On 1 July 1986, Dean acquires a block of commercial property block under a contract of purchase for $750,000. He also incurs stamp duty associated with the purchase of $25,000 as well as conveyancing and legal costs incidental to the purchase of $15,800. These costs were incurred on the date of settlement, which was 1 September 1986.

Dean was immediately sued and incurred $50,000 in legal costs defending his right to the commercial property block against a person challenging the legal validity of his title. These costs were paid on 15 February 1987. Ongoing expenses during the ownership period were interest totalling $120,000, deductible repairs to the property of $50,0000 and rates and taxes totalling $85,000. On 7 April 1991, Dean made capital improvements to the building totalling $75,000.

On 1 September 2019, Dean sold the commercial property block under a contract of sale for $1.2m. In doing so, he spent $7,5000 in advertising costs in relation to the sale and paid sales commission to the real estate agent of $48,000.

The commercial property block had been rented out to tenants for the period of Deans ownership.

Dean wants to know whether he is better off using the indexation method for calculating his capital gain or the discount method. Advice Dean and show your capital gains/loss calculation.

Option 2 You must answer both questions

A. Mike is a lawyer, who runs his own business and does not have any employees. At 3.00 am one morning his friend Leo phones and tells Mike that he has just been questioned by police about a drug trafficking matter. Leo informs Mike that he has not been arrested but he would like to retain Mikes services as his lawyer so that he can call him any time he needs legal advice or representation. Leo adds that he will pay Mike $35,000 per year regardless of whether his services are needed.

Mike agrees and he anonymously receives $35,000 into his bank account some months after, even though Leo has not called on him for any legal advice.

Discuss whether the $35,000 received by Mike is assessable income. (5 marks)

B. Savannah always had an interest in ballet since she was young. She received training as a ballerina and over the years, she has participated in a number of local dancing competitions and collected an array of trophies. At present, Savannah is employed as a full-time accountant and she has not danced in any competitions for the past seven years. During the current tax year, Savannah decided to get back into ballet and entered a local talent competition which she won and received a cash prize of $2,000.

Due to her recent win, Savannah decides to join another competition. This time in TV. She auditions for the ballet competition and she was one of the pool of 1,000 entrants selected to participate in the TV show. On being selected, Savannah was required to sign a contract with the production TV company agreeing to quite stringent rules restricting what media outlets she could talk to, where and when she had to appear and what was required of her if she reached the final 5 and if she won the competition. She also had to commit 5 days per week to the TV production, which meant she took unpaid leave from her work as an accountant. During the final weeks of the competition, a magazine offered a $20,000 prize to the contestant from the TV show that Savannah is part of who could record the most spins in a ballet dancing routine. Savannah won $20,000 but she did not win the TV competition.

Discuss whether the $2,000 cash prize and $20,000 prize are assessable income.