Taxation Theory Practice and law
A federal taxation system in a complex condition of the income-earner prevailing in Australia consists of Goods and Service Tax (GST) and Capital Gain Tax (CGT). Taxation laws and practices in Australia are considered as comprehensive tax that is value-added and generally imposed on the Goods and Services as GST. After imposing the GST taxation law on goods and services, the indirect taxes such as VAT, CST and Excise Duty are excluded. Acquiring assets that are non-inventory in nature for generating profitability is taxable.
The case scenario has observed that the City Sky Company is a real estate investment company that has strategies for investing in land for building 15 apartments. Considering that City Sky is a company registered under Australian taxation and thus it is eligible for taxation on income or other input as applicable. Purchasing vacant land either for investment or personal use purpose enables the taxpayer in generating a capital gain (Mahar, 2016, p.16). Thus the vacant land acquisition is considered to gain from capital assets. City Sky Co is eligible for CGT when it purposefully sells the vacant land.
As per the case scenario, City Sky is willing to build apartments and using the land for the business purpose for making profitability out of selling service. Selling of service and dealing with lands by sales proceed is considered as ordinary income that requires registration of GST. According to the statement of Freebairn, (2016, p. 555), for the purpose of acquiring vacant land and building rental property on such land, the taxpayer is eligible for claiming a tax deduction for incurring expenses on holding land. In the case, when City Sky is dealing with an off transaction of immovable property, the company is eligible for implementing the commercial venture that requires registration of GST.
From the given case question, it has been identified that a company like City Sky Co has purchased vacant land on the south side of Brisbane. The company is planning to develop 15 apartments for selling. In this regard, it can be said that this company has engaged with the local lawyer. The legal service is required for the development of 33000 dollars. It has been detected that The City Sky Co is manly registered for the purposes of Goods and Service Tax in a country like Australia. From the legal perspective of the Goods and Service Tax of Australia, it can be stated that the party i.e. The City Sky Co can claim the credit for GST which is included in the piece of the vacant land. The company has bought a vacant piece of land. In this regard, the law of Income Tax Assessment Act 1997 (ITAA) can be applied. As for this reason Input Tax credit or GST credit can be claimed by the organization. It is advised to the company that;
- The City Sky Co can claim the GST because this organization intends to use the property of land solely for the business. It is because the organization is going to build 15 apartments in the land for selling
- If the purchased price of the vacant piece of land is included GST, the organization can claim the input tax credit
- As the purchase is more than 82.50 Australian Dollars, the company has a tax invoice from the suppliers (Ramli et al. 2015, p. 149)
It is advised to the company that if the aforementioned conditions are fulfilled, the company can claim the for the input tax credit entitlements.
The land is not treated as an immovable property which falls into the category of goods nor in services, thus could it not be sectioned under GST (Mavropoulos, 2017, p.319). Hence, no GST is applied to the acquisition of vacant land. The case scenario has identified that City Sky is willing to build apartments on that vacant land that is categorised under the Australian provision of black credit. It has been stated by Schuster et al. (2018, p. e12377). Black credit is a term used for receiving of goods and services tax by implementing construction on immovable property. City Sky is not entitled to input tax on vacant land. After getting registered for GST by the City Sky, it is needed to impose GST rate as a tax deduction on each good and services inclusive of vacant land or new commercial premises. The city Sky would be eligible for claiming credit as the rate of GST is included in the price of purchasing business assets that are subjected to the normal rules of GST. The business activity statement for each transaction is then needed to be created and reported to the tax department. The taxpayer that is City Sky is not eligible for claiming the credit on the assets that are purchased by the company and already imposed on GST.
It has been recognised by the case of City Sky that $33000 has been taken for service from Maurice Blackburn, a local lawyer. The service taken by City Sky from a local lawyer is treated as a mechanism of reverse charge. In this system, the service receiver is imposed of GST tax. Due to using such service by City Sky as for the business purpose, it is eligible for claiming input credit tax on a similar amount. Since City sky as a development company has revealed the service by Maurice a lawyer for business purposes, it could claim the input tax on credit (Ingles, 2016, p. 6). The information of revenue regarding the income of Maurice Blackburn is irrelevant for the claiming input tax or GST. It is thus recognised that City Sky could claim for credit input tax for the service being availed by an advocate. It has been concluded form the material fact of the case scenario that vacant land has been acquired by City Sky within a geographical region of Australia which is not eligible for GST. However, construction of building on vacant land for commercial purpose and providing services is eligible for GST. It has been further concluded that City sky could claim for credit input tax for receiving service of $33000 from a lawyer.
Capital gain and capital loss are having two different aspects dependently. It considers the cost of purchasing assets and receiving an disposing of the assets. The Australian business operator is needed to pay tax on the capital gain that which forms a part of income to the taxpayer (Head and Burns, 2015, p.501). Holding of assets for more than 1 year induces a tax on assets by 50% which included 33.33 percent of superannuation funds. It is assumed as per the ATO that capital losses could be covered by capital gain however; a net capital loss could be carried forward. Calculation of CGT loss or gain is calculated on the basis of disposal of property or assets in a specific period and time period for holding of property. Disposal of assets as per CGT is assumed in the following condition
- Under section 104-10 of CGT event in A1
- Gain of capital is recognized in the condition when capital received by selling of property or by assets disposal cost higher than the base cost of assets.
- Capital loss is incurred when the cost base of the assets is higher than proceeds receive by selling of lands or other assets
- According to sec 104-10(2), assets disposal is considered when the ownership of assets is exchanged.
- Time for sales of assets as per sec 104-10(3) is incurred when the contract on disposal of assets is ventured.
From the given case question, it has been recognized that the sale of the land’s block is for 1000000 dollars. The land has been purchased by Emma as an investment in the year 1991. On the other hand, it has been identified that the sale of 1000 shares of Emma in Rio Tinto is for 50.85 dollars. In this regard, it can be sensed that Capital Gains Taxation law can be applicable here. In the context of the taxation system in a country like Australia, it has been detected that a tax is about to be applied if capital gain made on the asset disposal. It can be explained from the point of view of Evans et al. (2015, p. 735), CGT mainly operates by treating net capital gains as the taxable income in the year of tax. In this context, there are some consequences of the transaction of Capital Gains tax in Australia. It can be stated that the consequences of CGT canaries if;
· The stated asset is acquired before the date of 20th September 1985
· Asset for personal use that is acquired for up to the amount of 10000 dollars
· As per the law of ITAA 1197, it is stated under the Section 108-20(1), if the capital loss is made from any of the personal use assets can be disregarded.
c) Calculation of CGT
The case scenario of Emma reveals that the land costing $250000 have been purchased for investment purpose along with stamp duty of $5000 and legal fees of $10000. Emma has borrowed loan with interest of $32000. The service cost of interest on loan, insurance charges and advertising charges has been considering as legal charges that could be treated for CGT. However, the settlement of legal dispute charge is not a part of generating capital any way it is concerned as a private investment involving a family member. Hence the costs of dispute charges have been excluded while calculating CGT.
CGT on Land sold
Purchase cost = $250000
Stamp Duty = $5000
Legal fees = $10000
Loan interest = $32000
Insurance = $22000
Advertising charge = $27500
Block of land sold by Emma cost = $1000000 (the cost base). However, the selling element charges amounted to $346500
Hence, net capital gain of selling off the land by Emma amounted to $653500
$1000000 - $346500 = $653500
CGT on Share:
Emma has purchased 1000 shares as of 1982 at $3.5 per share. The purchasing cost of total share would be = 1000 * $3.5 = $3500
Selling of 1000 shares in Rio Tinto at $50.85 per share would amount to 1000 * $50.85 = $50850. Capital gain on the selling of share = $50850 - $3500 = $47350. The share has been held by Emma for more than 1 year which is eligible for tax on a capital gain of 50%.
CGT on Stamp duty sold
Amount of purchasing stamp = $60000
Stamp sold at $ 50000
Auction service charge = $5000
A capital loss incurred = ($50000 + $5000) - $60000 = -$5000
Capital loss is not eligible for tax deduction.
CGT on Sales of Piano
Purchased cost of piano = $80000
Sales cost of piano = $30000
Capital Gain = $50000
Total Capital Gain by Emma on the selling of land, share, Stamp duty and piano aggregately cost as follows
CGT on Land = $653500
CGT on Share = $47350
CGL on Stamp duty = -$5000
CGT on Piano = $50000
Total capital gain = $745850
Less: Tax on CGT of 47% = $350549.5
Less: Medicare Levy of 2% = $7906.01
Total CGT assessable by Emma = $745850 - $350549.5 - $7906.01
The CGT of Emma has ignored indexation and calculated capital gain taxable amount in the non-discount approach. Under the taxation law of ITAA 97 s 108- 5 CGT, an individual is liable of Medicare levy of 2% and income tax of 47% on the capital gain.
Evaluation of the case scenario of City Sky has concluded the concept of GST on providing goods and services as per the Australian tax. The GST analysis has concluded that service is undertaken by City Sky by a local lawyer of $33000 could be claimed as input tax. The common capital gain realized by most of the business or income earners is bonds, real estate, stock or property. The taxpayer is levied with the percentage of the tax rate on income or on transaction of goods and service as per the Australian taxation law. It can be concluded by the application of CGT tax that capital gain on sale of land could be deducted individually for 30%.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An alternative way forward. Austl. Tax F., 30, p.735.
Freebairn, J., 2016. Design alternatives for an Australian allowance for corporate equity. Austl. Tax F., 31, p.555.
Head, A. and Burns, S.A. eds., 2015. Distribution rules and taxation. CFP Board Financial Planning Competency Handbook, pp.501-507.
Ingles, D., 2016. Taxes on land rent. Tax and Transfer Policy Institute Working Paper, 6.
Mahar, F., 2016. The distortive effects of the capital gains tax regime. Tax Specialist, 20(1), p.16.
Mavropoulos, B., 2017. Tax help for Australian start-ups. Taxation in Australia, 52(6), p.319.
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.
Schuster, R., Law, E.A., Rodewald, A.D., Martin, T.G., Wilson, K.A., Watts, M., Possingham, H.P. and Arcese, P., 2018. Tax shifting and incentives for biodiversity conservation on private lands. Conservation Letters, 11(2), p.e12377.
Butler, D. and Chau, G., 2017. Superannuation: Transitional CGT relief for pension and TRIS assets for FY2017. Taxation in Australia, 51(7), p.384.
Chung, E., 2017. The absolute beginner's guide to capital gains tax. REIQ Journal, (May 2017), p.35.
Festa, D., 2018. CGT amendments: Unnecessary complications for small business. Taxation in Australia, 53(1), p.18.