Tutorial illustration 7(a)

In 1982, Kit Siang purchased eight hectares of land for a strawberry farm at a
cost of $320,000. By 1989, the plantation was well established and producing
strawberries of a good quality and deriving reasonable profits. As a result, on 1
October 1989, Kit Siang bought another two hectares of land for $40,000.
In 1997, the crop was exceptionally poor. Coupled with this, customs restrictions
were altered by the federal government, allowing a greater quantity of
strawberries to be imported from New Zealand. These conditions led to
financial difficulties, so Kit Siang decided to sell the land. Attempts to sell the
land as a whole were unsuccessful, although one agent did offer $400,000.
Therefore, Kit Siang decided to sell the land by subdivision. After rezoning and
gaining council approved in June 1999, Kit Siang spent $160,000 on the
subdivision in October and November 1999 and finally sold the land for $700,000 in
July of the current tax year to a local builder.
Required: Explain whether the profit arising from the sale of land is revenue or
capital in nature. You are required to set out your arguments available on both sides
of the proposition and draw a conclusion, supporting your conclusion with relevant
case law.
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*kit Siang use land for growing strawberry so is consisted income generating.
Answer :
Revenue Arguments
1.The land is not a personal enjoyment asset to him(personal enjoyment).
2.He subdivided the land before disposing it (sub-division of land).
Capital Arguments
1.The land is an income generating asset because it is used to run a strawberry farm
and the strawberries were sold to generate business income (income generating).
2.The land is held for more than 5 years (period of ownership).
3.No company is formed to sell the land (formation of company).
4.There is only one disposal transaction during the tax year (frequency of
transaction ).
5.He is not an expert in land trading because he is a farmer (expertise in the field).
6.He faced financial difficulties in business and decided to sell the land
(circumstances responsible to realisation).
7.The land is a long-term investment (non-current asset)for him as he kept the land
for 35years (intention).
8.Ad-hoc method was used to dispose the land as no office was set up and no staff
was employed to sell the land (methods employed in disposing a property).
9.The land is a non-current asset because he has kept the asset for more than
1 year (accounting evidence).