Tax Implications of Capital Assets Transactions - Desklib

Question: 1
In the analysis, the tax implication of various transactions, including the taxable
supplies, capital gains transactions, etc. have been analyzed and deliberated.
Material Facts -
As per the given situation, The City Sky Co. is in the business of development of
properties and making investments in the properties. The City Sky Co. has
purchased a vacant piece of land, for constructing 15 apartments, which would be
then sold by the company.
In the process of executing the purchase transaction, The City Sky Co. has availed
the services of a lawyer, who has charged $ 33,000. The lawyer who has provided
the service, works as a sole trader and earns $ 300,000 as revenue in a year.
Legal issues and relevant tax laws –
“A New Tax System (Goods and Services Tax) Act, 1999” deals with the application
of Goods and Services tax, including, providing the rate of tax to be applicable on
the taxable supply. It also provides guidance on topics such as, turnover threshold
for registering in GST, periodicity for filing of activity statement for GST, etc.
Section 23-15 of GST Act, 1999 provides guidance on the turnover threshold,
beyond which a business is required to obtain the registration in GST. The limit set
out in the section is, turnover exceeding
i. $ 50,000, or
ii. Such higher amount, as may be prescribed
(Ref: Goods and Services Tax Act 1999. Section 23(15), retrieved from
https://www.legislation.gov.au/Details/C2014C00008).
As per the section 23-15, the turnover applicable for assessing the applicability of
threshold has been increased to $ 75,000, by the Australian Tax Office.
Another important factor to be considered is the nature of business entity, in case it
is an enterprise, GST would be applicable irrespective of the turnover threshold of
the business, whereas in case it is a sole trader, the above-mentioned turnover limit
would be applicable and hence, the business would be required to be registered in
GST, when the turnover crosses the above mentioned limits.
GST paid on expenses incurred and purchases made in relation to the business of
the entity, would be allowed to be claimed as credit and to be reduced from the GST
payable by the entity, on the taxable supply provided by the entity. The credit of
tax paid is allowed to the entity, on the basis of invoice raised by the provider of
taxable supply, thus it is mandatory to retain a copy of tax invoice, in order to be
eligible to claim credit of GST paid.
GST rate applicable in Australia is 10% on the value of service. Since property
development is slightly different supply as compared to other supplies, the Act
provides the option to developers, to opt for Margin scheme, which enables the

seller to be able to charge GST, only on the amount of margin that the developer
would earn from the property. In case, the seller opts for Margin scheme, it is not
entitled to claim the tax credit for the taxable supplies purchased by the entity for
business.
Further, there are certain conditions, which must be fulfilled before being entitled to
avail the benefit under Margin scheme. The conditions aims at ensuring that the
scheme is availed only by the developers of residential apartments and is not being
misused by the resellers of the residential premises.
Application of laws to the facts of case: -
In the present scenario, The City Sky Co has availed the services of a local lawyer,
who works as a sole trader, in relation to purchasing a piece of land on which the
company intends to carry out the development of residential units. The company
paid $33,000 to the lawyer for his service.
Since the lawyer is operating individually as sole trader, he would be required to
register in GST, in case his turnover crosses the specified limit, i.e. $ 75,000 in a
year. It is given that, his turnover for a year is $ 300,000 and hence, he is required
to register in GST and thus, $ 33,000 charged by him, would include $ 3,000 for
GST. (33,000*10/11).
Conclusion:
The amount of GST paid by the company to the lawyer, is in relation to the business
activity of the company, since the services were availed in relation to purchase of a
piece of land, which would be used for construction of residential premises, which is
the business of the company. Thus, company is entitled to take the credit of GST
amount paid to the lawyer, the eligibility of credit would also be affected by the
output tax treatment, the company has opted for.
Since the company is constructing residential premises, it is entitled to opt for
margin scheme, wherein it is required to charge output GST only on the margin
earned by the entity and in that case, input credit for any service availed by the
company wouldn’t be available.
In case the company opts for normal taxation, it would be entitled to claim the GST
credit of $ 3,000 on the lawyer’s fees paid by the company.

Question: 2
The present case involves providing the tax treatment for four transactions
pertaining to capital assets, such transactions are:
i. Capital Gains Tax (CGT) on the Sale of block of land for $
1,000,000:
Facts:
Emma purchased a land in the year 1991 for the purpose of investment. It
was purchased for $ 250,000. In addition to the purchase consideration,
Emma has also incurred an amount of $ 5,000 for stamp duty and $
10,000 for legal fees paid to authority for purchase of given land
(Burkhauser, Hahn, & Wilkins, 2015). The said land has now been sold for $
1,000,000.
Also, in this case, Emma had to take a loan for purchase of land, on which,
total interest payments made by her, amounts to $ 32,000.
In the year 2015, Emma had a fight with the neighbors on misuse of land,
Emma had to spend $ 5,000 for legal fees, to settle the issue with
neighbors.
Emma has also incurred the following amounts, during the holding period
of the entity:
a. Council rates and insurance : $ 22,000
b. Removal of pine trees: $ 27,500
Further, at the time of sale of land, Emma had to incur a cost of $ 25,000
on auction, advertisement, legal fees, etc.
Legal provisions:
In Australia, any capital asset, which has been purchased after 25th September 1985
shall be subject to CGT on the amount of gain/loss made on the sale of property.