HI6028 Taxation Theory and Practice Law - Assignment Solution

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:

1. input-taxed supplies (covered under Division 40)
2. 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: 

1. carries on enterprise or supplies goods or services that are subject to GST;
2. 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:

1. 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)
2. Acquisition was a taxable supply by the vendor
3. Consideration is paid for that supply of goods or service
4. Entity is registered or required to be compulsorily registered for GST purpose (Section 11.5 of the Act)