Tutorial No. 4 Ordinary Income

(Starting the week beginning Monday 21 August 2017)

Q1Income from property

- Different examples of property receipts

Required

For each of the following scenarios involving receipts from property, consider whether the receipts are ordinary income under s 6-5 ITAA 1997, and state your reasons incorporating common law.(Ignore CGT consequences)

(1)Sale of a 5-bedroom residence held by the same family for 20 years. The parents are downsizing and upgrading as the children have left home. The best real estate agents have been hired to sell with the intention to realize the home's greatest value.

(2)A private lender receives interest (at a higher rate) on loans made to clients who do not meet bank eligibility requirements.

(3)A share trader reviews his trading account and smiles as he exclaims "We're in the money!".

Q 2Ordinary income

- Receipt from property as an isolated transaction

Scenario 1 - Joy's sale of her grandmother's home

Joy was a career teacher, and was contemplating retirement when she unexpectedly inherited the family home from her grandmother.Joy had assumed her grandmother would leave the property to her parents who were still alive.The grandmother's home was on a large block, and the house needed updating, although it was fit for rent.The market value was only $400,000 - basically land value. As Joy was only living in rental premises, Joy saw this was an amazing opportunity to build her dream home. She thought of knocking down the old house and building a new one, but she needed capital to do that and she only had $50,000 savings.She thought if she retired and drew down a lump sum of $200,000 in cash from her pension fund that would mean she would have sufficient capital to build but leave her with a small pension to live on.Then she realized if she kept the large 4 bedroom old house she could get $20,000 in rent for the year which would supplement her living needs on top of her pension. Accordingly, Joy built a new residence at the back of the grand parents house which cost her $200,000.

Two years later, Joy was living in her dream home, she had no debt, she had her small pension and rental income from the old home.But she found it stressful to deal with the tenants who were rowdy Uni students and found them unreliable in terms of payment. After one very loud party, Joy said to herself 'Enough is enough - I am going to sell granny's home to someone who will buy it to live in.I will get a neighbour who will care for the property and be respectful'.Joy subdivided the land for $20,000 and erected fencing for $5,000 so that she could sell the old house.However, Joy misunderstood that buyers for her inner city suburb expected a much better product for the price Joy was asking, and were not interested in renovating the old home.After a failed auction and market campaign, Joy spoke to her real estate agent who said she would have no trouble selling her dream house for her. Joy thought about it and then realized she could sell her new home she had been living in for the last 18 months and use those proceeds to knock down the old house and build a new home.This was indeed a windfall, as she always preferred the street front position that was not shaded by the giant tree from the neighbour's property. The real estate agent sold the house for $550,000 and Joy was staggered with the sale proceeds of the new home.Joy celebrated and immediately bought a new car.She now had the money to rent a unit nearby, knocked down the old home and build an even better dream home.

Required

The following scenario involves the sale of property as an isolated transaction.

Advise whether the receipt from the sale of the property would be ordinary income and give your reasons - common and statute law.

*For another problem question on 'receipts from property' refer to the Self Study Problem on Canvas.

Q 3Ordinary income

- Miscellaneous compensation receipts

Scenario re Jade

Jade has been an employee for 20 years for her employer and reached a senior level. However, the past 5 years have not been an easy road for Jade who has bitten her lip about many matters, particularly the way she has been treated by her senior managers.

Eventually the stress became too much for Jade when she found out from a 24 hour blood pressure monitor that she had a blood pressure level on a normal day peaking a number of times at 210 /120 - and her doctor advised if she continued like this she risked a heart attack or a stroke.Something had to change.

Jade then wrote to her employer and claimed that over the 3 years 2013-2014 she was victimized, bullied, harassed and suffered unreasonable administration, which she submitted was a breach of contract by her employer.

She had the same claims in 2015 and 2016 but they also included maladministration and misfeasance - again a breach of contract by her employer.

Jade's claims were referred to the employer's legal department and lawyers for both parties were brought in and negotiations took place.

The final result saw an exit strategy package for Jade involving the following elements:

(1)Back Pay for 3 pay rises - $15,000

Jade proved that she was unjustly denied pay rises for the last 3 years.She would be compensated via back pay in her next pay.

(2)Miscellaneous Leave - $80,000

Her employer stipulated her duty was to stay at home but she needed to make herself available if required.

(3)Annual leave and Long Service Leave

Annual leave ($10,000) and long service leave ($15,000) entitlements are to be paid out with the redundancy.^.

(4)Compensation for harassment - $50,000

Jade's claim of breach of contract via bullying, victimizing, harassment, unreasonable administration, maladministration and misfeasance was conceded by her employer to be harassment, and settled upon $50,000 compensation for pain and suffering.

Required

Advise whether the miscellaneous compensation receipts in the scenario are ordinary income.

The University of Adelaide Income Tax Law Tutorial No. 4 Ordinary Income (Starting the week beginning Monday 21 August 2017) Q1 Income from property - Different examples of property receipts Required For each of the following scenarios involving receipts from property, consider whether the receipts are ordinary income under s 6-5 ITAA 1997, and state your reasons incorporating common law. (Ignore CGT consequences) Q2 (1) Sale of a 5-bedroom residence held by the same family for 20 years. The parents are downsizing and upgrading as the children have left home. The best real estate agents have been hired to sell with the intention to realize the home's greatest value. (2) A private lender receives interest (at a higher rate) on loans made to clients who do not meet bank eligibility requirements. (3) A share trader reviews his trading account and smiles as he exclaims \"We're in the money!\". Ordinary income - Receipt from property as an isolated transaction Scenario 1 - Joy's sale of her grandmother's home Joy was a career teacher, and was contemplating retirement when she unexpectedly inherited the family home from her grandmother. Joy had assumed her grandmother would leave the property to her parents who were still alive. The grandmother's home was on a large block, and the house needed updating, although it was fit for rent. The market value was only $400,000 - basically land value. As Joy was only living in rental premises, Joy saw this was an amazing opportunity to build her dream home. She thought of knocking down the old house and building a new one, but she needed capital to do that and she only had $50,000 savings. She thought if she retired and drew down a lump sum of $200,000 in cash from her pension fund that would mean she would have sufficient capital to build but leave her with a small pension to live on. Then she realized if she kept the large 4 bedroom old house she could get $20,000 in rent for the year which would supplement her living needs on top of her pension. Accordingly, Joy built a new residence at the back of the grand parents house which cost her $200,000. Two years later, Joy was living in her dream home, she had no debt, she had her small pension and rental income from the old home. But she found it stressful to deal with the tenants who were rowdy Uni students and found them unreliable in terms of payment. After one very loud party, Joy said to herself 'Enough is enough - I am going to sell granny's home to someone who will buy it to live in. I will get a neighbour who will care for the property and be respectful'. Joy 1 The University of Adelaide Income Tax Law subdivided the land for $20,000 and erected fencing for $5,000 so that she could sell the old house. However, Joy misunderstood that buyers for her inner city suburb expected a much better product for the price Joy was asking, and were not interested in renovating the old home. After a failed auction and market campaign, Joy spoke to her real estate agent who said she would have no trouble selling her dream house for her. Joy thought about it and then realized she could sell her new home she had been living in for the last 18 months and use those proceeds to knock down the old house and build a new home. This was indeed a windfall, as she always preferred the street front position that was not shaded by the giant tree from the neighbour's property. The real estate agent sold the house for $550,000 and Joy was staggered with the sale proceeds of the new home. Joy celebrated and immediately bought a new car. She now had the money to rent a unit nearby, knocked down the old home and build an even better dream home. Required The following scenario involves the sale of property as an isolated transaction. Advise whether the receipt from the sale of the property would be ordinary income and give your reasons - common and statute law. *For another problem question on 'receipts from property' refer to the Self Study Problem on Canvas. Q3 Ordinary income - Miscellaneous compensation receipts Scenario re Jade Jade has been an employee for 20 years for her employer and reached a senior level. However, the past 5 years have not been an easy road for Jade who has bitten her lip about many matters, particularly the way she has been treated by her senior managers. Eventually the stress became too much for Jade when she found out from a 24 hour blood pressure monitor that she had a blood pressure level on a normal day peaking a number of times at 210 /120 - and her doctor advised if she continued like this she risked a heart attack or a stroke. Something had to change. Jade then wrote to her employer and claimed that over the 3 years 2013-2014 she was victimized, bullied, harassed and suffered unreasonable administration, which she submitted was a breach of contract by her employer. She had the same claims in 2015 and 2016 but they also included maladministration and misfeasance - again a breach of contract by her employer. Jade's claims were referred to the employer's legal department and lawyers for both parties were brought in and negotiations took place. The final result saw an exit strategy package for Jade involving the following elements: 2 The University of Adelaide Income Tax Law (1) Back Pay for 3 pay rises - $15,000 Jade proved that she was unjustly denied pay rises for the last 3 years. She would be compensated via back pay in her next pay. (2) Miscellaneous Leave - $80,000 Her employer stipulated her duty was to stay at home but she needed to make herself available if required. (3) Annual leave and Long Service Leave Annual leave ($10,000) and long service leave ($15,000) entitlements are to be paid out with the redundancy.. (4) Compensation for harassment - $50,000 Jade's claim of breach of contract via bullying, victimizing, harassment, unreasonable administration, maladministration and misfeasance was conceded by her employer to be harassment, and settled upon $50,000 compensation for pain and suffering. Required Advise whether the miscellaneous compensation receipts in the scenario are ordinary income. 3