Taxation Law: GST and Input Tax Credit, CGT and Capital Proceeds

This article discusses GST and input tax credit, CGT and capital proceeds in taxation law. It also covers the sale of block of land, shares, stamps, and grand piano. The article provides a comprehensive analysis of the laws and issues involved in these topics.

Running head: TAXATION LAW
Taxation Law
Name of the Student
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................5
References:...............................................................................................................................10

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Answer to question 1:
Issues:
The issue that is taken in this case involves the discussion about the GST and the
input tax credit that can be availed by the taxpayer in regard to transactions occurred during
the business course.
Laws:
If the taxpayer has obtained the vacant land either for using it in private purpose or
using the land for investment purpose, land is on a general note considered as the capital asset
that is subject to CGT when it is sold by a taxpayer. But if the taxpayer purchase the land for
using it in the business purpose or for profit yielding activity, then any type of sales proceeds
are held as ordinary earnings and the taxpayer would be required to register for GST (Long,
Campbell and Kelshaw 2016). The tax treatment of the land and the revenue that is earned
from selling the land is commonly reliant on the fact that whether it can be treated as the
capital asset or the subject of business or the commercial deal.
The goods and service tax is also mentioned as the consumption duty. The GST is
applied on the supply of goods as well as services that are made in Australia and the goods
that are imported in Australia. Commonly GST should only be paid on the value added
assessable supply (Marateo 2017). Commonly GST is payable by every company that are
providing a supply at every step along with the supply chain. GST is regarded as the
transaction based tax and the elements of the transactions are;
a. Supplier: The suppliers delivers the business matter of supply.
b. Receiver: This involves the person that receives the supply and pay the price for
consideration.

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Under “sec 9-40 of the GST Act”, the liability paying GST happens when the taxable
supply or import is made. As noted in “sec 9.5 GST Act, GST” is commonly charged on the
assessable supply (Tully 2016). A taxpayer makes taxable supply if a supply is made for price
in carrying the business activity that is related with Australia by a company that is registered
under GST. While creditable acquisition given in “sec 11.5 GST Act” denotes that the
acquisition of items are made with the creditable purpose. This represents a situation when a
company purchases a thing at the time of carrying on the entity’s activities but does not
involve the extent that the acquisition is used for making an input tax supplies or the
acquisition is private or domestic in nature.
Commonly when a registered company purchases something, then they are considered
entitled to credit for GST that is paid on the purchase until and unless the acquisition made is
for creditable purpose and the taxpayer holds a valid tax invoice. The decision given in “AP
Group Ltd v CT (2013)” denoted that there should be a consideration that must have
connection with supply and the supply should also have the consideration (Lam and Whitney
2016).
On the other hand there is also a reverse charge mechanisms that requires the recipient
to pay the tax liability on GST as an alternative to supplier for the receipt of goods or
services. The rules that is laid down in ATO states that things beside the goods and actual
property might attract GST when the Australian business purchases them. The activities may
be done out of Australia or may be made with the help of business that are carried on by the
seller out of Australia (Lavermicocca 2017). The applicability of reverse charge mainly
involves the conditions where the things purchased is for the business use either completely
or partially that is performed in Australia and the sale made to the taxpayer is for payment.
The reverse charge is applied when the sale has relation with Australia and the things
purchased by the taxpayer is the Australian based business recipient.

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Application:
The case City Sky Co reveals that the company has been registered for GST and it is
conducting the business of property development. In the recent transaction reported by City
Sky Co it has acquired a vacant land in Brisbane on which it intends to construct apartment
for trading it in the marketplace. As obvious the land that is bought by City Sky Co is termed
as the CGT asset. The land is not a movable property in case of City Sky Co and it also does
not constitute any type of services. The liability of GST does not originates in this situation.
As a result, there cannot be any claim for input tax credit.
While in the later part, City Sky Co paid Maurice Blackburn for availing its legal
service. The legal services that were provided by Maurice Blackburn to City Sky Co was for
developmental purpose and incurred $33,000 for the same. The services taken from the
advocate by City Sky Co qualifies under the mechanism of reverse charge. This is because
the services were completely for the business purpose and services was in exchange of
payment. The legal services was also connected to Australia and were mainly occurred in
continuance of the City Sky Co enterprise activity. Denoting “sec 11.5 GST Act” the legal
services sought by City Sky Co is a creditable acquisition (Eccleston and Smith 2015).
Noting the judgement of “AP Group Ltd v CT (2013)” City Sky Co is entitled to input tax
credit for the GST paid under the reverse charge mechanism.
Conclusion:
The purchase of vacant land cannot be considered as the GST transaction and as a
result no input tax credit is allowable however the legal services that is taken by City Sky Co
from Maurice Blackburn being GST registered will be able to claim the input tax credit for
the services taken.

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Answer to question 2:
Sale of block of land:
Most importantly the general rule that is clarified in “sec 116-20” provides that
capital proceeds involves consideration received in either cash or in kind in terms of market
value that is received by taxpayer in respect of CGT event (Blakelock & King 2017). The
computation of CGT normally involves adding up the elements of cost base or the reduced
cost base. There are notably five elements that are added all together.
I. Element 1 involves the purchase price, market value of the property and
construction cost under “sec 110-25 (2), ITA Act 97”.
II. Element 2 denotes the incidental expenses that have happened in regard to the
acquisition or disposing of the asset under “sec 110-25 (3), ITA Act 97”.
III. Element 3 is the non-capital ownership cost. Under “sec 110-25 (4), ITA Act
97” this characterizes the cost which not allowed to taxpayer as claim for tax
deduction (Khoury 2014). Examples are loan interest, rates, repairs etc.
IV. Element 4 of the cost base is the capital expenses when occurred by the
taxpayer in improving the value of asset. Under “sec 110-25 (5), ITA Act 97”
the examples of the cost are improvement, moving or installing expenditure
occurred on the asset.
V. Element 5 cost base involves the expenses that is occurred by the taxpayers in
increasing the value of the asset under “sec 110-25 (6), ITA Act 97”.
Emma sells the block of land for $1,000,000 but the land was actually purchased by
her for $250,000. For the calculation of Emma’s CGT there were several cost that were
occurred by her prior to sell. The cost incurred are segregated into five elements and it is
added up to know the cost base of asset. The purchase price paid by Emma is added in the

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Element 1 cost base of asset under “sec 110-25 (2)” as the market value paid to acquire the
asset (Guez 2018). While the stamp duty and legal fees were added up to cost base element 2
as incidental cost of purchase under “sec 110-25 (3)”.
She also took up loan to fund for the land’s purchase. The loan interest amounting to
$32,000 is a non-capital ownership cost under “sec 110-25(4)”. Till the time Emma held the
property she paid council rates, water rates and insurance (Pagura 2017). These cost are
added in the Element 3 cost base of property under “sec 110-25(4)”.
When the property was under her ownership there was also a legal expenses reported
by Emma for occurring dispute with the neighbours. The legal expenses is a capital expense
that is was incurred for preserving her rights on the asset. Under “sec 110-25 (6), ITA Act
97” it is added up as in Element 5 cost base of block of land. Emma lastly incurred outgoings
on cutting down the pine trees that were on the land (Sadiq 2017). The cutting down of pine
trees is a capital improvement cost occurred for improving the land. So under “sec 110-25
(6), ITA Act 97” it is added up in Element 4 cost base of land.
The overall capital proceeds obtained under “sec 116-20” after adding all the five
elements for CGT purpose is computed below;

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Sale of shares:
The most basic feature of the CGT is that taxes are imposed on the assets that is
purchased on or after the 20th sept 1985. These assets are mainly termed as the Post-CGT
assets and making capital gains from this asset is taxed under the CGT regime. While “sec
104-10 (5) (a)” explains that when an asset is purchased before the 20 September 1985 then
they are granted exemptions from the CGT (Pinto, Kendall and Sadiq 2018). These type of
assets are termed as pre-CGT asset.
Emma sells shares in the Rio Tinto that was purchased by her before the introduction
of the CGT regime in 1982. The shares were sold at a profit in 2015. By referring to “sec

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104-10 (5) (a)” the shares are acquired before 20 sept. 1985 (Pert, Chen and Carvosso 2017).
Therefore, the shares are pre-CGT asset and the capital gains is exempted for Emma.
Sale of stamps:
A collectables involves any one of the items that is listed under “sec 108-10 (2)”.
These are
 Art works (sculptures, paintings)
 Rare manuscripts or books
 Rare stamps, medals or coins
 Jewellery
This type of items are used by the taxpayers for their private purpose and enjoyment.
While “sec.108-10 (4)”, directs the taxpayers to quarantine the capital loss from collectables
(Killaly 2017). Emma derived a capital proceeds of $50,000 from sale of stamps. The stamps
are treated as an item of collectable listed under “sec 108-10 (2)”. The proceeds yielded
capital loss as the stamps were purchased for $60,000. The capital loss must be carried
forward to subsequent year because no other gains from collectables were reported in present
year.

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Sale of grand piano:
The personal use asset (PUA’s) is explained in “sec 108-20(2)” which involves
personal items are used by the taxpayers for their private purpose and enjoyment. Examples
are boats, household things, yacht etc. Under “sec 108-20 (1)” capital loss from PUA’s is
fully disregarded. The piano by Emma is a PUA’s under “sec.108-20(2)” and was sold
eventually for $30,000 after purchasing it for $80,000 in 2000. The capital loss suffered from
piano must be fully disregarded by Emma under “sec 108-20 (1)”.

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References:
Blakelock, S & King, P, 2017. Taxation law: The advance of ATO data matching. Proctor,
The, 37(6), pp.18–21.
Eccleston, R. and Smith, H., 2015. Fixing Funding in the Australian Federation: Issues and
Options for State Tax Reform. , 74(4), p.435.
Guez, S. et al., 2018. FINANCE & TAXATION. Stetson Law Review, 47(3), pp.561–582.
Khoury, D, 2014. Widening the availability of deductions under Australian taxation law. Tax
Specialist, 14(4), pp.207–211.
Killaly, J, 2017. Law design and compliance management for a viable company tax base :
Chapter 3. JOURNAL OF AUSTRALIAN TAXATION, 19(3), pp.45–50.
Lam, D. and Whitney, A., 2016. Practical aspects of the new foreign resident CGT
withholding tax. LSJ: Law Society of NSW Journal, (21), p.84.
Lavermicocca, C, 2017. Tax risk management and the application of ethics by large
Australian companies. AUSTRALIAN TAX FORUM, 32(4), pp.741–756.
Long, B, Campbell, J and Kelshaw, C, 2016. The justice lens on taxation policy in Australia.
St Mark's Review, (235), pp.[94]-106.
Marateo, D., 2017. An Effective Priority for the Commissioner of Taxation in Liquidation:
Bell Group NV (in Liq.) v. Western Australia. Adelaide Law Review, 38(1), pp.223–231.
Pagura, I, 2017. Law report: Tax update. Journal of the Australian Traditional-Medicine
Society, 23(3), pp.160–161.

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Pert, A, Chen, H and Carvosso, R, 2017. 'Bywater Investments Limited v Commissioner of
Taxation'; 'Hua Wang Bank Berhad v Commissioner of Taxation' (2016) 91 ALJR 59.
Australian Year Book of International Law, 35, pp.250–252.
Pinto, D., Kendall, K. and Sadiq, K., 2018. Fundamental tax legislation 2018 Twenty-sixth.,
Sadiq, K. and C.C.& H.R.E.A.L. et al., 2017. Principles of taxation law 2017 10th ed., Place
of publication not identified]: THOMSON LAWBOOK CO.
Tully, S, 2016. Taxation: Interpreting bilateral tax treaties. LSJ: Law Society of NSW
Journal, (28), pp.76–77.