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Question: andre and peter own precgt land that they have used...

Question details

Andre and Peter own pre-CGT land that they have used for deer farming. Over the past decade, the council has made a decision to rezone the land in and around the area to facilitate further plans for urban development in the area. Andre and Peter's land have been rezoned from rural to light industrial.

Andre and Peter had the property valued and the valuer estimated the land to have a market value of approximately $1 million dollars. Andre and Peter intend to subdivide and sell the land. In order to facilitate the subdivision, Andre and Peter engaged with a surveyor for costing of the subdivision. Related documentation outlines:

• 25 Lots, meeting minimum dimensions according to the industrial zoning 

• Land allocated for road widening and drainage 

• Waste water, sewer connections 

• Utility connections 

• Green spaces to comply with environmental protections

 

Andre and Peter arranged for the requisite permits from council as well as payment of application and other fees. Andre and Peter also arranged for the environmental, bushfire and indigenous assessment to be carried out. To fund these activities, Andre and Peter obtained a loan.

 

Prior to these activities, Andre and Peter had not been involved in any subdivision or property development activities and do not intend to do so in future. Andre and Peter have also engaged a real-estate agent to undertake the sale of the lots. The agent will receive commission based on the sale price obtained for the land. Andre and Peter will either sell the lots individually or to a single purchaser if the opportunity presents itself.

REQUIRED:

Advise Andre and Peter of the tax consequences in regard to the events outlined, by answering the following three questions:

1. Whether the proceeds from the above subdivision activities will be assessable as: ordinary income under section

6-5 ITAA 1997; or, statutory income pursuant to the capital gains tax (CGT) provisions in ITAA 1997. (9 Marks) 

2. In respect of your response to (i), briefly indicate the difference in treatment that would arise. (3 Marks) 

3. In respect of your response to (i) and (ii), briefly reflect on the impact of Andre and Peter being in a partnership. (4Marks)

 Your answer should include references to appropriate legislation, case law and tax rulings. Disregard GST and disregard section 15-15 ITAA 1997.

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