The System Of Federal Taxation In Australia: Case Study – GST Evaluation For The City Sky

Executive Summary

The current assignment is focused upon the concept of the taxation law as well as its practices which have been found to be essential for both individuals and the businesses. The current report has emphasized upon the application of GST services provided by the local lawyer to the company City Sky in order to construct building on vacant land that has been purchased by the company. The case study hs predominantly identified applicable input tax which is required to be claimed essentially by the company. The scenario based on CGT has determined that the deduction of tax on capital gains of 2% and 47% of the Medicare Levy in selling of stamp duty, piano, shares and property.

Introduction

The system of federal taxation in a critical situation of income earner in Australia basically consists of Capital Gains Tax (CGT), and Goods and Service Tax (GST). In Australia, the practices and laws in relation to taxation are actually considered as comprehensive tax which is actually value added and imposed on Goods and Services as GST. After imposition of GST on the services and goods, a number of indirect taxes like Excise Duty, CST and VAT are excluded. It is to be mentioned in this regard that acquiring the assets which are basically non inventory in order to generate profitability could be referred as taxable.

Question 1: The GST evaluation for The City Sky

1.1 Material facts in terms of The City Sky Co

From the case study, it has been observed that City Sky is a company which actually focuses on real estate investments. It has strategies encompassing investment in order to Construct 15 apartments. It can be said that City Sky is eligible for income or taxation or any other applicable inputs. The company is a registered company under the Australian Taxation. As per the view of Evans et al. (2015, p.735), purchasing any vacant land for the investment purpose or for any other use makes the tax payer capable to generate gains. So it can be said that City Sky is eligible for the CGT while selling vacant land. It is evident from the case study that, the company has plans to build apartments by utilizing the land in order to increase the profitability. In order to acquire vacant land and build any rental asset, the taxpayer has to be eligible to claim deduction of tax. This may enable the taxpayer to claim a deduction of tax to bear the expenses. Dealing with the lands and selling the service could be taken into account as the ordinary income which requires GST registration.

As per the current case, the company has been dealing with fixed properties off transactions. As a result it is eligible for adopting commercial ventures which would require GST Registration.

1.2 Analysis and identification of the legal issues

The given case study helps to identify that, companies like City Sky has bought vacant lands in the southern part of Brisbane. The company has been planning to build 15 apartments for sale. It has been found that, the company has approached to local lawyer and the legal guidance is required for development of AU$33000. It could be addressed that the company has been registered and GST has been imposed. From the legal point of view of GST in Australia, it could be evaluated that the company, City Sky could claim credit for the GST. It is included within the vacant land which the company has found to be purchased. The ITAA (Income Tax Assessment Act) of 1997 could be applicable essentially in this case (Deb, 2018, p.40). As a result, credit of Input Tax or GST could be claimed by the company. Some advises could be recommended for the company and if these are fulfilled, the company can claim for entitlement of credit of input tax:

• The company could claim credit of tax input is the cost price of the land is incorporated in GST (Ato.gov.au, 2019)
• The company could claim GST as it has to use the land for the business purpose solely and it will build 15 apartments which are going to be sold (Ato.gov.au, 2019).
• The company possess tax invoice from suppliers because the purchasing price is greater than the AU$82.50.

1.3 Application of relevant tax law

The land does not fall under the category of services or goods and thus it cannot b sectioned under the GST and no GST would be applied for the vacant land’s acquisition. From the case study it can be said that the company wants to build apartments on the land which can be classified under Australian provision of the Black credit. It is a specific term that can be used for receiving GST through implementation of construction on the immovable property (Business.gov.au, 2019). The company has not been entitled to input the taxes on the vacant land. It is required for the company to impose the GST on each services and goods for the purpose of claiming credit after being registered for the GST. In addition to that the company would be eligible to claim the credit because the GST rate will be included within the purchasing price of business assets which are to be regulated by the normal GST rules (Schuster et al. 2018, p. e12377). The statement of business activity for each and every transaction would be required to be reported after being created to the department of tax in Australia. The company is not actually eligible to claim credit on assets which could be purchased and on which GST have already been imposed.

1.4 Conclusion

It could be evaluated from the present given case study of City Sky, AU$33000 has been received from Maurice Blackburn, a lawyer from the locality. This service taken by the company from the layer can be treated as reverse change mechanism. Here, service receiver will be imposed of the GST tax. As a result of using the services, the company is eligible to claim tax of input credit. The company is basically a developmental company and the legal service has been looked after by lawyer Maurice. Hence the input tax can be credited on the credit (Datt and Keating, 2018, p.171). The revenue information in terms of the lawyer’s income is totally irrelevant in case of input tax claiming. Thus it can be recognized that the company can claim for credit of input tax due to the legal services that I availed by the advocate. From the above discussion, it can be concluded that City sky has acquired the piece of land in the Australia that is not eligible for the GST. On the other hand, the construction on the vacant land has been found to be eligible for GST. Furthermore, it can be said that the company can claim for the input credit tax in order to receive services of AU $33000 from the lawyer.

Question 2 CGT evaluation for Emma

2.1 Material fact of the CGT for Emma

Capital gain and the Capital Loss have two different aspects depending on the case scenario. Actually these two takes costs of purchasing the assets, disposing and receiving the assets into account. Australian business operator has to pay tax on capital gains that would form an essential part of the income for the taxpayer. Holding the assets for a greater time span than 1 year induces tax on the assets by a rate of 50 % that is included in 33.33% of the superannuation funds. It could be assumed that according to the ATO, the capital losses can be covered by the capital gains and thus a capital loss could be moved forward.

The calculation of the CGT gain or loss can be actually calculated based on asset or property disposal within a specific time period for holding the property. Following are the conditions under which assets disposal could be assumed according to the CGT:

• As per section 104-10(2), the disposal of the assets can be considered when at the time of exchange of ownerships of the assets (Schuster et al. 2018, p.e12377).
• Capital gains can be recognized in a condition when the capital is received by property selling or assets disposal having costs greater than the assets’ base cost
• According to the section 104-10(3), the sales time of the assets can be incurred when contract on the assets’ disposal is ventured.

2.2 Analysis and identification of legal issue

From the case question given, it can be recognized that the selling value of the land block is for AU $ 1000000. The land actually has been bought by Emma in the year 1991 in the form of investment. However, it can be identified that sale of AU $1000 shares of Emma in the Rio Tinto is for AU$ 50.85. It can be stated in this context that the law of Capital gains taxation could be applicable in this respect (Evans et al. 2015, p.735). It has been identified in the scenario of system of taxation in the Australia; a tax is generally applied if the capital gains are made on disposal of the asset. CGT actually operates through treating of the net capital gain as taxable income in the tax year. A number of consequences can be identified in this context which are:

• Personal use assets that can be acquired up to AU$1000 (Chardon et al. 2016, p.321).
• Standard asset that can be acquired before 20th September 1985.
• According to ITAA1197, it can be recognized under the Section 108-20(1) that if the capital loss can be made from any assets of personal use, it could be disregarded.

2.3 Calculation of the GST

The case study of Emma actually reveals that the land which costs $25000 has been purchased for the purpose of investment along with the stamp duty of AU$5000 and the legal fees of $10000. It is evident that Emma has borrowed loans having interest of AU$32000. It can be found that the service costs of the interest on the loan, advertising charges and the insurance charges have been considered as the legal charges and it could be treated for the CGT (Chardon et al. 2016, p.321). The settlement of the legal disputes cannot be considered as a part of generating the capital (Ato.gov.au, 2019). It is considered as the private investment and it involves a family member. As a result the dispute charges costs have been deducted at the time of calculation of GST.

CGT on sold land

Purchase cost is $250000

Stamp duty is $5000

Loan interest is $32000

Insurance is $22000

Legal fees is $10000

Advertising charge is $27500

Cost of land which Emma has sold is $1000000, the cost base. The charges of selling elements have amounted to AU $$346500.

So the net capital gains for selling the land is amounted to $1000000 – $346500 = $653500

CGT on the share

Emma purchases 1000 shares in the year 1982 at AU$3.5/share. The total share’s purchasing cost is therefore

1000 * $3.5 = $3500

However, selling 1000 shares in the Rio Tinto at AU $50.85 share will amount to

1000 * $50.85 = $50850

Capital gains on selling the share is

$50850 – $3500 = $47350

Emma has held the share and is eligible for the tax on capital gain of 50%.

CGT on sold Stamp duty

Purchasing stamp is $60000

Selling price of Stamp is $50000

Charge of auction service is $5000

Capital loss = ($50000 + $5000) – $60000 = -$5000

So capital loss is not eligible for the deduction of tax

CGT on the Piano sales

Purchasing costs of Piano = $80000

Selling costs of Piano is $30000

Capital gains is ($80000-$30000) = $5000

Total capital gains on selling of the land, stamp duty, share and piano total costs is

Land CGT is $653500

Share CGT is $47350

Stamp Duty CGL is -$5000

Piano CGT = $50000

Total capital gains = $745850

Less, CGT tax on 47% is $350549.5

Less medi-care levy of 2% is $7010.99

Total CGT is $745850 – $350549.5 – $7010.99 = = $388289.51

2.4 Application of the tax law

It can be stated in this context that the law of Capital gains taxation could be applicable in this respect (Sadiq and Sawyer, 2018, p.362). It has been identified in the scenario of system of taxation in Australia; a tax is generally applied if the capital gains are made on disposal of the asset. Emma’s CGT has ignored the indexation and has calculated the capital gains taxable amount in an approach of non discounted approach. Under the law of taxation of ITAA 97 s 108- 5 CGT, an individual will be liable of the medi-care levy of 2 percent as well as income tax at 47 per cent on capital gains (Nab.com.au, 2019)

Conclusion

From the analysis of the case study of City sky, it can be concluded that the service has been undertaken by the City Sky with the help of Local lawyer and can be claimed as the input tax. Common capital gains are bonds, property, stock or real estate. The taxpayer has been levied with percentage of tax rate upon the income or upon services and goods’ transaction according to the Australian taxation law. In order to conclude it can be said that with the application of the CGT tax, capital gains on selling of land can be deducted for 30% individually.

Reference list

1. Ato.gov.au (2019), Capital Gain tax, Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed on 6th August, 2019]
2. Ato.gov.au , (2019) vacant land GST law Available at: https://www.ato.gov.au/General/Property/Land—vacant-land-and-subdividing/Vacant-land/#Buildingarentalproperty [Accessed on 11th September, 2019]
3. Business.gov.au (2019), Goods and services tax (GST), Available at: https://www.business.gov.au/new-to-business-essentials/series-three/goods-and-services-tax-gst [Accessed on13th September, 2019]
4. Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.
5. Datt, K.H. and Keating, M., 2018, April. The Commissioner’s obligation to make compensating adjustments for income tax and GST in Australia and New Zealand. In Australian Tax Forum (Vol. 33, No. 3).
6. Deb, R., 2018. Tax Reforms and GST: A Systematic Literature Review. Journal of Commerce and Accounting Research, 7(1), p.40.
7. Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An alternative way forward. Austl. Tax F., 30, p.735.
8. Nab.com.au, (2019) capital Gain tax. Available at: https://www.nab.com.au/personal/life-moments/manage-money/money-basics/capital-gains-tax [Accessed on 16th September 2019]
9. Sadiq, K. and Sawyer, A., 2018. New Zealand’s Experience with Capital Gains Taxation and Policy Choice Lessons from Australia. eJTR, 16, p.362.
10. 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.