Despina owns and runs a busy accountancy practice in Rockdale, Sydney. She is the principal accountant and employs three administrative staff and two other accountants.

 

The practice operates from a large office located in a commercial building in Rockdale and provides accountancy services for individuals and small businesses. The office ('the original office') was purchased in November 2006 for a cost of $200,000. Despina used her personal savings and a large gift her parents to fund the purchase of the original office.


On 17 February 2020, Despina purchased another office (the 'new office') adjacent to the original office because the business was expanding and she believed that eventually the practice would need to employ extra staff and thus require more office space. The new office cost $400,000. Despina borrowed the funds from UBank at an interest rate at 7% pa. As the practice did not immediately require the extra space however, Despina agreed that the existing tenants in the new office could stay until their original lease term ended in December 2020. The tenants were paying rent of $2,000 a week, which was applied to help repay the bank loan.

 

When the tenants vacated in mid-December, the new office was refurbished in anticipation of extra staff being employed. However, before job vacancy ads for a senior and junior accountant were due to be posted in January 2021, Despina contracted covid-19 and was hospitalised for a week.

 

After learning that she was suffering from long covid and that she would not be able to return to full-time work, Despina decided to sell her accountancy practice in Rockdale and her house in Cronulla and move back to Gloucester, a rural town 4 hours-drive northwest of Sydney where she originally grew up. She was 52 years old at the time.

 

The house in Cronulla was purchased in October 1996 for $1.2 million and sold in March 2021 for $3.2 million.

 

On 17 February 2021 the practice was sold for a total sum of $1.4 million. This was comprised of the following:

Goodwill                                                  $350,000
Original office                                         $450,000
New office                                               $550,000
Office equipment & furnishings           $50,000
 

The annual turnover of the accountancy practice was $2.1 million. Despina also received a further $35,000 for signing a contract not to open another accountancy practice within a 10-km radius for the next three years.

 

Around the same time as the sale of her practice, Despina sold her shares in Realty Pty Ltd* ('RPL') for $300,000. RPL is a company which provides real estate services to home buyers and vendors in the Eastern suburbs of Sydney. Despina owns 20% of RPL. The remaining 80% of the shares in RPL are owned by George, who is the company director and Despina's ex-husband. Although she and George divorced in 2016, Despina has retained her 20% interest in RPL since 2010 when the company was formed. She was originally allotted the RPL shares without paying for them. The assets of RPL are valued at $3.8 million. During the 2021/22 tax year, the turnover of RPL was $1.6 million.

 

Required:

Advise Despina of the capital gains tax consequences from the above transactions. Your answer must be supported by reference to relevant legislation, caselaw and tax rulings (15 Marks)
Advise Despina of the taxation consequences if she decides to contribute $600,000 from the above asset disposals to her complying superannuation fund. Despina has not made any contributions to her fund since 2019. The current total balance in her superannuation account is $1.4 million.