Question 1 (4 points) Required: Discuss whether the sale of the blocks of land will generate ordinary income (citing authority where appropriate) (4 marks). Jim had always wanted to own and run a bed and breakfast (where guests pay to stay in overnight accommodation and receive breakfast the next day). About 10 years ago, he was considering purchasing a certain block of land suitable for running a bed and breakfast, which was situated about 30 km from Melbourne. At the time, a friend had mentioned to him that with Melbourne growing, in the future, this land might be worth a lot of money as Melbourne expands. Although Jim at the time was not motivated primarily by making money through the land rising in value, he still liked the idea that he could make a substantial profit from the land appreciating. He subsequently purchased that block of land, built a suitable building on it, and ran it as a bed and breakfast. After 10 years, Jim wishes to cease running the bed and breakfast, and enter into a different career. Luckily, the land had appreciated substantially in value. Rather than just sell it, Jim first demolished the bed and breakfast building, subdivided the land, and build roads on the land, as well as ensured that each block had gas, electricity and sewerage connections. He actively participated in this process. He then arranged for a real estate agent to sell each block of land.

Question 2 (4 points) Required: Discuss whether Carrie is carrying on a business (citing authority where appropriate) (4 marks). Carrie works as a full time engineer. However, she loves writing books, and spends about 15 hours a week doing so from her home office, which she uses exclusively for such purposes. She writes on average one book every 18 months, and when finished with a book, sells the copyright to a publisher. She has been doing so for about six years. However, her books have so far not been best sellers. She usually sells the copyright to each book for approximately a $5000 lump sum (not a royalty). She justifiably considers such a financial return a poor return for her time. When she first started writing books, she hoped to make enough money to quit her engineering job, but she is now losing hope of doing so. As part of the process of writing a book, Carrie will, on a few occasions every year, make research trips to nearby locations. She keeps records of these trips. She also occasionally hires an editor for advice about writing a book. The expenses for these (trips and paying an editor) amount to about $3000 a year.

Question 3 (4 points) Explain (citing sections where appropriate) whether the following receipts are specifically exempt from income tax (1 mark each): Government child care subsidy received by parents. A scholarship received by a full-time university student studying in an Australian university. The scholarship is paid by a major accounting firm. Under the terms of the scholarship, the student is obliged to undertake paid short-term employment for the accounting firm upon graduation. This employment involves giving presentations to university students about the merits of working for this firm. Student fee income received by a public Australian university that incurs its expenditures and pursues its objectives principally in Australia. Money earned by a constitutionally protected fund.