In March 2014, Jeremy and his wife Maxine, who were living in the Blue Mountains at the time, saw an advertisement in the Domain section of The Sydney Morning Herald for the sale of a duplex in the Sydney suburb of Marrickville for $1,250,000. It consisted of two three-bedroom flats described as the renovators dream. These two flats were on separate titles. Inspection revealed that although the property was in a run-down condition, it was quite livable. They decided to buy the property and live with their children in the bottom flat while they rented out the top flat. The signed contracts were exchanged for the premises on 15 May 2014 and the purchase price of $1,250,000 was paid on 28 June 2014, when the property was formally conveyed to Jeremy and Maxine. Soon after this, Maxines parents, who were living in the country- town of Bathurst, both had major health crises. Jeremy and Maxine decided that it would be best to have her parents re-locate to Sydney, and live closer to them, so that they could monitor and support them during their treatment. Following the purchase of the duplex, Maxines parents moved in and lived rent-free in the upstairs flat continuously for the entire period of ownership, whilst Jeremy, Maxine and their children lived in the bottom flat. The following outgoings were incurred in relation to the Marrickville property: a. Before purchasing the property, it was necessary for Jeremy and Maxine to travel to Sydney to inspect the property. On two occasions during this period, they had to stay overnight at a hotel in Sydney. The cost of transportation to Sydney and accommodation in Sydney amounted to $1,400 b. Stampdutyatthetimeofpurchasewas$72,000 c. Legal expenses on purchase amounted to $4,300 d. Thecostofobtainingandregisteringamortgage(loan)of$850,000ontheproperty was $2,700. e. Monthly interest payments on the mortgaged loan $3,100 f. Annual local government rates (taxes) on the property $3,200. g. Before moving into the property they had it painted throughout and several minor repairs completed. A contractor was paid $18,000 for this activity. Jeremy also helped the contractor and contributed 60 hours of his own labour. His labour was valued commercially at $58.00 per hour. 3 h. On 24 February 2016, the roof began to leak. Inspection revealed it was not worth repairing, so it was replaced in April for $73,000. The materials used were far superior to the original tin roof that was on the building. i. In March 2017 a storm broke windows on both levels repairs cost $895 for the upper level and $350 for the lower level. 2017 was a bad year for the family. Both parents of Maxine died within a month of each other in April. In early May, Jeremy suffered a stroke and was unable to work. Jeremys declining health meant that they struggled to meet the mortgage repayments as well as the rising costs of maintaining the property. As a result, Jeremy and Maxine decided to sell the property. SO: j. On 23 June 2017, they entered into a contract to sell the entire property for $1,820,000. Agent’s fees for this sale were $13,200 and solicitors conveyance fees were $3,300. k. Also on 23 June 2017 they sold two other assets. The first was a painting that they had purchased on 10 December 2013 for $7,000. This painting was sold for $8,500. The second was a Ming vase they purchased an art market in Hong Kong on 22 February 2014 for $10,000. They sold this for $200 (it turned out to be a fake). REQUIRED: Jeremy and Maxine seek your advice on the following matters: i. They would like to find out whether the sale of the property would give rise to any CGT liability, considering the fact that the ground floor flat was their main residence, and that Maxines parents lived in the top floor flat rent-free. Please provide explanations to support your answer. (4 marks) ii. They would also like to find out whether they can claim deductions for the expenditures listed in items (a) (j) above, that they can offset against their incomes in the relevant year? Would it have made any difference if the property had been rented out on an arms-length basis? (4 marks) 4 iii. Please show all workings and provide explanations. iv. If any capital gain has been made, how much tax is payable? (8 marks) (3 marks) v. Your advice to Jeremy and Maxine on the matters outlined above (excluding the calculations) must be presented in the form of a report to the clients. (1 mark) IMPORTANT: You must provide reasons (as well as cases, relevant ATO rulings, and provisions of the tax legislation) – that explain and support your answer. Failure to provide reasonable explanations will result in very low marks.
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