Taxation Report: GST, Capital Gain Tax, and Input Tax Credit Analysis

This report provides a comprehensive analysis of Goods and Services Tax (GST) and Capital Gain Tax (CGT) within the Australian taxation framework. It begins by examining the application of GST, particularly focusing on the City Sky Company Ltd and its eligibility for input tax credit. The report then delves into the intricacies of CGT, illustrating its application through various asset sales, including land, a grand piano, stamps, and shares. It details the calculation of capital gains and losses, considering factors such as acquisition costs, direct and indirect expenses, and the potential application of indexation and discounting methods. The report also explores the tax implications of specific asset sales and provides a practical understanding of how to apply taxation principles to real-life scenarios, interpreting relevant legislation and case law. The report also discusses the calculation of capital gains and losses, considering factors such as acquisition costs, direct and indirect expenses, and the potential application of indexation and discounting methods. The report offers a detailed overview of taxation concepts and their practical application, making it a valuable resource for students studying taxation theory, practice, and law.

Unit Code HI6028
Unit Title Taxation Theory, Practice & Law

Taxation
Contents
Introduction...........................................................................................................................................................3
1. GST concept (The City Sky Co).................................................................................................................3
2. Capital Gain Tax..............................................................................................................................................5
 Sale of a block of land.................................................................................................................................5
 Sale of a grand piano..................................................................................................................................6
 Sale of stamps..............................................................................................................................................6
 Sale of shares..............................................................................................................................................6
Conclusion............................................................................................................................................................8
References...........................................................................................................................................................9
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Taxation
Introduction
GST and service tax assumes a place of high importance when it comes to the taxation
purpose. The application of GST in Australia is at flat 10% and is levied on the supply that
pertains to goods and services. However, it is essential to know when the GST is required to
be paid. GST is needed to be paid when the goods and services unless they are exempted or
taxed as input. The same concept applies with capital gain and the limit from where the
capital gain is applicable on the assets needs to be ascertained. In this report, the GST
application by the company name Sky Company Ltd has been discussed together with the
entitlements of input tax credit. The second part deals with the capital gain of various assets
and then an overall computation has been done.
1. GST concept (The City Sky Co)
In accordance to this scenario, it was observed that the city sky company limited had a
development business as well as an investment industry but still was not going for application
of input credit which is also known as GST credit. It is common knowledge that whenever a
capital asset of an organization or an individual is sold then it will result in a capital gain or
loss. A capital gain occurs whenever the selling value is greater than the purchase value of
the asset. Whereas a capital loss is observed if the selling value is lower than the purchase
cost of the asset. It is necessary for the organizations to pay the capital gains tax if any type
of profit or revenue is earned by the individual from the proceeds of the capital asset. Selling
of property, patents, machinery, automobiles, etc. which have not been used for personal or
residential purposes are charged for GST
Vacant land can be termed as both residential and nonresidential property until and unless
the activity carried on the land is properly defined. If the land has not been used for residential
purposes then it will not be regarded as a residential property and will be charged for GST
(Bahari, 2019). The major point of consideration lies in the fact that whether the land was put
to residential use to any other activity. However, if the land was occupied by any resident,
then the individual may have the eligibility to exempt the property from taxes. If any kind of
plans or projects is needed to be conducted which have been labeled as residential, then also
the property is not exempt from taxes. Hence, it can be clearly stated that the property owned
by city Sky Company limited can be taxed for GST. The property bought by the company falls
under the purview of GST because there has been no residential activity on the premises
observed in the past years. Furthermore, it can be observed that the input tax credit of the
raw materials bought by the company for the construction of residential apartments can be
avoided as they have been recently purchased.
Return of goods and services tax can be claimed by an organization if and only if the services
that have been provided are for business expansion. Therefore it can be stated that the return
of GST can be made only if the services have been exclusively done for carrying out the
activities which are helpful in expanding the business. Moreover, it can also be stated that the
organization City sky company limited was liable to pay input tax credit on the GST amount.
The Organization was also observed to hire an advocate in order to render services to them
for claiming the input tax credit. A total of $33,000 was charged by the advocate for his
services. The total amount that has been mentioned in the invoice can be easily claimed for
input tax credit on GST if the services have been made exclusively for the organization and
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Taxation
have also been listed by the company as developmental activities. It was observed that all the
services were not directly related to the development activities carried out by the organization
because of which the company can claim the tax credit on the services rendered by the
advocate (Nethercott, Richardson & Devos, 2013). No claim can be issued on TMT bars,
cement, iron, etc.
The total revenue earned by the advocate was amounting to $300000. The maximum amount
for getting registered under the slab of GST is $75,000. Therefore, information that has been
received cannot be termed relevant because the organization was liable to claim input credit.
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Taxation
2. Capital Gain Tax
The assets that are retained by the company to generate revenue are known as a Capital
asset. These assets are not for selling in the usual course of operations. The term capital
asset comprises of various assets. Few examples of capital assets are manufacturing
machinery, land and buildings, motor vehicles, office equipment, etc (Black, 2019).
If the company wants to sell, dispose or transfer the capital asset, then it must register for
GST (Goods and services tax). This type of sale is usually considered to be taxable. In the tax
period, all the other consideration other than sales which are related to this activity shall be
reported.
There arises a capital gain tax liability when there is a sale or disposal of the asset. At this
point, there arises a capital gain or capital loss. There might be an existence of certain other
capital gains tax events such as the loss of capital gain tax asset or the creation of certain
contractual rights (ATO, 2019).
 Sale of a block of land
The total acquisition cost of an asset must be equal to all the costs that are directly or
indirectly related to the asset. All the other cost along with the purchase cost is considered to
be the total acquisition cost of an asset (Gaal, 20190. The total acquisition cost, in this case,
equals the sum of the purchase price, stamp duty, and legal fees. The purchase cost is
$250000, stamp duty amounts to $5000 and legal charges are $10000. The interest that is
paid on loan is directly attributable to the asset and hence considered to be the direct cost.
So, this amount must be added. Any cost that has been incurred for purchasing that asset is
considered to be the finance cost. Finance cost can be defined as the cost of finances that
were involved in buying or building any particular asset. Interest paid on loan can also be
categorized under finance cost ( Brown, Ferguson & Sherry, 2010). All the finance cost
should form part of the total acquisition price. The various other finance costs that have been
incurred for the purchase of asset amounts to $32000. The capital gain/loss can be computed
by deducting the number of expenses from sales consideration. The total expenses that
should be deducted amounts to $22000 which comprises of the council rates, insurance, and
water rates. These expenses can be said to be maintenance cost which is having a direct
relationship with the asset.
In the first month of 2005, there arose a dispute between the neighbor and the company for
the legal land fees and the settlement for this done for $5000. This expense incurred by the
company cannot fall under the category of maintenance cost and should be considered as a
personal expense. Such an expense does not increase the life of an asset and should be
considered as indirect costs. Some expenses are incurred by the owner for maintaining the
condition of the asset, so a rational amount can be obtained from its sale ( Yardney, 2019). It
also helps in minimizing the chances of capital loss that may arise from that asset. There
were some pine trees near the property of the company which was a threat to the value of the
land. An amount of $27500 was spent on removing these pine trees which the company
wanted to get rid of. The computation of capital gains is done by reducing all the expenses
from the sale price of the asset. Certain expenses were incurred at the time of sale such as
legal fees, advertisement and agent’s fees. The total of these expenses amounted to $25000.
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Taxation
In the given scenario, the total expenses that should be deducted from sales price must be
equal to $52500 ($25000+$27500) which means that both cost of uprooting pine trees, as
well as other expense spent at the time of sale, shall be subtracted. The gross sales
consideration amounted to $ 10000000, from which an amount of $52500 shall be deducted
to get the total sales consideration. The amount of total sales consideration on the sale of
land amounts to $947500.
The computation of capital gain can be done by deducting the cost base form the total sales
consideration amount that has been calculated above. Cost base can be calculated by adding
up the cost of acquisition ($265000), direct costs ($32000) and maintenance cost ($22000).
So, the total cost base equals to $319000. There is an alternative method to calculate the
cost base of an asset which is known as the indexation method. In this method, the cost that
is taken into consideration is the indexed cost. It is a very common fact that any individual or
company would prefer a method that minimizes the amount of tax which has to be paid
(Patnia, 2011). This method requires the multiplication of cost base with the indexation
number. The cost base is usually higher in the case of the indexation method which results in
lower tax. So, the capital gain tax can be represented by a downward graph. An increase in
the cost base of an asset will lead to a reduction in tax liability (Solomon, 2019).
 Sale of a grand piano
Any asset which is held for personal use is exempted if it’s worth is equal to or less than
$10000. The purchase of a grand piano was made in the year 2000 for $80000. The Piano
was sold for $30000 later on. This arose a capital loss of $50000. The company also has an
option to follow the indexation method because the ownership of the asset was more than
twelve months. The discounting method can also be availed which provides a direct discount
of 50%. The capital loss on applying this method would amount to $25000.
 Sale of stamps
Sale of stamps comes under the ambit of capital but subjected to certain condition. Stamps
whose value does not exceed $500 and is held for personal use shall be exempted. Stamps
worth $60000 were purchased from a personal collector (Solomon, 2019). So, capital gain tax
is applicable in this case. The stamps that were purchased through auction amounted to
$50000. There was an expense incurred of $5000 which has to be deducted from the gross
consideration. The net value of these stamps will amount to $45000 and the capital loss
amount will be equal to $15000.
 Sale of shares
The brokerage that was charged on the sale of shares was 2%. Each share was sold by
Emma for $50.85 and there were 1000 shares. The brokerage amounted to $1017. The net
amount received on selling these shares equal to $49833 (50850-1017). The cost of
acquisition of these 100 shares was $3500. The ownership exceeded twelve months which
means that the discounting method was applicable. The net capital gain without availing this
discount amounts to $46333 and on availing discount amounts to $23166.50.
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Taxation
There was capital gain from selling all assets except the sale of stamps. From the overall
discussion and computation it is clear that there was a capital loss of $15000 on the sale of
stamps. The capital gain from- land amounted to $314250, piano amounted to ($25000),
shares amounted to $23166.5. So, we can conclude that the net capital gain that has been
earned by the company for the year 2015 amounted to $297,416.5. This amount has been
calculated by adding up capital gain/loss of all assets that have been sold in this year.
Shares sales - $23,166.5
Land proceeds- $314,250
Capital loss
Piano - ($25000), Disposal of the stamp – ($15,000)
Capital Gain = $23,166.5 +$314,250 - ($25000) - ($15,000)
The net capital gain will amount to $297,416.5
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Taxation
Conclusion
The study of GST and capital in the scenario of Australia gives a clear indication that the rule
of GST and capital is applicable and depends upon the occurrence of different factors. As
seen from the case study capital gain is applicable when the conditions are meet and so is
the condition with the GST. For capital gain the limits or the conditions needs to be known
precisely thereby will help in proper implementation and proper code of conduct. Hence, by
the total understanding, it is clear that a capital gain is arising from the said case.
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Taxation
References
ATO 2019, Capital gains Tax 2019, viewed on 20 September 2019 <
https://www.ato.gov.au/General/Capital-gains-tax/
Bahari, N 2019, What is GST and how does it work?, viewed on 22 September 2019 <
https://legalvision.com.au/what-is-gst-and-how-does-it-work/>
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed on 22 September
2019 < https://www.realestate.com.au/advice/what-is-capital-gains-tax/>
Brown, P., Ferguson, A., & Sherry, S 2010, Investor behaviour in response to Australia's
capital gains tax, Accounting and Finance, vol. 50, no. 4, pp. 783, viewed 20 September 2019
<https://search.proquest.com/docview/762714715?accountid=30552
Gaal, J 2019, Tax tips: Vacant land: The deduction amendments, viewed 20 September 2019,
https://www.taxinstitute.com.au/titaxinaustralia/tax-tips-vacant-land-the-deduction-
amendments
Nethercott, L., Richardson, G.,& Devos,K 2013, Australian Taxation Study Manual, Oxford
university Press
Patnia, A 2011, No Capital gain tax or income tax on profit on sale of a car or other personal
effect, viewed 22 September 2019, https://taxmantra.com/capital-gain-tax-income-tax-profit-
sale-car-personal-effect/
Solomon, J 2019, Understanding Australian GST: A Guide for SaaS Companies, viewed on
22 September 2019 < https://www.chargebee.com/blog/gst-australian-saas-founders-heres/>
Yardney, M 2019, A Complete Guide to Capital Gains Tax, viewed on 21 September 2019 <
https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/>
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