LAWS6016 Taxation Law and Generating Income

Two years ago Peta purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons:
so that she and her family could live in the house; and
so that she could build three units on the tennis courts and sell them at a profit.
In the current tax year the tennis club next door offered to buy the old tennis courts, but only if Peta first restored them to good condition. Peta decided to accept the clubs offer instead of going ahead with her plan to build and sell units. Peta spent $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000.

Answer:

Introduction:

According to the case study, Peta mainly bought the house two years ago, where it holds two old tennis courts. The intention of Peta was mainly to reside in the houses, while generating income from nearby tennis courts. Nevertheless, later in some point Peta sold the tennis courts for $600,000, which is mainly termed as the assessable income. However, the overall motive of Peta was to reside in the property and earn from the tennis courts. Moreover, Peta has mainly spent the amount of $100,000 for building fence and developing the court. Therefore, the expense could be subtracted from the assessable amount received by Peta from sale of tennis court. This type of treatment for identifying the ordinary income is mainly identified from Section 6(5) (Ato.gov.au, 2017).

Peta being a moderate woman is not involved in real estate dealings, whereas the motive was mainly to generate profit from selling tennis courts. Furthermore, the planning of Peta was mainly to sell the property in parts and not in whole. Hence, under section 10(5) individuals are mainly able to categorise the overall amount generated from property sale. In addition, Peta mainly identifies the overall tax by deriving the overall net earnings by deducting expenses from income. Hence, if Peta uses the overall income as capital gains then she could effectively use 50% exemptions for reducing the overall tax on income (Long, Campbell & Kelshaw, 2016). According to the Section 6(5), the overall income received by Peta is not considered as ordinary income.

Reference:

Ato.gov.au. (2017). Ato.gov.au. Retrieved 6 June 2017, from https://www.ato.gov.au/business/income-and-deductions-for-business/assessable-income/

Long, B., Campbell, J., & Kelshaw, C. (2016). The justice lens on taxation policy in Australia. St Mark's Review, (235), 94.