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HI6028 Taxation Theory, Practice & Law Assignment - Holmes Institute, Australia

Learning Outcomes -

LO1. Demonstrate an understanding of the Australian income tax system, the concepts of income and deductions, CGT, FBT, GST general anti-avoidance provisions and income tax administration.

LO2. Identify and critically analyse taxation issues.

LO3. Interpret the relevant taxation legislations and case law.

LO4. Apply taxation principles to real life problems.

QUESTION 1- 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 - 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.

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.

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Solution - TAXATION THEORY, PRACTICE & LAW

INTRODUCTION

The government and regulators of a country are solely responsible for maintaining rules and regulation with respect to taxation which includes both direct taxes and indirect taxes. Taxes are an essential source of revenue for the government since it helps in meeting the expenditures of government and for maintenance of the global budget of an economy. In Australia also, it is the government who introduces taxes and makes necessary amendments so as to generate revenue. Earlier there were many kinds of taxes of indirect nature being imposed on the process of production and value addition of goods and services. However, the government abolished all these indirect taxes and have introduced uniform taxation called Goods and Services Tax, popularly known as GST all across the world. In case of direct tax, which is the tax on the income and wealth of individuals and businesses operating in Australia or generating revenue from Australia, there is Direct Tax Law including Income Tax Assessment Act (ITAA) within it. The ITAA constitutes provisions on various sources of income including the Capital Gains Tax (CGT) i.e. the tax on the gains arising from the sale of capital assets. In this paper, an analysis of the provisions of GST and CGT has been considered using the two case laws given.

QUESTION 1: THE GOODS AND SERVICES TAX (GST): ANALYSIS OF THE PROVISIONS OF INPUT TAX CREDIT (ITC):

Australian Government introduced indirect tax which was Goods and Services Tax (GST) so that uniformity on the process of taxation can be maintained and there can be the abolition of the various taxes which were in existence. GST helped in the avoidance of the double taxation system since earlier the taxes were such that they resulted in paying tax on tax. The amount collected from GST is used for the global budget being framed by the government whose ultimate goal is the improvement in the economy by way of improvement of industries, businesses that operates with the economy. As per the law of GST, there is a threshold limit which is applicable for all businesses. The businesses that cross the threshold limit have to register themselves under the law of GST mandatorily, otherwise, there will be huge penalties being attracted to them. The threshold limit is provided for the registration of GST is the case whether the gross total turnover exceeds $75,000 in any year. In cases, where the Gross Total Turnover of a business does not exceed $75,000 they have an option to register themselves and are not forced to get them registered under GST(Aaron Henry, 1974). The rate of GST applicable as per the law is 10% and 5.5%. The rate of GST is 10% for all the major category of businesses and industries whereas the rate of 5.5% which is a concessional rate is applicable to businesses that need boosts from the end of the government to grow. GST is not applicable i.e. exempted for certain categories of industries so that more and more businesses and entrepreneurs can take up that business for the development of the economy. The exempted industries are the ones which deal in a specific food, items of household and the healthcare industries. GST law further contains provisions on the amount if paid in excess to the government in relation to a particular product or service. This is returned by the government by way of Input Tax Credit (ITC) or by way of refund. The provisions of ITC helps in the adjustment of the output tax liability of the business with the Input Tax Credit being available to the business. However, there is no entitlement of the ITC to the end consumers i.e. the final consumers. GST has helped in maintaining balance and harmony within the economy and in between the business competitors with respect to the liability of taxation.

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The GST law contains a various provision in respect to the various sectors that operate within the economy. For the real estate sector, there are specific provisions being outlined under the law for the computation of GST (Anderson John E., 1993). In case a real estate property has received Completion Certificate (CC) then that property is outside the purview of GST and thus no GST is applicable to it. The non-applicability of GST is irrespective of the nature of the property i.e. residential or commercial. In the case of under-construction properties, GST is applicable and thus any transaction related to it would be analysed in accordance with the provisions of GST. Therefore, while analysing GST on the real estate property its nature with respect to its completion needs to be established in the very first instance.

The law of GST has laid down various criteria that are required to be met by the businesses so as to claim ITC, which are discussed as follows:

  • The registration of the business for the purpose of GST is the primary requirement for claiming ITC. The businesses that are not registered cannot claim ITC even if they have paid ITC on their purchases.
  • The goods or services on which the GST has been paid must have been used by the business for its business purpose.
  • The amount of GST on which ITC is being claimed is either being paid by the business or being taken into account by the business that is it has been considered as payable.
  • The invoice on which GST is being claimed must have a total amount that includes the amount of GST for claiming ITC on the same.
  • The tax invoice must have a clear bifurcation of the gross amount and GST amount. ITC can be claimed only if there is the proper format of the invoice which is in accordance with the law.

The Business Activity Statement, popularly known as BAS and the annual return contains the details of the input tax credit being claimed by the businesses and the same are submitted online in the GST portal (Bradbury Katharine L., and Mayer Christopher J., and Case Karl E., 2000).

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MATERIAL FACTS:

In the given case, there is a company named City Sky Co. which have a business being registered under the law of GST. The company is into the business of property investment and construction of apartments on the land. The company have received a tax invoice from its lawyer Maurice Blackburn as the legal fees on the legal consultancy. The tax invoice of the Maurice Blackburn amounts to $33,000 as lawyer fees. Therefore, the fact that needs to be analysed is that the amount included as GST on the lawyer fees can be allowed as ITC to City Sky Co. The fact that the lawyer Maurice Blackburn is registered under the GST law is clear from the fact that its annual revenue is $300,000 which exceeds the threshold of GST stating the fact that Maurice Blackburn is registered for the purpose of GST.

ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:

There is provision under the law of GST wherein a clear difference in the application of GST has been provided with respect to the under-construction and completed properties. According to the law, the completed properties are outside the purview of the provisions of GST. Since the company City Sky Co., runs a business wherein there is construction and sale of apartments thereby application of GST is present on its business. The requirement of the paper is the analysis of the fact that the amount paid or payable by City Sky Co., on the consultancy bill of the lawyer will be eligible for the purpose of the Input Tax credit.

The input tax credit of the lawyer fees bill would be made available if the criteria in relation to the same would be satisfied. The same has been discussed as below:

  • Both the companies i.e. the lawyer and the construction company are both registered under the law of GST and thus City Sky Co. can claim ITC on the consultancy fees of Maurice Blackburn.
  • City Sky Co. took the consultancy of a lawyer for the purpose of its business and thus the same is one of the criteria's of ITC that has been met.
  • City Sky Co. have either paid the company or will be paying the amount of $33,000 to Maurice Blackburn since the same has been accounted for by the company and so ITC can be claimed on it.
  • The amount of bill which is $33,000 is assumed to include $3,000 i.e. the 10% of GST on the consultancy fees of Maurice Blackburn. The amount of $3,000 is the ITC amount which will be claimed by City Sky Co.
  • The tax invoice being issued by Maurice Blackburn is in accordance with the provisions of the GST and thus the same can be claimed as ITC by the company City Sky Co.

CONCLUSION:

The City Sky Co. is thus eligible to claim $3,000 paid towards GST to Maurice Blackburn as the Input Tax Credit and can adjust this amount with its GST liability.

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QUESTION 2: CAPITAL GAINS TAX:

The question has specifically mentioned to ignore indexation and thus while computation of the capital gains the same have been ignored.

SALE OF A BLOCK OF LAND FOR $1,000,000:

Capital Gains are gains or losses that arise in relation to the sale or disposal of capital assets. The provisions stated in the Capital Gains provides the fact that all the expenses that are incurred by the holder of a capital asset with respect to it are being added in its original cost so as to derive gain or loss from the sale of that particular asset. The same applies in relation to the sale of land too (CCH, 2011). The cost incurred over and above its initial cost i.e. the cost of acquisition constitutes of the fact that they are being incurred for the creation and value addition to the land. Thus, the gains are computed by arriving at the cost of the land after adjusting all the other costs incurred with the sale proceeds.

MATERIAL FACTS:

The vacant land held by Emma is a capital asset in his hand this the land for purchase for the purpose of investments and thus the gain/loss that will arise from the sale of land will be subject to Capital Gains (A Auerbach, 1991). The cost that would be considered for capital gains would be the initial cost and any other cost being incurred on it to keep the land in a saleable position.

ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:

The capital gains on the sale of land in the hands of Emma would be:

Cost of Acquisition of Land

$250,000

Amount Paid towards Stamp Duty

$5,000

Amount Paid as Legal Fees

$10,000

Amount Paid as Interest

$32,000

Council, water rates and insurance

$22,000

Amount Paid as Legal Fees for clearing Dispute

$5,000

Amount Paid for Removal of Pine Trees

$27,500

Amount Paid for advertisement, legal and agent fees on the sale of land

$25,000

Total Cost of Land (A)

$376,500

Sale Value (B)

$1,000,000

Capital Gains (B)-(A)

$623,500

CONCLUSION

The vacant land being sold by Emma for $1,000,000 would result in the capital gains of $623,500.

SALE OF 1000 SHARES IN RIO TINTO FOR $50.85 PER SHARE:

The gain or loss on the sale of shares is being computed by adjusting the purchase price or sale price by any amount incurred for the same which means the purchase price is increased and the sale price is decreased with the additional cost. As per the law, the holding period is also important since a discount of 50% is given on the capital gains for the shares held for more than 12 months (D Halperin, 1991).

MATERIAL FACTS:

The shares of Rio Tinto was purchased and the same were sold after holding them for more than 12 months. Thus, the holding period discount would be applicable.

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ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:

The sale of the share would have a capital gain computed as below:

Sale Price of shares (1000*50.85)

$50,850

Less: Brokerage on sales paid (2% of 50850)

$1,017

Net Sale Price (A)

$49,833

Cost Price of 1000 shares (1000*3.5) (B)

$3,500

Capital Gains (A)-(B)

$46,333

Holding Period Discount (50%)

$23,166.50

Net Capital Gains

$23,166.50

CONCLUSION:

Capital Gain on sale of shares to Emma is $23,166.50.

SALE OF STAMP COLLECTION:

Stamps are included within the collectables(L Burman and W Randolph, 1994).

MATERIAL FACT:

The stamp was sold at a loss of $15,000 which would be allowed for adjustment is required to be analysed.

ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:

If the stamps would have been purchased or acquired before 16th December 1995 for less than $500 then they would have been allowed to have set off their losses with the gains on the sale of collectables. However, neither of the conditions is being satisfied and thus the loss on the sale of the stamp will not be allowed to set off.

Amount of Capital Loss:

Purchase Price

$60,000

Sale Price net of auction fees (50,000-5,000)

$45,000

Loss on Sale

$15,000

CONCLUSION:

The amount of loss of $15,000 will not be allowed to set off.

SALE OF GRAND PIANO FOR $30,000:

MATERIAL FACTS:

The piano is capital assets for Piano players. Assuming the fact that Emma is not a piano player, the loss on the sale of Piano will be not allowed to set off from any capital gains (L Burman, K Clausing and J O'Hare, 1994).

ANALYSIS OF LEGAL ISSUES AND APPLICATION OF LAW:

Capital Loss = Purchase Price - Sale Price = $80,000 - $30,000 = $50,000

CONCLUSION:

$50,000 would not be allowed to set off.

CONCLUSION:

The provisions of the laws in respect to GST and the CGT is required to be analysed well so as to compute the correct liability of taxes to avoid any dispute.

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