Taxation Theory, Practice and Law: A Comprehensive Analysis

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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 City Sky Co. is a registered firm, it is entitled to avail input tax credit under various
conditions. As per the information provided in the question, the firm has bought an
unoccupied piece of land and it is planning to build 15 apartments on it for the purpose
of sale.
As per the rules of taxation, land is an immovable property and it is neither considered
in the context of a service or a good, which states that under this condition, no GST is
applicable on it. If the company will be building apartments on the land, it will have to do
so under the provisions of Black Credit (Ling, et.al., 2016). This provision states that any
type of goods or services that is received by a person or entity liable for taxation
towards the construction of an immobile possessions like land, which can be taken in
the person’s account or for the purpose of business are not eligible for input tax credit.
Therefore, no input tax credit are applicable to City Sky Co. for purchasing the vacant
Land.
Another vital information gathered from the question states that the company has taken
services of a lawyer, Maurice Blackburn for an amount of $33,000. Under the rules
prescribed in the law of Goods and Services Tax, any services charged related to law
(Advocate) comes under the reverse charge mechanism, which means that the receiver
of the services will have to pay the GST. In case when the receiver tends to use such
kind of services for business purposes, only then it can be claimed for getting input tax
credit.
City Sky Co. is a development firm which is using the services of the advocate for its
business purposes, the company is completely liable to receive input tax credit for the
GST they have paid on the services that is received from the respective lawyer.
Input Credit means that when the manufacturer or seller is paying tax on the output or
the final product, he can reduce the tax by claiming the amount that he has already
spent on the inputs of material. In the above case, input tax credit was not liable under
the situation of purchase of land.
Relevant Law related to the Input Tax Credit are:
 Only for Business Purpose: Input Tax Credit is availed only at the activities
that are related to the business. If the sale of goods or services is serving a
partly business and partly personal objective, then the services will be availed
only at the business (Chen and Taib, 2017). If credit is used at any personal use
item, then it has to be reversed by the company.
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 Non-Payment of Invoices: The provided credit will be reversed if the invoices
generated are not paid within 180 days of issue. The firm can also be levied with
penalty in extreme cases.
 Proper Documentation: ITC can only be claimed if the firm has proper
documentation like the tax invoice, filed returns, GST registration proof.
 Issue of Credit Note: In a situation where the credit note was issued by the
supplier to the HO, then the reduction in the ITC will be later decreased.
There are certain conditions under which the Input Tax Credit is not applied, these are
provided as below:
 Motor Vehicles & Conveyance Vehicles that are used for Transportation cannot
claim ITC. The size of the vehicle comprises of 13 persons including the driver.
 Food, beverages and club memberships: ITC is not levied on the following
services- Food and beverages, Outdoor Catering, Beauty Treatments and
Cosmetic and Plastic Surgery (Asmuni, et.al., 2017).
 Services of General Insurance: Any services that provides services of general
insurance, repair and maintenance of motor vehicles or aircraft is not liable to
claim ITC.
 Sale of membership in a club, health and fitness centre: There is no
provision if ITC on the sale of gym or club membership.
 Construction of immovable Property: ITC is not available towards the
construction of Immovable property such as building on land. Even if the property
is further used for business purposes, still it will not be liable for claiming ITC. But
there is an exemption to this rule, Plant and Machinery can claim Input Tax
Credit.
 Restaurants: Under the rules of GST, restaurants are levied GST of 5%, but
they do not enjoy any ITC on the inputs, however there is a condition under this
law as well, restaurants that are part of any hotel whose room tariffs exceeds $
7500 will have to pay 18% GST and can claim ITC (Mintz, et.al., 2017).
As mentioned in the above case, it is clear that the City Sky Co. cannot does not under
the provision of paying ITC on the purchase of land. Though the firm bought the land for
the purpose of sale by making 15 apartments on it, but yet it will not be able to claim
Input Tax Credit on it. The firm hired a lawyer on their behalf to provide legal services
for the development of the project.
The fees of the lawyer is reportedly $ 33,000. His personal business is totally irrelevant
with that of the case. In this situation the company can avail taxes are being paid to the
services rendered to the lawyer.
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Another provision in ITC states that any services provided by the advocates will not
attract GST on the invoices. This comer under the reverse charge mechanism.
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Reverse Charge is a mechanism under which recipient of the goods or services is
responsible for paying the GST instead of the supplier. This is so because the receiver
will charge the GST from its clients and will deposit it with the govt. respectively. This is
also applied when the vendor or supplier with whom the party is dealing, is not
registered under GST. The receiver in this case has to make invoices for himself for all
the products he is purchasing or the services he is providing. The similar case is
applicable in the case of City Sky Co.
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Q. 2
Any profit or a gain that a person or entity derives from the sale of “Capital Asset” is
known as Capital Gain. In other words, it is the difference between the amount paid for
buying an asset and the amount received after selling the same asset (Chardon, et.al.,
2016). This act was introduced in Australia in 1985.This gain comes under the category
of income that is received by the person, therefore as per the rules of govt. under
taxation, tax is levied on such gains. This process of taxation is known as Capital Gain
Tax. This can be short term or long term depending upon the life of the good.
The “Capital Assets” can be categorized as:
 Land
 Building
 House Property
 Vehicles
 Patents
 Trademarks
 Jewellery
 Shares
 Personal Collectibles
The asset can be further segregated into two parts:
 Short-Term Capital Assets: Any assets that has been held with the entity or
person for a period of 12 months or less is termed as a short term capital asset.
 Long-Term Capital Assets: The assets that have been help for more than a
period of 12 months comes under the category of Long-Term Capital Assets.
The law framed by the govt. is applicable to every asset, but there are certain
exemptions in this law. The exemptions are applicable to the assets owned by an
individual and the interest charged on the asset. Few exemptions are mentioned as
below:
 If any person has purchased an asset before the date of 20th September, 1985
then it is known as Pre-CGT Asset. This property is exempt.
 Residential Property measuring upto 2 hectares of land is exempt under CGT.
 Personal use assets that were acquired for the price of $ 10,000. Items in this
category include boats, Furniture, etc.(Ramya and Sivasakhti, 2017).
 Capital Loss that is brought from a personal use asset.
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 Collectables that have been purchased upto the Value of 500. These include
Jewellery, Stamps, etc.
 Shares in a pooled developed fund and capital venture investments are also
exempt from CGT (Pomerleau and Cole, 2017).
 Life Insurance Policies that have been surrendered or sold by the original holder
of the policy.
 Any income or loss through the means of Gambling.
 Monthly or Half-yearly Payments that have been particularly designated under
certain government schemes.
To Assist, Emma for filing her income tax returns, we have to see how much tax is
gathered in her entities one by one. She has made certain transactions regarding the
purchase and sale of products. It will be calculated how much tax is levied on her
transactions.
1. Sale of Land
Sale of Land
Calculation of Capital Gains $
Purchasing Price of Land 250000
Stamp Duty 5000
Legal Fees 10000
Interest Paid 32000
Council rates, water Rates 22000
Total Payment 319000
Transactions in 2005
Legal Fees 5000
Misc Expenses 27500
Adv Fees 25000
57500
Total Payment 376500
Selling price of Land 1000000
Profit/Loss 623500
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As per the calculations above, it is noted that Emma had Capital Gain of $ 6, 23,500
after the sale of land which she purchased in 1991. Her land measures more than 6
hectares, therefore as per the law, the gain she received from selling the plot is
exempted (Blunden, 2016). She doesn’t have to pay tax on this income of hers.
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
In the year 1982, Emma purchased 1000 shares worth of $3.5 per share. She then sole
these shares at Rio Tinto for an amount of $50.85 per share. She had bought the
shares for $3,500 and sold them for $50,850. She had to pay a brokerage fee of 2% on
the total amount she received. After calculating the deduction, the total gains she
incurred on the sale of shares were $46,333. The taxation law has implied exemptions
on the sale of shares that are from the developed fund, therefore no tax will be levied on
her income from this transaction and she won’t have to pay any tax on this gain
(Pomerleau and Cole, 2017).
3. Sale of Stamps Collection
Sale of Stamps Collection
$
Purchasing Price of Stamps 60,000
Selling Price at Auction 50,000
Auction Fees 5,000
Amount received 45,000
Loss 15,000
In January 2015, Emma had bought stamps from a private collector worth of $60,000.
She sold the stamps for $50,000 in an Auction. She had to pay an additional fee of $
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5000 for the fees towards conducting the Auction. She just received $45,000 from the
above transaction and suffered loss of $ 15,000. In this case, as she had suffered loss,
no tax will be applicable. Even she would have incurred gain in this transaction, she was
not liable to pay tax on the capital gain, as income from the sale of stamps is exempt in
the law.
4. Sale of Grand Piano
Sale of Grand Piano
$
Purchasing price of Piano 80,000
Selling price of Piano 30,000
Loss 50,000
Emma bought a grand Piano in 2000 for $ 80,000. She sold the piano for $30,000. It
cause her a loss of $ 50,000. This transaction is also not liable for the context of
Calculating Capital Gains tax as she did not receive any gain from the above
transaction, and there is exemption on capital loss that is generated from a personal
use asset (Chardon, et.al., 2016).
In the above question, certain suggestions have been provided to Emma, in respect to
the capital gain tax that she had to pay in her Income Tax Return. After going through
all the items that she had sold, it was found that she was not coming under the bracket
of taxation due to certain exemptions. Providing right assessment for taxation is very
crucial as it can cause very high penalties later. It is important for Emma to closely
monitor every transaction that she is making. She should also be aware of the short
term and long-term asset gain that she can avail in the near future.
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References
 Asmuni, S., Yusoff, S. and Ses, N.S.M., 2017. Acceptance towards Goods and
Services Tax (GST) among local business communities. Journal of Emerging
Economies & Islamic Research, 5.
 Blunden, H., 2016. Discourses around negative gearing of investment properties
in Australia. Housing Studies, 31(3), pp.340-357.
 Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not
knowing your deduction from your offset. Austl. Tax F., 31, p.321.
 Chen, L.E. and Taib, M.S.B.M., 2017. Goods and Services Tax (GST):
Challenges Faced by Business Operators in Malaysia. In SHS Web of
Conferences (Vol. 36, p. 00027). EDP Sciences.
 Ling, S.C., Osman, A., Arman Hadi, A.B., Muhammad Safizal, A. and Rana,
S.M., 2016. Public acceptance and compliance on Goods and Services Tax
(GST) implementation: A case study of Malaysia. Asian Journal of Social
Sciences & Humanities, 5(1), pp.1-12.
 Mintz, J., Bazel, P., Chen, D. and Crisan, D., 2017. With global company tax
reform in the air, will Australia finally respond?. Minerals Council of Australia,
Melbourne, Australia, March.
 Pomerleau, K. and Cole, A., 2017. International tax competitiveness index
2015. Washington, DC: Tax Foundation.
 Ramya, N. and Sivasakthi, D., 2017. Gst and its impact on various
sector. Journal of Management and Science,(November), pp.65-69.
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