Taxation and Capital Gain Tax

This document explains the GST laws and input tax credit for City Sky Co. It also explains the computation of capital gains tax for Emma's land, shares, stamp collection, and grand piano.

TAXATION 1
TAXATION
Name
Institution
Date

TAXATION 2
Question 1.
The fact that City Sky is a property investment and development company, it is by law required
to be registered for GST because it is involved in buying property, redevelop and sell them. Tax
credit is fundamentally a core aspect for GST and it is also a major concern for tax registered
companies most importantly it is a good deal for people who buy goods for resale. A real estate
developer who needs to first purchase land for apartment development is bound to pay GST not
directly to the Australian Taxation Office but through the seller. At the time of land sell, the
seller is charged a GST and the seller includes it in the invoice he gives to the buyer and in this
case it is the City Sky Co. Therefore, it is entitled to an input tax credit because the purchased
land for commercial purposes- building apartments which will be sold to clients.
According to Bennett, and Chiert, (2018) of KPMG Australia, the GST laws changed beginning
from 1st July 2018 and that the buyer is taxed with obligation of withholding the GST imposed
on the purchase of vacant land. Therefore City Sky has the obligation to withhold the tax payable
on the purchase of the vacant land. The law changed as there were many loopholes in the
payment of the GST. It is evident that one would not know whether the vendor pays the GST to
the relevant authorities or not.
In Brisbane some companies have been summoned over fake ITC claims. The government was
very much concerned with whether the taxes were paid . "Effectively, while a business may have
paid the tax to a vendor for which it wants to claim credit, it may not be possible to ascertain if
the vendor has deposited the GST" (Sikarwar, 2019). From Sikarwar article, it clear that some
vendors did not pay the GST tax as required of them by law. But "GST law warrants a reversal
of input tax credit claimed by a business if its vendor has not paid the tax for which credit is
being claimed." So is from this law that many have beaten the system are evading taxes while the

TAXATION 3
buyers are not aware. The buyers unsuspectingly fill the tax returns claiming the credits. There
has been no mechanism to verify whether the vender paid the GST or not. The system or the
portal only captures whether the vendor included the tax in his or her invoice but does not
ascertain whether the vendor deposited the money for GST Sikarwar, (2019). Continues to
propose that there is no fairness when the buyers are bounced on their claims yet they did their
due diligence and paid the tax.
To claim the input tax credit the company is required to fulfill some conditions among them
which include; being a registered taxable person which is the case with our company City Sky.
The company should receive goods and services for business transactions and in this case the
land was purchased for developing apartments. The person claiming the input tax credit can
credit the ITC in their Electronic Credit Ledger on the portal as described in the GST law.
Various documents such as tax invoice are necessary to claim the ITC. It can also be claimed if
there is an actual receipt of the goods and filling all the GST returns like GST-1 up to GST-7.
How Input Tax Works under GST
The seller sold land City Sky Co bought. City Sky is now entitled to claim the input tax credit
using the purchase invoice he got from the seller. The seller would be required to upload her tax
invoice details as directed by the GSTR-1 and what detail was on the invoice is reflected in the
GSTR-2A. It is this same details that will reflect when City Sky files the GSTR-2 returns and it
will be typically the details of purchase. Then the tax authority accepts and acknowledges the
requests for City Sky and after that process, the tax credit is credited to the City Sky account.
There have been serious debates between the real estate developers and the authorities on
whether there should be Input tax credit or there shouldn't. Some developers argue that the tax

TAXATION 4
rates on the property should be lowered and ITC scrapped while others think otherwise. The tax
rates charged on affordable housing and luxury housing with input tax credit available are 8%
and 12% respectively. However if the input tax credit scrapped, the rates would be 1% and 5%
on the same products respectively. According to Ramamirtham, (2019), if the input tax credit is
removed, there will be cost implications on the side of the developers and this may render the
industry unattractive.
The price of property would be expected to reduce when the taxes are reduced but with the way
GST works, if the input tax credit is abolished and the developers don’t claim any tax credit it
would the prices for the housing would still remain high( Bhattacharya, Choudhury and
Majumdar, 2019). This would imply that the planned reduction in the GST rates for the housing
projects would not lower prices for the housing projects.
Question 2.
Capital Gain Tax
Capital gains or loss is obtained by getting the difference between the person paid when
acquiring an asset and the asset is sold (National Australia Bank Limited, 2019). This implies
that capital gains tax just its name capital gain is charged only when a person selling has made a
gain not a loss. Australian residents have a number of capital gains exemptions and the
commonest of all is the sale of a family home as state by National Australia Bank Limited, 2019.
The bank further emphasizes that in the computation of capital gains tax, it important to a record
your transitions pertaining sales.
According to Australian Taxation Office, Australian Government, (2019), Emma should be
aware that for capital gains or losses, the tax comes into question when a property is sold.

TAXATION 5
Moreover, he should be mindful of the allowable and the taxable expenses that are associated
with the transaction. In this particular case, Emma bought land in 1991 at $250,000 and sold it at
$1,000,000 making a considerable profit on the sale. Considering Emma's expenses at the time of
purchase, some expenses are taxable while some are allowable. The allowable expenses for
Emma for purposes of taxing are the bank loan interest of $32,000, the stamp duty of $5,000.
These expenses should be added to the land purchase cost. The legal fees $10,000, the council
rates of $22,000 and the $5,000 that was incurred in the settling of the dispute on the land are all
not included because they were not part of the expenses to acquire the land. Therefore this totals
our land purchase value amount to ($250,000 + $5,000 + $32,000) =$332,000.
The above are also expenses that were incurred by Emma before selling the land. Thefore, the
need to be deducted from the gross profit of the sale of land. The expense of $27,500 that was
incurred to clear dangerous pine trees from the land which is referred to as decommissioning
expense. Decommissioning expense is one which is incurred to 'beautify' the property so that it is
sold off at a reasonable value. The advertising costs and legal fees amounting to $25,000 are
allowable and are part of the selling cost. The total expenses here were ($27,500 + $25,000) =
$52,500.
Calculating the profit from the sale would be as follows.
The sales value $1,000,000 - $332,000 which is our new purchase price. The gross profit is
$668,000. Then from the gross profit, the sales costs are deducted which would leave Emma with
a taxable amount of ($668,000-$52,500) = 615,500.
Now the profit of $615,500 is the taxable amount which should be taxed.

TAXATION 6
However, in calculation of capital gains tax, one can be offered a 50% discount if she applies for
capital losses for any property that has been in her possession for over 12 months. This implies
that Emma can be liable for capital gains tax discount of 50% because she bought the land in
1991 and the land has been has for over 20 years. The capital gains tax is calculated using the
same rate as the income tax for the year in which the capital gains tax was assessed.
Sale of Emma's Shares
When Emma sold her shares to Rio Tinto, she paid a brokerage commission of 2 percent of the
amount she sold. So in the calculation of the capital gains tax, Emma should declare that expense
right away so that it is not taxed. The total revenue amount sold from the shares is (1000 shares
multiplied by the share prices of $50.85) is $50,850. The total commission that was paid to the
broker is ($50,850 x 2%) = $1,017. The net profit from the shares sale is $49,833. The brokerage
fee should be deducted from the gross because it was an expense that was incurred in order to
sell and in any case shares are normally sold through brokers. So the capital gains tax should be
calculated from the net profit of 49,833 dollars.
Emma should also bear in mind there is a very big difference in the short term and long term
capital gains. A capital gains tax on a property that has lasted for a long term time that is to say
more than 12 months attracts less tax a property that has been sold with a less period like less
than 12 month. The property that has been held for more than a year is charged according to the
tax threshold but a property that has not been held for more over 12 months charged at a rate
similar to the rate of individual income tax. So because of that the difference on long term
properties and the short term, the tax on long term is generally always lower. Boyte-White,
(2019) generally advises that it is better to sell property after you have held it for a year.

TAXATION 7
Sale of a stamp collection
Emma sold her stamp collects for a gross profit of $10,000 because she bought the stamp
collections at $50,000 and sold them at $60,000. So the gross profit is a difference in the selling
price and the purchase price as illustrated; selling price $60,000 - Purchase price $50,000 which
equivalent to $10,000. However Emma paid auction fees of $5,000 which is an allowable
expense and should be deducted from the gross profit before the capital gains tax is levied.
Therefore subtracting the auction fees from the gross profit would be leaving Emma with a
taxable gain of $5,000.
Sale of Grand Piano
The grand piano was sold at a net profit of $50,000 and there were no other expenses. The piano
was bought in 2000 at $30,000 and sold at a whopping price of $80,000 in 2015. So calculating
the difference in the selling price and buying price for the piano which is as follows. Selling
Price $80,000 - Buying Price $30,000 which is $50,000. The capital gains tax would be
calculated on the $50,000.
References

TAXATION 8
Australian Taxation Office, Australian Government, (2019). Guide to capital gains tax 2019.
[Online]: Retrieved from; https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2019/.
[Accessed on. 19th Sept. 2019].
Bennett, M. and Chiert, G. (2018). New GST rules for property developers. KPMG Australia.
[Online]. Retrieved from:https://home.kpmg/au/en/home/insights/2018/05/gst-rules-for-property-
developers-from-july-2018.html. [Accessed on: 19th Sept. 2019].
Bindal, M., Gupta, B. and Dubey, S. (2017). A study on customer perception towards input tax
credit in GST with special reference of alwar region. International Journal of Recent scientific
Research. [Online]; retrieved from: http://recentscientific.com/study-customer-perception-
towards-input-tax-credit-gst-special-reference-alwar-region. [Accessed on 19th Sept. 2019]
Bhattacharya, A., Choudhury, R., S. and Majumdar, D. (2019). Analysis of Trends in Property
Prices in Selected Indian Cities. Journal of Business and Management (IOSR-JBM). [Online]:
Retrieved from: http://www.iosrjournals.org/iosr-jbm/papers/Vol20-issue7/Version-5/
E2007053338.pdf. [Accessed 19th September. 2019].
Boyte-White, C. (2019).Understanding Long-Term vs. Short-Term Capital Gains Tax Rates.
Investopedia. [Online]: Retrieved from: https://www.investopedia.com/articles/personal-
finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp. [Accessed on: 19th
Sept. 2019].
National Australia Bank Limited, (2019). Calculating And Paying Capital Gains Tax. Helping to
make sense of capital gains tax. [Online]: Retrieved from:https://www.nab.com.au/personal/life-
moments/manage-money/money-basics/capital-gains-tax. [Accessed on: 19th Sept. 2019].

TAXATION 9
Ramamirtham, (2019). Input tax credit or no input tax credit: What will the real estate sector
choose? Housing.com. [Online]. Retrieved from: https://housing.com/news/input-tax-credit-or-
no-input-tax-credit-what-will-the-real-estate-sector-choose/. [Accessed: 19th Sept. 2019]
Sikarwar, D. (2019). Companies face queries over input tax credit claims. The Economic Times.
[Online]: Retrieved
from:https://economictimes.indiatimes.com/news/economy/finance/companies-face-queries-
over-input-tax-credit-claims/articleshow/69103759.cms?from=mdr. [Accessed: 19th Sept. 2019].