Assuming that Lara’s goal is to maximise her wealth, advise her as to whether she should undertake development before selling her rural property

Lara was born and raised in Canberra. She graduated from a Bachelor of Commerce
degree in 2005. From 2006 to 2010 she worked in the audit section of PwC in Sydney.
She had purchased a 1 bedroom apartment in Surry Hills, Sydney in November 2006 for
$400,000. She lived in this apartment from November 2006 to December 2010. !
From January 2011 to December 2014, Lara worked in PwC’s London office. She rented
an apartment in inner-city London during this time. Between July to December 2014,
Lara earned £5,000 per month in salary. !
On 1 January 2015 Lara returned to Australia to resume working in the PwC office in
Sydney. From this time, she earns $130,000 per year in salary. Lara resumes living in her
apartment in Surry Hills. This apartment had been rented out during the time she was
away in the UK. The tenants moved out at the end of October 2014. They had paid a
monthly rental of $2,400 from July to October 2014.

On 1 February 2015, Lara enrolled in a 12-week online economic history course. The
tuition fees were $1,000. Lara also spent $600 on textbooks. On 1 February, Lara also
purchased a laptop computer for $1,200, and she estimates that her usage is as follows:
50% for study on her economic history course, 30% to do PwC-related work and 20%
for personal purposes. If any depreciation deduction is available, assume Lara will use
the ‘diminishing value’ method. !
Since 2007, Lara has owned a large area of (vacant) rural land on the outskirts of
Sydney. She had used the money received from her Grandmother’s inheritance to
purchase this land. She had paid the vendor $500,000 in March 2007. In 2015 Lara
noticed that the surrounding properties had substantially increased in value. She has
decided to sell the property. In its current state, the property is worth $1,200,000. Lara is
wondering whether she should undertake development work (applications for
subdivision and rezoning, land clearing, installation of drains) so as to increase the value
of the property even further. The contemplated development work on the property,
involving the hiring consultants, engineers and other professionals, would cost her
$250,000. If she undertakes development, she expects to receive a total of $2,500,000
from the sale of the land.

In June 2015, Lara sells her shareholding in ABC Chemicals for $10,000. She incurred
$100 in brokerage fees on the sale. She had purchased these shares in November 2014
for $8,000. In June 2015, Lara also sells a painting to her friend Tommy for $6,000. The
month before the sale the painting had been valued at $10,000. She had received the
painting as a gift from her Grandmother in June 2005 (i.e. she did not pay her
Grandmother anything for the painting). The painting had a value of $7,000 at the time
Lara gained ownership of it. The painting’s value has increased substantially as its artist
has become much more well-known in recent years. !
In the previous income year, Lara made a $5,000 loss on the sale of shares and a $1,000
loss on the sale of a set of antique chairs. !!

INSTRUCTIONS !
In reference to Australian tax law, answer the following questions: !
1. Assuming that Lara’s goal is to maximise her wealth, advise her as to whether
she should undertake development before selling her rural property. Consider the
tax implications, citing relevant authorities;
2. Discuss the tax treatment of all other receipts and outgoings mentioned in the
facts above – identify the items which constitute assessable income and identify
the items that are allowable deductions. Fully explain your answers and cite
authorities.
3. Based upon the conclusions reached in (2) above, calculate Lara’s final tax
liability for 2014/2015 (you do not need to consider the sale of the rural land for
the purpose of this calculation). Please clearly identify/label the figures in your
calculation. !
Assume $1 Australian dollar = £0.57 British Pounds. !
If you need to make any reasonable assumptions to answer this question, then proceed to
do so, and state any assumption(s) you make.

 

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