Question - Penny wished to purchase a family home in the Melbourne eastern suburbs. She was hoping to fund the entire purchase with the $1m sales proceeds of her old home so she would be debt-free. Instead, Penny purchased a large vacant block of land for $1m from the sale proceeds of her old home. The land was much larger than her needs, so she borrowed a further $1m to construct four identical houses on the subdivided land. Penny engaged the services of a builder, although she was involved in the planning and management of the project to save costs.
Penny retained one home for her family to live in and the remaining three houses were marketed and eventually sold by her for $1m each.
Required:
1. Advise Penny on the alternative ways that she could be assessed on the proceeds of the three townhouse sales. Explain your reasoning and any legal precedent that you rely on.
2. What is the assessable income under the alternative approaches?
3. In your opinion which is most likely to be the correct outcome in this case?