Jacinta turned 55 years of age. Having spent the last thirty years working as a labourer for a construction company Jacinta was looking forward to retiring. As part of her retirement plan. Jacinta purchased a three-acre property in Bendigo, Victoria for $2,500,000. Jacinta chose to purchase in Bendigo as the rate of return was much higher than in her home town of Sydney

. The property purchased a is a purpose-built Specialist Medical Centre that has four separate consulting rooms, two treatment rooms and all the facilities to support four fulltime practitioners. Ample parking and comfortable waiting areas make it an ideal location for patients to access as it was located in a busy hospital precinct. Currently tenanting the property is three obstetricians; Dr Hobart, Dr Norwady and Dr Rita. All three tenants are paying $50,000 of rent per year and $12,000 of outgoings.

 Jacinta agreed to purchase the property and signed the contract in June 2018 subject to a 30-day due diligence. The due diligence resulted in one adverse finding. Dr Rita has been habitually late in making rent payments. On presenting this finding to the vendors, Jacinta’s agents were able to negotiate a new clause in the contract. The contract was amended to include a repayment of $50,000 of the proceeds if any of the tenants were late in making rent payments by more than three months. Settlement occurred on the property in July 2018. Jacinta paid $30,000 to her agent for the due diligence on settlement.

 Just a month after purchasing the property, Jacinta was contacted by her neighbours who asked if she would be interested in joining their association of property owners in her street who were applying to the council for a development application which would allow them to build and subdivide a number of affordable aged care housing. Jacinta was enticed by the profit that could be made on her property as there was a spare two acres not currently being used at the back of her medical centre. Jacinta attended the regular meetings of the association and contributed $55,000 in September 2018 which was used to pay a town planner to prepare the documentation required for council. The application was successful.

 The association of property owners agreed to continue to work together to build the housing as they believed that they would be able to source better trades to build the development for a better price if they banded together. The group incorporated a company to organise the development which they called Bendigo Developers Pty Ltd. They continued to hold regular meetings where they collectively made many decisions regarding the development. The group tendered out the development and selected a competent builder. Once building was well underway the group employed a sales person who set up a stand in the local shopping centre with a model of what the property would look like. Any interested buyers would be given a tour of the development site and be invited to sign a contract of purchase in a temporary building the group purchased and labelled “Bendigo Developers site office”.

 During construction Jacinta’s tenants were frustrated with the amount of noise resulting from the construction. Dr Hobart was so frustrated that he refused to pay rent and only resumed paying after four months when he received a final demand 200187 Take Home Exam Session 1 4 notice. Jacinta claimed $50,000 from the vendor as agreed in the contract and was successful.

 In August of 2020 the development was complete, and Jacinta paid $1,200,000 for the construction, subdivision and sale of eight aged care houses on her property. All eight houses were sold and settled in September 2020 and Jacinta received $6,000,000 million in total. Since purchase of the property Jacinta has paid $22,000 of council rates for the property.

 Needless to say, Jacinta was very happy with the progression of her retirement plan. Not only did she have a great amount of cash funds from the sale but she also retained the medical centre on 1 acre of the property which she plans to continue to rent out throughout retirement.

 Question 1: Part A

Advise Jacinta whether the $6,000,000 could be considered ordinary income? Your answer must focus only on the ordinary income implications of this question. Your answer must discuss all the ways the receipt might be ordinary income to Jacinta.

 Question 2: Part B

Advise Jacinta whether the $6,000,000 could have capital gains consequences? Your answer must include a capital gains calculation and address each payment made or received by Jacinta as it relates to the capital gain or loss. For example, do you include the $30,000 payment made to the agent for due diligence in the calculation and if so why? Your answer must focus only on capital gains implications of this question.