Taxation Theory, Practice & Law Assignment - HI6028 T2 2019, Holmes

This assignment solution addresses taxation principles, focusing on GST and capital gains tax (CGT) within the Australian context. The first part examines a company's eligibility for input credit concerning a property purchase and related services, determining if GST applies and if input tax credits can be claimed. It analyzes the treatment of vacant land and its potential for residential use. The second part delves into capital gains and losses from asset dealings, including the sale of land, stamps, shares, and a grand piano. It details how to calculate acquisition costs, apply relevant tax deductions, and determine taxable capital gains, considering factors like stamp duty, legal fees, brokerage, and the application of the 50% discount method for assets held over 12 months. The assignment provides a comprehensive analysis of tax implications for various asset transactions, along with a list of references.

Taxation Theory, Practice & Law

Taxation
Answer 1
The given company is engaged in the business of investment and development. The
company cannot apply for input credit as it doesn't fall under the purview of the GST credit.
Capital assets can either be sold at either capital gains or capital losses. When the capital
assets are resold at an amount greater than its actual worth, then the profit that is earned
is termed as a capital gain. On the other hand, when the capital assets are sold at an
amount lesser than its actual value then the loss incurred is termed as a capital loss. Since
the profits earned are taxable under law, therefore, the capital gains that are earned must
also be necessarily taxed (Australian government, 2019). When there is a profit earned
from the sale proceeds of vacant land that was solely used for commercial purposes, then
the same must be necessarily taxed for GST. The treatment of a land as a residential or
an non residential property depends on the actual usage or the manner in which it was
utilized. This completely depends on the purpose for which the land has been taken into
use (Bahari, 2019). Vacant land cannot be regarded as residential property if the same
has not taken into use for any residential purpose. Vacant land that has been used for any
residential purposes or bears the eligibility of being owned can only be regarded as a
residential property. It must be noted that even though the vacant land is planned for being
taken into use for residential activity in the future, then also the same cannot be regarded
as a residential property. Hence, during the application of GST various provisions needs to
be considered otherwise it would be difficult to get the actual figure (Bahari, 2019).
The above points make it very clear that the property bought by The City Sky Company
doesn't fall under the purview of GST. The City Sky Company cannot avail input credit
since the newly bought property is out of the purview of goods and service tax. No
residential activity of any kind has been performed on the vacant land. The newly bought
land has remained devoid of any kind of residential activity and hence, the company
cannot claim input credit on GST. The company can avoid input credit on raw materials
that are meant to be taken into use for the development of residential flats on the recently
purchased property (Nethercott, Richardson & Devos, 2013).
As the services were related to the expansion of the business it therefore qualifies for the
reversal of GST. As the services were solely for the business purpose, the company is in a
position to claim the GST reversal(Brown, Ferguson & Sherry, 2010). To qualify for GST
reversal, it is essential that the services must pertain to the business and related to the
development. Hence, claiming of input tax can be done in this regard. Further, to claim the
amount of input tax, a n advocate was hired whose fees amounted to $33,000. Another
consideration that can be made in this regard is that the reversal of GST can be done in
this scenario. When it comes to raw materials, the credit cannot be availed. The barrister
received $300,000 as revenue and for being registered under the purview of GST, the
maximum ceiling has been raised to $75,000. This information seems to be irrelevant and
hence, the company can claim an input tax credit.
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Taxation
Answer 2
A capital gain or capital loss can occur when there is dealing in the capital asset. In the
case of amount arriving from the sale, proceeds tend to be higher in comparison to the
value of the asset then it can be termed as a capital gain. Therefore, a capital gain will
arise when there is a rise in the value of the assets while a capital loss will be projected
when there is a decline in the asset’s value. Capital gain is subjected to capital gain tax but
certain condition needs to be fulfilled. In Australia, the capital gain is subjected to capital
gain tax (Pratt & Kulsrud, 2013).
Sale of a block of Land
The expenses that have been incurred and contain a direct link with the asset acquisition
will be included at the time of computation of the overall acquisition cost. Hence, the total
expenses that are incurred during the purchase of the capital asset should be ascertained
and computed to arrive at the overall value of the asset. From the details, it can be
commented that the legal charges, purchase price, and stamp duty need to be summed to
arrive at the figure. Hence, to arrive at the total cost the following expenses need to add up
with the asset cost:
Acquisition of asset - $ 250,000
Add:
Stamp duty - $ 5000
Legal charges - $10,000
Total price of acquisition = $265,000
Further, the interest that is paid on loan should be considered because it is a direct cost
and related to the asset. The cost that is done exclusively for the asset acquisition should
be considered as a finance cost (Yardney, 2019). Hence, interest paid on loan will come
under the ambit of overall acquisition cost. For the computation of the overall acquisition
cost, the finance cost must be added to the asset cost. Thereby, from the above scenario,
we can add an amount of $32,000 for the finance cost that is incurred. Furthermore, the
expenses that are incurred to maintain the condition of the asset should be excluded or
deducted. In the case of Emma, the expenses consisted of council rates, water rates, and
insurance amounting to $22,000 hence should be deducted from the sale proceeds of the
capital asset.
In the case, a dispute existed between the company, as well as the neighbour in respect of
the legal fees of the land that was settled at the beginning of 2005 for a sum of $5000.
These expenses are not attributable to the asset and hence treated as a personal
expenditure. No treatment will be done in this regard. On the other hand, there are various
expenses incurred to enhance the life of the asset or to produce a better condition. It is
ensured that the capital loss is minimum. The company incurred an amount of $27,500 to
remove the pine trees from the property. The pine trees occupy space and are a threat to
the market of the land. Instead of this, the expenditure was made to enhance the value of
the asset. Apart from this, the company made an expenditure of the amount $25,000 that
was in respect of advertisement, legal fees, and agent fees. Thereby, the sale proceeds
from the land must comprise of
Uprooting pine trees =$27,500
Fees (legal, agent and advertisement) – $25,000
Total expenses - $52,500
Gross sale amount - $10,000,000
The computation of the capital gain tax will be derived by the reduction of the cost base
from the amount that is attained. The overall cost base will be computed by adding the
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Taxation
asset acquisition $26,500 with the direct cost of $32,000 and the cost of maintenance
$22,000. The total figure derived after all the costs comes to $319,000.
Apart from the above method, any method exists to compute the total cost base. In this
scenario, an index cost for each cost base is selected. However, it is entirely upon the
individual to go for a particular selection. However, the selection of the method depends
upon the benefit that it generates and lessens the amount of taxation. The indexation
number gets multiplied with the cost base when it comes to the index cost method. Hence,
it clearly defines that the capital gain tax will decline in the particular method and that the
cost will rise in the index method. Hence, it is a clear indication that the increment in the
cost will tend to pull the capital gain tax downward and will project a downfall.
Sale of stamps
Stamps can be exempted from the ambit of capital gain tax provided it is held for personal
use and that the value should not exceed $500. However, in this scenario, stamps were
purchased for an amount of $60,000 and as seen the amount exceeds $500 hence
subjected to capital gain tax (KMPG, 2019). The stamps were purchased from the auction
and are directly attributable to sales. The same amounted to $50,000. Further, an amount
of $5000 was spent for the auction fees and the same need to be deducted ($50,000-
$5,000) meaning $50000 is the gross consideration.
Hence, in this scenario we arrive at capital loss that is $60,000 - $45,000 = $15,000
Sale of shares
The shares were sold by Emma at $58.50 per shares and a total number of shares was
1000 shares hence an amount of $50850 was paid together with a brokerage. While
computing capital gain the brokerage amount needs to be deducted from the sales
consideration (Camp, 2019). Here, the brokerage will be 2% of $50850 that would lead to
$1017 hence net sale proceeds will be $49833 ($50850-$1017). Here the acquisition cost
will be $3.5 * 1000 = $3500. As the shares were held for more than 12 months it qualifies
for the discounting method and hence 50% of the capital gain amount can be availed. The
net capital gain will be $49833 - $3500 = $46333 therefore after discounting method the
capital gain on shares =$23166.5
Sale of Grand Piano
When the assets are held for any personal use then is exempted until the value of
$10,000. In this particular case, the piano was purchased for an amount of $80,000.
However, the same was sold for $30,000. It indicates that an amount of $50,000 appears
as a capital loss. The piano was used for a period exceeding 12 months and hence
indexing benefit can be availed (James, 2015). Here, Emma has a chance to avail the
50% discounting method. The net capital loss will be $25,000
Hence, taxable capital gain for Emma will come to:
Sale proceeds of shares - $23,166.5
Sale proceeds of land - $314,250
Capital loss
Disposal of stamp – ($15,000)
Piano - ($25000)
The net capital gain will amount to $297,416.5
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Taxation
References
Australian government 2019, Residential Premises, viewed on 22 September 2019 <
https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Input-
taxed-sales/Residential-premises/>
Australian government 2019, Residential Premises, viewed on 24 September 2019 <
https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Input-
taxed-sales/Residential-premises/>
Bahari, N 2019, What is GST and how does it work?, viewed on 23 September 2019 <
https://legalvision.com.au/what-is-gst-and-how-does-it-work/>
Brown, P., Ferguson, A., & Sherry, S 2010, Investor behaviour in response to Australia's
capital gains tax, Accounting and Finance, 50(4), 783 viewed on 13 September 2019
<https://search.proquest.com/docview/762714715?accountid=30552
Camp, A 2019, How to avoid capital gains tax when selling property, viewed 25 September
2019, https://www.finder.com/avoid-capital-gains-tax-when-selling-property
James, C 2015, Capital gain vs. cash flow, viewed 20 September 2019,
https://www.realestate.com.au/advice/capital-gain-vs-cash-flow/?pid=article-page|
source:advice:article-page-bottom
KMPG 2019, New GST rules for property developers, viewed on 25 September 2019 <
https://home.kpmg/au/en/home/insights/2018/05/gst-rules-for-property-developers-from-
july-2018.html>
Nethercott, L., Richardson, G.,& Devos,K 2013, Australian Taxation Study Manual, Oxford
university Press
Pratt, J. W. and Kulsrud, W. N 2013, Federal Taxation. Penguin Publishers
Yardney, M 2019, A Complete Guide to Capital Gains Tax, viewed on 25 September 2019
< https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/>
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