AUSTRALIAN TAX LAW

Sale of Premises

As well as working as an employee, Abbie also owns a private business (as a sole trader) that offers tax consulting services for clients. She had a friend called Peter who ran a clothing store (as a sole trader). Peters business owned the retail store premises, as well as the land it was located on. Two years ago, Peters store was struggling to make money. As a result, Abbies business lent Peters business $200,000 at 5% annual interest.

However, a year after the loan was made, it became clear that the business could not repay the loan. As a result, Abbie and Peter came to an agreement: in exchange for Abbies business forgiving the debt, Abbies business would take a 40% interest in the land that the premises were located on. This agreement also made it clear that the land would be sold in the near future. Consequently, the shop was demolished. Also, council plans were obtained to build an 8-storey apartment. This involved Abbies and Peters businesses paying a collective total of $40,000 for architect, lawyer and local council fees. The land was then sold to a developer for $1 million through a real estate agent.

Required: For Abbie, consider the effect on her assessable income for the receipts as follows:

1. Discuss whether Abbies receipt of her share of the proceeds from the sale of the land constituted ordinary income (5 marks).
2. Discuss the CGT consequences of the sale of Abbies apartment (6 marks).