This assignment consists of two (2) case studies. You must complete all the case studies and all parts of each case study.

Case Study One

The following separate transactions require your advice as indicated:

Kate is a teacher who was born in Australia and up to 12 August 2017 she worked in Toowoomba. Having resigned from her job in Toowoomba, Kate travelled to Fiji on 13 August 2017 to join her husband Jack who has been working at a university in Fiji. Jack and Kate have three children and from 13 August 2017 the family has been living in a rented house provided by Jack's university employer. Jack has a 3 year contract with the university in Fiji which expires in June 2020 at which time they intend to return home. During the year ended 30 June 2017 Kate earned $14,000 in rent from renting out their home in Toowoomba (her share) and interest income of $500 from an investment in an Australian bank. She works part-time as a teacher in Fiji and earned $19,000 AUD during the year ended 30 June 2018. Provide advice to Kate as to whether she is a resident of Australia for the year ended 30 June 2018 and based on your conclusion advise Kate of the amount that she should include in her assessable income in Australia for the year ended 30 June 2018.

Sales of prescription drugs and other items of trading stock  $457,000.

Purchases of prescription drugs and other items of trading  $230,000.

Trading stock on hand at 30 June 2017 - tax purposes  $85,000.

Salaries and Wages paid to staff $95,000.

Drawings by Elizabeth from the business for living expenses $55,000.

Greg has been operating an illegal drug operation from his home in Brisbane for the past 10 years. He purchases the illegal drugs and on-sells them through a network of drug dealers throughout the city. On 1 July 2017 Greg had no drugs on hand but had drugs with a market value of $27,000 on hand at 30 June 2018. This stock of drugs cost him $11,000 to purchase and he considers that it would cost him $15,000 to replace these drugs. Sales of drugs during the year ended 30 June 2018 were $147,000 and purchases were $72,000. In addition to his drug receipts Greg won $15,000 in a lottery prize on 4 March 2018 and he used this money to purchase more drugs to sell to the public. Provide advice to Greg as to what amount(s) if any he should include in his assessable income for the year ended 30 June 2018.

Bernie carries on a delivery business where he employs 4 staff. Bernie provided $5,000 worth of delivery services to Paul (one of his customers) but Paul indicated that he did not have any money to pay Bernie. Instead of paying Bernie cash Paul allowed Bernie to use one of his residential rental properties to live in with his family for 6 months during the year ended 30 June 2018. The market value of the rental property was $6,000 for the 6 month period. Provide advice to Bernie as to whether he needs to include any amount in his assessable income as a result of being provided with free accommodation.

Melanie carries on a cleaning business and earned $500,000 in income during the year ended 30 June 2018. Her biggest customer Brown Pty Ltd (Brown) accounts for 95% of her work and paid her $475,000 in fees for the year ended 30 June 2018. Brown has just indicated to Melanie that it will be cancelling their cleaning contract and will pay her compensation of $200,000 for cancelling the contract. Melanie considers that due to the fact that Brown is paying her this amount she will have to close her business because she will have insufficient work to keep her business in operation. Provide advice to Melanie as to whether the $200,000 would be ordinary income.

NOTE: For all scenarios above, provide advice as requested, indicating any amount that would be included as assessable income for the year ended 30 June 2018. You must support your discussion with reference to any relevant authorities. Please refer to the marking criteria for further details on requirements.

Case Study Two

Elizabeth is a qualified pharmacist who operates her own business in a shopping centre in Toowoomba. She employs 3 staff and has been in business for 6 years. Elizabeth provides you with the following information in relation to her trading activities which is relevant to calculating her taxable income for the year ended 30 June 2018:

Additional information not included in the above figures:
- Elizabeth paid her 16 year old daughter, Sophie $20 per hour for working 300 hours in the business. The normal rate per hour for employing a 16 year old is
$10 per hour.
- The trading stock on hand at 30 June 2018 is valued at: cost - $75,000, replacement price - $82,000 and market selling value - $130,000.
- Elizabeth pre-paid one year's lease payments on 29 June 2017 of $25,000. The prepayment relates to the period 1 July 2017 to 30 June 2018.
- Elizabeth purchased a car to do deliveries for the business and to use for private purposes. The log book indicates that 70% of the use is for a taxable purpose. The car was purchased on 1 September 2017 for $58,000 (excluding GST) and the running costs in the current year were $5,600.
- During the year there was an attempted robbery at the business premises and some of the glass in the shop windows was shattered. Her insurance company and the owner of the building refused to pay for the cost of replacing the windows so Elizabeth replaced the windows at a cost of $4,500. The replacement windows were made of toughened glass which made them much stronger than the original windows and much less likely to break.
- During the year Elizabeth investigated the possibility of opening another pharmacy in the town. She had completed her investigations and was ready to commence setting up the new pharmacy when another pharmacist approached her indicating that he also wished to open a new pharmacy and he paid Elizabeth
$20,000 for agreeing not to open her new pharmacy for a period of three years. Elizabeth accepted the offer and decided not to proceed with the new pharmacy.
- On 4 February 2018 she flew to a two day pharmacy conference in New Zealand. The cost of registration for the conference was $500 and the cost of the return flight was $750. After the conference was finished she spent 5 days touring New Zealand and the cost of travel and accommodation was $720.

Required: Provide advice to Elizabeth in relation to the tax consequences of the above transactions for the year ended 30 June 2018 and calculate her taxable income.

Assume that she is an eligible small business, but refer to the normal deductibility rules in the first instance and then cite any special rules that might apply. Support your advice with reference to any relevant authorities.