Taxation of Capital Gains: Calculation and Applicability of Laws

Question: 1
Facts of the case:
In the question, there is a company which is engaged in the business of property
investment and development, the company is known by the name of The city sky
co. Company has recently identified a vacant piece of land, which it intends to
acquire in order to use it for construction of residential flats, in relation to the
said purchase, company has availed the services of a lawyer, who has charged $
33,000 for his services.
Lawyer is operating as a sole trader and had an annual turnover of $ 300,000.
Applicable legal provisions:
For an enterprise, GST is applicable on the taxable supplies, irrespective of the
amount of taxable supplies made by the entity, whereas, in case the provider of
taxable supply is operating individually, as a sole trader, he is governed by
section 23-15 of Goods and Services Tax Act 1999, which provides the threshold
beyond which the individual businesses are required to register under GST and
charge GST on the taxable supplies made by them. As per the said section,
turnover threshold is:
 $ 50,000 or
 The amount as may be decided by the regulations,
whichever is higher.
(Ref: Division 23-15 of A New Tax System (Goods and Services Tax) Act, 1999,
retrieved from
https://www.treasury.gov.au/sites/default/files/2019-03/Explanatory-Material-A-
New-Tax-System.pdf, viewed on 25 September, 2019).
A New Tax System (Goods and Services Tax) Regulations, 2019 has notified $
75,000 as the prescribed turnover, beyond which the individual is required to
register in GST. (Ref: A New Tax System (Goods and Services Tax) Regulations,
2019, retrieved from
https://www.treasury.gov.au/sites/default/files/2019-03/Explanatory-Material-A-
New-Tax-System.pdf, viewed on 28 September, 2019).
From the perspective of the receiver of taxable supply, GST paid on the taxable
supply availed for the purpose of business of the entity, is allowed to be claimed
as a credit from the GST payable on the output taxable supply, this effectively
reduces the net cost of the taxable supply for the service receiver.
In relation to the real estate developers, there are certain exceptions for claiming
the input tax credit, implying that GST paid on these assets wouldn’t be allowed
to be claimed as a credit. The exceptions spelled out in the law, is as under:
 GST on deposit made under a standard land contract
 When the land developer opts for margin scheme
 Property has been purchased for personal use.

 In cases where the received of taxable supply is not registered for GST, when
the purchase was made.
These provisions are not applicable to any entity other than sole trader, for
example, an enterprise needs to get register under GST, regardless of the
turnover.
Depending on the nature of taxable supplies that have been availed by the
entity, credit of GST paid on taxable supplies, is allowed to the entity. Generally,
the credit for GST paid on all taxable supplies availed in relation to the business
of the entity, are eligible for credit.
In Australia, Presently GST is levied at the rate of 10% of the value of taxable
supply. In general, the value of taxable supply is the value at which the sale
transaction takes place, whereas, since in case of residential premises, the
amount involved is huge, the developers of residential premises are given an
option to pay GST on the margins earned by the developers, instead of paying
GST on the sale price of the residential units, this scheme is known as “Margin
scheme”.
If the developer opts for margin scheme, he wouldn’t be entitled to input credit
of GST paid by him in relation to the taxable supplies used by the developers.
Margin scheme was introduced to give benefit to the developer of the dwelling
units and not the resellers and hence, the benefit of Margin scheme is available
only to the developers on new units.
Opting for margin scheme, takes away the right to claim input credit for the GST
paid on taxable supplies availed by the developer. Thus, the developers can
either pay tax on full value of the dwelling units and claim the credit of GST paid
on input taxable supplies or it can pay tax on his margin amount and forego the
credit of GST paid on taxable supplies, which is otherwise permissible.
Application of laws to present scenario:
The lawyer engaged by the company, Maurice Blackburn is operating as a sole
trader and he has achieved turnover of $ 300,000, Thus, based on Section 23-15
of A New Tax System (Goods and Services Tax) Act 1999, he is required to
register in GST and charge GST on the services provided by him. Thus, of the
total invoice amount of $ 33,000 raised by him, $ 3,000 would pertain to GST.
Since, the company has availed the services of the lawyer in relation to the land,
which is being purchased for construction of residential units, i.e. for business
purposes. Hence, The City Sky Co. would be entitled to avail input tax credit for
the input services and goods (supplies) availed by the company.
Conclusion:
GST credit for the legal services availed by the company, shall be allowed to the
company only if the company decides not to avail the margin scheme, available
for the developers.

Question 2:
Taxation of Capital gains is different than the taxation of ordinary income.
Taxation of capital gain shall depend on the nature of capital gain; i.e. long or
short term and it is also dependent on the asset on which the capital gain/loss
has occurred.
The given case pertains to taxability of some events, in context of Capital Gain
for Ms. Emma.
The following transactions needed to be discussed:
a) Block of land sold for $1,000,000
Emma purchased the land for $250,000 and also incurred additional cost of
$5,000 as stamp duty and $10,000 as legal fees, for acquisition of the said land,
in 1991. The land was being sold for $ 1,000,000 in the current year. During the
ownership tenure of the above said land, there were following expenses which
were being incurred by Emma:
 Interest cost for loan taken for acquisition of land: $32,000
 Council rates, water rates and Insurance: $22,000
 Legal fees for settlement of dispute: $5,000
 Removal of Pine Trees: $27,500
 Advertising, agent fees and legal fees: $25,000
Total amount incurred: $111,500
As per the provisions of Section 100(25) of Income Tax Assessment Act, 1997,
sale of such illustrative items would be exempt from Capital Gain Tax, that is, an
assessee is not required to pay tax on the sale of such assets:
 a motor car or motorcycle
 Residential House
 any asset that was acquired prior to 20 September 1985, (20th
September 1985 is the date from which the law was being enacted)
(Ref: Section 100-25 of ITAA, 1997. Retrieved from
https://pinpoint.cch.com.au/360document/legauUio695785sl24364354/section-
100-25-what-are-cgt-assets/overview. Accessed on 26 September 2019).