Karl is a rich employee investment banker. His friend Petra ran a DVD store. Petra
owned the DVD store premises and land that it was located on. Petra needed some
money as her store was struggling financially, so Karl lent her business $100,000 at
8% annual interest. However, after a year it became apparent that her business could
not repay this. Consequently, they came to an agreement, where in exchange for Karl
forgiving the debt, he would take a one quarter interest on the land that the business
premises was located on. At the time of this arrangement it was agreed that the land
would be sold in the near future. Consequently, the store was demolished, and council
plans were obtained to build a 5 storey apartment in its place. Karl was the one who
organised the demolition and worked closely with the architects and lawyers to get the
council approval. This involved about $20,000 in fees for architects and lawyers.
Subsequently, the land with plans and council approval was sold through a real estate
agent for $800,000.
Required: Discuss whether the sale of the land generates ordinary income for
Karl due to laws relating to the assessability of extraordinary/isolated
transactions. Do not discuss Capital Gains Tax. Where appropriate, support
your answer with legislative and case authority.
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