UNIVERSITY OF SYDNEY
FACULTY OF LAW

COURSEWORK POSTGRADUATE PROGRAM

TIME ALLOWED: 2 HOURS JUNE 1999
(20 MINUTES READING TIME)

CANDIDATES ARE REQUIRED TO ANSWER TWO QUESTIONS. ALL QUESTIONS ARE OF EQUAL VALUE

OPEN BOOK EXAMINATION

1. sale of a car;
2. sale of an item of trading stock;
3. sale of an asset acquired prior to 20 September 1985;
4. sale of a partner’s interest in partnership assets, and a partner’s interest in a partnership that is not reflected in individual assets;
5. meaning of "acquisition" and "disposal" of assets;
6. section 160M(1A) and changes of trustee;
7. sections 160M(6) and 160M(7);
8. timing rules for acquisitions and disposals formerly in s. 160U;
9. the "cost base," "indexed cost base" and "reduced cost base";
10. the interaction between CGT and income tax, and between CGT and FBT?

2. What is the significance of the High Court decision in Orica Limited for the CGT generally? Does the 1997 Act have any impact on the reasoning in the decision?

QUESTION 2 ON NEXT PAGE

Arthur was the sole beneficiary under the terms of his father's will and in July 1992 the executor of the will advised Arthur that it would shortly be transferring to him a 3 hectare parcel of land on the northern coast of NSW, valued at that time at $750,000. The land had been owned by Arthur's father who died in June 1991. Arthur was at that time living in a small fibro cottage on the land in which Arthur's father had also lived until he moved into a retirement village in January 1990. Arthur planned to demolish the cottage and construct a large two-storey building in which he would live, maintain a small office for his medical practice and run a convalescent home. The building would be two storeys with the first floor for Arthur's use and the ground floor set up as 4 self-contained flats which patients could occupy for a weekly rental while recuperating from illnesses. Arthur would live on the first floor and maintain a home office in one of his rooms but would not move his main surgery from the nearby town.

In order to realise his plan, Arthur proposes the following steps:

• In October 1992 he would move into a caravan in the local caravan park and begin to demolish the cottage. Arthur's companion, Beth, currently lives in the caravan. Arthur intends to ask Beth to move to the new building with him upon its completion.
• In order to help finance the construction of the building Arthur would subdivide the land into two parcels and sell the rear 1.5 hectare parcel. He believes it could be sold for $300,000 in November 1992.
• Construction of the new building would commence in January 1993 at an expected cost of $600,000. Arthur would have to borrow at least $250,000 from Bank Ltd. He would use the rental paid by patients to finance the interest.
• At completion in March 1993, Arthur believes the remaining land and building would be worth $900,000.

After that time Arthur plans to leave Australia to study in the US. If so, he will probably sell the development. Advise Arthur on the tax consequences of these facts.

What would be the result if Arthur were left only a life interest in the will, carried out the development plan with the consent of the remainderman (the person entitled to the freehold title to the property on Arthur’s death) and remained in occupation of the new building until his death in 1999?

In answering this question assume that the CGT provisions of the Income Tax Assessment Act 1997 have been in effect since 20 September 1985.

QUESTION 3 ON NEXT PAGE

Harry owns a suburban premises from which he operates an up-market coffee shop. Over the last 10 years of operation (commencing when the building containing the shop was first constructed at a cost of $100,000), Harry has developed a reputation for fast and friendly service which has generated a loyal customer base. Harry has also benefited from the proximity of the premises to a number of office buildings.

Harry has decided to pursue other interests and sells the business to Rosie. Harry has agreed to assign the land and building and sell the fitout and all plant and equipment to Rosie. Harry has also agreed not to open up another coffee shop or restaurant within one kilometre of the original shop for five years. To ease the transition to Rosie as the new owner/manager, Harry will continue at the coffee shop for two weeks and introduce the customers to Rosie. The contract for sale of the business allocates the total consideration of $1,000,000 as follows: $300,000 for the assignment of the land; $100,000 for the building; $100,000 for plant and equipment (tax written down value of $120,000); $500,000 for goodwill and nil for the agreement not to compete.

1. Consider the tax consequences of this transaction.