Taxation Law Report: GST and Capital Gains Tax in Australia

This report analyzes Australian taxation law, focusing on the Goods and Services Tax (GST) and Capital Gains Tax (CGT) implications for two scenarios. The first scenario involves "The City Sky Co," a property development company, and examines its entitlement to input tax credits on the purchase of land and solicitor services. The report determines whether these acquisitions are creditable based on the New Tax System Act 1999 (GST Act 1999), considering factors such as registration for GST, creditable purpose, and the nature of the supplies. The second scenario analyzes the sale transactions of Emma, focusing on CGT consequences under the Income Tax Assessment Act 1997 (ITAA 1997). It assesses CGT liabilities on the sale of land, shares, a stamp collection, and a grand piano, considering cost base calculations, holding periods, and the pre-CGT status of certain assets. The report applies relevant legislation to determine CGT implications, including the use of the discount method for capital gains and the treatment of capital losses from collectibles and personal use assets.

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Table of Contents
Question 1....................................................................................................................2
Question 2....................................................................................................................4
Transaction 1 - Land Block.......................................................................................4
Transaction 2 – Shares.............................................................................................5
Transaction 3 – Stamp Collection.............................................................................5
Transaction 4 – Grand Piano....................................................................................6
References...................................................................................................................7
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Question 1
In the scenario presented, the relevant taxpayer is a company named “The City Sky
Co” which conducts business in relation to property development and has purchased
a land parcel (empty) for development purposes. Besides land, the company has
also availed solicitor (Maurice) services for the process of fulfilling with the legal
formalities involved in the development process. A monetary consideration has been
paid for acquisition of both land and solicitor services. The objective is to outline any
nput tax credit entitlement arising for the company on account of supplies procured.
In order to determine the nature of transactions which entitle the taxpayer for input
tax credits, the applicable legislation is “New Tax System Act 1999” also called as
“GST Act 1999”. It has been highlighted in s. 11-1 of this act that input tax credit
would be available for taxpayers those who indulge in creditable acquisitions. The
necessary conditions to be met for creditable acquisitions have been outlined as
follows in accordance with s. 11-15 (Austlii, 2019).
 Consideration has to be provided by taxpayer for making the acquisition or
purchasing the supplies.
 The taxpayer ought to be registered for GST purposes or should meet the
threshold annual revenue requirement highlighted in the GST Act 1999.
 The acquisition of only taxable supplies can be creditable acquisition thereby
leaving out GST exempt and input taxed acquisition.
 The purchase or acquisition of supplies ia meant for a “creditable purpose”.
.
It is noteworthy that the term acquisition as used above would refer to the purchase
of service or goods by the taxpayer. An essential criterion for input tax credit
entitlement is usage of acquisition for creditable purposes where creditable would
imply that supplies would be meant for carrying business activities and not for
personal use (Reuters, 2017). If any intended acquisition for creditable purpose is
deployed either for personal usage or generation of non-taxable income, then it
would no longer be creditable. Section 11-25 highlights that on creditable
acquisitions, the extent of input credits available to a taxpayer would be equivalent of
the GST paid by the taxpayer while making the acquisition (Woellner, 2014).
Division 40 GST Act 1999 highlights a category of supplies which are input taxed
owing to which GST is not applicable on these goods. As GST is not applicable,
hence input tax credits also do nor arise for the acquirers of theses goods. In the
context of the given taxpayer, a relevant category which is input taxed is residential
premises (Barkoczy, 2018). If any acquirer purchases any residential premises, then
the same would not have any GST consequences implying no input credits for the
acquirer. However, this understanding is valid only when the property is used for
private use and not commercial use. A key feature of residential premises is the
presence of some house like establishment on the property which can be confirmed
by previous housing use of premises (Deutsch et. al., 2016).
For the scenario provided, two supplies have been acquired which are underlined
below.
1) Empty land parcel
2) Solicitor services
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Based on the information provided, it is known that land acquired by company does
not have any constructed area in the form of residential house. Since the land is
completely vacant, hence it cannot be termed as residential premises as under the
current condition it cannot be used as residence. Further, it is noteworthy that the
development and construction on the land is not for residential purpose bur is
commercial. This is evident from the fact that the company does not intend to use
the land for residence of executives or employees. Rather, this is a trading stock for
the company which it would develop, construct flat and then sell to willing customers.
The supply of empty land parcel is creditable acquisition as it fulfils all the criteria
highlighted below.
 The company has not got the land for free and would have given some
compensation to acquire this.
 The company is registered for GST as is indicated in the relevant facts.
 Empty land does not fall within residential premises category and thereby
would not be input taxed and hence GST would be levied on the transaction.
 The intended use of land would be for creditable purpose only.
The above arguments clearly highlight that the land parcel acquisition made by the
taxpayer would be categorised as creditable. The result is that the company can
claim input tax credits on this purpose whose amount would be the same as the
amount of GST that has been levied on the transaction.
The solicitor services provided by Maurice have been availed by the company for
assisting with the development of property. It may be considered that the services
provided by Maurice are essential for property development owing to the host of
legal formalities which may be required. Also, it is noteworthy that solicitor services is
not included under Division 40 GST Act 1999 and would attract GST provided the
supplier is registered for GST purposes. This is true for Maurice since his annual
turnover is much higher than the threshold for GST registered. Also, the services
obtained from Maurice are not for free since it is known that an invoice amounting to
$ 33,000 has been raised in regards to this service. Considering the above
discussion, it would be fair to conclude that services offered by Maurice would fall
within the ambit of creditable acquisition and hence entitle the company to input tax
credits on the GST paid on the services acquisition.
Since, Maurice can be assumed to be registered for GST, thus the invoice provided
for services would be inclusive of GST. Hence, GST component of legal services =
$33,000*(1/11) = $ 3,000. The company can claim this amount as input tax credit
besides the GST paid on the purchase of empty land (Sadig et. al., 2016).
Question 2
The key aspect is to analyse the given sale transactions of taxpayer Emma incurred
in FY2015 under the relevant legislation considering the Capital Gains Tax (CGT)
consequences.
Transaction 1 - Land Block
4

Land is termed as acapital asset unless the taxpayer is not in the land selling/buying
business for income generation purpose. Therefore, the disposal of capital asset
would trigger A1 CGT event. Under s. 104-10, the cost base of asset will be
deducted from the net sale revenue because the capital gains/losses will be
determined through cost base and sale revenue (Woellner, 2014). Cost base of any
capital asset includes some main elements as discussed in s. 110-25 TAA 1997. All
the five elements of cost base are shown below (Nethercott, Richardson and Devos,
2016).
 In accordance with ss. 110-25(2) ITAA 1997: The total cost paid to the seller by
the taxpayer to purchase capital asset.
 In accordance with ss. 110-25(3) ITAA 1997: Incidental cost in buying or/and
selling the capital asset. These include stamp duties, advertisement, legal fees,
agent fees, auction fees and so forth.
 In accordance with ss. 110-25(4) ITAA 1997: Money spent by taxpayer to
get/maintained the ownership. This includes tax paid on the land, loan interest
payments paid by taxpayer against the loan. However, this aspect is only true for
the capital asset which are purchased posterior to August 20, 1991.
 In accordance with ss. 110-25(5) ITAA 1997: Capital expenditure to improve the
quality or maintaining vaue of the capital asset.
 In accordance with ss. 110-25(6) ITAA 1997: Capital expenditure to preserve the
legal title of asset.
Cost base computation
Incidental cost in buying “Legal fees and stamp duty”
Incidental cost in disposing “advertisement, agent/legal fees, expense to eliminate
the pine trees”
Expenses to maintain the ownership “Considering buying done posterior August 20,
1991)
Expense resulted to maintain legal title
Cost paid to buy the land
Cost base
Sale revenue
Capital gains/losses computation
Capital gains from land
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Emma has obtained a capital gainsof $655,500 through the sale of her land asset.
Also, the holding period for the asset exceeds 1 year which makes the capital gains
long term. As a result of this, CGT liability will be imposed on only 50% of the capital
gains obtained. This understanding has been derived through discount method as
given in s. 115-25 ITAA 1997 (Sadiq et. al., 2016). Therefore, 50% discount would
be offered to Emma.
Capital gains for CGT purpose
Therefore, it can be concluded that Emma has to pay CGT on the capital gains
$327,750.
Transaction 2 – Shares
Shares of company that the taxpayer acquired for investment purpose would also be
termed as capital asset. Therefore, the disposal of capital asset would result in A1
CGT event. The imperative factor regarding the applicability of CGT on taxpayer
would be that it must not be categorised under pre-CGT asset. This can be checked
through the date of purchase of the asset (Reuters, 2017). It is clear that Emma has
bought Rio Tinto’s 1000 shares in the year 1982 which shows that the date of owing
the asset precedes to the onset of the CGT regime i.e. September 20, 1985. This
represents that shares capital asset is pre-CGT asset. Thereby, the CGT will not be
imposed on Emma in relation to any capital gains/(losses) on the share sale.
Therefore, it can be concluded that Emma does not have any CGT payable on
share disposal.
Transaction 3 – Stamp Collection
Emma purchased the stamp collection that would be part of the collectible asset
under the highlights of s. 108 ITAA 1997. This transaction of sale of collectible asset
triggers A1 CGT asset. Also, under s. 104-10, the cost base of asset will be
deducted from the net sale revenue. The cost base has main five elements which ae
discussed in s. 110-25 ITAA 1997 (Barkoczy, 2018). It is noteworthy that capital loss
from collectible would only be compensated against the capital gains obtained from
sale of collectible. Further, if the concerned taxpayer does not obtain any capital
gains from collectibles then the incurred unsettled capital losses will move to next
financial year for settlement under s. 108-10 ITAA 1997 (Deustch et. al., 2016).
Cost base computation
Incidental cost for stamp collection “Auction Fee”
Cost paid to buy the stamp collection
Cost base =
6

Sale revenue
Capital gains/losses computation
Capital loss derived from disposed stamp collection
As apparent from the above that Emma has capital loss of $15,000 from collectible
which directly would be transferred to next year because she does not have any
capital gains from collectibles. Emma’s capital loss from grand piano disposal
would be moved to next year and thus, no CGT lability raised on the current
year for this.
Transaction 4 – Grand Piano
Grand piano of Emma would be categorised as personal use asset because she has
realised it for personal purposes and not for any commercial purpose i.e. for deriving
taxable income. Further, this would not be part of the collectible. It is essential to see
that Emma has acquired the same for a cost price greater than the net sum of
$2000. Also, the acquisition has been made in the year 2015 which implies that the
CGT would be applied on the capital gains/losses from the asset sale. It is apparent
that the cost price exceeds the sale price which represents that Emma has suffered
capital losses. Also, under s. 108-20 ITAA 1997, the capital loss resulting from
personal use asset disposal will be totally disregarded for CGT (Nethercott,
Richardson and Devos, 2016). Therefore, it can be concluded that Emma does not
have any CGT payable on Grand Piano disposal.
It can be said based on the above analysis, that Emma needs to pay CGT after
applying the marginal tax on the received capital gains of $327,750 derived from
land block sale. Further, no CGT liability would be applicable on her for the sale of
shares and grand piano. Also, she has received a capital loss of tune $15,000 from
collectible which would be adjusted through the capital gains of collectibles in future
and hence, would be shifted to next year.
7

References
Austilii (2019) A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999,
viewed at http://classic.austlii.edu.au/au/legis/cth/consol_act/antsasta1999402/
(Accessed September 30, 2019)
Barkoczy, S. (2018) Core Tax Legislation and Study Guide 2018. 3rd edn.Sydney:
Oxford University Press Australia
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian
tax handbook.8th ed. Pymont: Thomson Reuters.
Nethercott, L., Richardson, G., and Devos, K. (2016) Australian Taxation Study
Manual 2016. 8th ed. Sydney: Oxford University Press.
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON
REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting,
A. (2016) Principles of Taxation Law 2016.7th ed. Pymont: Thomson Reuters.
Woellner, R. (2014) Australian taxation law 2014. 10th ed. North Ryde: CCH
Australia.
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