Question 2 - Principles and Concepts (10 Marks)

Terry and his wife Sherry married in 1986. As Terry had extensive experience in farming the couple quickly acquired a large land holding near a town called Camden for $20,000 on the 1 February 1987. They also bought a 19th century cottage on a separate lot of land across the road from the large land holding and made that their home where they had their three daughters. The couple used the land to farm a number of vegetables including zucchini, pumpkin and turnips. Terry would transport the vegetables to the market where he sold the produce to the various stalls who would then on sell the goods to the public. Sherry would make pickled vegetables using her family's secret recipe and Terry would also sell these to the stallholders. Terry and Sherry loved this rural life and were very happy.

In 1997 Terry decided to start farming goats and sought council approval for the

erection of a goat shed with a milking stall on their large block of land, previously only used to grow vegetables. The goat shed and milking stall were approved and

with the help of Sherry and children Terry successfully managed both his market

garden and goats - expanding their sales to stallholder's goat milk, goat milk products and goat leather goods.

To the couples dismay the property and surrounding areas had been re-zoned for

residential development in 2010. Terry and Sherry enjoyed their rural life and

continued to farm the land and sell their goat and vegetable products. By 2018 the farm was surrounded by high density residential housing and council was consistently investigating complaints about the stench which came from the goats. Due to complaints Terry and Sherry were forced to close their goat farming activities. After spending $200,000 for removal of the goat shed and remediation of the land around it, in 2020, the couple reluctantly sold the property to a land developer for $5,000,000.

Required: What are the income tax consequences of the sale of Terry and Sherry's

land? Discuss.

NOTE: Your answer must be supported by references to relevant legislation, case law

and rulings. This includes discussion of issues relating to mere realisation of the land

or whether this is an isolated transaction.

HOWEVER, you do not need to consider capital gains tax provisions or the primary

production provisions. And neither are you required to calculate tax payable.