Taxation Theory, Practice and Law: A Case Study of City Sky Co.

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Taxation Theory, Practice and Law
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Table of Contents
Q. 1.............................................................................................................................................................3
Q. 2.............................................................................................................................................................6
References................................................................................................................................................10
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Q. 1
As per the Australian Law, any registered firm is entitled to avail input tax credit that are
sourced under various conditions. Same is applicable on City Sky Co. The firm has
bought an untenanted land and it aims to build 15 apartments on it for the purpose of
sale.
According to the taxation law, land is considered as an immovable property and it does
not comes under the category of a service or a good, which significantly implies that
under this condition, GST cannot be charged towards it. Building of further property on
the purchased land, has to be done under the under the provisions of Black Credit.
Under this law, any type of goods or services that is received by a person or entity that
can be considered liable for the purpose of charging tax towards the creation of an
permanent assets like land, which is also used by the company for trade activities
cannot be considered for input tax credit (Stantcheva, 2017). Therefore, in this case City
Sky Co. cannot claim input tax credit for purchasing the vacant Land.
It is also noted that the firm took help of an Advocate, namely Maurice Blackburn by
paying him $33,000. As per the rules applicable under the Goods and Services Tax, if
there are any services which are taken from an Advocate, then it comes under the
reverse charge mechanism, due to which the receiver of the services has the
responsibility to pay the GST. If the services of a lawyer are related to business, only in
those circumstances, the firm can Claim Input Tax Credit.
City Sky Co. is aiding the services of a lawyer to develop its business and get suitable
advice regarding the matters of law. Due to these services, the company is completely
liable to obtain input tax credit for the GST which they had paid on the services derived
from the advocate.
The term Input Credit means that in a situation where tax is paid on the final product, he
can reduce the tax. This is achieved by claiming the amount that has been previously
paid over the inputs of the raw materials. In the above case, input tax credit was not
liable as the company was purchasing a land.
Related Law applicable to the Input Tax Credit are:
 Business Purpose: The provision of Input Tax Credit is availed only to the activities
that are related to the business purposes. If the sale of goods or services is serving a
dual purpose of business as well as personal objective, then the services will be availed
only for the business (Emery, 2016).
 Untimely Payment of Invoices: If the generated invoices are not cleared with a time
frame of 180 days, then the provided credit will be reversed. This can also lead to hefty
penalty.
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 Credit Note Issuance: When the credit note is issued by the supplier to the HO, then it
will result in reduction in the ITC.
Few conditions under which the Input Tax Credit is not applied, are mentioned as
below:
 Motor Vehicles used for Conveyance The vehicles that are specifically used for the
purpose of transportation does not comes under the bracket to claim ITC. The size of
the vehicle that comes under this category contains of 13 persons inclusive of the
driver.
 Club memberships and Food and Beverages: Under the GST Law, ITC is not
claimed on the provided services- Food and beverages, Outdoor Catering, Beauty
Treatments and Cosmetic and Plastic Surgery.
 General Insurance: Any services that are providing general insurance, repair and
maintenance towards motor vehicles or aircraft are not liable to claim ITC.
 Sale of membership in a Fitness Centre: Provision of ITC on the sale of gym or club
membership is still not there in the law.
 Construction of immovable Property: ITC cannot be levied on the construction of
Immovable property such as building on land. It is relevant even if the property is further
used for business commitments (Stanford, 2018).
 Restaurants: Provided the laws governing GST, restaurants are levied 5% GST yet
they cannot claim any ITC on the inputs, however there is an exemption stating, the
tariffs range exceeding of $ 7500 will mandatorily pay 18% and can also claim ITC.
As per the case of the City Sky Co., it is observed that the firm does not comes under
the provision of that demands payment of ITC on the purchase of land. The main aim of
the firm is to build 15 apartments on it and then send it to customers for generating
revenue, yet it is not liable to claim Input Tax Credit on it. The firm had respectively
hired a lawyer on their behalf whose job is to provide them legal services towards the
development of the project.
The fees that the lawyer generally charges is $ 33,000. In this case, his personal
business is entirely separate from the dealing of this case. Therefore, in this scenario,
the firm can avail taxes that are being paid to the services that are rendered to the
lawyer.
There is another provision in ITC which mentions that any services that the lawyers are
providing will not incorporate GST on their invoices (Pearl, 2016). This is relevant with
the reverse charge mechanism.
In the GST Law, there is a mechanism which states that the recipient of the goods or
services is accountable for paying the GST in its place of the supplier. This has been
made with the consideration that the receiver will charge the GST from its clients in its
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invoice and will deposit it with the govt. correspondingly. This situation is also prominent
under a condition when the vendor or supplier with whom the transaction is being done
is not registered under GST. In this particular case, the receiver has to make invoices
for himself for all the products that he is purchasing or for all the services that he is
providing. The similar case is relevant in the case of City Sky Co.
Q. 2
Any profit or a gain that is derived to a person from the sale of “Capital Asset” is known
as Capital Gain. It can be also termed as the difference between the transactions costs
that is received from the purchasing and selling of a same asset over a certain period of
time. This act was incorporated in Australia in the year 1985.The capital gain is
measured under the category of revenue that is received by the person from sale,
henceforth following the rules of govt. under taxation, these gains are liable to be paid in
tax (Freebairn, 2018). This process of taxation is known as Capital Gain Tax. This can
described as short term or long term depending upon the life of the good.
The “Capital Assets” can be categorized as:
 House Property
 Land
 Building
 Trademarks
 Patents
 Jewellery
 Vehicles
 Shares
 Personal Collectibles
The asset can be further segregated into two parts:
 Short-Term Capital Assets: If any person or any entity has held with him an asset for
a period of One year or less, then it is termed as a short term capital asset.
 Long-Term Capital Assets: Under this category, all the assets that have been held for
a period of more than 12 months are termed as Long-Term Capital Assets.
Every asset is entitled for Capital gain Tax by the Govt., but there are few exemptions in
this law. These exemptions are valid to the assets owned by an individual and the
interest charged on the asset. Few exemptions are mentioned as below:
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 Any asset purchased by a person before the date of 20th September, 1985 is known as
Pre-CGT Asset. That property comes under exemption.
 Ant residential property that measures upto 2 hectares of land comes under exemption
from CGT (Martin, et.al., 2016).
 Assets that were purchased for the price of $ 10,000 for personal use, like boats,
Furniture, etc.
 Capital Loss that is brought from a personal use asset.
 Collectables that have been purchased upto the Value of 500. These include Jewellery,
Stamps, etc.
 Certain Exemption regarding the shares bought through a pooled developed fund and
capital venture investments are also in the Law.
 Life Insurance Policies that have been submitted or traded by the original holder of the
policy.
 Revenue or Forfeiture gathered through the means of Gambling (Pearl, 2016).
 Government Schemes Policies that needs to be paid on Monthly or Half-yearly basis.
For the purpose of assisting Emma for filing her income tax returns, we need to
evaluate each of entities one by one. All the transactions that she made regarding the
purchase and sale of products needs to be scrutinized. On the basis of that it will be
calculated how much tax she is supposed to pay.
1. Sale of Land
Sale of Land
Calculation of Capital Gains $
Purchasing Price of Land 250000
Legal Fees 10000
Stamp Duty 5000
Interest Paid 32000
Council rates, water Rates 22000
Total Payment 319000
Transactions in 2005
Legal Fees 5000
Adv. Fees 25000
Misc. Expenses 27500
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Total Payment 376500
Selling price of Land 1000000
Profit/Loss 623500
It can be noted after calculating the above details, that the Capital Gain that Emma had
after the sale of the land purchased in 1991 was $ 6, 23,500. As per the Australian law,
if a land measures more than 6 hectares, then any gain that is received from selling the
land is exempted from Tax. Therefore, Emma doesn’t needs to pay any tax on the
income she received.
2. Sale of Shares
Sale of Shares
$
Purchased 1000 Shares @ $ 3.5 3500
Sale of Shares @ $ 50.85 50850
(Less) Brokerage Fee @ 2% 1017
Total Amount 49833
Profit/Gain 46333
Emma purchased 1000 shares in the year 1982, which were priced at $3.5 per share.
She previously had Shares of Rio Tinto that she sold for an amount of $50.85 per share.
The initial cost at which she bought those shares was $3,500 and then she sold them
for an amount of $50,850. For this transaction she was liable pay a brokerage fee of 2%
on the total amount she gained after the trade. The total gains after computing all the
deductions which were incurred on the sale of shares were $46,333. There are certain
exemptions on the sale of shares that are implied by law, this states that any gain that is
received from the sale of shares which are related with the developed fund is exempted
to taxable income (Stanford, 2018). Therefore on the basis of this law, no tax will be
levied on her income from the respective sale of shares and she is not liable to pay any
tax on this gain.
*The shares are assumed to be bought from Pool Development Fund
3. Sale of Stamps Collection
Sale of Stamps Collection
$
Purchasing Price of Stamps 60,000
Auction Fees 5,000
Selling price at Auction 50,000
Amount received 45,000
Loss 15,000
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Emma had bought few stamps from a private collector in January 2015 that costed her
$60,000. Then she sold the same stamps in an Auction for $50,000. There was an
additional fee of $ 5000 that she had to pay as a token for conduction the Auction.
Through the auction, she only gained $45,000 and this led to a loss of $ 15,000. Under
this scenario, Emma had suffered loss and due to this no tax will be applicable. In the
situation of her gaining some amount in this transaction, she still wouldn’t be liable to
pay tax on the capital gain, because as per the Australian law income from the sale of
stamps is exempt (Emery, 2016).
4. Sale of Grand Piano
Sale of Grand Piano
$
Purchasing price of Piano 80,000
Selling price of Piano 30,000
Loss 50,000
In the year 2000, Emma bought a grand Piano for $ 80,000. She sold the piano for
$30,000. The following transaction led to a loss of $ 50,000. Due to the loss incurred,
the transaction is not liable towards the context of Calculating Capital Gains tax as there
was no income received from the above transaction, and there is a provision of
exemption on capital loss that is generated from a personal use asset.
After evaluating all the transactions that took place, it is recommended to Emma that
she doesn’t need to pay any Capital Gain Tax as she did not come under the taxation
bracket, due to the several exemptions mentioned.
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References
 Emery, J., 2016. Decoding the regulatory enigma: How Australian regulators should
respond to the tax challenges presented by bitcoin. Tax and Transfer Policy Institute
Working Paper-1/2016.
 Freebairn, J., 2018. Opportunities and challenges for CGE models in analysing
taxation. Economic Papers: A journal of applied economics and policy, 37(1), pp.17-29.
 Grudnoff, M., 2016. CGT main residence exemption. The Australia Institute Policy brief,
January.
 Martin, C., Pawson, H. and van den Nouwelant, R., 2016. Housing policy and the
housing system in Australia: an overview.
 Pearl, D., 2016. The Policy and Politics of Reform of the Australian Goods and Services
Tax. Asia & the Pacific Policy Studies, 3(3), pp.405-411.
 Stanford, J., 2018. The declining labour share in Australia: Definition, measurement,
and international comparisons. Journal of Australian Political Economy, The, (81), p.11.
 Stantcheva, S., 2017. Optimal taxation and human capital policies over the life
cycle. Journal of Political Economy, 125(6), pp.1931-1990.
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