Question 3(10 marks): Bill and Fred Leman had been very successful financially. On the death of their father in June 1990, the brothers had inherited a hotel called The Golden Arms' and 50 hectares of land in a prime residential area of the Mornington Peninsula in Victoria. Their father had built the hotel in 1976 at a total cost of $600,000 (land $375,000 and building $225,000) and paid a further $120,000 for the hotel's licence to sell alcohol. In June 1989, their father increased the size of the hotel by 50% by building a new wing on the eastern end of the hotel at a total cost of $150,000. Two weeks after their father's death, Bill and Fred were offered $1,500,000 for the hotel building (which included the new extension which was valued at $330,000) and $300,000 for the licence to sell alcohol. The brothers declined to sell, although the local estate agent deemed the offer to be a good price as the land alone was valued at $600,000 at the time. The 50 hectares of land on the Mornington Peninsula was acquired by their father in November 1989 for $1,500,000. He had originally intended to retire to the property and establish a vineyard. After their father's death, Bill and Fred had structured their affairs so that the Golden Arms Hotel was operated as a partnership with each brother having a 50% interest in the business. In June 1991, the brothers formed a company (Leman Pty Ltd) which issued both Fred and Bill with 1,500,000 non-redeemable ordinary shares paid up to $1.50 each in consideration for the title to the Mornington Peninsula land which after their father's death they had jointly owned. At the time of the transfer the land had a market value of $3,000,000. Fred and Bill were the sole shareholders and directors of Leman Pty Ltd. After acquiring the land, Leman Pty Ltd proceeded to develop it. The company constructed roads and subdivided the land into 100 half-hectare lots. The cost of the subdivision, incurred in the March quarter of 1992, was $300,000 In the September quarter of 1992, 50 lots were sold to private owners for an average price of $60,000 per lot, while a building construction company paid $75,000 for a 12-month option to acquire the remaining 50 blocks. The building construction company exercised its option in Oxford University Press Sample Chapter Capital Gains 35 Australian Taxation Study Manual 10-070 September 1993 and paid $3,000,000 for its 50 lots. Legal and other costs in disposing of land averaged $2,100 per lot To ensure that only quality houses were constructed on this land, Leman Pty Lid required each purchaser to sign an agreement which bound the purchaser to ensure that the house constructed would not be two-storey and would be at least 15 squares in area. The agreement required each purchaser to pay $75,000 to Leman Pty Ltd if the agreement was breached. In July 2017, Fred's marriage of 20 years ended when his wife filed for divorce. The divorce cost Fred $1,700,000 in an out-of-court settlement. In order to raise these funds, Fred had to dispose of several of his assets. First, in August 2017, Fred disposed of half his 50% share in The Golden Arms Hotel for $1,200,000. Under the terms of his disposal, the incoming partner (Mary Brown) paid Fred $1,200,000 and in return acquired a 25% interest in the business (half of Fred's 50% interest in the partnership). The purchase agreement contained the following information: Business land and buildings 650,000 Goodwill Fixtures and fittings 350,000* 105,000 Trading stock 95,000 $1,200,000 The value of the goodwill was determined as 70% site goodwill (licence to sell alcohol) and 30% personal goodwill. Second, in December 2017, Fred disposed of his collection of Australian wildlife paintings. The collection was valued at $350,000 if sold at auction, but as Fred wished to keep the collection in the family, he sold it to his brother Bill for $310,000 Fred had purchased the collection in March 1995 for $120,000. Discuss the tax implications for Fred Leman, Bill Leman, and Leman Pty Ltd that resulted from each of the above events. In each case you must identify the statutory provisions involved and any relevant case law. Where appropriate, calculations should be provided to support the conclusions from your analysis. Where more than one outcome is possible, state what assumptions you have made and what further information you would require in order to come to a sound conclusion. Question 3(10 marks): Bill and Fred Leman had been very successful financially. On the death of their father in June 1990, the brothers had inherited a hotel called The Golden Arms' and 50 hectares of land in a prime residential area of the Mornington Peninsula in Victoria. Their father had built the hotel in 1976 at a total cost of $600,000 (land $375,000 and building $225,000) and paid a further $120,000 for the hotel's licence to sell alcohol. In June 1989, their father increased the size of the hotel by 50% by building a new wing on the eastern end of the hotel at a total cost of $150,000. Two weeks after their father's death, Bill and Fred were offered $1,500,000 for the hotel building (which included the new extension which was valued at $330,000) and $300,000 for the licence to sell alcohol. The brothers declined to sell, although the local estate agent deemed the offer to be a good price as the land alone was valued at $600,000 at the time. The 50 hectares of land on the Mornington Peninsula was acquired by their father in November 1989 for $1,500,000. He had originally intended to retire to the property and establish a vineyard. After their father's death, Bill and Fred had structured their affairs so that the Golden Arms Hotel was operated as a partnership with each brother having a 50% interest in the business. In June 1991, the brothers formed a company (Leman Pty Ltd) which issued both Fred and Bill with 1,500,000 non-redeemable ordinary shares paid up to $1.50 each in consideration for the title to the Mornington Peninsula land which after their father's death they had jointly owned. At the time of the transfer the land had a market value of $3,000,000. Fred and Bill were the sole shareholders and directors of Leman Pty Ltd. After acquiring the land, Leman Pty Ltd proceeded to develop it. The company constructed roads and subdivided the land into 100 half-hectare lots. The cost of the subdivision, incurred in the March quarter of 1992, was $300,000 In the September quarter of 1992, 50 lots were sold to private owners for an average price of $60,000 per lot, while a building construction company paid $75,000 for a 12-month option to acquire the remaining 50 blocks. The building construction company exercised its option in Oxford University Press Sample Chapter Capital Gains 35 Australian Taxation Study Manual 10-070 September 1993 and paid $3,000,000 for its 50 lots. Legal and other costs in disposing of land averaged $2,100 per lot To ensure that only quality houses were constructed on this land, Leman Pty Lid required each purchaser to sign an agreement which bound the purchaser to ensure that the house constructed would not be two-storey and would be at least 15 squares in area. The agreement required each purchaser to pay $75,000 to Leman Pty Ltd if the agreement was breached. In July 2017, Fred's marriage of 20 years ended when his wife filed for divorce. The divorce cost Fred $1,700,000 in an out-of-court settlement. In order to raise these funds, Fred had to dispose of several of his assets. First, in August 2017, Fred disposed of half his 50% share in The Golden Arms Hotel for $1,200,000. Under the terms of his disposal, the incoming partner (Mary Brown) paid Fred $1,200,000 and in return acquired a 25% interest in the business (half of Fred's 50% interest in the partnership). The purchase agreement contained the following information: Business land and buildings 650,000 Goodwill Fixtures and fittings 350,000* 105,000 Trading stock 95,000 $1,200,000 The value of the goodwill was determined as 70% site goodwill (licence to sell alcohol) and 30% personal goodwill. Second, in December 2017, Fred disposed of his collection of Australian wildlife paintings. The collection was valued at $350,000 if sold at auction, but as Fred wished to keep the collection in the family, he sold it to his brother Bill for $310,000 Fred had purchased the collection in March 1995 for $120,000. Discuss the tax implications for Fred Leman, Bill Leman, and Leman Pty Ltd that resulted from each of the above events. In each case you must identify the statutory provisions involved and any relevant case law. Where appropriate, calculations should be provided to support the conclusions from your analysis. Where more than one outcome is possible, state what assumptions you have made and what further information you would require in order to come to a sound conclusion