HI6028: Taxation Theory, Practice & Law- Individual Assignment
QUESTION 1- (10 MARKS)
The City Sky Co is a property investment and development company. Recently the company purchased a vacant piece of land south of Brisbane on which it is planning to build 15 apartments to sell. The City Sky Co has engaged the services of the local lawyer, Maurice Blackburn, to provide the legal services required for the development for $33,000. Maurice Blackburn runs an established sole trader business and turns over revenue of $300,000 per year.
Advise The City Sky Co of the input tax credit entitlements that they may be entitled to. Assume that The City Sky Co is registered for GST purposes.
QUESTION 2 – (10 MARKS)
Emma has provided to you a listing of the transactions she has undertaken throughout the financial year to assist you in completing her 2015 income tax return.
Sale of a block of land for $1,000,000: Emma purchased the land as an investment in 1991. The purchase price was $250,000, plus $5,000 in stamp duty, $10,000 in legal fees. To fund the purchase, she took out a loan on which she paid interest totaling $32,000. During the period of ownership her council rates, water rates and insurance totaled
$22,000. In January 2005 a dispute occurred with a neighbour over the use of the land and the legal fees incurred amounted to $5,000 in resolving this dispute. Before putting the property on the market $27,500 was spent to remove a number of large dangerous pine trees that were on the land. Advertising, legal fees and agent’s fees on the sale of the land were $25,000.
Sale of Emma’s 1000 shares in Rio Tinto for $50.85 per share: Emma paid brokerage fee of 2% on the sale. Emma initially purchased the shares for $3.5 per share in 1982.
Sale of a stamp collection Emma had purchased, from a private collector, in January 2015 for $60,000: Emma sold the collection at auction for $50,000. Auction fees totaled $5,000 for the sale.
Sale of a grand piano for $30,000: It was initially bought for $80,000 in 2000.
Advise Emma of the capital gain tax (CGT) consequences of her transitions. Ignore indexation. Your answer must include references to relevant tax law and or cases.
Answer 1
When a company is registered for GST, it will add GST value in the price it charges for its goods and services. Along with this it is also allowed to claim tax credits for the amount of GST that is charged to them when they buy a good or service from their supplier. Tax credits allow a business to reduce the amount of tax payable by them to the tax authorities.
After getting registered for GST, a business needs to identify its sales that are taxable and those that are exempt. Business carries out its operations by issuing GST invoices and receiving GST invoices. GST deducted from the payable amount to suppliers is recorded as a liability that is due to be paid to tax authorities on behalf of that supplier.
One can claim GST credit for any amount of GST that has been made part of the price of goods and services bought from suppliers of your business. This is also termed as an input tax credit (McCouat, 2012).
The term may claim where the following conditions exist:
- The purchases made by the business are fully or partially intended to be used in the business only. It means that business need should be met from the purchase.
- GST has been included in the purchase price, which means that the price would be considered at the time of purchase.
- Price of good or service from the supplier has been paid or a liability created as payable which would be paid later.
- A GST invoice has been obtained from the supplier
These conditions ensure and highlight how GST would be applied and to which circumstances. Different other aspects and definitions of GST have been mentioned so that the claim of GST may be valid.
As we can see from the case, City Sky Co is a registered business. Hence it is eligible for any input tax credit wherever it seems applicable. It has bought a piece of land that was vacant in order to build and sell apartments.
Land is a property that cannot be moved. It is neither a service nor a good. So, it does not fall under the umbrella of GST. Hence it can be said that purchase of a vacant piece of land is free from any GST implications.
It can be discussed further that City Sky Co is aimed at building apartments on this piece of land. As per the GST taxation rules, there is no claim for the input tax credit for goods and services used for the purpose of construction upon immovable property. Even if the goods and services are used further in the course of business, no input tax credit can be claimed. Hence City Sky Co is not eligible for any input tax credits in this case (Clear Tax, 2019).
Secondly, City sky Co has used the development services of an advocate for a price of $ 33,000. As per the rules of Australian taxation office, a reverse charge is possible in a few circumstances. In a reverse charge, the GST amount id paid by the buyer.
In the case of City Sky co any administrations have taken from an advocate fall under reverse charge component. Under this charge GST is to be paid by the beneficiary of business. In the event that the beneficiary uses such benefits for its business purposes, only then it may claim an input tax credit otherwise it may not. As we can see the business of city sky co is in its development stage, and the services from advocate are being used in the course of business only, the input tax credit can be claimed by City Sky Co in the event of buying services from its lawyer, Maurice Blackburn. The figure for revenue of the lawyer is mentioned in the case, but it is irrelevant under the taxation rules for GST.
The above-mentioned GST rules are applicable upon businesses if they got registered on or after 1st July 2017(Australian Taxation Office, 2019).
Answer 2:
Capital gains tax (CGT) is the tax that is paid by a chargeable person on the disposal of chargeable assets. CGT is an important tax type as it is applied to critically important assets to be invested, and it was made part of Australian taxation system in the year of 1985. Capital gains tax can be applied to a specific set of assets. These sets are which are acquired on or after the date. Any assets with gains or losses owned before this date are not subject to capital gains tax in their taxation law.
After including the capital gain tax into the taxation system of Australia, it was September 20, 1985, which became the date to recognize and apply capital gain tax. Any asset acquired on or after 20th September 1985 must come under the capital gain tax until and unless the taxation law specifically excludes or exempts at some circumstances. The tax may be used for application upon the gain/loss from disposal of certain assets of capital investment, and some of these assets have been listed in the following:
- Real Estate
- Shares
- Crypto currency
- Leases, licenses, contractual rights
- Collectables and personal use assets
However, a few exemptions exist for capital gains tax upon the sale of an asset, and these are:
-
Main residence
Your main residence is exempt from CGT however exceptions may exist in some circumstances.
-
Car or motorbike
A car is defined as a vehicle which carries less load or passengers not more than 9 in number.
-
Personal Use Items
If an item of personal use is bought for a value less than $10,000, it is also exempt from the capital gains tax
-
Collectables
If a collectible is purchased for a value of $500 or less at the time of acquisition. Any gain from its sales is also said to be exempt from capital gains tax.
- Depreciating assets which have wholly been utilized by any business.
- Any assets that were acquired before CGT came into existence, i.e. July 1985.
- Assets used for the production of exempt income
- Gambling winnings and losses
- Gifts made by will
- Gain/loss from shares of pooled investments
Below is the list of Emma’s transaction which will now be evaluated based upon the Australian CGT rules in order to finalize her income tax return.
1-Sale of a block of land for $1,000,000:
Long term capital assets have duration-based aspect of being considered as long-term capital assets. Generally, this duration of time is 36 months for buildings. In the case of Emma the land has been held over a duration of 36 months so any capital gain arising from its sale would be chargeable under CGT rules.
In our question, both the land and shares come under the definition of long-term capital assets because they have been possessed for the period of more than 36 and 24 months respectively. So, we have to pay long-term capital gain on the above income.
| Land: | |
| Sale Value of land | $ 1,000,000 |
| Expenses incurred on the land | $ 57,500 |
| Purchase Consideration: | $ 265,000 |
| Cost of Improvement | $ – |
| (A)Gross Long-term Capital for Land: | $ 677,500 |
Purchase consideration includes $ 5,000 of stamp duty and a further $10, 000 incurred as legal fee.
The five major elements that add up to make the cost of the assets are as below:
i-Amount or property paid to acquire the asset
The money being paid in order to purchase the asset based upon the true market value of it.
ii-Incidental costs relating to the event of purchase
There is a list of incidental costs that are included as part of the total cost of the asset. This includes charges of the service provider for the purchase such as a surveyor, auctioneer, accountant, broker, etc. Stamp duties and costs of transfer are also included in the cost of the asset. Advertising and valuation costs are also a must to add to the original total cost. Searching fee such as titles of lands and other related fees. However, searching costs exclude the cost of travelling to search for the asset under consideration. The cost also includes borrowing costs related to any mortgagor loan application fee. Expenditure incurred directly to obtain ownership of the asset that is being purchased.
iii-Costs to own an asset
The cost to own an asset is not included in the cost of the asset if it was acquired before August 1991. All taxes, rates, repairs, insurance must be included in the cost to own and have possession of the asset if it has been possessed and acquired after August 1991.
iv-Capital costs that enhance the value of assets or its installation or its relocation:
The cost is incurred to serve two purposes which are to increase the CGT asset value or preserving its original value. The installation charges are incurred in setting up the asset as part of the cost element of that asset.
v-Capital costs for defending the ownership title of the CGT asset
Finally, the capital expenditure incurred upon defending or preserving the entitlement or rights connected to the asset.
The deductible expenses from the cost of assets will be $ 27,500 paid for the removal of the dangerous tree plus $ 5,000 legal fee incurred upon dispute resolving plus 25,000 advertising agent’s fee to put up the land for sale.
2-Sale of Emma’s 1000 shares in Rio Tinto for $50.85 per share:
Capital assets for the long-term period will be considered only if they have been acquired for a period of 24 months or more than it in the case of shares holding. In the case of Emma, the shares have been held over a duration of 24 months so any capital gain arising from its sale would be chargeable under CGT rules.
| Shares | Rate | Total | |
| Consideration of shares | 1,000 | $50.85 | $50,850.00 |
| Purchase Price of Shares | 1,000 | $3.50 | ($3,500) |
| Brokerage fee | ($70) | ||
| Long Term Net Capital Gain | $47,280.00 |
A long-term capital gain of $ 47, 280 can be seen upon the sale of shares in Rio Tinto by Emma. The shares basis is calculated as purchase price of the share at a rate or $3.5 per share plus the 2% brokerage fee the was incurred by Emma. Hence the shares basis was calculated as 53,570. This basis is deducted from the sale consideration that Emma is being received $ 50,850. Hence, a capital net gain was incurred of $ 47,280 which is chargeable under CGT rules.
Both of the above capital assets will be charged a tax upon any gains arising from their sale.
3-Sale of a stamp collection Emma had purchased, from a private collector, in January
2015 for $60,000:
| Total | |
| Sale price of Stamp | $50,000.00 |
| Purchase Price of Stamp | -$60,000 |
| Auction fee | -$5,000 |
| Long Term Net Capital Loss | ($15,000.00) |
Emma purchased the stamp for $60,000; however, it was sold on a loss of $15,000 as its purchase price was 50,000 plus an auction fee expense was also incurred to put the collection on auction.
The Stamp is considered as a collection under CGT rules. Gains upon collections are exempt from CGT if the acquisition price is $500 or less. The stamp collection of Emma is quite expensive hence no exemption can be claimed. Moreover, loss from this stamp is non-deductible in the computation of her annual income as this is not an income-producing property.
4-Sale of a grand piano for $30,000:
| Total | |
| Sale price of Piano | $ 30,000 |
| Purchase Price of Piano | $ – 80,000 |
| Long Term Net Capital Loss | ($50,000) |
Grand piano is considered as a personal use asset in the capital gains tax rules. Emma bought the Piano for $80,000 in 2000, and now it is being sold at $30,000 only. Hence a capital loss of $50,000 has been incurred by Emma. However, this loss is also non-deduct able in computation of her annual income as this is again not an income producing asset.
Both losses from the sale of stamp and piano are non-deduct able from her annual income. However, all expenses in connection with the holding of land must be capitalized in order to increase the basis of land (Cooper et al., 2017).
References
Australian Taxation Office, 2019. Reverse charge of GST on things purchased from offshore. [Online] Available at: https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/International-transactions/Reverse-charge-of-GST-on-things-purchased-from-offshore/ [Accessed 23 September 2019].
Clear Tax, 2019. Cases Where Input Tax Credit under GST Cannot Be Availed. [Online] Available at: https://cleartax.in/s/gst-cases-where-input-tax-credit-is-unavailable [Accessed 23 September 2019].
Cooper, G.S., Evans, C. & Kumar, A.K., 2017. Australian CGT Handbook 2017-18. 9th ed. Thomson Reuters (Professional) Australia Limited.
McCouat, P., 2012. Australian Master GST Guide 2012. CCH Australia Limited.
