HI6028 Taxation Theory, Practice & Law Assignment: Taxation Issues

This taxation law assignment addresses key concepts of the Australian tax system, specifically focusing on Goods and Services Tax (GST) and Capital Gains Tax (CGT). The assignment analyzes a case study involving a company's purchase of land, legal services, and the application of the reverse charge mechanism for GST. It also examines the tax implications of selling land, shares, stamps, and a grand piano, considering the relevant CGT events, cost base elements, and the treatment of pre-CGT assets and personal use assets. The solution interprets relevant tax legislations and case law, applying taxation principles to real-life scenarios to demonstrate an understanding of the Australian income tax system.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................4
References:.................................................................................................................................9

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Answer to question 1:
Issues:
The study that is considered here is for the claim of input tax credit for the taxable
supplies and taxable imports.
Laws:
The provision of the Goods and Service Tax introduced during the 1st July 2000 to
replace the wholesale tax and the indirect tax. GST is observed as the final consumption
inside the Australia and imports inside the Australia. Noting the description provided inside
the “sec 7-1 GST of the Act”, GST is commonly paid by tax payers on the chargeable
supplies (Ramli et al. 2015). The taxpayer can lower the GST by claiming the input tax
credits on the creditable acquisition and creditable imports. Where the input tax credit is
found to be in excess of the GST payable on the assessable supplies then the taxpayer is
allowed for a refund.
The definition regarding the taxable supply is noted down with in the sec 9-5, that says;
a. There is ought to be a supply
b. The supply is only for the consideration
c. The supply is only for and in the business course of the company or for persistence of
the company activity
d. There should be a connection with Australia; and
e. The supplier is required to be listed or listed under GST.
Noting the explanation given in “sec 9-10 (1)” the description of supply is notably
given in “sec 9-10 (1) of the GST Act” to take into account any type of supply whatever. It is
necessary that the supply of goods and services should be made by the suppliers (Hass and

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Kopanyi 2017). On the other hand, for a supply to be considered as the taxable there must be
a consideration for that supply. This would involve the matter of price that must be inclusive
of GST. Whereas in “sec 9-15” consideration is defined as the voluntary and involuntary
payments, acts or forbearances that is related with the supplies or inducements for the supply
of anything (McCluskey and Franzsen 2017). The explanation provided inside the “para 9-
5(a) of the GST Act” explains that when the supplier makes the taxable supply then the
taxpayer must make the supply for consideration. As described in the “sec 195-1”,
consideration generally involves the payment in relation with the supply. The decision which
the taxation commissioner has given in “AP Group Ltd v CT (2013)” provides that it is
necessary to have a connection with the consideration for supply. In addition to this, the
supply should always happen in the business course of the entity.
There are also some situations when it becomes necessary for the purchaser to pay the
GST while the onus of paying the GST does not fall on the supplier (Cvrlje 2015). This is
known as reverse charge. The mechanism of reverse charge says that the service receiver is
required to pay the GST rather the service provider. The reverse charge mechanism is applied
apart from the tangible goods purchase and mainly it is implemented on the supply of
services. The rules of reverse charge mechanism say that there should some conditions that
must be met before its applicability (Elkins 2019). The conditions are that the supply must be
made to the entity in the course of its enterprise activity and should have the connection with
Australia. The supply must be made to the entity in exchange of payment and the supply is
either in parts or completely for the business purpose.
Application:
The applicability of the above given laws can be made in the evidences that is gained
from the case of City Sky Co. The company is listed under the GST and during the year it has

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purchased vacant land in South of Brisbane. The initial objective of purchasing the land is for
building apartments on it so that the company can resale it. Now in respect to the GST and
input tax entitlements it can be stated that the vacant land is observed as capital gains tax
asset. Therefore, it can be stated that no GST is payable on the purchase of vacant land and
there cannot be entitlement relating to the input tax credit for City Sky Co.
Despite the fact given above, it is also noted that City Sky Co also made a payment
$33,000 to Maurice Blackburn. The payment made were mainly for the legal services that
City Sky Co has taken from it for development of property on the land. The payment that is
made to Maurice Blackburn by City Sky Co is a reverse charge mechanism since the GST is
paid by City Sky Co as the company here is the receiver of service (Burman et al. 2016).
Additionally, the services are taken by City Sky Co while carrying on the business activities
in Australia. Furthermore, quoting the instance of “AP Group Ltd v CT (2013)” the supply to
City Sky Co is a consideration under “sec 9-15”. The services are in exchange of payment.
So under the reverse charge mechanism the company will be permitted to get the input tax
credit because the legal services are continuance of City Sky Co business activities
(Auerbach and Hassett 2015).
Conclusion:
Under the reverse charge mechanism, the entitlement relating to the input tax credit is
available to City Sky Co for the legal services taken while no GST credit is available for the
purchase of vacant land since it is a capital asset.
Answer to question 2:
Sale of block of land:
The sale of the CGT asset leads to “CGT event A1” within “s.104-10”. Most notably
sale happens only when the change in ownership happens. “Sec.110-25” deals with the five

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elements of CGT. This involves the acquisition cost as the first element in “sec.110-25 (2)”
which represents the total money taxpayer paid to purchase the asset. The second elements is
associated with the incidental cost such as the stamp duty, legal fees, brokerage etc. under
“sec.110-25 (3)”. The third element is the charges of owning the asset under “sec.110-25
(4)”. This element involve interest paid on borrowed fund, rates, taxes etc. occurred while
owning the asset. Generally these cost is not permitted for tax deduction when the asset is not
used for making income (Wanless 2018). The fourth elements is known as the enhancement
cost under “sec.110-25 (5)” that takes into account the capital outgoings. This element
denotes the capital outgoing occurred for preserving or improving the asset value held by
taxpayer. The fifth element under “sec.110-25 (6)” is the title cost (Arnason and Gissurarson
2017). The title cost usually represents the cost of establishing, holding and defending the
title or right to the asset.
A list of transaction has been provided by Emma for her 2015 tax return and she
reported the disposal of land for $1,000,000. The sale of land is a “CGT event A1” under
“sec.104-10”. However there were also some cost that she has also reported in respect of
land. The cost are classified in five elements cost base (Ihori 2017). The first element is the
acquisition cost under “sec 110-25 (2)” which denotes the acquisition price of $250,000 paid
in respect of acquiring the land. The second element under “sec.110-25 (3)” includes the
stamp duty and legal fees. This is known as the incidental cost of land. The third element
denotes the loan interest, rates relating to water and council along with insurance for land
(Saez and Stantcheva 2018). This cost represents the price paid by Emma for owning the
asset under “sec 110-25 (4)” and the same is added under the cost base element.
There was also a legal cost that Emma has provided in the list of transaction for her
2015 tax return as this cost was incurred by her for defending the right to use the land. The
legal fees for dispute with neighbours is a title cost under the fifth element of “sec.110-25

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(6)” which is added under the five elements of cost base (Fleurbaey and Maniquet 2018).
There was instance where before selling the land some dangerous pine trees were cleared at a
cost of $27,500. This cost represents enhancement cost and should be termed as capital
outgoing for preserving the asset. So it will be included inside the fourth element cost base
under “sec.110-25 (5)”.
Sale of shares:
The key design feature of the CGT is that it considers those assets bought after 20 sept
1985. This generally means that CGT does not applies to the asset before the date of 20 sept

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1985 (Ramsey 2015). An asset when it is acquired before the aforementioned date is known
as the pre-CGT asset and upon making the disposal there is no tax payable.
While filing for 2015 Emma Tax return it is noticed that she has also sold the shares
that she held in Rio Tinto. The shares she has held in Rio Tinto was bought in 1982. When
Emma sold the asset in 2015 she derived capital gains. Emma purchased the shares before 20
sept 1985. So the shares are pre-CGT asset and upon making its disposal in 2015 she does not
has to pay tax as it is exempted.
Sale of stamps:
A collectable is known as the stamps, coin, medal etc, that is used or kept for own use
of an individual under “sec.108-10 (2), ITA Act 97”. If the collectable purchased by a person
for greater than $500 then the gains are taxed while any loss is only allowed for offset against
the CGT gain derived following the sale of another collectable (Turley 2017). In the same
way, stamps sold by Emma is a collectable inside “sec.108-10 (2), ITA Act 97” while the
loss earned in relation to stamps should be taken forward to next year by Emma.

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Sale of grand piano:
A personal use asset is also a CGT asset which involves cars, yacht, household items,
furniture held for own use by a person under “sec.108-20” (Golosov, Nekoei and Shourideh
2016). No matter what the price paid by a person for acquisition of personal use asset, the
capital loss is omitted under “sec.108-20 (1)”. The grand piano held by Emma under
“sec.108-20” is a personal use asset. The sale of piano made Emma suffer a loss because the
cost price of $80,000 is less than the sale price of $30,000. Emma is advised to omit the loss
under “sec.108-20 (1)”.

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References:
Arnason, R. and Gissurarson, H.H., 2017. Individual transferable quotas in theory and
practice (Vol. 4). Almenna bókafélagið.
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American
Economic Review, 105(5), pp.38-42.
Burman, L.E., Gale, W.G., Gault, S., Kim, B., Nunns, J. and Rosenthal, S., 2016. Financial
transaction taxes in theory and practice. National Tax Journal, 69(1), pp.171-216.
Cvrlje, D., 2015. Tax literacy as an instrument of combating and overcoming tax system
complexity, low tax morale and tax non-compliance. The Macrotheme Review, 4(3), pp.156-
167.
Elkins, D., 2019. Consumption Taxation in Rawls' Theory of Justice.
Fleurbaey, M. and Maniquet, F., 2018. Optimal income taxation theory and principles of
fairness. Journal of Economic Literature, 56(3), pp.1029-79.
Golosov, M., Nekoei, A. and Shourideh, A., 2016. Taxation, Sorting and Redistribution:
Theory and Evidence.
Hass, A. and Kopanyi, M., 2017. Taxation of Vacant Urban Land: From Theory to
Practice. International Growth Center, London School of Economic and Political Science:
London, UK.
Ihori, T., 2017. The Theory of Taxation. In Principles of Public Finance (pp. 205-227).
Springer, Singapore.
McCluskey, W.J. and Franzsen, R.C., 2017. Land value taxation: An applied analysis.
Routledge.

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Ramli, R., Palil, M.R., Hassan, N.S.A. and Mustapha, A.F., 2015. Compliance costs of Goods
and Services Tax (GST) among small and medium enterprises. Jurnal Pengurusan (UKM
Journal of Management), 45.
Ramsey, F.P., 2015. A Contribution to the Theory of Taxation. Economic Journal, 125(583),
pp.254-268.
Saez, E. and Stantcheva, S., 2018. A simpler theory of optimal capital taxation. Journal of
Public Economics, 162, pp.120-142.
Turley, G., 2017. Transition, taxation and the State. Routledge.
Wanless, P.T., 2018. Taxation in centrally planned economies. Routledge.