Capital Gains Tax on Sale of Assets - Case Study Analysis

Question: 1
Material Facts -
In the given case, the company, The City Sky Co., which is engaged in property
investment and development, has availed the services of a local lawyer, Maurice
Blackburn. Maurice has charged $ 33,000 for the service. The service was availed in
relation to a vacant piece of land, which was purchased by the company, on which it
is planning to build 15 apartments.
Legal issues and relevant tax laws –
Application of Goods and Services Tax, i.e. GST, is dealt with, by “A New Tax System
(Goods and Services Tax) Act 1999. Section 23-15 of the said act, deals with the
turnover threshold for registration in GST regime, a sole trader is required to
register in GST, if his turnover for the year crosses:
i. $ 50,000, or
ii. Such higher amount, as the regulations specify
(Ref: A New Tax System (Goods and Services Tax) Act 1999. Section 23(15),
retrieved from https://www.legislation.gov.au/Details/C2014C00008).
As per Australian Tax Office, threshold requirement has been increased to $ 75,000,
i.e. any person having a turnover of more than $ 75,000 is required to register
under GST.
The above-mentioned limits are applicable for sole traders, in case the entity
involved is an enterprise, the entity is required to register in GST, irrespective of the
turnover of the entity.
The entity would be entitled to take the credit of tax paid on the purchases made or
expenses incurred for business, which have been incurred for the GST-registered
business. The input tax credit so claimed would be reduced from the output tax
liability of the company, and it would be shown as credit in the activity statement
which would be filed for the relevant period wherein tax settlement is made for the
period.
In order to be able to claim the credit of GST, it is mandatory to retain the valid tax
invoice from the seller. The settlement statement or a contract of sale, cannot
replace the tax invoice to claim GST credits. Tax invoice is mandatory to hold, while
claiming the input tax credit on any service.
Further, the seller will also be required to pay the amount of GST on sale, in case of
construction of new residential premises. And, thus, seller can claim the credit of
GST paid on the construction costs incurred by the entity and any other services
availed in relation to the construction of residential premises, for sale.

Normally, rate of GST is 10% of the value of goods or service sold by the entity, i.e.
the taxable supply provided by the entity. The value of taxable supply is computed,
as under:
Selling price of taxable supply * 10/11,
Where, the selling price refers to the amount charged for the goods or service,
including the GST amount.
As an exception to the normal rule of GST, for the sellers involved in sale of new
residential premises, the statute provides another option i.e. margin scheme, as
per which, the liability of GST is reduced to the portion of margin earned by the
developer, instead of the total selling price. If developer or seller is selling the
premises which will or could be used for residence, he is supposed to intimate the
purchaser in writing (before settlement of the property) whether or not the
requirement of withholding tax would apply on the buyer or not.
The act has also spelled out various conditions, that a business needs to comply
with, to claim margin scheme: -
Residential premises, as mentioned in the margin scheme would not include the
sale of vacant land, this would include dwelling units, flats and houses, which are
made with an intent of being occupied as residences.
Residential premises are deemed to be new when it satisfies any one of the
following conditions:
a) It is never sold as a residential premise
b) There have been substantial renovations, which led to the development of
residential premise
c) Building has been build by demolishing the existing building
In order to claim the margin scheme, the developer needs to forego, the GST credit
on the purchase price of the property or he could use the margin scheme, in cases
where GST was not charged by the seller of the property to developer. In case full
GST was charged, when the property was originally purchased, developer is not
entitled to opt for margin scheme and also, since the GST is chargeable on the land
price has already been charged from the seller, the differential GST, that seller
would be liable to pay, shall pertain only to the cost of construction of the property
and the margin of the developer. And on the construction cost, he could, anyway
claim the credit of input tax paid.
Application of laws to the facts of case: -
In this case the sky co has engaged the services of local lawyer for the development
of $33,000 which would include GST of $3000, Since, it is mentioned that the lawyer
is working as a sole trader and his revenue is $ 300,000 per year and hence, based
on Section 23-15 of A New Tax System (Goods and Services Tax) Act 1999. He is

required to register in GST and is required to charge GST on the taxable supplies
being made by him.
Conclusion:
The City Sky company could be operating in either of the two ways, i.e. paying GST
on the total sale price or on the margin amount only, the treatment of GST would be
as under:
1) The sky co can take GST credit of the legal expenses in case of normal sale
where they are eligible to take credit on their purchase and liable to pay
normal GST on their sale price; or
2) The sky co cannot take GST credit of the legal expenses in case of margin
scheme where they are liable to pay GST on margin amount only not on full
sale price.
Thus, the company can or cannot take GST credit, based on the treatment of output
liability which company decides, i.e. either to go for GST on full sale value or on
margin only.
Question: 2
Facts of the case:
In the given case, Emma has undertaken following four transactions in the fiscal
year 2015:
i. Sale of block of land for $ 1,000,000
ii. Sale of 1000 shares in rio-tinto for $ 50.85 per share
iii. Sale of stamp collection, purchased in January 2015
iv. Sale of grand piano for $ 30,000.
As per Law: -
The transactions mentioned above are in the nature of sale of capital assets by the
assessee. Capital Gains are dealt with, by Section 100(20) of Income Tax
Assessment Act, 1997, which provides the list of events that attract Capital Gains
Tax. Further a summary of CGT events is provided in Section 104(5) of the said act
(Ref: Income Tax Assessment Act, 1997. Section 100(20). Retrieved from
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s100.20.html.
Viewed on 22 September, 2019).
Set 100(25) provides an exemption from capital gains tax on the gains made on
sale of certain assets, those assets are as under:
a) House used as residence, (with some exceptions);
b) a motor car or motorcycle;
c) any asset that has was acquired prior 20 September 1985.