Comprehensive Analysis of Australian Taxation: GST and CGT

This report provides a detailed analysis of Goods and Services Tax (GST) and Capital Gains Tax (CGT) in the Australian context. The GST section examines input tax credit entitlements for a property and investment company, The City Sky Co., focusing on the purchase of vacant land for apartment development. It addresses relevant taxation laws and provides conclusions regarding GST liability and credit claims, including calculations for legal service expenses. The Capital Gains Tax (CGT) section analyzes various transactions by an individual named Emma, including the sale of land, shares, a stamp collection, and a grand piano. It identifies material facts, legal questions, and applicable tax legislations. The report assesses CGT implications, considering acquisition and disposal costs, exemptions, and the application of CGT rules to different asset types, concluding with a comprehensive overview of the CGT consequences for Emma's transactions.

TAXATION THEORY,
PRACTICE & LAW

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1: The Goods and Services Tax (GST)...............................................................1
Identification of material facts..................................................................................................1
Identification of Legal Question and relevant taxation law.................................................2
Application of Tax legislations relating to GST.....................................................................2
Detailed and Accurate Conclusions.......................................................................................3
QUESTION 2: Capital Gains Tax (CGT)...................................................................................4
Identification of material facts..................................................................................................4
Identification of Legal Question and relevant taxation law.................................................6
Application of Tax legislations relating to CGT....................................................................6
CONCLUSION...............................................................................................................................8
REFERENCES............................................................................................................................10

INTRODUCTION
In order to raise adequate amount of financial resources to meet various fiscal
expenditures, the government of an economy may charge a certain amount on the
goods and services produced, held and utilised to generate income by both individuals
and organisations. This charge is known as Taxation and is carried out in a manner
which is viable, equal and efficient from administrative perspective (Boadway and
Tremblay, 2016). This report aims to provide valuable insights in regards to taxation
structures relating to Goods and Service as well as Capital Gains. For this purpose, the
report is divided into two sections that attempt to address the GST and CGT
respectively which draw inferences and make relevant conclusions regarding their
treatment from taxation authority perspective.
QUESTION 1: The Goods and Services Tax (GST)
The Goods and Service Tax is a broad-based taxation structure prevalent in
most of the economies worldwide and is highly dependent upon the economic
environment prevalent in those countries. In Australia, the GST is a kind of value-added
tax which is applicable at the rate of 10% on sale of most of the goods and services and
is subjected to certain types of exemptions as well as concessions (Datt and Keating,
2018).
Identification of material facts
In the context of given case scenario, a property and investment company,
namely The City Sky Co., has purchased a block of vacant land that it intends to use for
business purposes. The company plans to use this piece of property for building 15
Apartments to sell subsequently in future. For this purpose, the firm utilised the services
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of a local lawyer for the provision of legal services relating to development. For this, the
company incurred an additional $33,000. Also, Maurice is a sole trader who has annual
revenue earnings of worth $300,000.
Identification of Legal Question and relevant taxation law
Here, the question arises regarding what sort of input tax credit entitlements is
the company City Sky Co. is eligible for claiming as per the ATO guidelines given in Part
7-1: GST and Input Tax Credits under Part 2-1: The Central Divisions of a New Tax
System (Goods and Services Tax) Act 1999.
Application of Tax legislations relating to GST
In order to advice the firm regarding its input tax credit entitlements, it is assumed
that The City Sky Co. is registered for GST purposes. Essentially, Section 17.5 of the A
New Tax System (Goods and Services) Act 1999, such entitlements can be expressed
as the amount of credit which is included in the price of business inputs (Deb, 2018).
Based on the situation of The City Sky Co. it can be said that since it is a registered
organisation, it will be eligible for the entailment of input tax credit entitlements wherever
necessary. Since the company is predominantly dealing in the acquisition of property
and their subsequent sell-off, City Sky's transaction relating to purchase of vacant land
shall be treated as a revenue asset rather than a capital one (Land as a Capital Asset,
2019). This is due to the fact that the company has bought the land with an intention to
develop, subdivide and sell in the near future. Thus, making it entitle to the inclusion of
GST in its price. Apart from this, it is also important to ensure that there is a genuine
effort demonstrated on the part of the enterprise to indicate that they intent to build a
property on the vacant land. This may include seeking finance for the development of
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such property, engaging with builders or contractors to obtain insights regarding the
suitable construction process as well as costs relating to it and meeting local real estate
agents to ascertain expected rental returns, among others (Vacant Land and GST,
2019).
For the purpose of indicating that the company has any such steps which
demonstrate its intentions to further develop the block of vacant land, the case study
shows that City Sky did indulge in meetings with a local lawyer, named Maurice
Blackburn, to provide the legal services required for the development of the property.
For this, the investment company incurred an additional $33,000. Thus, City Sky would
be entitled to the deductions relating to the expenses incurred in the form of loan
interest, council rates and other ongoing holding costs, if any.
Detailed and Accurate Conclusions
As a result, the company is entitled to pay GST on property sale, subjected to
normal GST Rules, and is entitled to input tax credit claims regarding the construction
costs and purchases related to such an event. This is due to the fact that one is only
liable to pay GST when they sale an asset, however, they are eligible for claiming GST
Credits for purchase of such land. As per the ATO Guidelines, the City Sky Co. would
be liable to pay GST as one-eleventh of the sale price of each apartment sold by the
company (Building and Construction of Residential Premises, 2019). Since the
company has just purchased the unit for building residential purposes, information
regarding its purchase price has not been given, thus, credit entitlement cannot be
ascertained through mathematical operations. However, it is eligible to achieve the
credit entitlement on that purchase price, including $33,000 that City Sky Co. incurred
on the development of such property in terms of legal services availed by the
organisation from Maurice. In Australia rate of GST charged on most of the goods and
services is 10% except some (GST and Sale of Property, 2019).
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The amount of $33000 is including GST amount that means it is 110% of the base
amount. Calculation of the amount of only GST is as follows-
33000*100/110 = $30000
Amount of GST= $33000 - $30000 = $3000
This $3000 will be used as GST credit for City Sky company and can be used to
settle the tax liability under GST.
QUESTION 2: Capital Gains Tax (CGT)
Capital Gains Tax can be defined as that charge which may be imposed on the
realisation of profit on the sale of certain classes of assets by state or federal
government (Evans, Minas and Lim, 2015). A capital gain is usually denoted as the
difference between the acquisition and disposal costs incurred by and individual or an
entity. It is important to note that unlike Goods and Service Tax, CGT forms the part of
income tax rules and regulations set out in the Income Tax Assessment Act (ITAA),
1997. Also, if a capital loss is incurred on disposal of any capital asset, no CGT claim
can be made by the tax payer on such events.
Identification of material facts
In the context of given case scenario, an individual named Emma provides a list
of transactions which have been enumerated as under:
Events ($)
Sale of a block of land 1000000
Sale of shares 50850
Sale of Stamp collection 60000
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Sale of grand piano 30000
In addition to this, there are certain additional costs which have been incurred in
the due course of completion of aforementioned transactions. These have been
identified as under:
 Sale of a Block of Land:
The land sold by Emma was first bought by her in 1991 for a price of $250,000.
In addition to this, there are extra charges that were incurred on such purchase which
mainly relate to:
 Stamp Duty worth $5,000.
 Legal Fees of $10,000.
 Payment of Interest on Loan equivalent to $32,000.
During the acquisition of Ownership:
She incurred annual charges that mainly relate to council rates, water rates and
insurance. This totalled $22,000. During the time of ownership, Emma and her
neighbour had a dispute which resulted in an additional cost of $5,000 in the form
of legal fees that was incurred to resolve such a problem.
At the time of selling the land:
She put the property on the market and incurred $27,500 on the removal of large
dangerous pine trees from the land. Also, advertising, legal and agent fees on
such sale also amounted to $25,000 being incurred on her part.
 Sale of shares:
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Emma first bought 1,000 shares in 1982 at a rate of $3.5 per share. While selling
such shares at the rate of $5.85 each, she also paid a brokerage of 2% on the total sale
price.
 Sale of Stamp Collection:
Emma first bought her stamp collection from a private collector in January 2015
at $60,000. She later sold this collection in an auction for $50,000 and incurred an
auction fees of $5,000.
 Sale of Grand Piano:
Purchase Price of the Piano amounted to $80,000 which was initially acquired by
Emma in 2000.
Identification of Legal Question and relevant taxation law
Here, the question arises as to how Emma should treat all these transactions in
the light of Capital Gains Tax rules so as to account for all the CGT Events and their
related consequences for her transitions as described in New Business Tax System
(Capital Gains Tax) Act 1999 (Capital Gain Tax Law, 2019).
Application of Tax legislations relating to CGT
In order to advice Emma regarding CGT consequences in relation to the
transactions she entered into, it is assumed that there is no impact of indexation. These
have been discussed as under:
 Sale of a Block of Land:
During this CGT event, a variety of costs have been incurred at three different points
of time viz. Purchase of Land, during its ownership and disposal. While taking into
account the Capital Gain Tax regarding sale of block of land, it is first identified that
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whether such a land was a place of principal residence for Emma or was it a vacant
land or used for business purposes (Jones, 2016). From the given information, it is
clearly evident that Emma utilised this block of land as an investment for which she and
her neighbour entered into a dispute during January 2005. As per the ATO Guidelines,
CGT exemption is applicable on those who bought their homes before September 20,
1985. However, this is not applicable in Emma's case who purchased this piece of
property in 1991 for $250,000. Since she is selling her house for $1,000,000 there is a
substantial amount of capital gain realised which totals to $653,500 (=$1,000,000-
$250,000-$5,000-$10,000-$32,000-$27,500-$22,000). These costs have been included
while computing the Capital Gain on sale of land for Emma as they are of incidental
nature and have been incurred while acquiring as well as disposing off the capital asset
(Computing Capital Gain, 2019). Costs such as Advertising, Legal Fees and Agent Fees
on the sale of the land, that totalled $25,000, are not eligible for claiming under CGT
(Items not included on Sale of Property, 2019).
 Sale of shares:
Another CGT event relating to sale of shares was indulged into by Emma. Based on
the information provided, capital gain on sale of shares is the difference between its
purchase and sale price. Such a profit would be eligible under CGT Rules if they have
been purchased after September 20, 1985. Since Emma purchased the shares in 1982,
such a class of asset is exempted from CGT Rules (Exemption of Assets and CGT,
2019).
 Sale of Stamp Collection:
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As per Section 108-10(2), an assortment of stamps is usually considered as a
collectable for taxation purposes (Kraal and Kasipillai, 2016). One disregards a profit
realised on sale of such a collectable, if its acquired for a price less than $500 or an
interest in it before December 16, 1995 or if such an interest was acquired when such a
collectable had a market value less than $500 or less. As the stamp collection was first
bought by Emma in January 2015 at a price more than $500, it is eligible under CGT
Rules. However, she has incurred a capital loss on the sale of such collectables since
the sale price is less than the purchase price. As per Section 108-10 of the ITAA 1997,
losses from any collectables are to be offset through the gains from collectables. Since
no such gains have been recorded so far, such a capital loss will be disregarded for
Emma from CGT claim perspective.
 Sale of Grand Piano:
Section 108-20 of ITAA 1997 defines a personal use asset is one which is not a
collectable and is mainly kept for entertainment purposes or enjoyment. Any asset
which is acquired for less than $10,000 is exempted from CGT Claims as outlined in the
Section 180-10 if ITAA 1997 (Sale of Personal Use Assets and CGT, 2019). This is not
applicable in Emma's case who bought such an asset for $80,000 in 2000. Since it is
sold by her for $30,000, there is a capital loss on sale of the piano worth $50,000
(=$80,000- $30,000) is to be disregarded in the light of Section 180-20 of ITAA 1997
which states that any loss arising from sale of personal use assets is to be disregarded.
Detailed and accurate conclusions
Here, the total Capital Gain of Emma amounts to $653,500. Thus, it can be said
that Emma would be liable to CGT claims for sale of block of land whereas sale of
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shares (nil), grand piano (-$50,000) and stamp collection (-$5,000) would not be taken
into account as they have rendered a capital loss for the tax-payer (Tang, 2016).
CONCLUSION
From the above report, it can be concluded that Taxation plays an important role
in determining in what manner the tax-payer must file their returns as well as what are
the claims and deductions that they are privy to. Apart from this, Goods and Service Tax
provides a broad-based taxation on items sold or consumed within the economy
whereas the Capital Gains Tax is mostly concerned with the taxing of any profit or loss
realised on any CGT event.
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REFERENCES
Books and Journal
Boadway, R. and Tremblay, J. F., 2016. Modernizing Business Taxation. CD Howe
Institute Commentary. 452.
Datt, K. H. and Keating, M., 2018, April. The Commissioner’s obligation to make
compensating adjustments for income tax and GST in Australia and New
Zealand. In Australian Tax Forum (Vol. 33, No. 3).
Deb, R., 2018. Tax Reforms and GST: A Systematic Literature Review. Journal of
Commerce and Accounting Research. 7(1). p.40.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An
alternative way forward. Austl. Tax F.. 30. p.735.
Jones, D., 2016. Capital gains tax: The rise of market value?. Taxation in
Australia. 51(2). p.67.
Kraal, D. and Kasipillai, J., 2016. Finally, a goods and services tax for Malaysia: A
comparison to Australia's GST experience. Austl. Tax F.. 31. p.257.
O’Connell, A., 2017. Australia. In Capital Gains Taxation. Edward Elgar Publishing.
Tang, C., 2016. Australian GST update—2015. World Journal of VAT/GST Law. 5(1).
pp.32-41.
Online
Land as a Capital Asset. 2019. [Online]. Available Through:
<https://www.ato.gov.au/General/property/land---vacant-land-and-subdividing/
vacant-land/#Land_as_a_capital_asset>
Vacant Land and GST. 2019. [Online]. Available Through:
<https://www.ato.gov.au/General/property/land---vacant-land-and-subdividing/
vacant-land/>
Building and Construction of Residential Premises. 2019. [Online]. Available Through:
<https://www.ato.gov.au/general/property/property-development,-building-and-
renovating/building-and-construction---residential-premises/>
GST and Sale of Property. 2019. [Online]. Available Through:
<https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Property/GST-
and-property/?anchor=ApplyingGSTtoProperty#ApplyingGSTtoProperty>
Capital Gain Tax Law. 2019. [Online]. Available Through:
<https://www.legislation.gov.au/Details/C2004A00556>
Computing Capital Gain. 2019. [Online]. Available Through:
<https://www.ato.gov.au/General/Property/Land---vacant-land-and-
subdividing/Vacant-land/#Land_as_a_capital_asset>
Items not included on Sale of Property. 2019. [Online]. Available Through:
<https://propertytaxspecialists.com.au/whats-deductible-or-not/>
Exemption of Assets and CGT. 2019. [Online]. Available Through:
<https://www.ato.gov.au/General/Capital-gains-tax/CGT-assets-and-
exemptions/>
Sale of Personal Use Assets and CGT. 2019. [Online]. Available Through:
<http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s108.20.html>
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