PROBLEM
ABC Sport Pty Ltd is a distributor of golf and tennis equipment based in Melbourne. It has recently experienced a reduction in projected sales, primarily because a major supplier, who supplied 40% of the sporting goods that ABC Sport distributed to its customers, cancelled a contract to supply sporting goods to ABC Sport. ABC Sport received $200,000 compensation from the supplier for the cancellation of the supply contract. Although a new supplier was found, John Smith, who is both the accountant and the Managing Director of ABC Sport, decided that more was needed to be done to improve sales and make the company more efficient. On 1 August 2016, John visited Brisbane for four weeks to examine the possibility of relocating some of the ABC Sport stores to Brisbane, where the weather is warmer for a longer period of time each year and accordingly, potential clients would have more time to play golf and tennis. The cost of this trip was $6,000. After returning to Melbourne, the company spent $125,000 analysing whether the relocation of some of the ABC Sport stores to Brisbane was desirable.
John was paid a salary of $100,000 a year and ABC contributed to John’s superannuation fund. ABC Sport also paid for his son’s school fees of $20,000 a year and provided John with a car for both business and private use. John regularly leaves his youngest son at the child care centre that ABC Sport provides for employees free of charge. ABC also gives John a new set of golf clubs each year and pays for his annual membership subscription to CPA Australia.
On 2 April 2017, the Board of Directors resolved to relocate some of the stores to Brisbane. By June 2017, production of golf clubs in Brisbane had commenced.
Prior to moving to Brisbane, John sold the family home, which was bought in 2000. At the time of purchase, the land was vacant and in 2006, John constructed a home on the property, which the family has lived in ever since. Prior to that, the family lived in rented accommodation. John was a keen yachtsman and in 1984 he had purchased an ocean racing yacht for $500,000. He sailed the yacht in a number of Sydney to Hobart races. In 2012, he installed a new mast in the yacht at a cost of $600,000. He decided not to take the yacht to Brisbane, and sold it for $2,000,000 in September 2016. At the time of sale, the mast was valued at $500,000. John
also sold a small houseboat for $8,000. He had purchased it for $12,000 in 2008 and the family used it for recreational purposes on the Murray River. John was an expert horse rider and had purchased a horse for $14,000 in 2009. He trained the horse and competed in equestrienne events as a hobby. He decided not to take the horse to Brisbane, and sold the horse for $30,000 shortly before moving to Brisbane. He also gave his mother an antique table he had purchased for $12,000 in 2006 from an antique shop in Melbourne. The table had been manufactured in 1922. At the time he gave it to his mother, it was valued at $18,000.
In 1982, John had purchased a 10 hectare block of land near Wandin, east of Melbourne, for $300,000. The family regularly spent the weekend at the property, and both John and his daughter kept their horses there. In 2014, the land was rezoned for residential development and became very valuable. John therefore decided to sell the property. He obtained a council permit to subdivide the land. However, when the decision was made to move to Brisbane, John did not continue with the subdivision and sold the land to a local property developer for $3,000,000.
In June 2017 ABC Sport was fined $50,000 for a breach of the Trade Practices Act.
Required:
Advise ABC Sport and John on the taxation issues arising from the above fact situation. Reference should be made to appropriate legislation, case law and rulings.