Holmes Institute HI6028 Taxation Assignment: GST and CGT Analysis

This assignment, prepared for the HI6028 Taxation Theory, Practice & Law unit at Holmes Institute, analyzes the Goods and Services Tax (GST) and Capital Gains Tax (CGT) in the Australian context. The assignment begins with an in-depth examination of GST, focusing on the provisions of Input Tax Credit (ITC) and its application to a property investment and construction company, City Sky Co., considering legal fees and registration requirements. The second part of the assignment delves into Capital Gains Tax, calculating gains from the sale of a block of land and 1000 shares in Rio Tinto, and a grand piano, applying relevant costs and legal principles while ignoring indexation. The analysis includes material facts, legal issues, and the application of law, providing detailed calculations and conclusions for each scenario. The assignment demonstrates an understanding of Australian income tax, CGT, and GST principles, interpreting relevant legislation and applying taxation principles to real-life problems.

TAXATION THEORY, PRACTICE & LAW
TRIMESTER: T2 2019
UNIT CODE: HI6028
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Contents
INTRODUCTION................................................................................................................................................3
QUESTION 1: THE GOODS AND SERVICES TAX (GST): ANALYSIS OF THE PROVISIONS OF INPUT TAX CREDIT
(ITC):.............................................................................................................................................................3
QUESTION 2: CAPITAL GAINS TAX:...............................................................................................................5
SALE OF A BLOCK OF LAND FOR $1,000,000:............................................................................................5
SALE OF 1000 SHARES IN RIO TINTO FOR $50.85 PER SHARE:..................................................................6
SALE OF STAMP COLLECTION:..................................................................................................................7
SALE OF GRAND PIANO FOR $30,000:......................................................................................................7
CONCLUSION:...................................................................................................................................................7
REFERENCES:....................................................................................................................................................8
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INTRODUCTION
The government and regulators of a country are solely responsible for maintaining rules
and regulation with respect to taxation which includes both direct taxes and indirect taxes.
Taxes are an essential source of revenue for the government since it helps in meeting the
expenditures of government and for maintenance of global budget of an economy. In
Australia also, it is the government who introduces taxes and makes necessary
amendments so as to generate revenue. Earlier there were many kind of taxes of indirect
nature being imposed on the process of production and value addition of goods and
services. However, the government abolished all these indirect taxes and have introduced
a uniform taxation called Goods and Services Tax, popularly known as GST all across the
world. In case of direct tax, which is the tax on the income and wealth of individuals and
businesses operating in Australia or generating revenue from Australia, there is Direct Tax
Law including Income Tax Assessment Act (ITAA) within it. The ITAA constitutes
provisions on various sources of income including the Capital Gains Tax (CGT) i.e. the tax
on the gains arising from sale of capital assets. In this paper, an analysis on the provisions
of GST and CGT has been considered using the two case laws given.
QUESTION 1: THE GOODS AND SERVICES TAX (GST): ANALYSIS OF THE
PROVISIONS OF INPUT TAX CREDIT (ITC):
Australian Government introduced indirect tax which was Goods and Services Tax (GST)
so that a uniformity on the process of taxation can be maintained and there can be
abolition of the various taxes which were in existence. GST helped in the avoidance of the
double taxation system since earlier the taxes were such that they resulted in paying tax
on tax. The amount collected from GST is used for the global budget being framed by the
government whose ultimate goal is the improvement in the economy by way of
improvement of industries, businesses that operates with the economy. As per the law of
GST, there is a threshold limit which is applicable for all businesses. The businesses that
crosses the threshold limit have to register themselves under the law of GST mandatorily,
otherwise there will be huge penalties being attracted to them. The threshold limit being
provided for the registration of GST is the case whether the gross total turnover exceeds
$75,000 in any year. In cases, where the Gross Total Turnover of a business does not
exceeds $75,000 they have an option to register themselves and are not forced to get
them registered under GST (Aaron, 1974). The rate of GST applicable as per the law is
10% and 5.5%. The rate of GST is 10% for all the major category of businesses and
industries whereas the rate of 5.5% which is a concessional rate is applicable to
businesses that needs boosts from the end of the government to grow. GST is not
applicable i.e. exempted for certain categories of industries so that more and more
businesses and entrepreneurs can take up those business for development of the
economy. The exempted industries are the ones which deals in specific food, items of
household and the healthcare industries. GST law further contains provisions on the
amount if paid in excess to the government in relation to a particular product or service.
This is returned by the government by way of Input Tax Credit (ITC) or by way of refund.
The provisions of ITC helps in the adjustment of the output tax liability of the business with
the Input Tax Credit being available to the business. However, there is no entitlement of
the ITC to the end consumers i.e. the final consumers. GST has helped in maintaining
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balance and harmony within the economy and in between the business competitors with
respect to the liability of taxation.
The GST law contains various provision in respect to the various sectors that operates
within the economy. For the real estate sector, there are specific provisions being outlined
under the law for computation of GST (Anderson, 1993). In case a real estate property
have received Completion Certificate (CC) then that property is outside the purview of
GST and thus no GST is applicable to it. The non-applicability of GST is irrespective of the
nature of the property i.e. residential or commercial. In case of under-construction
properties, GST is applicable and thus any transaction related to it would be analysed in
accordance of the provisions of GST. Therefore, while analysing GST on the real estate
property its nature with respect to its completion needs to be established in the very first
instance.
The law of GST has laid down various criteria that are required to be met by the
businesses so as to claim ITC, which are discussed as follows:
 The registration of the business for the purpose of GST is the primary requirement
for claiming ITC. The businesses that are not registered cannot claim ITC even if
they have paid ITC on their purchases.
 The goods or services on which the GST has been paid must have been used by
the business for its business purpose.
 The amount of GST on which ITC is being claimed is either being paid by the
business or being taken into account by the business that is it has been considered
as payable.
 The invoice on which GST is being claimed must have a total amount that includes
the amount of GST for claiming ITC on the same.
 The tax invoice must have a clear bifurcation of the gross amount and GST amount.
ITC can be claimed only if there is proper format of invoice which is in accordance
with the law.
The Business Activity Statement, popularly known as BAS and the annual return contains
the details of input tax credit being claimed by the businesses and the same are submitted
online in the GST portal (Bradbury, 2000).
MATERIAL FACTS:
In the given case, there is a company named City Sky Co. which have a business being
registered under the law of GST. The company is into the business of property investment
and construction of apartments on land. The company have received a tax invoice from its
lawyer Maurice Blackburn as the legal fees on the legal consultancy. The tax invoice of the
Maurice Blackburn amounts to $33,000 as lawyer fees. Therefore, the fact that needs to
be analysed is that the amount included as GST on the lawyer fees can be allowed as ITC
to City Sky Co. The fact that the lawyer Maurice Blackburn is registered under the GST
law is clear from the fact that its annual revenue is $300,000 which exceeds the threshold
of GST stating the fact that Maurice Blackburn is registered for the purpose of GST.
ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:
There is provision under the law of GST wherein a clear difference in the application of
GST has been provided with respect to the under-construction and completed properties.
According to the law, the completed properties are outside the purview of the provisions of
GST. Since the company City Sky Co., runs a business wherein there is construction and
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sale of apartments thereby application of GST is present on its business. The requirement
of the paper is the analysis of the fact that the amount paid or payable by City Sky Co., on
the consultancy bill of the lawyer will be eligible for the purpose of Input Tax credit.
The input tax credit of the lawyer fees bill would be made available if the criteria in relation
to the same would be satisfied. The same has been discussed as below:
 Both the companies i.e. the lawyer and the construction company are both
registered under the law of GST and thus City Sky Co. can claim ITC on the
consultancy fees of Maurice Blackburn.
 City Sky Co. took the consultancy of lawyer for the purpose of its business and
thus the same is one of the criteria’s of ITC that has been met.
 City Sky Co. have either paid the company or will be paying the amount of $33,000
to Maurice Blackburn since the same has been accounted for by the company and
so ITC can be claimed on it.
 The amount of bill which is $33,000 is assumed to include $3,000 i.e. the 10% of
GST on the consultancy fees of Maurice Blackburn. The amount of $3,000 is the
ITC amount which will be claimed by City Sky Co.
 The tax invoice being issued by Maurice Blackburn is in accordance with the
provisions of the GST and thus the same can be claimed as ITC by the company
City Sky Co.
CONCLUSION:
The City Sky Co., is thus eligible to claim $3,000 paid towards GST to Maurice Blackburn
as the Input Tax Credit and can adjust this amount with its GST liability.
QUESTION 2: CAPITAL GAINS TAX:
The question have specifically mentioned to ignore indexation and thus while computation
of the capital gains the same have been ignored.
SALE OF A BLOCK OF LAND FOR $1,000,000:
Capital Gains are gains or losses that arises in relation to the sale or disposal of capital
assets. The provisions stated in the Capital Gains provides the fact that all the expenses
that are incurred by the holder of capital asset with respect to it is being added in its
original cost so as to derive gain or loss from sale of that particular asset. The same
applies in relation to the sale of land too (CCH, 2011). The cost incurred over and above
its initial cost i.e. the cost of acquisition constitutes of the fact that they are being incyrred
for the creation and value addition to the land. Thus, the gains are computed by arriving at
the cost of land after adjusting all the other costs incurred with the sale proceeds.
MATERIAL FACTS:
The vacant land held by Emma is a capital asset in his hand this the land for purchased for
the purpose of investments and thus the gain/loss that will arise from the sale of aldn will
be subject to Capital Gains (A Auerbach, 1991). The cost that would be considered for
capital gains would be the initial cost and any other cost being incurred on it to keep the
land in a saleable position.
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ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:
The capital gains on sale of land in the hands of Emma would be:
Cost of Acquisition of Land $250,000
Amount Paid towards Stamp Duty $5,000
Amount Paid as Legal Fees $10,000
Amount Paid as Interest $32,000
Council, water rates and insurance $22,000
Amount Paid as Legal Fees for clearing
Dispute
$5,000
Amount Paid for Removal of Pine Trees $27,500
Amount Paid for advertisement, legal and
agent fees on sale of land
$25,000
Total Cost of Land (A) $376,500
Sale Value (B) $1,000,000
Capital Gains (B)-(A) $623,500
CONCLUSION
The vacant land being sold by Emma for $1,000,000 would result in the capital gains of
$623,500.
SALE OF 1000 SHARES IN RIO TINTO FOR $50.85 PER SHARE:
The gain or loss on sale of shares are being computed by adjusting the purchase price or
sale price by any amount incurred for the same which means the purchase price is
increased and the sale price is decreased with the additional cost. As per the law, the
holding period is also important since a discount of 50% is given on the capital gains for
the shares held for more than 12 months (D Halperin, 1991).
MATERIAL FACTS:
The shares of Rio Tinto was purchased and the same were sold after holding them for
more than 12 months. Thus, the holding period discount would be applicable.
ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:
The sale of share would have a capital gain computed as below:
Sale Price of shares (1000*50.85) $50,850
Less: Brokerage on sales paid (2% of
50850)
$1,017
Net Sale Price (A) $49,833
Cost Price of 1000 shares (1000*3.5) (B) $3,500
Capital Gains (A)-(B) $46,333
Holding Period Discount (50%) $23,166.50
Net Capital Gains $23,166.50
CONCLUSION:
Capital Gain on sale of shares to Emma is $23,166.50.
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SALE OF STAMP COLLECTION:
Stamps are included within the collectables (L Burman, 1994).
MATERIAL FACT:
The stamp were sold at a loss of $15,000 which would be allowed for adjustment is
required to be analysed.
ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:
If the stamps would have been purchased or acquired before 16th December, 1995 for less
than $500 then they would have been allowed to have set off their losses with the gains on
sale of collectables. However, neither of the conditions is being satisfied and thus the loss
on sale of stamp will not be allowed to set off.
Amount of Capital Loss:
Purchase Price $60,000
Sale Price net of auction fees (50,000-
5,000)
$45,000
Loss on Sale $15,000
CONCLUSION:
The amount of loss of $15,000 will not be allowed to set off.
SALE OF GRAND PIANO FOR $30,000:
MATERIAL FACTS:
Piano are capital assets for Piano players. Assuming the fact that Emma is not a piano
player, the loss on sale of Piano will be not allowed to set off from any capital gains (L
Burman, 1994).
ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:
Capital Loss = Purchase Price – Sale Price = $80,000 - $30,000 = $50,000
CONCLUSION:
$50,000 would not be allowed to set off.
CONCLUSION:
The provisions of the laws in respect to GST and the CGT is required to be analysed well
so as to compute the correct liability of taxes to avoid any dispute.
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