Understanding Australian Revenue Law: Expert Insights | Sally

Assignment Task

QUESTION - there are 5 Items TO THIS QUESTION
Sally Tompkins is a senior executive in the Canberra office of a large company called TopCo Ltd (TopCo). Sally needs to do her income tax return for the 2022 income year and she has come to you for advice.
She provides the following information about her income and expenditure.

Item 1-Sally's Income
She receives $300,000 per annum in salary from the TopCo. In addition to her salary, Sally received an annual performance bonus of $100,000 on 15 June 2022 as she had met certain billing targets. Sally's investment portfolio comprises of the following:

Before Sally joined TopCo, she worked as a senior executive in the Australian Public Service (APS). TopCo had to entice her away from the APS by offering her a payment of $250,000 if she agreed to work for TopCo. Sally gladly signed the employment contract with TopCo and received the payment on 3 December 2021.
Sally loves cooking and dreamed of having her own catering business or restaurant down the South Coast. She loves watching TV shows like MasterCook. She bought all of the latest appliances for her home kitchen. Her friends invited her to their parties because they knew Sally would make fantastic canapes to have with drinks. Sally was busy most weekends cooking for the parties she would attend in the evenings. Sometimes her friends would offer to pay for the ingredients she used in making the party food. She charged prices for her food that only covered the cost of the ingredients. She paid for everything using cash and threw the receipts into the kitchen drawer.
The owner of a stylish café in Manuka, Rita, contacted Sally after eating her food at a party in Red Hill. Sally agreed to supply prepared food (cakes and cooked meals) for Rita's cafe. In early July 2020 Sally placed cards on the sales counter in Rita's café with her photo and contact details. Rita's sales in the café increased and Sally's phone rang off the hook. People were keen to buy Sally's prepared food and eat it in their home.
Sally employed an accountant to keep her books of account and develop plans to grow the revenue from her cooking. The accountant told her to set up a website so people could read about Sally and her food. Sally was very busy and employed two apprentice chefs to help her with cooking the food. Very soon Sally was supplying her food to cafés and restaurants around Canberra and also sold her food online through her website. In the 2021 income year, Sally earned $80,000 from the catering activity, and $125,000 in the 2022 income year.
Sally wanted to move her catering activity to somewhere bigger so that she could increase the range of prepared food she sells. She decided to renovate the house that she owned near the beach in Bateman's Bay. She bought the property back in 2018 as a friend told her that the Bateman's Bay area, being a holiday destination close to Canberra, was becoming popular and the land would increase in value in the next 10 years. Sally engaged an architect to help her renovate the house in Bateman's Bay. The architect advised Sally to find another place for her catering kitchen and turn the house and land in Bateman's Bay into a 50-unit apartment block and sell the apartments. Sally thought this was a better idea. Sally built the apartment block using a builder who charged her $14.5million to do the construction. The value of the land at the time the construction commenced was $1.1 million. She sold all of the units in the apartment block in January 2022 for $50 million.
Sally has a small investment portfolio comprised of Wesfarmers shares. Sally received fully franked dividends of $4,000 in the 2022 income year.

Required:
Explain to Sally how the gains in the above-mentioned transactions would or would not constitute assessable income under the income tax legislation. Use relevant legislation and case law to support your answer.
Include calculations if required. If you decide that an amount is a capital receipt assume it is not assessable income for the purposes of the Assignment (i.e., there is no need to calculate the capital gain).

Item 2-Sally's Expenses
Sally works 3.5 days (Monday to Thursday) a week for TopCo and spends 1.5 days (Thursday and Friday) a week in her kitchen at home. Sally incurs the following expenditure during the 2022 income year.

• She pays $3,000 to the local greengrocer for fresh vegetables to use in her catering activity.
• She receives a $500 speeding fine on the way to Woolworths to buy food.
• On 1 April 2022, she buys a laptop to use in the catering activity, costing $3,600. The Commissioner states that the laptop should last 3 years. Sally uses the laptop 15% of the time to stream movies and watch MasterCook.
• She travels between her office at TopCo and home 5 days a week, by bus, at an annual cost of $1,200.
• Sally uses the kitchen to make the food and one of the bedrooms in her home as an office to do administration relating to the catering activity. She pays $3,500 per month in interest on her home loan and $800 per month in heating and cleaning costs for the home. She spends 25 hours per week on the cooking activity in the kitchen which is also used for family purposes. The kitchen and the bedroom take up 25% of the space in the house (15% kitchen and 10?droom).
• Sally employs two apprentice chefs to help preparing the food she sells to Rita, paying a total of $20,000 in wages per year.
• She pays $2,000 to a cookery equipment retailer for chef's jackets and pants for her staff members.
• Sally is thinking about starting a new business - a cookery school. She asks her accountant to investigate the feasibility of the business before she decides. The accountant's report cost $3,000. She also secures a loan of $50,000 from the Bank to help set up the school. However, Sally decides not to start the business. She then decides to use the loan to fund her existing catering activity. She pays interest of $3,000 on the loan, in arrears.

Required:
Using relevant legislation and case law, explain to Sally whether the amounts in the above-mentioned transactions would or would not be allowable deductions for income tax purposes in the 2022 income year. Show calculations where appropriate. Do not consider the trading stock rules.

Item 3 - GST liability
Required:
Using legislation and case law, explain the GST implications of the transactions relating to the catering/cooking activity to Sally, and whether a GST liability or an input tax credit will arise (including the amount). Assume that all entities are registered for GST. All amounts are GST-inclusive (where applicable). Do not calculate the net amount for the purpose of the section 17-5 of the GST Act. Do not consider the GST consequences of Sally's building activity or the receipt of the dividends.

Item 4 - Taxable Income and Income Tax Payable
Required:
Calculate Sally's taxable income and income tax payable for the 2022 income year. Use legislation to explain your calculation. If you need to make certain assumptions in performing the calculation, state them in your answer.

Item 5-Group Presentation
Each Group will also be required to submit a Group Presentation - a short video presentation (no more than 15 mins) providing an oral explanation of their answer. Each member of the Group is required to participate in the Group Presentation. Instructions to be provided separately.

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