Taxation Theory and Practical Law: Capital Gains and GST

This report provides a comprehensive analysis of taxation in Australia, specifically focusing on capital gains tax (CGT) and Goods and Services Tax (GST). The report begins with an introduction to the Australian Constitution and the role of taxation in generating government revenue. The first section examines a case study involving a property development company (City Sky Co.) and a sole trader lawyer (Maurice Blackburn), analyzing the implications of GST, input tax credits, and mandatory registration requirements. The second section delves into capital gains tax, exploring its application to various transactions, including the sale of land, shares, and personal assets. The report analyzes Emma's financial transactions, determining capital gains or losses and the relevant tax implications. The conclusion highlights the importance of taxation laws in funding government expenses, emphasizing the rules, regulations, and exemptions related to GST and CGT. The report references various books and journals to support its analysis.

Taxation Theory
and Practical Law

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The Australian Constitution is the legal foundation of commonwealth of Australia
and sets legal system for the government by dividing power between the federal
government and states. Taxation is one of the largest revenue generating sector for
government of Australia that is governed through act specially designed to impose tax.
Revenue generated through taxation is used to meet various fiscal expenditure and
establishing good economic conditions in country. In this project report two different
taxations are reported that are capital gain taxation and goods and service tax. A
detailed information regarding laws that governs these taxes and conclusions regarding
various dealings as per taxations is reported (Dafflon, 2015).
QUESTION 1
Identification of material facts:
The City Sky Co is a property investment and development company. On a piece
of land company is planning to build 15 apartments to sell. Service of a lawyer named
as Maurice Blackburn is engaged to provide required services that will help in property
development operations in business for $33000. Maurice Blackburn is a sole trader
earning a turnover of $300000 per financial year. The City Sky Co is already registered
under GST and implications of input tax credit needs to be advised to the company.
Identification and analysis of legal issues:
In the given case scenario the issue that arises is regarding availing the amount
of input tax credit. Mandatory registration requirements for business organisations and
implications of all the provisions of GST on businesses. All these issues for City Sky Co
and Maurice Blackburn will be resolved as the the laws prevailing in Australia through
Goods and Service Taxation law (De la Feria, 2018).
Application of tax law to material facts:
Goods and Service Tax Act, 1999 governs all the businesses in Australia that are
registered under this act. As per section 17(5) of the act when turnover of an enterprise
is more then $75000 (gross income minus GST) is required to get registered within 21
days. City Sky Co is involved in business of property investment and development and
registration of these vendors is required when-
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 turnover of all the transactions conducted in an financial year is more than
threshold limit for mandatory registration, or
 business is registered as an enterprise that is involved in business related to
property development for resale and generating revenue
The City Sky Co is already registered under GST that leads to implication of all
the rules and regulations mentioned in GST act (Filatova, 2014). When business is
registered under GST the imposition of tax as per GST is done on all the business
transactions entered during an financial year. Their are certain types of sales that will
not be included in turnover of City Sky Co are as follows-
 Sale of a residential unit but not a new house
 sale of a property is made in the settlement of any due payment
 sale of a personal property that does not belongs to business enterprise
 rental income that is earned through renting a residential house
As City Sky Co is registered under GST there are certain benefits that a
registered business organisation under GST enjoys. The amount of tax that will be
charged to consumers for goods and services offers is including with amount of tax. A
chain is input tax credit is created that will help in removing double taxation and
cascading effect can be minimised. As City Sky Co is involved in property development
business then GST related to legal consultation fee, architect's fees can be used to take
credit.
Maurice Blackburn is a sole trader who is earning revenue of $300000 in a
financial year which creates legal implication of registration as per GST Act, 1999 in
Australia. When businesses registered under GST takes services from each other then
amount of tax charged in the services can be taken as credit. Input tax credit is the tax a
business pays on a purchase of intermediate goods and services that is required for
providing final goods. These amount of tax can be reduced tax liability when sales are
made (Greenberg, 2013). Claiming of input tax credit comes with certain restrictions
which are as follows-
 purchases are made with an intention to use for private or domestic purpose
 purchases are intend to use to make input-taxed supplies
 some purchase that is specified for not to claim any income tax deductions
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 land is purchased under marginal scheme
 when purchase of goods do not include GST amount
 when amount is paid to employees in business as wages are free from GST
implications
 no valid invoice is present for GST
 time limit has expired for claiming the amount of GST
Detailed and Accurate Conclusion:
Rules and regulations when implied in the present case scenario leads Maurice
Blackburn to get registered under Goods and Service Tax of Australia. Service of legal
advise is taken by The Sky City Co from Maurice Blackburn and paid an amount of
$33000 for this (Lanis and Richardson, 2013). A general rate that is privileging in
Australia for GST tax is 10% and this fees for legal advise is inclusive of tax. The
amount of tax can be calculated as follows-
$33000*100/110 = $3000
GST that is included for lawyer services is of $3000 and as both the businesses
are registered under Goods and Service tax act this amount of tax can be claimed as
input tax credit by Sky City Co.
QUESTION 2
Identification of material facts:
In the present case Emma is an individual who provides a list of transactions that
are undertaken by her in an financial year. All these transactions are related with the
sale and purchase of capital assets. For implication of tax liability on the transactions
entered Capital Gain Tax which is part of Income Tax law needs to be understand in
described manner.
Identification and analysis of legal issues:
The legal issues that are involved in the case is in relation to sale of a block of
asset and various expenses that are made at the time of purchase and sale of land.
Together with this various other assets are sold by Emma. An identification needs to be
made in relation to status of the assets sole as whether it is an capital asset or not
(Piketty and Saez, 2012).
Application of tax law to material facts:
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Capital-gains-tax is a branch of Income Tax Act, 1997 that generally deals with
profits earned through sale of assets such as house, cars, investment in properties,
bonds and shares or any collection of art. Assets that are tangible and has a useful life
longer than one year and is not intended for sale during the normal course of business.
For an individual capital assets refers to anything the individual owns for personal or
investment purpose. Capital gain or loss is a part of income tax return as no separate
tax is imposed for this. Amount of capital gain is added to assessable income and
significantly leads to increase the amount of tax payable. When loss is incurred from
sale of capital assets then amount of loss can be settled only against income earned
through capital gain. No other income can be reduced for the amount of loss under
capital assets. Profits earned through sale of an asset that is held for less then one
year will be taxable as normal income (Capital Gain, 2019). Identification of the amount
of gain or loss on sale of capital assets can be calculated as follows-
 Amount of sales price reduced with commission paid for sales is more then
amount spend to purchase that particular asset including all the other expenses
for purchase. This will generate capital profits. When visa versa of the situation
happens then it leads to generation of capital loss.
Capital gain is taxed as normal income earned during a financial year but
different rate of tax is applied on individuals on the basis of income earned by them in a
financial year. These rates of tax are as follows-
 0% tax is charged on the income earned below $38700 and income tax return is
filled as single. This limit will be $77400 when tax return is filled by together by
married persons.
 15% tax rate will be applicable on the capital gain when income earned by an
individual is between $38701 to $500000 for single. This limit will be $38701 to
$600000 when married persons together filled their return.
 20% rate of tax will be charge when the amount of capital gain earned in a
financial year is more the $500000 for an individual and $600000 when married
persons filled their return together.
Detailed and Accurate Conclusion:
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Sale of Block of land: Emma purchased a block of land with a price of $250000
plus a stamp duty of $5000 and legal fees of $10000. All these expenses together with
the amount of interest paid of $32000 and fees incurred to resolve the issue related to
land will form part of cost of acquisition of the land. This land is sold at $1000000 by
incurring $25000 expense to an agent and net selling price will be $975000 for Emma
(Posner, 2014). The amount of $27000 incurred to chop trees on that land will not be
considered as sales expense.
Sale of Shares: Emma sold shares that are acquired by her in the year 1982 at
the rate $3.5 per share. In the year 2015 these shares were sold at the rate of $5.85 per
share and a brokerage of 2% incurred by her.
As per Capital-gains-tax shares are taxed when the sale price of shares after
adjusting with brokerage or commission is more then price paid for purchase of the
asset (Snape, 2015). This rule of charging tax on shares will be applicable when assets
(shares) are purchased after September 20, 1985. As Emma has purchased these
shares before 1985 this gives exemption form Capital Gain as per Income Tax Act,
1997.
Sale of stamp collection: Emma has sold stamp in an auction for $50000 with an
auction fess of $5000. These stamps are purchased for $60000. As per section 108-
10(2) collected stamps when sold are usually charged with tax. Sale of stamp will not be
liable for taxation when the amount of acquisition of the stamp is less then $500. As
Emma do not fall under this exemption because the purchase price was $60000. As per
Capital-gains-tax law the amount of purchase is more then sales amount that results in
capital loss. As per section108 of Income Tax Act losses that are incurred from sale of
stamp can be reported against capital gain.
Sale of a piano: As per section108(20) of Income Tax Act, 1997 assets that are
collected for usage and enjoyment of an individual is considered as personal asset.
Together with this assets that are purchased with less the $10000 will be exempted
from implication of Capital-gains-tax law. Emma purchased a piano for an amount of
$80000 and sold this for $30000. Loss of $50000 that is generated from sale of
personal assets of Emma will be not allowed to set off against income generated
through capital gain (Exemption of Assets and CGT, 2019).
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CONCLUSION
From the above project report it has been concluded that implementation of
various taxes on businesses and individuals is one major source of funding government
expenses. Large amount of funds are generated through multi-pal activities and to treat
all in equal manner taxation law is designed. In this law all the rules and regulations
regarding treatment of profits, losses and exemptions is mentioned that will help in
calculating taxation liability as per Goods and Service Tax and Capital-gains-tax.
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REFERENCES
Books and Journals
Dafflon, B., 2015. The assignment of functions to decentralized government: from
theory to practice. Handbook of multilevel finance, Edward Elgar, Cheltenham,
pp.163-199.
De la Feria, R., 2018. Tax fraud and the rule of law.
Filatova, T., 2014. Market-based instruments for flood risk management: a review of
theory, practice and perspectives for climate adaptation policy. Environmental
science & policy. 37. pp.227-242.
Greenberg, M., 2013. The moral impact theory of law. Yale LJ. 123. p.1288.
Lanis, R. and Richardson, G., 2013. Corporate social responsibility and tax
aggressiveness: a test of legitimacy theory. Accounting, Auditing &
Accountability Journal.
Piketty, T. and Saez, E., 2012. A theory of optimal capital taxation (No. w17989).
National Bureau of Economic Research.
Posner, R. A., 2014. Economic analysis of law. Wolters kluwer law & business.
Snape, J., 2015. Tax law: Complexity, politics and policymaking. Social & Legal Studies.
24(2). pp.155-163.
Online
Capital Gain. 2019. [Online]. Available through:
<https://www.ato.gov.au/General/Capital-gains-tax/>
Exemption of Assets and CGT. 2019. [Online]. Available Through:
<https://www.ato.gov.au/General/Capital-gains-tax/CGT-assets-and-
exemptions/>
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