HI6028 Taxation Assignment: Goods and Service Tax & CGT Analysis

This assignment solution for HI6028, Taxation Theory, Practice & Law, addresses Goods and Service Tax (GST) and Capital Gains Tax (CGT) in the Australian context. The GST section explains the tax's nature, application, and reverse charge mechanism, using a case study involving a company using legal services. It clarifies how GST is levied, paid, and how tax credits are claimed. The CGT section defines capital gains and losses, detailing the tax implications of asset sales, including shares and real estate. It covers exemptions, the tax calculation process, and the impact of holding periods on tax rates. The solution also provides detailed calculations for determining the cost base of assets, including allowable expenses. This assignment aims to demonstrate understanding of the Australian income tax system, critical analysis of taxation issues, interpretation of relevant legislation, and application of taxation principles to real-life problems.

ASSIGNMENT
TAX THEORY, PRACTICES AND LAWS
HI6028
SUBMITTED BY:
11

Contents
SOLUTION 1......................................................................................................................3
GOODS AND SEVICE TAX...........................................................................................3
SOLUTION 2......................................................................................................................4
CAPITAL GAIN TAX.......................................................................................................4
References.........................................................................................................................8
2

SOLUTION 1
GOODS AND SERVICE TAX
This tax is also known as the value-added tax. This is a tax which adds further values to
the commodities or services. The tax is imposed with a rate of 10%. Although this is not
the fixed-rate most of the commodities attract this rate only. This is the tax which is paid
by every one person present in the chain who is paying the tax receives his tax amount
back except the person who is the ultimate consumer of the goods or services. This tax
is a destination-based tax or other words it can be said that this is consumption-based
tax and its burden is borne by the person who will actually consume it. [GST Law]
Each and every organization which has registered itself under this tax or is liable to
register in this tax is liable for charging the tax as per the schemes and rules defined in
the act. These sellers have to charge the tax from the buyer and need to deposit this to
the government and they can claim credits for the tax they have given. There are a
number of ways this credit could be utilized in the business. (When to charge GST (and when
not to))
In Australia, all the persons or organization registered under this tax are liable for the
tax collection and further it is the duty for the person so registered to pay the collected
taxes to the government. There is number of distinct policies and rules made under the
GST law for distinct taxpayers as well as for distinct goods and services too.
From the case study, the basic things one could observe is that the company named
City Sky is taking legal services from a lawyer and those services are for the purpose of
business. The company is paying the fees of the lawyer to him. The annual income of
the lawyer is near to about $300,000. The income earned by the lawyer is taxable in the
country as it is above the exemption limit.
The company will pay the fees to the lawyer and the government has levied the GST on
the fees of the lawyers. The company is liable for the GST to the government as the
company is a registered business entity under the law of GST and the services of the
lawyer are charged under the scheme of Reverse Charge Mechanism. This is the
mechanism which states that there are few cases in which the person or entity who is
paying the amount to the other party is liable to pay tax on their basis. Similarly, the
services of the lawyer are also mentioned under the list of Reverse Charge. (GST)
The company will pay the fees to the lawyer and the company is liable for the GST
payable on the basis of the lawyer to the government. The company City Sky is paying
the fees to the lawyer and this tax would be paid by the City Sky only as the tax is
payable by the registered entity on the basis of the services they receive which are of
3

complete use to the business or are partially utilized by the business. As the services of
the lawyer are under the list of Reverse Charge, so the GST is payable by the other
party which is involved in the transaction.
As the tax is paid by the company so, therefore, all the credits will be received by the
company itself. That is the company is the one which would be entitled to the credits.
The company will pay the tax on the lawyer services and hence the credits would be
entitled to the company. The company will receive this credit because the services they
have received are for the use of the business and therefore it involves further sales and
these services are further given to the customers. The services of the lawyer are been
utilized by the organization for the apartments and these apartments are constructed for
further sale. The company can claim the credits for the tax they have paid on the behalf
of the lawyer and they would be receiving the credits of the GST they have paid. (GST)
The GST would be paid at the time when the fees t the lawyer is paid and the Input Tax
Credit would be received by the company in the upcoming year that is the year next to
the year when the GST is paid to the government. The tax is paid by the company as
the services of lawyer are covered under the head of Reverse Charge Mechanism; a
mechanism in which the tax is paid by the person who is paying the charges is liable to
pay the tax also. The tax credits would be availed by the company as the company is
the tax bearer and the law of GST says that the benefits of credit should be availed by
the person who is bearing the pain of taxpaying. The law says that the person who is
paying the tax would get the benefit of the credit otherwise the double benefit could be
availed by any person. In this case, the tax is paid by the company and the credit should
be availed by the company itself otherwise if the credit is availed by the lawyer than he
would get the double benefits, first one is the tax-saving and the other one is the
availing of the credits, so because of this reason the tax credit would be availed by the
company.
Therefore, from the above-prepared study based on the case, it could be concluded that
the liability of tax, in this case, would be borne by the company as this service falls
under the reverse charge mechanism. As the tax is paid by the company, so the tax
credit given by the government would be availed by the company only as it has borne
the liability of paying tax. The amount of the tax would be calculated on the fees of the
lawyer. [When to charge GST and when not] (When to charge GST (and when not to))
SOLUTION 2
CAPITAL GAIN TAX
If the sale made by assessing involves any of the goods such as shares and real estate
then there would either occur capital loss or capital gain on the sale made by him. A
4

capital gain or loss can be defined as the difference between the cost that is incurred on
the acquisition of the assets and the amount which the assessee has received at the
time when they made the sale. This is the difference in the amount of acquisition and
the amount of disposing of. The gains that the assessee has from these capital assets
had to be noted in his return of income and they have to pay the capital gain taxes over
the incomes or gains they have earned from the disposing of the assets. These taxes
are to be paid in the year when the gain has occurred. This tax is considered as part of
the income tax. Capital losses that had occurred cannot be settled from any of the other
heads of income and thus can be adjusted from the head of Capital Gains only. [Capital
Gain assets and exemptions] (CGT assets and exemptions)
The acquisition of assets which are taken up after the date September 20, 1985, would
attract the capital gain taxes. There are certain exemptions also claimed under this act
and these exemptions include the Personal Assets of the person and other is the assets
which are depreciating assets. For instance, furniture, house, and personal cars doe not
attract the taxes of capital gain. These assets are applicable on the date when the
obligation of the contract is been fulfilled and not on the date of the physical transfer.
[Calculation of the cost base of Real Estate]
If the person is the resident of Australia, then each and every asset of the person is
taxable under capital gain no matter where the location of the asset is. Sale of assets
anywhere all around the world attracts the capital gain tax in Australia.
All the gains have to be disclosed in the financial year they have occurred. In a financial
year, if both capital gains, as well as losses, have occurred then the assessee has to
pay the amount net off the losses and gains and hence should be paid in the same
year. If the asset is been held with the assessee for the period of more than one year
than, the capital tax is discounted by 50%. This discount is only given in the case when
the assessee is either an individual or a small business. [Capital Gain Taxes]
The treatment for the units of shares is been done in the same way as that for the other
assets. The calculations are done in the same as other assets. The person whose
business is trading of shares then this is not considered as the capital gain and would
be treated as the income of the person. For investors sale of shares and the gains
attained would be treated as the capital gain and hence chargeable to taxes. [Base of
cost]
For the acquisition at costs, the formula based upon the cost of assets involves the
aggregate of the costs which are incurred in the acquisition and are directly related to
the asset acquisition. These costs include all the charges such as purchase price, the
brokerage service charge, stamp duties which are to be paid. The transfers of the
5

assets include the costs of the stamp duties, charges of advertisement and other
expenses which are directly attributable. [Formation of the cost base] (Cost base)
After the date, August 21, 1991 the costs of the taxes over land and repairs and the
premiums of insurance would be included. All the costs made by the assessee in the
moving and disposing the assets for adding the value to the assets would also be
included in the costs.
On the collectives the taxes are applicable as they are kept for personal use or
enjoyment; they involve photographs, drawings, and other antiques. If the value of
collectibles does not exceed $500 then they do not attract the capital taxes if they are
been acquired before December 16, 1995. [Capital gains or losses working]
If there are any losses incurred on disposing of the collectibles than these losses could
be set off from the amount of the gains acquired from the sale of such collectibles only.
There are few years when there are only capital losses from the collectibles and no
gains, in this case, these losses are carried forward for the upcoming financial years.
There is no limit on the carry forward of the losses stated in the Australian laws
regarding the losses occurred from the collectibles. [Shares and similar investments]
(Modifications and interaction with other rules)
Sale for $1,000,000 of the block of land
The above question has said that Emma has bought a land in the year 1991 and the
price at which she purchased was about $250,000, and the other $5000 incurred on the
stamp duty and the amount of $10,000spent for the payment of the legal charges, and
these costs are included in the actual cost of the asset. The cost incurred for free
interest-paying fees of the amount $32,000. $22,000 would be forming the part of the
cost as these are the taxes and insurance premiums. Also the costs of $5000 will also
form part of the cost of assets as they are incurred after the date June 30, 1989. The
other costs that would be included in the costs are the cost of tree removal and the fees
involved in the sale.
Cost of assets could e calculates as follows-
Particulars $
Purchase price 250,000
Stamp Duty 5,000
Legal Fees 10,000
6

Interest on Borrowed Loan 32,000
council rates, water rates and insurance 22,000
Legal Fees Against Neighbor 5,000
Removal of Pine Trees 27,500
Advertising, legal fees and agent’s fees
on the sale
25,000
Total Cost of Assets 376,500
The selling price is $1,000,000 as this is stated as per the question.
The price of capital gain could be calculated as-
Sale price minus purchase price and hence this gives the amount of capital gain.
Capital Gain can be calculated as follows-
Calculation of Capital Gain
Particulars $
Sale Price 1,000,000
Purchase price 376,500
Capital Gain 623,500
The question has stated that the indexation shall not be considered and the capital gain
will be calculated normally without taking the consideration of indexation.
The discounted method would be used as follows-
50% of $623,500 that is equal to the amount $311,750, so the capital gain taxes would
be calculated on the amount $ 311,750.
Sale of 1000 shares at $50.85 each share in the Rio Tinto:
No capital gain tax is to be paid by Emma as the shares are purchased before the date
19 and hence no tax would be paid by her on the sale.
Purchase of stamp collection from a private collector by Emma in January and
their sale:
$60,000 in the year 2015
As the stamps collected by Emma would attract the capital taxes as the purchases were
made for $60,000 and she sold them for $50,000 and the additional charges of $5000
7

for auction charges would also be included. The capital loss could be calculated as-
(50000-60000-5000) that is equivalent to $15,000.
These losses could be settled only from the gains of the collectibles and if there are no
gains than these losses would be carried forward in the future years and no specific
time limit is given for carrying forward of these losses. [Working of Capital losses and
gains] (Working out your capital gain or loss)
Grand Piano sold for $30,000
Emma purchased a piano in the year 2000 for the amount of $80,000 and this piano
was sold for about $30,000. This asset was purchased by Emma for the personal use
so that it does not attract any of the capital losses or gains as it is utilized for personal
purpose. No capital gains or losses would be attracted by this transaction in this
financial year. [Modification rules of the law] (Capital gains tax)
References
Calculating the cost base for real estate. (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/
Calculating-the-cost-base-for-real-estate/
Capital gains tax. (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/General/Capital-gains-tax/
CGT assets and exemptions. (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/
#collectables
Cost base. (n.d.). Retrieved from www.ato.gov.au:
https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-
loss/Cost-base/
Elements of the cost base and reduced cost base. (n.d.). Retrieved from
https://www.ato.gov.au: https://www.ato.gov.au/general/capital-gains-tax/working-out-
your-capital-gain-or-loss/cost-base/elements-of-the-cost-base-and-reduced-cost-base/
GST. (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/Business/GST/
Modifications and interaction with other rules. (n.d.). Retrieved from
https://www.ato.gov.au: https://www.ato.gov.au/general/capital-gains-tax/working-out-
your-capital-gain-or-loss/cost-base/modifications-and-interaction-with-other-rules/
8

Shares, units and similar investments. (n.d.). Retrieved from
https://www.ato.gov.au/general/capital-gains-tax/shares,-units-and-similar-investments/:
https://www.ato.gov.au/general/capital-gains-tax/shares,-units-and-similar-investments/
When to charge GST (and when not to). (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/Business/GST/When-to-charge-GST-%28and-when-not-to%29/
Working out your capital gain or loss. (n.d.). Retrieved from https://www.ato.gov.au:
https://www.ato.gov.au/general/capital-gains-tax/working-out-your-capital-gain-or-loss/
9