Question
The State Government announced on 1 April 2017 that a Multi Function Penitentiary (MFP) would be built on land at Gillman in South Australia that
The State Government announced on 1 April 2017 that a Multi Function Penitentiary (MFP) would be built on land at Gillman in South Australia that has been vacant for many years since the failed Multi Function Polis initially proposed for the site. This MFP will involve a uniquely integrated one stop concept of law and order where alleged criminals will be charged, tried and imprisoned all at the one time. The Government believes the benefits of such a concept will be to reduce by at least one-third the cost of administering law and order in the community, and alleviate overcrowding in other prisons. It decided that the MFP should be privately built, owned and operated. After seeking expressions of interest, the Government entered into negotiations with Servcorp Pty Ltd (Servcorp), a company that carries on the business of developing prison business practices and operating systems, and implementing them in return for a fee. Servcorp has a wholly owned subsidiary, Prisoncorp Pty Ltd (Prisoncorp), that carries on the business of operating and managing prisons in other Australian States. In some of those States, Prisoncorp has also been responsible for building the prison operated and managed by it. Both companies were incorporated in Australia. The negotiations were undertaken by the Government and Servcorp in South Australia and resulted in the Government agreeing to: (1) Pay to Prisoncorp a grant of $10m, which was required to be applied by Prisoncorp towards the cost of it building the MFP; (2) Transfer to Prisoncorp at a nil cost to it land having a value of $2m, on which Prisoncorp was required to build the MFP; (3) Pay to Prisoncorp an annual fee of $20m, indexed annually to increases in the consumer price index, for it operating the MFP; and (4) Pay to Servcorp a lump sum payment of $5m in consideration for Servcorp exclusively making available to the Government information about its business practices and systems for operating prisons. These terms are set out in a contract that is being entered into and executed here by all three parties. You have been consulted by Prisoncorp and Servcorp before they execute the contract. On the basis that they are taxpayer company entities that are Australian residents, you are required to outline for each of them whether any of the receipts in (1) to (4) are assessable income, giving brief reasons for your answer.
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