QUESTION - there are 5 Items TO THIS QUESTION
Rick Hastie is a senior executive in the Canberra office of a large company called
DxP Ltd (DxP). Rick needs to do his income tax return for the 2021 income year and
he has come to you for advice.
He provides the following information about his income and expenditure.
Item 1 - Rick's Income

He receives $500,000 per annum in salary from the DxP. In addition to his salary,
Rick received an annual performance bonus of $100,000 on 15 June 2021 as he
satisfied certain billing targets. Rick's investment portfolio comprises of the
following:
 

Asset	Acquisition Date	Acquisition Price	Notes
Queanbeyan property	24 June 2015	$600,000	Property is a vacant warehouse site
Shares in BHP	3 March 2018	$50,000	Shares pay dividends

Before Rick joined DxP, he worked for a large mining company GlenRio. DxP had
to entice him away from the mining company by offering him a payment of $250,000
if he agreed to work for DxP. Rick gladly signed the employment contract with DxP
and received the payment on 3 December 2020.

Rick loved working with his hands and had dreams of becoming a famous furniture
maker. He makes the furniture using timbers such as oak and hardwood. Rick set
up a studio in the garage of his home. In mid-2018, he bought wood-working
equipment and timber from the local merchant. Rick worked in his studio most
weekends. At first, he made furniture just for his friends when they asked him. He
also sold his furniture occasionally at the local market on Saturday mornings. He
charged prices for his furniture that only covered the cost of the materials. He paid
for everything using cash and threw the receipts into an old oil tin.

The owner of a stylish furniture store in Manuka, Mick, contacted him after seeing
Rick's furniture at a friend's house. Rick agreed to let Mick show his furniture in his
store. Once Rick's furniture went on display in Mick's store in early July 2019, Rick's
phone rang off the hook. People were keen to have an item of Rick's furniture on
display in their home.

He employed an accountant to keep his books of account and develop plans to
grow the revenue from his furniture-making. The accountant told him to set up a
website so people could read about Rick and his furniture. Rick was very busy and
employed two carpentry apprentices to help him with the furniture. Very soon Rick
was supplying his furniture to boutique furniture stores around the country and also
sold his furniture online through his website. In the 2020 income year, Rick earned

 

 

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120,000 from the furniture-making activity, and $275,000 in the 2021 income year.
Rick wanted to move his studio to somewhere bigger so that he could make more
furniture. He decided to renovate a vacant warehouse site that he owned in
Queanbeyan. He bought the property back in 2015 as a friend told him that the
Queanbeyan area, being close to Canberra, was becoming popular and the land
would increase in value in the next 10 years. Rick engaged an architect to help him
renovate the warehouse site. The architect advised Rick to find another place for his
studio and turn the vacant warehouse site in Queanbeyan into 10 courtyard homes
and sell them. Rick thought this was a good idea. Rick built the courtyard homes
using a builder who charged him $4.5million to do the construction. The value of the
vacant warehouse site at the time the construction commenced was $1.1million. He
sold the 10 courtyard homes in January 2021 for $7.5million.
Rick has a small investment portfolio comprised of BHP shares. Rick received fully
franked dividends of $4,000 in the 2021 income year.

Required:

Explain to Rick Hastie how the gains in the above-mentioned transactions would or
would not constitute assessable income under the income tax legislation Use
relevant legislation and case law to support your answer.

Do not consider residence and source issues. Include calculations if required. If
your decide that an amount is a capital receipt assume it is not assessable income
for the purposes of this Assignment (ie, there is no need to calculate the capital
gain).

Item 2 - Rick's Expenses

Rick works 3.5 days (Monday to Thursday) a week for DxP and spends 1.5 days
(Thursday and Friday) a week in his furniture studio at home. Rick incurs the
following expenditure during the 2021 income year:

• He pays $100,000 to a timber merchant for timber and other materials to use in
making his furniture.
• He receives a $500 speeding fine on the way to Mick's store to deliver furniture.
• On 1 May 2021, he buys a laptop to use in the furniture-making activity, costing
$3,600. The Commissioner states that the laptop should last 3 years. Ricks uses the
laptop 10% of the time to stream movies and watch sport.
• He travels between his office at DxP and home 5 days a week, by bus, at an annual
cost of $1,500.
• Rick uses the garage to make the furniture and one of the bedrooms in his home as
an office to do administration relating to the furniture-making activity. He pays $2,500
per month in interest on his home loan and $600 per month in heating and cleaning
costs for the home. The garage and the bedroom take up 25% of the space in the
house.
• Rick employs two students to work in the studio, paying a total of $50,000 in wages

 

 

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per year.
• Rick is thinking about starting a new business buying and selling recycled timber. He
asks his accountant to investigate the feasibility of the business before he decides.
The accountant's report cost $4,000. Rick decides not to start the business.

Required:

Using relevant legislation and case law, explain to Rick whether the amounts in
the above-mentioned transactions would or would not be allowable deductions
for income tax purposes in the 2021 income year. Show calculations where
appropriate. Do not consider the trading stock rules.


Item 3 - GST liability

Required:

Using legislation and case law, explain the GST implications of the transactions
relating to the furniture-making activity to Rick, and whether a GST liability or an
input tax credit will arise (including the amount). Assume that all entities are
registered for GST. All amounts are GST-inclusive (where applicable). Do not
calculate the net amount for the purpose of the section 17-5 of the GST Act. Do not
consider the GST consequences of Rick's building activity or the dividends.

Item 4 - Taxable Income and Income Tax Payable

Required:

Calculate Rick's taxable income and income tax payable for the 2021 income year.
Use legislation to explain your calculation. If you need to make certain assumptions
in performing the calculation, state them in your answer.

 

 

 

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