Waite Pty Ltd is a company limited by shares incorporated under the Corporations Act 2001. The Constitution of Waite Pty Ltd does not contain an objects clause. Waite Pty Ltd has two shareholders Ross and Richard who are both Australian resident natural persons. On 1 July 2010 Waite Pty Ltd acquired 1 hectare of land on the New South Wales Mid North Coast. The purchase price of the land was $100,000. Minutes of the directors meetings at the time of the purchase of the land disclose that the purpose of the purchase was to build holiday cottages for rental to the public. In fact no work on the construction of holiday cottages ever commences.

On 1 July 2021 Magnate Pty Ltd, a company incorporated under the Corporations Act 2001, acquires all the shares in Waite Pty Ltd. Magnate Pty Ltds previous business activities have been confined to the construction of commercial buildings in Melbourne but its constitution does not contain an objects clause. Magnate Pty Ltd, in determining a purchase price for the shares in Waite Pty Ltd, valued the Mid North Coast land at $150,000. Following the purchase of the shares in Waite Pty Ltd new directors are appointed to Waite Pty Ltd. The new directors resolve to seek a rezoning of the Mid North Coast land with a view to constructing 4 homes on the land and selling each home at a profit. Waite Pty Ltd pays council fees of $2000 and legal fees of $3000 in relation to the rezoning application.

The rezoning application by Waite Pty Ltd is successful. Following the rezoning Waite Pty Ltd obtains an estimate of the market value of the Mid North Coast land. The valuation of the land is $500,000. In August 2021, Waite Pty Ltd commences work on the construction of the homes.

On 1 January 2022 the construction of the homes is completed at a total cost of $1 million. The homes prove to be very popular and each one sells for $2 million.

Advise Waite Pty Ltd on what amounts, if any, will be included in its assessable income as a result of these transactions.

Tax policy question

Critically evaluate Australias capital gains tax discount rule (discount capital gains) against the tax policy criteria of equity, efficiency (neutrality) and revenue adequacy. In addressing this, you may want to consider the following: (i) how non-capital gains are brought to tax outside the CGT regime; and, (ii) the CGT rules before the CGT discount was introduced.