Taxation Theory, Practice & Law: A Comprehensive Report

Desklib provides solved assignments and past papers to help students understand complex topics like Australian taxation.

Taxation Theory, Practice &Law
1

Table of Contents
Introduction...................................................................................................................... 3
Question 1........................................................................................................................4
Input tax entitlements to Concern company.................................................................5
Question 2........................................................................................................................6
Consequences of capital Gain tax (CGT).....................................................................6
Significance of Capital gain on sale of a block of land...............................................6
Consequences of Capital Gain on sale of shares......................................................7
Consequences of capital gain on Transfer of stamp collection..................................8
Consequences of Capital Gain on sale of Piano.......................................................8
Conclusion..................................................................................................................... 10
References.....................................................................................................................11
2

Introduction
This report focuses on the taxation system of Australia. Australian taxation system is
regulated by Australia’s federal government. The concern system is a mix of both direct
and indirect taxes which are imposed by both central and state government of Australia.
For better understanding, this report is divided into two parts. First part of this report
emphasis on importance of GST which is an indirect tax in Australia. This part covers
the case of City sky co which deals in investment of property. Concern the company is
planning to build flats for selling purposes. legal issues and principles related to concern
tax system is to be discussed in this report. The second part of this report deals with
provisions of the capital gain taxation system of Australia. Capital gain arises on the
transfer of capital assets. Various provisions and cases related to CGT Act have to
discussed in this report along with legislation sections.
3

Question 1
Identification of problem
In this question case study of city limited is given which deals in property investment
and construction. Concern Company is registered under the GST. Vacant land has
been purchased by the concern company to construct flats. Concern Company has
engaged a lawyer for this purpose who was paid $33,000 for this service (PWC.Com,
2017).
Goods and service tax on Building and construction
GST is a type of indirect tax which is charged on the purchase and sale of commodities
in Australia. Concern tax was introduced by the Australian government in the year 2000.
Before the Adoption of GST, sales tax was applicable in Australia. If any company is
registered in Australia and has an annual turnover of more then 75,000 in financial year
then concern company has to registered under the GST Act. Registered companies
has to pay GST to taxation department. An ABN no is Issued by Australian taxation
authority to each firm that has applied for GST.ABN no is an 11 digit unique registration
no which is allotted to companies that apply for GST registration. Concern no helps in
the identification of business (Krever Teoh, 2017).
In case of below-mentioned conditions, property Company is required to register under
GST
 If the turnover from the transactions is more than specified limit which is
mentioned in GST.
 If activities which are performed in the business are related to the resale of
Property and to earn profit from these transactions. Property is a common term
that is used in the case of construction and real state companies. Property not
only includes building and land but also includes interest and license fees paid
while taking ownership of land.
In this particular case, concern company has purchased land for the purpose of
Construction. The company has paid the amount of this land to the owner of the
Property. As per the law, sales value of this land includes applicable GST amount. This
tax amount has to paid by Seller to the Tax department. (Accounting Tools,2018).
If any credit is claimed for GST paid by the company then it is Known as ITC or input tax
credit. Input implies any goods which are used in the business excluding capital goods.
GST Credit can only be claimed only if tax is paid by the concern company. if the
required amount of tax is not paid by the concerned company then it will not be able to
claim ITC. (PWC.Com, 2017).
4

Conditions Which has to be fulfilled for claiming ITC
 ITC can only be claimed only if the business is registered for GST
 ITC will not be allowed on GST exempted Goods and services.
 The amount of GST should be mentioned on the tax Invoice which is received
while purchasing Goods. If the amount of GST is not mentioned in the invoice
then the business cannot claim GST credit.
 ITC Can be Claimed only on Goods which are purchased for business purposes.
GST paid on Purchase of Goods for private purpose will not be entitled to GST
credit.
 If any commodity is Purchased to make input tax sales then also ITC cannot be
Claimed on such purchase.
Input tax entitlements to Concern company
Concern company has purchased land for construction purposes. GST is also paid by
the concerned company on the Purchase of vacant land. But Concern Company Is not
entitled to Claim ITC on this transaction. As per the provisions of Australian Taxation,
GST credit is not allowed on the amount of tax paid on any immovable property.
(Blöchliger, H., 2015).
Concern company is required to purchase various types of raw materials like cement,
sand, steel, finishers, binding wires for construction purposes. Suppose the company
has incurred $50,000 on the Purchase of all these raw materials. Other cost was also
incurred by a company like labor cost, transportation cost, wages of employees.
Concern company is not entitled to claim GST credit On GST amount which is Paid on
purchase of these raw materials which are to be purchased for construction of flats.
However, this provision does not apply to the Purchase of Pant and machinery. In
simple words, if any machinery is purchased for construction purposes and the GST
amount is paid on Purchase then Company can Claim ITC on the GST amount.
However, if there is any different case like the incorrect amount of GST Paid or
Purchase invoice is not Proper then the company Cannot Claim GST credit.
(Accounting Tools,2018).
In this case, $33,000 were also paid to Maurice Blacburn who is a lawyer. This amount
is Paid to Provide legal services about construction. Now there may be two situations
attached to This Case. If a relevant amount of tax is paid at the time of making payment
to the lawyer for legal services then Company Can claim GST Credit. And If GST is not
paid by city co while making Payment to a lawyer then it is not liable to claim ITC. So
based on these observations it was found that city co will not be entitled to any GST
5

Credit on Purchase of land and Purchase of raw material for construction but it can
claim ITC on amount paid to lawyer for legal services (CR 2005/182,ATO).
6

Question 2
Consequences of capital Gain tax (CGT)
Any gain arises on the sale of capital assets is treated as capital gain. If assets are
used in the business for less than one year then gain arises will be treated as short
duration capital Gain and if assets are used in business for more than one year then
profit arises on such sale will be considered as long-duration capital gain. In this case of
Emma is given who is an Australian resident. Various transactions are given which are
done by her in the year 2015-16 (CR 2019/56, Ato).
In this report Capital gain/loss will be calculated on below-mentioned items
 Capital Gain on sale of part of land
 Capital Gain on transfer of shares if Rio limited
 Capital Gain on sale of Stamp Collection
 Capital Gain on sale of personal use assets
Significance of Capital gain on sale of a block of land
If any profit arises on the sale of non-depreciable assets then such gain is treated as
capital gain. In this case, Emma has sold part of the land which was acquired by her in
the year 1991. This block was purchased by her for investment purposes. She has to
pay $250,000 as purchase consideration for the acquisition. In addition to this amount,
Emma has also paid $5,000 as stamp duty expenses and $10,000 as legal fees
expanse. As the amount of investment was high she has to take a loan to cover the
amount. An amount of $32,000 was also paid by her as interest in a loan. In the year
2005, a dispute occurred on this land and she has to pay $5000 as legal fees for solving
the dispute. At the time of selling it was found that there were danger pine trees on this
land and it is necessary to remove these pine trees for selling, so an additional amount
of $27,500 was incurred on removing pine trees. When the land was ready to sell an
amount of $25,000 was paid to lawyer as legal and advertising fees. Finally, the land
was sold for $1,000,000. (Maleki, Sameti, 2017)
Capital Profit on transfer of Part of land
Particulars Amount
Sales value of land $1,000,000
Acquisition price
($250000+$ 5000(stamp Duty)+$10,000 (Legal
fees) $265,000
Interest Deposited on loan $32,000
7

Amount of water & Insurance Expanses $22,000
Legal charges Incurred $5,000
Amount Involved In removing dangerous Pipe $27,500
Advertising, Legal Expanses on sale $25,000
Capital Gain On Sale of Block of Land $623,500
Above table Highlights that Emma has received capital gain of $6,23,500 on this sale.
Several expenses like advertising, interest charges, legal charges were also incurred in
this transaction. The cost of land was $250,000 at the time of purchase but after adding
all these necessary expanses purchase price has reached to $376,000. As per the
provisions of the CGT Act if any capital gain is received on sale of Vacant land then
such capital Gain will be exempted from tax.
Consequences of Capital Gain on sale of shares
Capital Gain occurs in case of transfer of shares and securities. In Simple words, if any
person has received any profit on transfer of shares and securities then such Gain will
be treated as capital Gain but the income from the sale of shares should after earn after
1985.
In this Case, Emma has sold shares that were purchased by her in the year 1985. The
acquisition price of these shares in the year 1982 was $3.5 per share and in the year
2015 share price has increased to $50.85 per share. Emma has also paid brokerage
for selling these shares. (CR 2019/56, Ato).
Capital gain calculation
Particulars
Amount
($)
Sales Value of Shares
(1000*$ 50.85) 50850
Brokerage paid 1017
(2% of 50850)
Net amount of sale 49833
($50350-$1007)
Purchase Price of Shares 3500
(1000*3.5)
Capital Gain On Sale of Shares 46333
(49343-3500)
8

As per the calculations Purchase price of shares in 1982 was $3500(1000*3.5) but at
the time of sale, price of shares has increased to $ 50.85 per share. Total Amount
received from sale of share in 2015 by Emma was $50,850 but she has also paid $1017
as brokerage on this amount so the amount of brokerage will be deducted from sales
amount. So as per the above calculations, the net amount which is received on the sale
of shares is $49,833. And if the Purchase price is subtracted from this amount this gives
the amount of capital gain which is earned on this sale. Now as per the provisions of the
CGT Act if any gain arises from the sale of shares of pooled development fund then it
will be exempted from tax. (Property update, 2019). In simple words, the assesse is not
liable to pay any tax on the gain which is received from the sale of shares. (Christensen,
2017)
Note: These shares are treated as venture capital investment
Consequences of capital gain on Transfer of stamp collection
In the previous year, Emma has sold stamp collections which were purchased by her in
the year 2015 for $50,000.And as these stamp collections were sold in auction. Emma
also has to pay $5000 as Auction fees on this sale.
Capital gain Calculation
Particulars Amount
Sales value of stamps $50,000
Auction fees Paid On stamps $5,000
Net sales $45,000
($50000-5000)
Cost of Stamp Collection In the
year 2015 $60,000
Loss on sale of Stamp Collection
($60,000-$45,000) $15,000
As per Calculations, Emma has Suffered a loss of $15,000 on the transfer of stamp
collections. The cost of stamp collections in the year 2015 was $60,000 but at the time
of sale, she has received only $45,000 after paying auction fees (Christensen, 2017).
According to CGT, act Tax is charged Only on Capital gain. If any person has suffered a
capital loss on sale then such capital loss will be carried forward in next year and will be
adjusted from the capital of Capital Gain. So, in this case, no tax is charged on the
capital loss of $15,000. This loss will be carried forward in Next year. (Maleki, Sameti,
2017)
9

Consequences of Capital Gain on sale of Piano
Emma has also sold a Piano in the year 2015. This Piano was bought for $80,000 In the
year 2000. From 2000 to 2015 Emma was using this piano and in the year 2015, she
has sold this Piano.
Calculation of capital loss
Particulars
Amoun
t
Sales Value of Piano
$30,00
0
Purchase Price of Piano
$80,00
0
Capital loss on sale
$50,00
0
The above table shows that Emma has suffered a capital loss of $50,000 from the sale
of Piano. Emma has to pay $80,000 when she purchased this Piano in the year 2000.
And in the event of sales she has received only $ 30,000. Provisions that were applied
to the sale of stamps will be applied here because Emma has receives a capital loss on
this transaction. As per CGT act Capital loss will be adjusted from the capital gain of the
next financial year. Even if Emma has received Capital gain up to $10,000 on this
transaction then that gain will also be treated as exempted because as per CGT act
assesse is not required to pay tax on the sale of personal use assets whose cost is less
than $10,000. (Business.gov.in).
Calculation of CGT on net capital Gain.
Calculation Net capital Gain Amount($)
Capital Gain on land $623,500
Capital gain on shares $46,333
capital loss on stamps $15,000
capital loss on piano $50,000
Net Capital Gain $594,833
($669,833-$75000)
Tax on capital Gain $892,24.95
(30% on 594,833)
10

The above table is shown the net amount of capital gain which arises from the
transactions which were done by Emma in the year 2015. Table shows that Emma has
received capital gain on sale of land and shares while on the other two items i.e stamps
and piano she has suffered capital loss.Net amount of capital gain for Emma is
$594,833 and as per the CGT rate which is 30% she has to pay tax on this amount. The
total Tax payable by Emma is $892,24.95. (Business.gov.in).
11

Conclusion
This report gives an understanding of the Taxation system which is applicable in
Australia. The consequences of both direct and indirect tax have been covered in this
report. This report was divided into parts to explain entitlements and consequences. In
the first part case of City sky co is discussed which is a property investment company.
This part includes material facts regarding GST which are applicable in Australia.
Various Conditions are discussed in which concern the company can apply for GST
Credit /ITC. Several other formalities were discussed which had to be fulfilled for
claiming GST credit. In the second part, CGT act consequences were discussed with
the help of various transactions. The case of Emma is discussed who had sold several
items in the previous year. Capital gain/loss is calculated on various items that were
sold by Emma. It was found that Emma has received capital Profit on sale of land
shares and suffered a capital loss on the sale of piano and stamp collection. This part
covers reasons for the exemption of Capital Gain for the given transactions.
12