Could you complete the two questions? How long do you need and how much should I spend? How should I pay you if you can do it?
Sam, Cat and Sel Fimmers are siblings who were raised on a farm on the outskirts of Gelling, a medium size regional town in Australia. They are all Australian citizens and come from a long line of farmers, and the extended family has large land holdings. Currently, the family grows some soybeans, raises specialty alpaca, and grows grapes for wine production.
Sam is the eldest (age 47) and was married to Sylvia until 2014. When Sylvia and Sam separated in 2014, she transferred Sam six blocks of land in the town of Gelling as part of their split of their assets. Each lot was worth $125,000 at the time of the transfer. Sylvia purchased the blocks for $100,000 each in 1996 before they were married, and the lots were in her name until the transfer in 2014. Sam immediately sold one lot to Mel Stenor, and used the sale proceeds to build an investment rental house on one of the blocks of land. Sam planned on cutting and selling some timber on the remaining four parcels of land in the next decade. In the short term, the four lots remained undeveloped green space to make the value of the rental significantly higher.
The investment rental house Sam built is called ‘Bluestone’ and is a high-end residential rental property with a swimming pool. Mel Stenor built a residential house, also with a swimming pool, next to Bluestone and lives in it part time, while he lives in Sydney for the remainder of the year. Mel calls his home ‘GreenPool.’ Sam incurred $7,000 in legal expenses when he first built Bluestone confirming that the property line between Bluestone and GreenPool was correctly titled as well as some additional legal research relating to the title of the parcel. In 2017, temporary tenants hosted a massive pool party and managed to break the piping system to Bluestone’s swimming pool. It cost Sam $3,000 to repair the pipe, using similar materials for aesthetic purposes, as the water to the swimming pool comes aboveground from the house. At the same time, Sam upgraded the pool tile edging when the pool was being repaired, at a cost of $12,000. The previous edging was cracked taupe-coloured tiles, and Sam upgraded to black tiles. This pool party happened on the same weekend that Mel moved to GreenPool full time, telling everyone in Gelling he was ‘recovering’ from filming a movie in Sydney. Mel was so enraged by the party, he sued Sam claiming that the north end of Sam’s yard and the corner of the pool was actually on Mel’s property, and that the boundary was therefore incorrect when Mel purchased the property. Sam used the same legal firm and got the bogus lawsuit dismissed, at a cost of $4,500.
Knowing that Mel was going to be a major annoyance going forward, in 2019 Sam decided to develop the remaining four blocks of land that he inherited. Sam decided to build a 12 unit apartment complex on the four lots (which partially abut GreenPool). Sam spent $13,000 on the initial plan, hiring an architect to design the apartment building. Sam demanded that the apartment building cover the majority of the four lots, and that the parking area be placed as close as possible to GreenPool. The architect submitted the plans to the Gelling Building Commission, but after complaints by both Mel and the other neighbouring properties, the Gelling Building Commission refused to grant a planning permit for the 12 units and parking. Sam went on holiday for a few weeks, and when he returned, he asked the architect to instead design high end duplexes on each of the four lots. The subsequent plans were submitted and approved by the Gelling Building Commission. Construction of each duplex cost $200,000 each, with additional architect costs of $5,000. Sam considered himself the general contractor and was on-site every day managing the costs of building, chose all the interior and exterior finish work, and even acted as an interior designer to stage the first duplex before he sold any of the duplexes. The first one was similar to a ‘show home’, and Sam personally marketed and sold the three duplexes for $450,000 each without a realtor or legal advice, using a contract off the internet.
After Mel moved into GreenPool full time, Sam found it much more difficult to rent out Bluestone, so he decided to sell the Bluestone property at the same time that the duplexes were for sale. Sam put the property on the market for $475,000 and ultimately sold Bluestone in the current tax year for $450,000. He paid a conveyancing company $1,500 to prepare the proper paperwork to close the deal, as well as $5,000 for tax advice, as he thought that it was too expensive to pay a licensed tax advisor or his lawyers for advice.
The three siblings have long had a business partnership that owns and manages a casual pub in Gelling (‘the SSC partnership’). When their grandmother died, she left some inheritance for the three grandchildren. Sel provided the initial start-up funds for the partnership while Cat and Sam used their portion to buy the pub building itself, which generates interest payments. The partnership is formalised with a contract, and any income and expenses are equally split between the three siblings, except for the interest payments noted below. The pub is managed by Jemma, who is a long time local and makes great casual pub-style food. The partnership has the following expenses in the current tax year:
Jemma’s salary of $65,000 plus superannuation contribution
Interest split 50/50 for Cat and Sam’s capital contribution to buy the original pub building $26,000
Interest to Sel on a loan that was used to start the business $40,000
Purchase of $4,000 worth of logo’d jumpers, $1,000 worth of stock sold in the current year
Sel (age 39) has always been considered the ‘wild child’ of the family. While Cat and Sam have been growing their businesses and investments in Australia, Sel uses the annual interest from the loan to live abroad in southeast Asia. Sel recently come home to Australia after his long-term romantic relationship failed in Bali. With this year’s $40,000 in interest on the loan repayment, Sel has asked his siblings to support him in opening up a wine bar in Gelling, where they would sell specialty wine from the areas. Both Cat and Sam think there is some value in investing in an upscale wine bar in Gelling, but they are nervous to take on a project with Sel. Cat has a feeling that Sel might not have the skills to manage the books of a business. Sam just thinks his brother is ‘too flighty’ to be serious about sticking with a project for very long.
Sel suggests that the siblings start a new corporation, SCC Corp, that would lease the empty room in the back of the pub for a wine bar. Sel suggests that the new corporation that would provide a significant tax savings, so that the wine bar and partnership will be profitable due to the tax savings, regardless of how much wine they sell. Sel suggests that the corporation would pay rent to the partnership that was deductible against any corporate income from the wine bar, and the partnership would gain income from corporate rent. Sel suggests that the corporate rent be paid in advance, and that the corporation be given a 25% discount for the advance rent payment. The pre-payment discount of 25% that Sel proposes is significantly more than a usual business discount would be; Cat and Sam believes that no more than 5% discount is typical and appropriate.
Question
(a) Please discuss the tax consequences of the above SCC partnership expenses (disregard any expenses relating to the wine bar discussion). Support your answers with case and/or legislative authority, and show calculations where appropriate. You do not need to calculate any superannuation contributions. You do not need to reference any tax effects listed in other questions; only address the partnership expenses. (10 marks)
(b) Discuss the income tax implications of the rental structure for the proposed corporation, as well as whether the rental structure might raise anti-avoidance concerns. Support your answers with case and/or legislative authority, and show calculations where appropriate. (10 marks)