QUESTION 3 20 MARKS Michelle Mental is a registered psychologist. Over the past decade, she has established herself as the leading sports psychologist for top professional sportspeople in Melbourne. However, her career is at a cross-roads, as her income has fallen by 80 per cent in the 2019-2020 income year. Nearly all of her clients have recently relocated to Queensland. Queensland is the only State in Australia that remains relatively unaffected by the Covid-19 pandemic. As a result, all of the premierships sporting teams in all of the major sporting codes are now based in Queensland, which is where all their games are played. Michelle comes to you for advice regarding the income tax implications of two different options that she is considering. She has always operated her business as a sole trader, and will continue to do so regardless of the option she chooses to implement. Based on her business turnover, she operates a small business entity as defined, and will continue to meet this definition regardless of the option she chooses to implement, to take advantage of the tax concessions available under Div 328 ITAA97. Option 1: (10 marks) Michelle and her family relocate to Queensland in February 2020, and she opens a sports psychology practice in Red Hill, close to all of the major sporting grounds in Brisbane. The advantage of this option, is that she can resume face-to-face therapy sessions with her existing clients and that she can expand her business by signing up new clients in Queensland. She will also be eligible to receive a business expansion grant from the Queensland Government totalling $10,000. The disadvantage is that she would have to cancel the lease agreement on the property she uses in Melbourne to operate her business, and her husband would have to resign from his fulltime employment in Melbourne as a leading marketing consultant. However, based on her husband's experience, she plans to employ him in her business to take responsibility for marketing and advertising as part of a plan to sign up new clients to expand her business. Michelle's lease agreement on the Melbourne property expires on 30 June 2020. Her rent, as stipulated in the lease agreement, totals $5,000 per month. If she cancels the lease agreement effective from 1 February 2020, she will still be liable for the full rent until her landlord finds a new tenant or until 30 June 2020, whichever comes first. Due to severe Covid-19 restrictions that are in place across Melbourne, her landlord stands little chance of finding a new tenant before 30 June 2020. On that basis, Michelle's landlord agrees to a reduction in her rent, so that she only has to pay rent of $2,000 per month from 1 February 2020 to 30 June 2020, but on condition that she prepays the full amount due of $10,000 on 1 February 2020. If she chooses this option, Michelle will agree to these terms and make the prepayment on 1 February 2020. This means she will vacate the premises on 1 February 2020, giving her landlord vacant possession of the property on that date. Therefore, Michelle will no longer operate her business from these premises, starting on 1 February 2020. In order to sign up new clients, Michelle would have to undertake a well-planned marketing and advertising campaign, incurring the following expenses for the remainder of the 2019-2020 income year: Pay her husband a gross salary that totals $230,000 which is commensurate with the salary he earned in Melbourne, but $80,000 more than the gross salary paid to leading marketing consultants in Brisbane Pay for two months of outdoor advertising on electronic billboards at major sporting grounds in Brisbane at a cost totaling $60,000. The billboards are owned and operated by a nationwide company that has several clients at any one time that advertise on the billboards Purchase new uniforms for her office staff, comprising of designer denim jeans and white button shirts, at a cost totaling $3,500 Order and pay for water bottles and gymnasium towels that she would give away free of charge to her existing clients. Her name and business website address will be printed on these, at a cost totaling $1,900 Hosting a cocktail party for the coaches of all the professional sports teams based in Brisbane, to introduce them to her new Brisbane practice. Michelle plans on hosting this function at a restaurant venue that overlooks the Brisbane River, at a cost totaling $25,000. Option 2: (10 marks) She remains in Melbourne, but expands her business to host online group coaching and mentoring sessions. To do so, she will incur the following expenses in the 2019-2020 income year: The purchase cost of a 3-D digital video camera, purchased on 1 March 2020, at a cost totalling $98,000 The purchase cost of a high definition video editing computer system on 1 April 2020, at a cost totalling $185,000 A one-off, upfront licence fee totalling $5,000 to use the software that comes with the high definition video editing computer system and which is essential and required to operate this computer system She will schedule two-weekly appointments with a hairdresser to have her hair professionally managed so that she looks her best when she appears in the online sessions. These costs will total $1,000 She will pay a makeup artist $1,200 to teach her how to apply her own makeup so that she looks her best when she appears in the online sessions. Michelle's income tax records reveal that the opening balance of her small business asset pool as at 1 July 2019 totals $186,000. You are required to: Discuss all of the relevant income tax implications for the 2019-2020 income year, for each of the two options that Michelle is considering, separately. Show all your calculations and provide reasons for your answers. Your answers should reference relevant sections and divisions of the Income Tax Assessment Acts, relevant case law and relevant rulings from the Australian Taxation Office.