John Law, a dairy farmer, and his wife retired to the Sunshine Coast of Queensland in 2015 with $3.5 million in cash. They planned to spend some of their retirement years travelling the world in first class style and indeed took a very enjoyable 4 month trip to Europe in 2015/2017 at a cost of $170,000. Although John  enjoyed the trip very much, he became anxious that they would soon run out of money as his wife was already planning an extended holiday on the world's most luxurious cruise ship. So he began to consider ways of making some extra money in his retirement. 

Since moving to the Sunshine Coast, John  had observed through reading the local newspapers and checking the prices in the local real estate agents' windows that the value of waterfront properties was steadily inflating. He spoke to a couple of the local real estate agents and some builders who confirmed that there were large profits to be made, especially on new waterfront apartments. The real estate agent confirmed that apartments in the $450,000 to $550,000 price range sold very quickly. He also sought advice from the local council as to the planning requirements. 

John  set up a corporation called 'John  Property Pty Ltd' and he is the sole shareholder and director of the corporation. John  paid $1 for his share and then loaned money to the corporation.

So on 23April 2017, John  Property Pty Ltd purchased half a hectare of waterfront land for $1 million in order to build a block of apartment units. John  Property Pty Ltd commissioned a builder to design and build a block of ten apartments at a cost of $180,000 each. The builder also looked after all of the planning requirements. 

The apartments were completed in May 2019. In August 2019 John  Property Pty Ltd was successful in its application to have the apartments separated by means of strata titles, and by November 2019, all ten of the apartments had been sold through the local real estate agents for $420,000 to $440,000 each. 

With the proceeds John  Property Pty Ltd purchased a nearby block of land for $1.4 million in December 2019 with the intention of building more apartments. However, three months later John  Property Pty Ltd abandoned that idea when it was offered $2.9 million for the adjoining land, which John  Property Pty Ltd accepted.  

 

Required:

 

Advise John  Property Pty Ltd of the possibility of being assessed with respect to s 6-5 ITAA 1997 in regards to the above transactions. (Discuss this in relation to ordinary income only and ignore any capital gains issues).