Australian Income Tax: GST and Capital Gains Taxation

This report discusses various topics in relation to Australian income tax such as fringe benefit taxation (FBT), CGT (Capital gain Taxation, GST regime for goods and services provided. It helps to learn aspects of goods and service tax as well taxability under head capital gain.

Executive Summary
In this report, we will discuss various topics in relation to Australian income tax such as
fringe benefit taxation (FBT), CGT (Capital gain Taxation, GST regime for goods and
services provided. Such laws have been applied in accordance with requirement of
question and also related case law along with provision of tax has been described.
It also describes the following questions:
(a) Whether the entity is required to take registration under GST Act or not?
(b) Whether business entity can claim credit in respect of GST paid?
It helps to learn aspects of goods and service tax as well taxability under head capital
gain. No capital gain tax will attract on sale of consumable and personal collectables.
It is mandatory to take registration under goods and service tax; total receipts will
increase to $75000. When transaction has been occurred between two registered
entities, the person responsible for payment of tax will able to take claim of GST credit.
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Contents
Introduction 3
Discussion 4
Answer – 1: 4
GST Provision applied on respective case and conclusion: 5
Answer – 2: 6
Tax treatment of capital gain income and also various techniques for calculation of capital
gains: 7
Application of law to the case: 11
Conclusion 12
References 12
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Introduction
In this assignment, there are two questions which are related to goods and service tax
and capital gains tax. It also requires testing knowledge of students in relevant areas of
goods and servicing tax including input tax credit.
It requires calculation of capital gain in respect of following capital assets such as land,
shares and collectables as well as personal assets.
Discussion
Answer – 1:
In this question, it discussed about the City Sky Co which is in currently engaged in
making investment as well as developing property. Basically, it is in practice to sell
apartments after construction of such property. City Sky co. has gained service from the
Maurice Blackburn who is involved in providing lawyer service. The annual Turnover of
the Maurice Blackburn is $300,000. Due to exceeding threshold limit of $75,000, He is
also required to take registration under GST.
Issue of this Case: Whether the company can claimed credit of GST for fees paid to
lawyer for providing services to the company?
The discussion under this case is based on new legislation of GST Act 1999.
As per provision of GST Act 1999, there is threshold for registration of business under
GST. i, e where annual turnover of business exceed $ 75,000, the assessed is required
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to take registration under the GST Act, 1999. It is also provided that once business has
got registered under GST, No cancellation of such registration is allowed for a period of
12 months from the date of such registration. (ATO, QC 22412).
As per ATO Law and Section 11-5 of Australian income tax assessment act 1999, GST
would be levied on taxable supplies. If a person supplies anything for something in
exchange whether in cash or kind for conducting business then such supplies is called
taxable supplies.
It is also stated under section 11-10(2) of Australian income tax assessment act that
Supply includes provision of service as well as consultancy services and others too.
In accordance with section 9-70 of Australian income tax assessment act, 1999, The
prescribed rate for calculation of GST is 10% of taxable value of supply. As per s9-
75(1), where amount of taxable supply is given inclusive of GST, then GST will be
calculated using the following formula:
GST = Taxable Value of Supply including GST*10/110.
As per section 7-12 of Australian income tax assessment act 1999, Where amount of
transactions made between two parties, who are registered under GST, exceeds $75
and such amount of taxable supply includes GST, then such party is required to provide
a tax invoice in relation of transaction affected among them. The person can claim an
input tax credit in respect of GST paid on such transaction. Such credit is referred to as
an input tax credit. (ATO, QC 22430). Hence, any acquisition in which are in nature of
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creditable acquisition, then credit in respect of GST can be claimed in respect of such
tax
GST Provision applied on respective case and conclusion:
As per above law, where the company is registered under GST , then such company is
entitled to get the advantage of credit of GST subject to other provision of law.
Accordingly, The City Sky Co. is able to claim credit of GST Paid.
As stated above, credit can be claimed in respect of goods or service which is in nature
of creditable acquisition. As per ATO law, Sale of land is outside the purview of GST
provision for claiming input tax credit. Accordingly no credit of GST can be claimed in
respect of purchase of land. In the instant case law, company is engaged in the
business of constructing building and sells such building as residential apartments on
the purchased land. As per section S 40-65(1) of Australian income tax assessment act,
1999, it is also stated in law that the residential apartments are input tax and so they
need not to make payment of GST on sale of such residential apartments.
However, the legal service from Maurice Blackburn is in nature of creditable acquisition.
Hence The City Sky Co. is entitled to claim credit of GST paid in respect of such
service.
The input tax credit is calculated as follows:
= $33,000*1/11 = $3,000.
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Answer – 2:
A person who holds shares or make investment in shares with intention to earn income
in the form of the dividend can be referred as shareholders. A person can acquire
shares directly from the company, through bidding under general public offer or through
stock exchange. The following point is worthwhile for taxation approach in respect of
shareholders:
● In case shares have been purchased, such cost shall form part of capital asset
and not to be deducted from current income for calculation of taxable income.
● As per ATO, where shares have been purchased and sale after a certain period,
there may be chances that income will arise in such sale. As per ATO law,
income on sale of shares shall be added as assessable income as well as capital
gain tax will attracts on such tax if sale consideration shall exceeds the cost of
acquisition of such shares.
● In case there is loss on such sale instead of gain, then such loss can be set off
from income which is in nature of capital gain. No setoff will done from income in
any other nature. It can be referred as intra-head adjustments and such loss can
also be brought forward so that any future capital gain is reduced.
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● Any cost which is incurred in relation to sell and purchase of shares can be
considered as part of the cost of acquisition of shares and shall be deducted for
calculation of capital gain.
● However, any income which is in nature of dividend shall be assessable as
income but no capital gain will attract in such income.
Tax treatment of capital gain income and also various techniques for calculation of
capital gains:
Where any shares which is held with intention to earn income in form of dividend nature
and capital asset in nature, then income on sale of such shares is in nature of capital
gain and it will attracts capital gain tax. In Australian income tax act, 1997, the tax
treatment in respect of capital gain is discussed in division 100 to division 104 of part 3-
1.
There are basically three methods have been described for the purpose of calculation of
capital gain tax which are as follows:
(a) CGT discount method
(b) Indexation method
(c) Other method:
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1) CGT Discount Method: It is stated that companies shall not adopt CGT discount
method. Such method is to be applied by any person other than company for the
purpose of calculation of capital gain.
● The following conditions are required to be fulfilled for calculation of capital gain
under this method:
○ Taxpayer must not be company.
● CGT Event should be taken on or after September 1999.
● Holding period of asset should be one or more year
● No indexation method has been applied by taxpayer
● There is an exception for holding asset for at least one year which are as follows:
○ Where the asset has been acquired due to breaking up of relationship of
marriage between two people. It is deemed to be fulfillment of condition of
one year in f the joint of holding of both partners exceed 12 months.
● In case of compulsory acquisition of asset under CGT or such asset has
been dismantled, lost, replacement asset has been acquired. Condition of
one year has been fulfilled if the period of holding of such asset exceeds
12 month together by both owners.
● Such asset has been acquired under inheritance due to death of estate.
As in this case, asset has been transferred to legal assignee or legal heir
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of estate that has died. Condition for the same will be fulfilled if period of
holding in together exceeds 1 year and such asset has been purchased
on or after September 1995.
● Under this method individual or trusts can claim a discount of 50 % of
capital gain, however at the same time super funds will claim discounts of
33.33% discount of capital gain. However, no discount will be applicable in
the case of capital losses.
2) Indexation Method: Another method for showing computation of capital Gain is
indexation method. The following condition is required to be satisfied for the
computation of capital gain under indexation method:
● CGT Event should be taken on or after September 1999
● Holding period of asset should be one or more year
● It is stated under law; company is required to mandatory to apply such
method for calculation of capital gain. However such method is not applicable
to investment companies which are listed on stock exchange. This method is
compulsory for the companies other than investment companies which have
listed on the stock exchange.
There is an exception for holding asset for at least one year which is as follows:
○ Where the asset has been acquired due to breaking up of relationship
of marriage between two people. It is deemed to be fulfillment of
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condition of one year in f the joint of holding of both partners exceed 12
months.
○ Such asset has been acquired under inheritance due to death of
estate. As in this case, asset has been transferred to legal assignee or
legal heir of estate that has died. Condition for the same will be fulfilled
if period of holding in together exceeds 1 year and such asset has
been purchased on or after September 1995.
This method provides relation to assessed by increasing cost of acquisition by
multiplying certain factor which is referred as consumer price index (CPI)
3. Other Method: Last method is other method”
● In case where asset holding is less than 1 year, then such method is required
to be applied for the purpose of calculation of capital gain
● It can be said that it is one of the most convenient of all the methods for
computation of income under head of capital gain.
In the instant question:
Emma sold 4 types of asses which include shares, land, stamp collection and grand
piano.
Application of law to the case:
Calculation of capital gain in respect of given asset is as follows:
Calculation of capital gain on sale of Land
Sale consideration of Land $1,000,000 is to be reduced
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by $25,000 which is equal to
$975,000
Cost of acquisition of land base (ATO, QC 17161,
2019)
Addition of
250,000+5,000+10,000
+32,000+22,000 which is
equal to $319,000
Capital gains liability = (Capital proceeds – Cost
base)
= $656,000
Calculation of capital gain from Shares sold
Calculation of Tax Liability = Nil. As per stated law, no
capital gain tax will attract if
shares purchased before 20th
September 1985.
(ATO, QC 52206, 2019).
As per Australian taxation law
ID 2013/19, No capital gain tax
will be levied on sale of shares
which is purchased on or
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before 20th September 1985.
Calculation of capital gain on Stamp Collection & Grand Piano
As per ATO law, Collectable and personal assets cannot be considered a capital
asset. Accordingly, income on sale of such assets will not attract any capital gain tax.
In the instant case, collectable and personal assets are Stamp collection and grand
piano. Hence, such asset will not attract any capital Gain Tax. (ATO, QC 22163,
2019).
Conclusion
Hence, Total Capital Gain is $656,000. As given in question Asset is held for a time of
more than one year, CGT discount method can be applied for computation of Net
capital Gain.
Net capital Gain = $656000- $656000*33.33% = $218667.
As per provision of Australian income tax assessment act, 1999, where any capital loss
has been carried forward from previous, such loss can be utilized to reduce net capital
gain.
It is further stated in provision that any capital loss cannot be used to reduce income
under other head.
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However, capital loss of current year can be brought forward to set off capital gain of
next year.
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References
A New Tax System (Goods and Services Tax) Act 1999. “GST and input tax credits”.
Retrieved on 9th September 2019 from:
https://www.legislation.gov.au/Details/C2017C00218/Controls/
Australian Government, 2017.ATO QC 52173. “Working out your capital gain”.
Retrieved on 9th September 2019 from: https://www.ato.gov.au/General/Capital-gains-
tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/Choosing-the-
indexation-or-discount-methods/
Australian Government, 2018.ATO QC 52006.“Shares, units and similar investments“.
Retrieved on 9th September 2019 from: https://www.ato.gov.au/General/Capital-gains-
tax/Shares,-units-and-similar-investments/
Australian Government, 2017.ATO QC 52196. “Sale of property and other CGT events”.
Retrieved on 9th September 2019 from: https://www.ato.gov.au/General/Capital-gains-
tax/Your-home-and-other-real-estate/Sale-of-property-and-other-CGT-events/
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