Sale of Premises
As well as working as an employee, Abbie also owns a private business (as a sole trader) that offers tax consulting services for clients. She had a friend called Peter who ran a clothing store (as a sole trader). Peter’s business owned the retail store premises, as well as the land it was located on. Two years ago, Peter’s store was struggling to make money. As a result, Abbie’s business lent Peter’s business $200,000 at 5% annual interest.
However, a year after the loan was made, it became clear that the business could not repay the loan. As a result, Abbie and Peter came to an agreement: in exchange for Abbie’s business forgiving the debt, Abbie’s business would take a 40% interest in the land that the premises were located on. This agreement also made it clear that the land would be sold in the near future. Consequently, the shop was demolished. Also, council plans were obtained to build an 8-storey apartment. This involved Abbie’s and Peter’s businesses paying a collective total of $40,000 for architect, lawyer and local council fees. The land was then sold to a developer for $1 million through a real estate agent.
Abbie’s Investment Property
Abbie purchased an apartment on 1 March 2005, for $300,000, and paid stamp duty of $15,000. She moved into it immediately. On 1 March 2015, Abbie bought herself a house. She immediately moved into it and, thereafter, treated it as her main residence. From this time (1 March 2015), Abbie rented out her original apartment to a tenant. Its market value at the time was $500,000. In March 2018, with regards the apartment, Abbie paid $2,000 for repairing recently broken windows and $30,000 for renovating the kitchen. Abbie sold the apartment on 1 March 2021 for $650,000.
Abbie had paid $15,000 in council rates for the period 1 March 2005 up till 1 March 2015, and $6,000 for the period 1 March 2015 to 1 March 2021.
Required: For Abbie, consider the effect on her assessable income for all five (5) receipts as follows:
- Discuss whether Abbie’s receipt of her share of the proceeds from the sale of the land constituted ordinary income (5 marks).
- Discuss the CGT consequences of the sale of Abbie’s apartment (6 marks).
- Assume for Abbie’s apartment that the facts are different: she rented out the apartment from purchase (1 March 2005) till 1 March 2015, and then lived in it from 1 March 2015 until the time she sold it on 1 March 2021 (from the time she lived in it she treated it as her sole main residence for tax purposes). What difference would this make to the CGT consequences regarding Abbie’s apartment (4 marks)?