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Martin purchased a derelict building on 1st January 2013 in Surry Hills for $500,000. To finance the purchase Martin borrowed $500,000 from Big Bank Ltd at 10% interest per annum. Before Martin bought it, the building had been leased by a charitable organisation to a women’s refuge at a nominal rental of $100 per week. On 1st January 2013, there was still a year remaining under the lease.
When Martin purchased the building he shouted, “I have a dream!” Martin’s dream was that one day the building would be a multicultural café, the “World Community Café”, where people from all over the world would want to come and eat. Martin wanted the logo to be a world globe inside a coffee cup. On 14th February 2013, Martin applied to the local council for permission to redevelop the building as a café. The cost of putting together the application, including the architect’s fees, was $35,000. On 14th February 2013, Martin also gave the women’s refuge one month’s notice to vacate the premises. The women’s refuge refused to vacate and Martin incurred $10,000 in legal fees associated with ejecting the group. The women’s refuge finally vacated the building on 1st June 2013.
The local council consented to the redevelopment on 1st May 2013. On 1st May 2013 Martin borrowed a further $700,000 from Big Bank Ltd, again at an annual interest rate of 10%, to undertake the necessary renovations for the redevelopment. The total cost of the renovation work was $700,000. $100,000 was spent on the central coffee making machine and the individual nozzles. $500,000 was spent on plastering and painting the inside of the building. $60,000 was spent replacing the existing awning to protect café customers from the weather. The old awning was made from cloth and was operated manually. The new awning is made from Kevlar and operates electronically. $40,000 was spent on a new stereo system that is Apple compatible. Martin had the stereo system at home between the time when he bought it (4th May 2013) and 1 January 2014.
The café was due to open on 1st December 2013. However, on 15th November 2013, Martin received an injunction notice from a competitor, World Cup Coffee. The injunction prevented Martin from opening his café until a substantive matter was resolved in court. World Cup Coffee alleged that Martin’s logo was substantially similar to theirs and that Martin’s café would materially affect their business. (World Cup Coffee’s logo is a cup of coffee inside a globe of the world.) Martin incurred $50,000 in legal fees in relation to the injunction proceedings but was unsuccessful. Martin tried to find another concept and logo for his café before 1st December 2013 but he was so disillusioned by the legal proceedings that he lost interest in the café. Instead he opened an art gallery on 1 January 2014 which shows photos by artists from all around the world.
Required:
Advise Martin of the tax consequences that will result to him on these facts. You need to consider both the 2012-2013 and 2013-2014 income years.
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