Question 1
Part A
Alex and Adah have been married for 7 years. For the duration of their marriage Adah has not had a paid job. Recently Alex had a medical operation, but unfortunately he did not recover fully from it and he now requires constant care. Adah now cares for Alex 24 hours per day. Alex sued the doctor that performed the operation, but the doctor was not liable as it was found that he had acted without negligence. Despite this, the doctor and his insurance company decide to give Adah $200,000 in recognition of the 24-hour care that she will provide Alex in the coming years.
Required: With reference to case law, discuss whether the $200,000 constitutes assessable income (10 marks)
Part B
As it turned out, Alex’s health declined rapidly and Adah rings you to tell you that he passed away shortly after she received your advice. Adah seems happy that she has received the $200,000. She tells you that she is so happy with the earlier advice that you gave her that she is going to give you $8,000. The partners of your firm are so pleased that your client is so happy with your services that they give you a $1,000 gift card by way of a bonus.
Required: Discuss whether you will be assessable on the $8,000 and the $1,000. Where appropriate support your answers with legislative authority and case authority. (10 marks)
Question 2
In March 2017, Profit Ltd. purchased 50 acres of rural land in Warrnambool, Victoria. At the time the land was zoned rural, but the directors of Profit Ltd. were aware that the land would increase in value and it was likely in the future that the land would be zoned as residential. In the company documents it was stated that the land was acquired for the purpose of sheep farming. The sheep on the land were to be looked after, and the wool from the sheep to be sold to wool manufacturers. The selling of the wool was successful at first, but by about 2019 the demand for the company’s wool began to decline. In January 2020, at the next general meeting, the shareholders of Profit Ltd. decided that the wool growing business was no longer sufficiently profitable to justify the company’s involvement in the business. At the same time, the land had become ripe for development as the zoning rules had changed to permit subdivision. The directors of Profit Ltd. therefore decided to take the steps required to have the land rezoned residential. To obtain council approval to subdivide the land, Profit Ltd. was required to provide sewerage services and to carry out electrical and water works, which were carried out over the next twelve months. The company was actively involved in the marketing of the land and had sold all the subdivided blocks of land at a substantial profit by June 2021.
Required: Advise Profit Ltd. of the income tax implications of the above transactions, referring to case law and sections of legislation where appropriate.
20 marks