The major assessment task for this subject is designed to be submitted in two parts to enable you to benefit from feedback provided on Part A (Assessment task 2). Assessment tasks 2 and 3 relate to the tax affairs of Bill. The information presented in this first task will be relevant, to both Part A and Part B, along with the feedback provided when your submission is returned.

Bill owns and has operated a bicycle shop in a major regional town since 1 July 2011. He lives 15 minutes from town on 5 hectares with his spouse. The property is on two titles. The 4 hectare block has their home and was purchased in joint names. The adjacent 1 hectare has a large shed and workshop/studio apartment that existed when the blocks were purchased and in which they lived while building the house and was purchased only in Bills name. Both properties were purchased at the same time, on 1 November 2009, and the home was completed and they moved in on 1 December 2010.

The annual gross turnover from the bicycle shop last year was $1,200,000 and he expects this to increase by around 10% in the current year.

Each year he arranges for the storage of bicycles purchased, if required by customers, in the shed for pick up in the week before Christmas. Generally these start to be stored from July. In addition he has stored some second hand trade-in bikes acquired mostly in February to October which he drops off at the Mens Shed every month. These are reconditioned by the Mens Shed members and donated to charity. He has undertaken these activities since July 2015.

During the current year he has undertaken an extension to the shop premises which was finished in April costing $200,000. This additional space will discontinue the need for storage away from the shop.

This assignment has two parts, both must be submitted and your submission should adopt the ILAC decision model. Ensure you note relevant legislation, case law or other supporting information as well as any additional information you may require. The report should follow the style guide below.

Each part has a different submission date. The Part A response is to be based on the data provided below under the heading Assessment item 2.

Part A Question

As a result of the additional storage space Bill is considering the option to sell the 1 hectare containing the shed and workshop/studio apartment. The property was purchased for $300,000 and Bill has made no improvements during the time he has held the property and while he borrowed 80% of the purchase price he has now repaid 60% of his borrowings. He neighbour who is a Real Estate Agent has indicated he believes he could sell the property for $500,000.

Required

Determine the tax consequences of the sale? (You are NOT required to calculate any possible tax payable but should provide some indication of the amount of any possible assessable component).

Your advice is to take the form of a report (adopting ILAC style) which will form part of the client work papers and should include a recommendation based on the known facts provided above as well as identifying any additional information that should be requested prior to providing any advice to the client (15 marks)

This is the second component of the problem solving assessment task. Your response to Part B should also consider relevant data provided in Part A and feedback provided in respect of Part A.

Part B Question

Bill decided not to sell the property opting instead use the apartment as a bed and breakfast following an increased interest in regional holidays. It was available for bookings from the beginning of February. He did however sell two paintings that had been hanging in the studio apartment. He had purchased them in 2009 for $700 each, he sold one for $450 and the other for $900.

At the end of the current financial year the following activities had occurred.

Bicycle business
Sales	$ 1,382,500
Purchases	$ 1,078,000
Opening stock (1 July)	$ 210,000
Closing stock (30 June)	$ 240,000
Occupancy expenses (rates, electricity etc)	$ 58,000
Wages	$ 85,176
Travel (actual cost of work van)	$ 23,500
Installation of fittings for new storage area.	$ 38,000
Painting of internal and external walls, excluding new storage space.	$ 25,000
Phone & Internet store	$ 6,000
Loan payment on 1 hectare property (includes interest on loan for year $ 4,752)	$ 8,000

Wages expense includes:

• superannuation for two employees;
• payment to a part time retail assistant who works 20 hours per week at $25.50;
• payment to his spouse who does cleaning, and occasionally works in the store for approximately 4 hours per week at $32.00 per hour; and
• wage to Bill of $52,000.

The wage to Bill and payment to his spouse are deposited into a joint account.

From this joint account the following transactions occurred:

Interest earned		$27.00
Bed and Breakfast activities (30 days of bookings from February)
	Income	$ 3,000
	Provisions expense	$ 900
	Occupancy expenses	$ 1,000
	Expense relating to advertising online	$ 300

Rental property in spouses name only (expenses paid from joint account)
	Income (net of agents fees)	$ 19,874
	Repairs to bathroom expenditure	$ 570
	Lawn upkeep expense	$ 2,600
	Loan Payments (includes interest on loan for year $11,550)	$ 14400
	Depreciation expense	$ 1,000
	Rates, Insurance and water fees	$ 3,450

Bills spouse also worked as a part time nurse earning $47,000 with tax withheld of $6,604 and incurred $2,300 in employment related expenses such as uniform, professional subs and training costs.

Bill has paid $35,700 PAYG installments.

Required

1. Prepare a report explain what amounts would or would not be included in the calculation of the tax payable for Bill to be retained in a work file. (15 marks)

1. Prepare a draft letter to Bill advising the tax position. (5 marks)

Both parts can be submitted in a single file. Ensure all calculations are clearly detailed (Total of 20 marks for Part B).