Kristie is 42 and decided to buy an investment property with a view to selling the land in the future to fund her retirement. She considered between buying an inner suburban house on a small piece of land or an outer suburban house on a larger piece of land. She eventually decided on the larger outer suburban house. Although her primary intention was to hold the house and sell it at her retirement, one of the factors that made her decide to buy the outer suburban house is that she wanted to be open to the possibility of developing the land in the future. As it turned out, 12 months later Kristie got lucky in that her investment property was rezoned by her council, which meant that she was able to build a 5 storey apartment on its land (subject to local council approval). She went to a lot of work to get local council approval, which involved getting a professional planner to draft sketches and plans as to what the proposed apartments would look like. This cost her around $15,000. After gaining council approval, she decided that she did not want to be actively involved in the building process, and so paid a professional builder $7m to construct the apartment block (and demolish the existing house). When the apartments were complete rather than sell each unit individually, she sold the whole block herself to a rich investor for $12m. Required: Ignoring Capital Gains Tax, discuss whether the sale of the apartment block generates ordinary income. Where appropriate, support your answer with legislative and case authority.

Answer rating: 100% (QA)

The sale of the apartment block might generate ordinary income depending on the specific situation a... View the full answer