Missing Home Case Study Essay

Question 2:

Winnie, a resident of Australia, decided to sell her business of horse breeding located in the Melbourne's south-eastern suburbs in 2015. However, the buyer did not want to purchase the land. Bought for $1m in 2005, the real estate is 10 hectares in size. At first, he opted for auctioning the entire real estate, but that attempt failed to raise her reserve price of $10m, so she passed it in. Although the reserve was a fair market value, her real estate agent felt that buyers would not be impressed in buying the entire land. Winnie sought advice from various accountants and agents who recommended that most home buyers would find smaller blocks more affordable. For example, 10 vacant one-hectare blocks would only require minimal subdivision costs, and sell for $2

million per block.

In addition to that, Winnie was also advised that 50 townhouses could be built at the cost of $100,000 each and they could sell for $1m each. Seemingly, she took the latter advice and installed office cabins on the site and personally managed the entire construction, sales, and marketing activities in July 2016. 50 townhouses on an equal size and value blocks were constructed, and after one year (June 30, 2017) half of these (25) had been sold for a total of $25m. Following the description above, I will provide Winnie with a detailed advice of the possible income tax consequences of the $25m real estate sales in 2017. Other factors related to the advice will include a review of the alternative views based on the facts, using quality legal references. The paper will also cover the assessable income resulting from each alternative view, and my opinion on which I think is the better or

correct outcome.
Advice
Since Winnie made $25m from the sale of half the townhouses by June 30, 2017, she would have to pay taxes in line with the tax rates for the 2016-2017 income years. For that reason, she will pay the following taxes:
Taxes = $54,232 + (0.45 * [$25,000,000- $180,000])
= $54,232 + (0.45 * 1,700,000)
= $54,232 + $765,000
= $819,232
Payroll Tax
In Australia, Payroll Tax is paid according to the rates set by the state. Since Winnie operated her business within Melbourne, she had to pay this tax in line with the rates charged by Victoria State:
Payroll Tax = (4.85 * 250,000)
= $1,212,500
Temporary Budget Repair Levy
Since Winnie’s income is above the $800,000, she will have to pay a payroll tax as outlined below:
Temporary Budget Repair Levy = (0.02 * 25,000,000)
= $500,000
Medicare Levy
Since Winnie is a resident of Australia for tax purposes, she will have to pay 2 percent of her income for Medicare Levy.
Medicare Levy = (0.02 * 25,000,000)
= $500,000
In total, Winnie will have to pay the following taxes:
Total Taxes = $(819,232 + 1,212,500 + 500,000 + 500,000)
= $3,031,732
Alternatives
A review of Winnie’s case divulges that she had three options for selling her real estate. First, she would have sold it for the reserve price of $10 million. Second, she could have also subdivided it into 10 one hectare blocks and sold it for $2 million each to get $20 million. The third option was to build 50 townhouses and sell for $1 million each to get $50 million. Although she must pay taxes at the same rate for any option regardless of the selection, Winnie should consider the number of profits she will acquire when it comes to choosing the best alternative.
Assessable Income
By selling the land for the reserve price, Winnie will only be taxed once. However, she will pay taxes as many times as the number of income years she sells it using either 10 one hectare blocks and sold it for $2 million each or 50 townhouses and sell for $1 million each to get $50 million. For that reason, Winnie will make lesser profits using the other options than selling the plot at once. She should sell the plot using the other options within one income year, she will make more profits than doing the same for the reserve price.
Opinion
In my point of view, Winnie should just sell the property by building 50 townhouses and selling them for $1 million each to obtain $50 million. Although she would have to pay more taxes than using the other options. However, she would gain higher profits in return and therefore it would be more successful from Winnie’s stand point.