The assignment must be typed, in either pdf or word format, and the typeface must be either Arial or Times New Roman, using 12 font, with a 5 cm margin on the left hand side. The assignment must be single sided and must also contain a Reference List. For citation of legislation, cases, and secondary sources, you are required to use Footnotes.
The Assignment should be no longer than 2500 words. The total marks for this assignment is 30 marks. The marking criteria for the assignment are set out as follows:
Assignment Assessment Criteria Communication Correct syntax, grammar and spelling. Clarity of thought and expression. Demonstrated knowledge of the law Answer reflects a good knowledge of the relevant legislation and relevant case law – an understanding of their scope and operation Analytical skills (legal problem solving technique) Ability to identify the particular legal issues raised by the relevant facts, i.e. the questions in dispute. Distinguishing where appropriate between different facts and different rules of law.
Applying the law to the relevant facts (do the facts fit the legal rules?) Reaching a conclusion and expressing it ("In my view...." "I consider, on the basis of the facts provided, that...."). If the legislation is open to more than one interpretation your task is to say so and to decide which one should be considered of greater weight and to state why. Presentation Correct citations of cases and legislation. Layout/ setting out (use of appropriate headings - clarity, ease of reading).
QUESTION Part A (1200 words)
Megan Marvel was a senior executive working for Paradigm Films, an international film production company. In this role, she earns a salary of $250,000 per annum. In 2018, Megan received an Academy Award (‘Oscar’) for her work in directing a film. She received a gold statue worth $20,000. She had to sign a contract agreeing not to sell the statue.
Five years ago, Megan was unhappy with her career with Paradigm Films and started to think about changing her career. She decided to leave the company. She had significant savings and wanted to see if she could make her name as an independent film producer. When she left her job, Megan entered into a contract with Paradigm Films where she agreed that she would not work in the film industry for 2 years in return for a payment of $500,000.
Megan's investment portfolio comprises of the following:
Acquisition Date: 24 June 2010
Acquisition Price: $200,000
Notes: Property is a 10 hectare (ha) vineyard with a house and farm buildings near Hall.
She spends a lot of time at her vineyard near Hall, mainly on the weekends. She owns a house in Yarralumla that is her main residence. The vineyard has a house, several farm buildings, and the land where the grapes are growing. She is a member of the local winemakers’ association and attends lectures on growing grapes for commercial use. She employs two students on a part-time basis to help her look after the vines. After a couple of years, Megan realised that she was harvesting a significant quantity of grapes. Megan started selling her grapes to local winemakers in the area. She keeps records of her income and expenses. For the last two years, Megan’s revenue from selling the grapes averaged $100,000 per year.
Recently, Megan was approached by a property developer. The developer advised her to redevelop the farm buildings into 25 townhouses. The farm buildings were located in a separate area to the vineyard and her house, so she decided to subdivide the property into two 5 ha lots of equal size (Lot A and Lot B). Lot A had the house and vineyard, which she retained for her personal use. Lot B had the buildings that would be redeveloped into 25 townhouses. The cost of the subdivision was $20,000 for Lot A and $50,000 for Lot B.
She engaged a builder to build the 25 townhouses on Lot B and worked closely with him on the design of each townhouse. At the time the development commenced, the market value of Lot A was $500,000 and $250,000 for Lot B. The construction costs for the townhouses built on Lot B was $25m. Shortly after completion, Megan sold the 25 townhouses built on Lot B for $37.5m on 30 June 2018.
Required: Explain to Megan Marvel whether the above amounts are assessable income under the Income Tax legislation. Use legislation and case law to support your answer.
Income tax assessment on case study
The paper introduces Meghan Marvel, who used to work in an international film production company called Paradigm Films as a senior executive. She received an Oscar for direction in a film. She used to earn 250,000 dollars annually but since she decided to leave the company since she was unhappy with her career. She later decided to invest her income in the dwelling sector of Australia and acquired a 10-hectare plot of land in 200,000 dollars which had a vineyard with a house and several farm buildings. The paper provides an assessment of her income tax based on two scenarios, which are vineyard business and income from redeveloping and selling the farm buildings.
Income taxes are the most significant forms of tax based legislation in Australia. The charges are collected through the Australian Taxation Office by the government of Australia. Income taxes comprise 27.8 percent of the GDP of the country. The income tax in the country consists of capital gains tax and Goods and Services Tax (GST) among others. The assessment of taxes based on the income generated by Meghan is twofold. When she was using her Vineyard to sell grapes and create revenue and using the income from selling of the grapes to redevelop the farm buildings into townhouses and sale of those properties.
Scenario 1: Income tax assessment from the selling of grapes
When Meghan bought ten hectares of land, she was benefited with the asset of a vineyard. The owner started spending a lot of time in her vineyard. The vineyard consists of a house and several buildings on the farm and also a land where the grapes are grown. The owner is the member of the local association of the winemakers and attends how to grow grapes for commercial benefit. The owner also employs two students who help Meghan to look after the vineyard on a part-time basis. After a couple of years when Meghan realised that she was harvesting grapes at significant quantity, she started selling the vines to the locally based winemakers. Since 2012, Meghan generates more than 100,000 dollars each year from the selling of the grapes.
The taxation laws in the country clearly state that the owner must include any income which is generated from the property in the tax returns and can claim deductions on the income tax for some expenses of the property. The owner will also be liable for the tax on capital gains acquired from the commercial use of the property. Meghan also has GST entitlements as well as obligations when it comes to the profit generated from the grape selling business (Heinemann & Shume, 2015). The said taxes are collected by the Australian Taxation Office or ATO.
The ATO defines a business as small or large based on the generation of revenue, some employees and consolidated assets. Since Meghan's business does not attract income more than 25 million dollars, has two part-time students working as employees and consolidated assets worth 500,000 dollars which significantly less than the required 12.5 million dollars, therefore, her business falls under the category of small enterprise. The benefits of being a small business in Australia will result in several tax exemptions like social security tax, Medicare tax, and unemployment tax among others which comes under the FUTA and FICA act (Burkhauser, Larrimore & Lyons, 2017). FICA is the Federal Insurance Contributions Act, and FUTA is the Federal Unemployment Tax Act (Vandenbroucke, 2016). However, the personal taxes are capped at 10,000 dollars which means if the business generates revenue less than 10,000 dollars annually then the owner is not liable for personal tax which is not the case of Meghan's business as it makes over 100,000 dollars on average every year.
Scenario 2: Income tax assessment on building properties and selling them
The tax on the property bought by Meghan will surmount to a total of 1152 AUD from 2010 to 2011. The tax breakup includes fixed rates charges of 555 dollars, AUV rate charge of 492 dollars and Fire and Emergency Services Levy (FESK) charge of 104 dollars (Freebairn, 2016).
Building new properties or renovating the already existing properties comes under the jurisdiction of the capital territory of Australia which is Canberra. The tax applicable on the said construction of the buildings is Goods and Services Tax. The GST in Australia is 10 percent on most goods and services (O'Connor & Strauch, 2018). If an individual buys a new property, GST will be applicable on top of the price of the property just like sales tax. Generally, GST on acquiring or redeveloping new properties is one-eleventh of the sales price which means that Meghan has to pay 3.4 million AUD on top of the 37.5 million AUD, after selling the townhouses that were built on lot B.
Since Meghan sold the properties on lot B under Australian taxable property, she has to report the sale under Australian tax return as well as pay tax on the capital gains over the profit acquired (Smith, 2015). Taxable Australian properties include apartments and houses as well as commercial buildings. The interest on the property can be direct that states the complete ownership of the land or indirect interest that indicates the purchase of at least 10 percent of the property mainly attributable to Australian real estate (Cardew, 2017). The owner must report to the Australian tax return during the disposal of the property on net capital gain or loss. In making capital gains, the owner has to pay tax on the capital gains.
Meghan was renovating the lot A of the farmhouse to expand her vineyard business where she would grow more grapes and sell it to the local winemakers. Since the property was utilised for business, she will be imposed with taxes based on 'renovating for profit.' The owner has to register that part of the land separately under GST. The tax regulations of Australia clearly state that if a landowner is building or renovating the property for business activities and the income generated from the business is more than 75,000 dollars annually, the owner is liable to be taxed under GST, and the events will be regarded as an organisation. However, the owner can claim GST benefits from the current taxation on any future dwellings she wants to invest on (Smith, et al., 2016).
In the case “Rio Tinto Services Ltd v Commissioner of Taxation  FCAFC 117” clearly shows that Rio Tinto was denied the credits according to the GST act which entitles the members of the GST group to supply accommodations to employees and provide auxiliary as well as contracting service providers in the distant Pilbara region (Hurley, Beasley, George & Flamingh, 2015).
The paper heavily focuses on the capital gains tax as income tax based on the first scenario where Meghan decided to use the Vineyard for the grape selling business and generate significant income from selling the grapes to the local winemakers. The paper concludes by assessing the taxes on goods and services on redeveloping the farmhouse buildings and selling them at a considerable price.