Justin Levine is a Brisbane-based entrepreneur with a background in property development and a qualification as an engineer. Justin is currently considering two investment options. He has completed the cash flow and profitability analyses for these investment options, but he has insufficient knowledge about income tax law. Therefore, he has asked you to advise him on the income tax implications of these investment options. Justin has decided to base his investment decision on a very short investment horizon due to the significant uncertainties associated with the economic impact of the COVID-19 pandemic.
Therefore, you have to advise him about all of the income tax implications relevant to the 2019–2020 income year for each of the two investment options separately. Investment option 1: (7 marks) Justin owns a factory building that he built on land that he purchased many years ago.
The construction of the factory building was completed on 1 April 2017 at a cost totalling $630,000. He financed the total construction cost through a 25-year mortgage loan, incurring a mortgage lender guarantee insurance premium totalling $6,300 on 1 April 2017. The factory is used to manufacture custom-built motorcycles and motorcycle parts that Justin sells online in a business that he operates as a sole trader.
This business is classified as a small business entity for income tax purposes and Div 328 applies to this business. Justin is considering: Settling the mortgage loan early on 31 March 2020, to save further interest. Therefore, during the 2019–2020 income year he will repay $440,000 towards the principal debt and $12,400 in interest to pay off the full mortgage loan balance.
Purchasing a new packaging machine on 1 March 2020 from a supplier based in Brisbane at a purchase cost totalling $90,000. The machine will be ready in use from 10 March 2020. The effective useful life of the packaging machine is 8 years.
Investment option 2:Justin owns another separate business as a sole trader. This business is classified as a small business entity for income tax purposes and Div 328 applies to this business.
This business has immediate growth potential due to the COVID-19 pandemic as it manufactures surgical masks and personal protection equipment. But to grow the business, Justin must purchase several pieces of equipment. Based on quotes that he obtained from suppliers, these are the details about the new pieces of equipment Justin is considering purchasing:
A new 3-D printer, purchased on 1 April 2020 from a supplier based in Sydney at a purchase cost totalling $850,000. The printer will be ready in use from 1 April 2020. The effective useful life of the printer is 2 years.
A second-hand smelter, purchased on 15 March 2020 from a supplier based in Germany at an Australian dollar equivalent purchase cost totalling $4,123,450. The effective useful live of the smelter is 30 years. Import duties payable will total $250,000.
The smelter must be calibrated on site in order to permanently mount it into position. Justin found a calibration specialist who lives in Melbourne. Justin will incur the following costs so that the specialist can come to Brisbane and stay in a 5-star hotel to calibrate the smelter so that it will be ready in use from 1 May 2020: o Calibration service fee paid to the calibration specialist $125,000
o Accommodation and two meals per day $15,000 You are required to answer the following question: Advise Justin of the income tax implications of each of the investment options separately.
Therefore, you must discuss all of the relevant income tax implications for the 2019–2020 income year for each of the two options separately. Show all your calculations and provide reasons for your answer. Your answer should reference relevant sections and divisions of the Income Tax Assessment Acts, relevant case law and relevant rulings from the Australian Taxation Office.
