Tax Assignment: GST and Capital Gains Tax Analysis for City Sky Co.

This tax assignment analyzes two scenarios: City Sky Co., a property investment and development company, and Emma's financial transactions. The assignment explores the input tax credit entitlements for City Sky Co., considering GST regulations and the services of a sole trader lawyer. It determines eligibility based on GST registration and annual turnover thresholds. The second part assesses Emma's capital gains tax (CGT) obligations from the sale of land, shares, a stamp collection, and a grand piano. The analysis applies ATO guidelines, considering assets acquired before and after specific dates, and the classification of personal use assets. The assignment calculates CGT liabilities, taking into account costs, deductions, and exemptions, providing a comprehensive overview of tax implications for both entities.

Running head: TAX ASSIGNMENT
Tax Assignment
Name of the Student
Name of the University
Author Note

1TAX ASSIGNMENT
Table of Contents
Solution to Question 1....................................................................................................2
Solution to Question 2....................................................................................................3
References.....................................................................................................................6

2TAX ASSIGNMENT
Solution to Question 1
Identification of the Issue
The City Sky Co is a property investment and development company. In recent
times, the company bought a vacant piece of land south of Brisbane. The company’s
plan is to construct 15 apartments in this piece of land and sell them on a later date. For
obtaining legal services required for the development of the property, the company hired
the services of a local lawyer named Maurice Blackburn. His fees was $33000. The
business of Mr Blackburn is conducted as a sole trader and the annual turnover of his
business is $300000. City Sky Co is registered for GST purposes and want advice
about the input tax credit entitlements that they may be entitled to.
Identification and Analysis of Relevant Legal Issues
An input tax credit is also popular as GST credit. This credit is provided to a
business on the prices of its input goods and services used in the business. The
purpose of getting this input tax credit is to use it to reduce the GST paid at the time of
sale of goods and services (Palil et al. 2013). In order to obtain the input tax credit on
goods and services, every entity needs to satisfy a few conditions. They are mentioned
below:
 The taxpayer need to register themselves for GST purposes;
 If a good or service is used for both business and private purposes, then GST
credit can only be obtained on the extent to which it is used for business
purposes;
 Input tax credit cannot be claimed on items used to make input-tax sales. Input-
tax sales are those in which tax is levied on the inputs but the final product is not
being sold in a single instance (Bain et al. 2015). The product is used to earn
income over a period of time. Some of the examples of input-tax sales include
renting out properties to others for residential purposes. Therefore, an
organisation that is involved in renting of properties cannot claim input tax credit
on the amount that it spends on the renovation and repairs related to the
property;
 If the sale being conducted is a sale of the property, then GST is not chargeable
on the resale of a property. Hence, input tax credit is also not available on the
amount spent on renovating a property sold once;
 For an entity involved in the sale of residential properties, GST credit is available
only on the sale of new residential properties. In case of a previously existing
property, the renovations made to the property must be substantial in nature.
Only then can the property be classified as new and GST can be obtained on it. If
a property is being demolished and a new property is being built in its place, then
the new property should also be built in the same land in which the old property
existed. Otherwise, GST cannot be claimed on the new property constructed.
 The person providing the services should also be registered for GST purposes.
In case he is not registered for GST, then he should at least be covered under
the regulations of GST. This improves the uniformity in the applicability of GST
(Lang and Lejeune 2014). If the annual turnover of a business exceeds $75000,
then that particular business is automatically covered under GST.
Application of Law to Facts of the case

3TAX ASSIGNMENT
As it is already assumed that City Sky Co is registered for GST purposes, the
entity is allowed to claim input tax credit on the goods and services used by it in a
particular year. Since, it is not involved in the reselling of already sold properties or is
conducting input-tax sales, its business is eligible for claiming input tax credit on the
sales made by it in a financial year. As the piece of land does not remain vacant or is
being sold without any further developments, the entity can claim input tax credit that
can be set off with the GST payable by it at the time of sale. The lawyer appointed
by the entity, Mr Blackburn is conducting his business as a sole trader. Even if he
may not be registered for GST purposes, his annual turnover is $300000, which is
more than $75000. Hence, the service provider is also covered under GST
purposes. Therefore, as City Sky Co satisfies all the criteria that are required to
obtain input tax credit, the company can claim credit on the GST charged on the
$33000 paid to Mr Blackburn as his fees.
Overview
After considering the facts and relevant tax guidelines together, it can be
suggested that City Sky Co is not involved in any business that is not covered under
GST purposes. It has also registered itself for business purposes and is obtaining
services from a sole proprietor on whom the GST rules are also applicable. Hence, it
can be suggested that the entity is eligible to obtain input tax credit on the amount
paid to the solicitor.
Solution to Question 2
Identification of the material facts to the issue
Emma has undertaken four transactions in the year 2015 and needs assistance
in filing her tax return along with the capital gains tax (CGT) consequences that she will
face due to her transactions.
 The first sale was of her block of land for $1000000 that she had purchased as
an investment in 1991. At the time of purchase, the value of the property was
$250000. Stamp duty paid on the same was $5000 and the legal fees was
$10000. In order to able to fund her purchase of the land, she took a loan. The
total interest paid on this loan was $32000. As she had owned the land for a
significant amount of time, other taxes were also paid by her during the course of
her ownership. These included council rates, water rates and insurance of
$22000. A dispute occurred with a neighbour in January 2005 over the use of the
land. The settlement of this dispute cost her $5000. Before selling the block of
land, she spent $27500 to remove a large number of dangerous pine trees that
were on the land. Advertising, legal and agent’s fees to complete the sale of land
were totalled at $25000.
 The second transaction was the sale of 1000 shares in Rio Tinto for $50.85 per
share. 2% brokerage was paid on the sale of the shares. These shares were
purchased for $3.5 per share in 1982.
 The other transaction was the sale of stamp collection that was purchased from a
private collector in January 2015 for $60000. These were sold at an auction for
$50000. The fees of the auction was $5000.

4TAX ASSIGNMENT
 The final transaction was the sale of a grand piano that was purchased for
$80000 in 2000. This was transferred in exchange for $30000.
Identification and Analysis of Relevant Legal Issues
The rules of ATO suggest that if an individual purchases a block of vacant land
as an investment or for their own usage, capital gains tax is charged on the amount
received from their sale (Ato.gov.au 2019). If the block of land is used for business
purposes, then the income gained on its sale is to be charged as the ordinary income
earned during the course of the business. The council rates, water and insurance
charges are not allowed as a deduction from the sale proceeds of the land as it is not
being used in the purpose of revenue generation in a particular year. This is the same
case with the bank interest, legal dispute fees and the costs incurred in selling the land.
However, these items can be added to the original cost of the asset to reduce the
amount of capital gains earned from the sale of the asset. CGT is not applicable on
assets purchased before 20 September 1985 (Ato.gov.au. 2019). If the assets acquired
before this date were destroyed, then CGT would still not be applicable on an asset if its
replacement does not cost more than 120% of the cost of the original asset. Stamp
collections are a part of the collectibles suggested by the guidelines of ATO. According
to their guidelines, CGT is not charged on individual collectible items that did not cost
more than $500 (Ato.gov.au. 2019). If they cost more than that, CGT is to be charged
on the amount received from their sale. However, fees incurred in the sale of the assets
like auction fees are allowed to be deducted from the sale proceeds of the assets.
Grand Piano is a part of the personal use assets which are mainly kept for the
enjoyment or usage of an individual or his colleagues. As per the relevant guidelines of
ITAA 1997, a personal use asset which did not cost more than $10000 at the time of
purchase, is not chargeable under CGT (Classic.austlii.edu.au. 2019). In case the cost
exceeds $10000, then CGT is charged on the proceeds received from its sale.
Application of law to the facts
In Emma’s situation, the vacant block was purchased as a mode of investment. It
was not used to produce any business income. Hence, the money from the sale of land
will be charged under CGT and the insurance, water rates and council rates will not be
deducted from the sale amount. These need to be added to the cost of the asset and
reduced from the sale amount to obtain the capital gains earned during a particular
year. Hence, the total costs of $22000, legal fees of $5000 and renovation costs of
$27500 along with advertising and sales commission of $25000 are to be added to the
cost of the asset and deducted from the sale proceeds. There is no CGT levied on the
sale of shares purchased by Emma from Rio Tinto in 1982 as they were acquired before
20 September and have not been replaced since then. The stamp collection from the
private collector has exceeded a cost of $500. Hence, if they are sold, CGT is to be
paid. The stamp collection was acquired in January 2015 for $60000. So CGT is levied
on the entire amount after deducting the auction fees of $5000 paid by Emma to enable
the sale of the assets. The piano bought by Emma in 2000 is a part of the personal use
asset defined by ITAA 1997. Tax is to be paid on the capital gains if the cost of
acquisition of these assets was more than $10000. As the piano was bought for $80000
in 2000, CGT is applicable on the amount received from its sale. For the year 2015,
Emma is liable to pay taxes on the entire amount of capital gains received from the sale
of the piano for $30000.

5TAX ASSIGNMENT
Conclusion
Emma has entered into 4 transactions in the financial year 2015 which are
covered under the capital gains tax charged by the ATO. The sale of the block of land is
covered under CGT and tax is to be paid on the amount received from its sale.
However, costs incurred on the land like bank interest, insurance and legal fees are to
be added to the cost of the asset to determine the amount of capital gains. The shares
from Rio Tinto are not covered under CGT and no tax is to be paid on them. The stamp
collection exceeds $500. Hence, tax is to be paid on their sale. However, the auction
fees are to be deducted from the sale proceeds received from the stamp collection. The
piano, which is a personal use asset is covered under the CGT. As the cost of
purchasing the asset was more than $10000, the amount earned by Emma on its sale is
taxable by the authorities. Hence, these advices constitute the CGT to be payable by
Emma in the given year.

6TAX ASSIGNMENT
References
Ato.gov.au. 2019. CGT assets and exemptions. [Online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/
#Personal_use_assets [Accessed 13 Sep. 2019].
Ato.gov.au. 2019. Guide to CGT 2000. [Online] Available at:
https://www.ato.gov.au/Forms/Guide-to-CGT-2000/?page=192 [Accessed 13 Sep.
2019].
Ato.gov.au. 2019. Vacant land. [Online] Available at:
https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/Vacant-
land/ [Accessed 13 Sep. 2019].
Bain, K., Walpole, M., Hansford, A. and Evans, C., 2015. The internal costs of VAT
compliance: Evidence from Australia and the United Kingdom and suggestions for
mitigation. eJTR, 13, p.158.
Classic.austlii.edu.au. 2019. INCOME TAX ASSESSMENT ACT 1997 - SECT
108.20Losses from personal use assets must be disregarded. [Online] Available at:
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s108.20.html [Accessed
13 Sep. 2019].
Lang, M. and Lejeune, I. eds., 2014. Improving VAT-GST.
Palil, M.R., Ramli, R., Mustapha, A.F. and Hassan, N.S.A., 2013. Elements of
compliance costs: Lesson from Malaysian companies towards Goods and Services Tax
(GST). Asian Social Science, 9(11), p.135.