Case Study One

The following separate transactions require your advice as indicated:

John has been operating a retail business in Toowoomba for the past 10 years. He sells mobile phone and other device accessories as well as undertakes repairs to such items within the store. Further, John utilises this legitimate business to launder proceeds from his illegal drug operation. He purchases illegal drugs and on-sells them through a network of drug dealers. On 1 July 2020 John had illegal drugs on hand with a market value of $80,000 (cost price $40,000). As at 30 June 2021, he had illegal drugs on hand with a market value of $110,000 (cost price $55,000). Sales of illegal drugs during the year ended 30 June 2021 were $300,000 and other drug purchases were $150,000. John plans on including 20% of his gross profit from his drug enterprise in his taxable income for the mobile phone business. He believes this will avoid any unwanted ATO attention to his lifestyle and other assets in the event of an audit. Provide advice to John as to what amount(s) if any he should include in his assessable income for the year ended 30 June 2021.

REQUIRED: For all scenarios above, provide advice as requested. You must support your discussion with reference to any relevant authorities (including legislation and relevant case law). Please refer to the marking criteria for further details on requirements.

(Demonstrated level of understanding of the specific ordinary income and trading stock issues in relation to John through the application of the identified law)