the compensation was determined by reference to the commission that would have been payable to Rothbank under the terms of the original contract. The agreement also stated that Rothbank would not act as a finance broker for other firms in the mining industry for two years. In determining the compensation, of some concern to Rothbank was the possible loss of reputation that it would suffer from the cancellation of the agreement.

Required:

Advise Rothbank of the taxation consequences arising from the termination of the contract for the $2023-24$ tax year, citing relevant legislation and case law to support your answer. Please ignore any CGT implications.