QUESTION 11

Michael is a Chief Financial Officer, earning a salary of $200,000 per annum. His brother George is a successful cattle farmer. Seeking to follow in his brothers footsteps, Michael purchased a property near his brothers farm on 1 July 2020 for $1,000,000 and paid stamp duty of $55,000 and legal fees of $2,000. The property was partially funded by a loan of $800,000 from the Commonwealth Bank at an interest rate of 6.5% per annum. The interest charges amounted to $52,000 for the 2020-21 income year.

During July 2020 Michael had the farmhouse repainted and carried out minor repairs at a cost of $3,300 (incl GST) then the property was tenanted (from 1 August 2020), with monthly rent being $1,800.

Michael purchased the following assets in the 2020-21 income year

Tractor- purchased 10 March 2021- Cost(incl GST):66000 & effective life of 15 yrs

Tools- purchased 15 March 2021- Cost(incl GST):35000 & effective life of 5 yrs

In April 2021, Michael spent $10,000 on seeds and fertilizer and commenced planting.

Michael realised that buying the property was a mistake because he didnt have sufficient time to commit to it. After lengthy discussions with his brother (George), Michael decided to sell the property to George for $800,000. At the time of the sale, the property was valued at $1,000,000.

The contract for the sale was entered into on 30 May and settlement occurred on 1 August 2021. The tenant continued to rent the farmhouse until 30 June 2021. The tractor and tools were also sold to George on 30 May 2021 for $60,000 and $30,000 respectively (market rates).

Required:

Assume where relevant, the diminishing value method is used for depreciation. Also assume that Michael is not registered for GST.

Using relevant legislation and case law to support your answer, calculate:

Michaels taxable income for the relevant financial years based on the above information. Michael can substantiate his costs. (13 marks); and

Michaels income tax payable. (2 marks