HI6028 Taxation Theory and Practice Law | Assignment Help
Question 1
Facts of the case:
In the instant case, City Sky Co (CSC) a property investment and development company which is registered for Goods and Services Tax (GST) services has acquired the services of a legal firm Maurice Blackburn (MB) which is a sole proprietor service provider and turns over the revenue of $300,000 per year. There is no information as to whether the legal firm is registered for GST purposes hence it is assumed that it is not. Advice is sought on the input tax credits that may be available to CSC for adjustment against its output tax it has to pay on property development business being a registered person for GST under the provisions of A New Tax System (Goods And Services Tax) Act 1999 (hereinafter “The Act”). More specifically whether acquisition of legal services from MB
Legal issues and questions involved in the case:
GST is charged by entities that are GST registered or are required to be registered for GST purposes on taxable supplies (Section 9.5 of the Act). Consequently, the question arises in the instant case is whether MB providing legal services is considered GST registered? And if so, can legal services provided be said to be covered within creditable acquisitions?
A registered person would charge GST at the rate of 10% on supplies of GST taxable goods and services (Section 9.7), and in turn would be allowed to obtain credits of certain GST charged inputs (certain acquisitions and imported goods) used in the GST charged outputs (supply of goods or services). However, levy of GST would be attracted only in case of taxable supplies and imports, and it would not be attracted in case of:
- (i) input-taxed supplies (covered under Division 40)
- (ii) GST-free supplies (covered under Division 38) [section 9.5]
The legal question that arises is whether sale of apartments developed on a vacant piece of land would be covered under any of the above GST exemption? If so, can GST creditable inputs be claimed on GST exempt supplies?
Rule of law applicable:
Rules pertaining to registration of entities for GST
GST registration is required if an entity:
- (i) carries on enterprise or supplies goods or services that are subject to GST;
- (ii) an entity that even if not registered for GST purposes, carries on a business that has GST turnover that meets the definition of ‘registration turnover threshold’
CSC being an enterprise buying land with the intention of developing it and selling it for profit is required to be registered for GST and is so registered. Whereas, MB is not registered but its turnover for the year exceeds the registration turnover threshold which is $75,000 per annum (Section 23.15 read with ATO, 2019). Hence, even if not registered MB will have to charge and pay GST on its invoices since the day it became liable to be registered.
Rules pertaining to claim of creditable acquisitions
The general requirements for claiming creditable inputs by CSC are as follows:
- (i) Input GST is paid on goods / services acquired solely or partly for “creditable purpose”, which is defined by section 11-15 as:
- Acquisition made for the purpose of carrying on your enterprise would qualify for creditable purpose,
- Acquisitions related to supplies that would be input taxed or acquisition that relates to private or domestic nature would not quality for creditable purpose (Section 11.15 of the Act)
- (ii) Acquisition was a taxable supply by the vendor
- (iii) Consideration is paid for that supply of goods or service
- (iv) Entity is registered or required to be compulsorily registered for GST purpose (Section 11.5 of the Act)
Hence, input adjustments can only be allowed to CSC if all of the above conditions are met. The most important requirement to analyze in the instant case is that stated in (i) above viz. whether acquisition by CSC relates to taxable supplies or input taxes supplies. This is discussed as follows.
Rules pertaining to charge of GST on sale of apartments
The long-term lease or sale of immovable property is input taxed to the extent that it is used predominantly for residential accommodation. However, there are two exemptions to this rule:
- (i) Commercial residential premises – i.e. property is to be occupied for the purpose of any commercial activity
- (ii) New residential premises (ATO, 2019) – i.e., where the property constructed is either of the following:
- Property / apartments have not been previously sold as residential premises;
- Property is created through substantial renovation of existing premises (subjectively evaluated); or
- Old buildings demolished and replaced by new buildings on the same piece of land (Section 40.65 and 40.70).
In all three cases above, sale would be subject to GST qualifying as a taxable supply.
Application of law to the material facts of the case:
In the instant case, property i.e. apartments are being constructed by CSC on a vacant piece of land. As stated above, the first sale of a residential premises being occupied primarily for residential accommodation (i.e. it provides shelter and contains basic human living facilities) would attract the GST provisions under the New Tax System (Goods and Services Tax) Act 1999. Hence sale of apartment by CSC would be subject to a 10% GST. Consequently, the input taxes paid against supply of goods or services utilized in the construction and development of property (including legal services acquired from MB) whose supply is subject to GST can be claimed as creditable inputs by CSC, provided following conditions are met.
- Tax invoices for supplies are available as evidence (e.g. invoice by MB for rendering legal services in relation to land development),
- Tax invoices can be issued within 28 days of the request in the form approved by the regulator,
- ‘Recipient created tax invoices’ may be allowed subject to discretion of the Commissioner (Barkoczy, 2019).
Implication of the margin scheme (Division 75)
Considering that the developed property would be sold to unregistered buyers who would be unwilling to pay 10% GST on an already significant value of purchase of apartment, CSC could avail the benefit of margin scheme to reduce the overall cost of property and remain competitive in the market.
Under this scheme, GST would be calculated on the differential amount of CSC’s consideration for acquiring the property and its sale proceeds from the property (also called ‘the margin’) [Section 75.5]. The formula is as follows:
GST – 1/11 x ‘margin’ for apartments (Section 75.10)
However, if this scheme is availed:
- CSC would not be entitled to any input credits / adjustments available under the normal law (Section 75.20);
- CSC would not be required to issue tax invoice
