Part A - Luke and Linda Lucky

At the start of the 2015 income year, Luke and Linda Lucky set up an eBay account to sell some of their belongings and save for an overseas holiday. Setting up the account was free. During this first income year, their total sales were $20,000 and this all related to second hand personal items sold below their cost or items sourced cheaply from garage sales or giveaways. However, Luke and Linda discovered through this process there was an untapped market for low-cost home decorator items.

Therefore, at the start of the 2016 income year, Luke and Linda began to import low-cost home decorator items that are similar to expensive designer pieces. They sell the items through their eBay account. Luke and Linda have spent $16,000 during the 2016 income year acquiring stock. Some of the stock is sold exactly as it was purchased, whereas some stock is modified through embellishments, painting, customisation etc. All listings are made with a minimum bid price that represents 210% of the cost price. Up until 30 June 2016 Luke and Linda have made total sales of $38,000 in relation to sales of stock items. Their current orders in progress show a 30% increase in sales volume for July 2016 compared to the same month the previous year.

During the income year, one of Luke and Linda's customised items was featured on a popular home renovating TV show. This resulted in an influx of orders that they would not have been able to fill given the small nature of their business. They therefore sold the rights to their design to a large retail company and were paid a lump sum of $200,000 in exchange for transferring the original design, existing stock and materials to the company. The agreement states that they are entitled to $1.20 per additional item sold for a period of 12 months, after which all rights to manufacture the items rest with the retail company. Up to 30 June 2016, 20,000 items had been sold by the retail company, with payment due to be received in July 2016.

Luke currently has a full-time job as an engineer and Linda works part-time as a teacher. Linda is also working on a website which will launch in May 2017. The website will allow them to sell their stock directly online without the need for eBay auctions.

Required:

a) Discuss with reference to appropriate legislation, case law and/or rulings whether Luke and Linda are carrying on a business for taxation law purposes in either the 2015 or 2016 income years.

b) Discuss with reference to appropriate legislation, case law and/or rulings whether any amounts received in relation to the sale of the design are ordinary income in the 2016 income year.

c) Briefly discuss with reference to appropriate legislation, case law and/or rulings whether the cash or accruals basis of accounting would apply to Luke and Linda.

Part B -

You are required to prepare a written research assignment that addresses one of the provided topics below. The purpose of the task is for you to demonstrate high level critical reflection and analytical reasoning skills in the context of the application of Australian taxation law and taxation law policy. You must undertake academic research which demonstrates the following:

- An in-depth your understanding of how the specific tax law applies,
- The policy context of the law and if relevant how other jurisdictions deal with similar issues,
- Critical reflection as to whether the law achieves its stated purpose, aligns with principles of good tax policy or could be improved/amended. These critical reflections should be supported by the research you have undertaken as well as your own independent thought.

Topic Choices

1. CGT Discount for Foreign Residents - discuss and critically evaluate the policy reasons for the removal of the CGT discount for foreign tax residents. You should include a discussion of the policy objectives and your evaluation of whether the removal will achieve these policy objectives.

2. Negative Gearing - discuss and critically evaluate the extent to which tax deductible negative gearing impacts upon savings and investment decisions. Your paper should clearly outline what is meant by negative gearing from a tax perspective and how the Australian tax system treats negatively geared investments. You should include an evaluation of whether negative gearing from a tax perspective should be removed.

3. Deductions - discuss and critically evaluate the extent to which Australia's deduction regime satisfies the principles of a good tax system (specifically simplicity and fairness). You may like to compare and contrast this with the deduction system in New Zealand.

4. CGT Small Business Concessions - discuss and critically evaluate the Small Business CGT Concession regime in Australia. You should include a discussion of the overall policy objectives and your evaluation of whether regime currently meets these objectives or whether further amendments are necessary.

5. Division 7A (treatment of private company loans) - discuss and critically evaluate Division 7A as a specific anti-avoidance provision. You should include a discussion of the overall policy objectives and your evaluation of whether the Division currently meets these objectives or whether further amendments are necessary.

6. Part IVA Amendments - The general anti-avoidance provisions were recently amended. Discuss and critically evaluate the policy reason for these amendments and whether they are likely to meet these objectives or not.