Tutorial 2 Tax Law PDF

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TUTORIAL WEEK 3 (TOPIC 2) Q10 First Part: charged u GST or not? Discuss whether GST would apply on the following supplies: a) The sales of fruit by a grocer - GST free supply (s.9-5 & Div 38) b) Painting services (incl. paint & labor) to paint a house - Taxable supply (s. 9-5 & s.7-1) c) The sales of books by a newsagent - Taxable supply (s.9-5 & s.9-7) d) The sales of shares in a company - Input taxed supply (s.9-5 & Div 40) 1. Any financial supply (anything related to finance) 2. Residential property (if it has been sold aka 2nd hand) e) The supply of a meal at a restaurant - Not GST free, because something had been processed f)

The payment for audit services by an accounting firm - Taxable supply (not a financial service)

g) The opening of a bank account - Input taxed supply (Div 40)  Financial supply h) The provision of an advice by a bank regarding a loan - Financial supply, therefore input taxed (Div 40) i)

The sales of a new residential home by a builder - Taxable supply; new home – (residential home is input taxed except new residential Div 40)

j)

The sale of a holiday home - Input taxed supply (presuming it an old home (Div 40))

k) The lease of city office premises - Taxable supply (s.9.4 & Div 40) commercial so taxable supply l)

Payment for a medical consultation by doctor - GST free supply (Div38)

m) Payment for an education course delivered by a school - GST free supply (Div38)

Q11

Second part: claim back GST

Discuss whether Input Tax credits would be available for the following acquisitions. a) The purchase of books by a bookshop from a publisher - Yes (s. 11-5) - Something not for your consumption, can claim back the GST from ATO. Creditable acquisitions b) The purchase of meat from a butcher by a hamburger restaurant - No - There is no creditable acquisition, because it (meat) is GST free supply. c) The purchase of a computer by a doctor for use preparing his surgery’s accounts - Yes (doctor is making GST free supplies rather than input taxed) (s. 11-5) - Are not consuming but use it for the business - Doctor providing GST free supply but they still can claim back the GST. d) The purchase of pipes by a plumber for use in repairing a sewer at a client’s home - Yes, taxable supplies to the home owner (s.9-5; Div 40) However if the person that lease the house opt for plumber services for their clients, since it is input taxed supply so it cannot apply any… e) The purchase of a new home unit from a developer by a home owner - No, though sale of a new home is a taxable supply (Div 40) but the home owner is buying for personal use **If you are doing business with input tax, you cannot claim back.

Q12 Monash Property is in the business of selling residential properties, including existing residential properties and new residential properties. Monash Property also carries on the business of leasing / renting the properties it owns in Australia to tenants. Monash Property is registered for GST and reports for GST on a monthly accrual basis. For the month ended 30 April 2018, Monash Property made the following supplies to customers and tenants: Sales – New residential property Sales - $5,050,000 (Taxable supply) Existing Residential Property - $3,300,000 (Input-taxed supply) Rent Invoiced – Residential Property - $300,000 (Input-taxed supply) Purchase new computers and received following request for payment. COMPUTER PLUS PTY LTD Tax Invoice Customer: Monash Property Pty Ltd Invoice Date: 5 May 2018 Description: Laptop Computers (x30) at a total cost of $33,000 ($3,000 GST incl) Issues: Whether “Monash Properties” (MP) a) Is registered or required to be registered (s.23-5)

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Rule (relevant legislation): s.23-5 (registration threshold); apply rule … Has to be registered, is way above the threshold. More than $75,000 need to be registered

b) Is making taxable supplies (s.9-5; see +ive and -ive limbs) - Sale of new property  taxable supply (exception under Div 40) = $5,050,000 * 1/11 = $459,091 (GST Payable) - Sales of existing property  input taxed (Div 40) = $3,300,000 = no GST - Lease of residential property  input taxed (Div 40) = $300,000 = no GST c) Can claim input tax credit on computer purchase (s.11-20) - Creditable acquisition – can claim back GST when purchase $33,000 = $30,000 (Cost) + $3,000 (GST) - Cannot claim back the entire amount, using the computer for all of the three supply, only $5,050,000 is taxable supply - The acquisition is partly creditable (need apportionment) (1 taxable, 2 input taxed; can claim only on taxable supply) = Taxable supply / total supplies X 100 = 5,050,000 / 8,650,000 X 100 = 58% - Creditable amount = $3,000 (GST on computer) X 58% = $1,740 -You can claim back to the extent of the creditable acquisition; cannot claim back any on input taxed supplies but can claim back on taxable supply -Rule s.11-20 (input tax credit); s.11-5 (creditable acquisitions) d) Can attribute the income tax credit in Business Activities Statement for month of April (s17-5) - No, cant attribute Invoice issued on 5 May; BAS relates to the month of April even u acquire on April, u can claim only on the date of tax invoice; can only claim on the month of May coz tax invoice issued on May 5 - Rule s17-5; s.29-10(1) (apply rule and conclude)

e) Has a valid tax invoice (s.29-10 (3), (4)) to claim tax credit - Not valid, must have ABN of supplier (exists on tax invoice/) - Amount > $1,000, must have purchaser name’s (exists on invoice) - Implications of GSTR 2013/1 (on verifying supplier)

The first GST issue relates to whether or not Monash Property Pty Ltd (MP Pty Ltd) is making any taxable supplies. MP Pty Ltd is registered for the GST, as required (s. 23-5 GST Act). If MP Pty Ltd is making taxable supplies, it must pay GST on the taxable supplies (s. 7-1 or s. 9-40 GST Act 99). Taxable supplies are supplies that meet all the positive limbs of s. 9-5 GST Act and do not fall into the negative limbs. Under the positive limbs of s. 9-5 GST Act, MP Pty Ltd will be making taxable supplies if it supplies anything (s. 9-10 GST Act) for consideration (s. 9-15 GST Act) in the course of its business (s. 9-20 GST Act), and the supply is connected with Australia (s. 9-25 GST Act). Under the negative limbs of s. 9-5 GST Act, the supplies will not be taxable supplies if they are GST free supplies (ie. listed in Div 38 GST Act as a GST free supply) or input taxed supplies (i.e. listed in Div 40 as an input taxed supply). Based on the facts provided, MP Pty Ltd makes 3 types of supplies 1.

Sales of new residential property &

2.

Sales of existing residential property &

3.

Leasing of residential property

Sales of new residential property will be taxable supplies because ‘new’ residential property is an exception under Div 40 GST Act, and therefore not an input taxed supply so GST is payable. Sales of existing residential property will not be taxable supplies because supplies of residential property that is not new, is an input taxed supply under Div 40. Therefore, no GST is payable on the $3,300,000. Residential leasing will also not be a taxable supply because it is an input taxed supply under Div 40 and therefore no GST is payable by MP Pty Ltd on the $300,000 rent. Therefore, MP Pty Ltd is only making taxable supplies when it sells new residential premises, (all other supplies it makes are input taxed supplies). MP Pty Ltd is only required to pay GST on the new residential premises that it sells. The GST payable will be $459, 091 (i.e. 1/11 x $5,050,000).

The second GST issue relates to whether MP Pty Ltd can claim input tax credits for the GST component of the price it paid for the new computers it purchased. If the purchase of the computers is a creditable acquisition, then MP Pty Ltd can claim input tax credits (s. 11-20 GST Act). MP Pty Ltd will make a creditable acquisition where it acquires anything solely or partly for a creditable purpose; and the supply to it was a taxable supply (i.e. GST was included in the price paid) and it provided consideration; and it was registered for the GST (s. 11-5 GST Act). A creditable purpose is a purpose connected to carrying on the registered business, but not to the extent that the business is making input taxed supplies (i.e. 11-15 GST Act). As MP Pty Ltd is making some taxable supplies and some input taxed supplies, the acquisition of the computers is only partly for a creditable purpose (assuming that the computers were purchased for all parts of the business, not simply for the part of the business that sells new residential property which is a taxable supply). MP Pty Ltd will have to provide a reasonable basis for apportioning the cost of the computers across the various parts of its business. One way of apportioning the input tax credits available could be based on the proportion of taxable supplies to overall supplies made by MP Pty Ltd. Assuming that the figures provided are representative of MP Pty Ltd’s business, its taxable supplies amount to 58% of MP Pty Ltd’s business (ie. $5,050,000/ 8,650,000 x 100) (Note- it is

probably more accurate to take out the GST component of the 5,050,000 here which would produce a lower %  the key point you need to make is that the basis for apportionment must be reasonable and supportable if audited). Therefore, the acquisition is partly for a creditable purpose and MP Pty Ltd will be able to claim a portion of the input tax credit on the purchase of the computers (providing they have a valid tax invoice to support the claim- see discussion below). The GST component on the purchase of the computers was $3,000, therefore the input tax claimable is 58% x 3,000 = $1740.

The third GST issue is whether the tax invoice is a valid tax invoice. Attribution of input tax credits cannot occur until a valid tax invoice is held (s. 29-10 (3) & (4) GST Act). The requirements for a valid tax invoice are set out in s. 29-70 GST Act. The invoice must identify the supplier and its ABN, the recipient’s identity (because the supply is greater than $1,000), the details of the thing supplies including quantity and price, the extent to which the supply is a taxable supply, the date the document was issued. The invoice from Computers Plus Pty Ltd does not contain the suppliers ABN and is therefore not a valid tax invoice. MP Pty Ltd will need to also include the ABN of Computers Plus Pty Ltd to make its claim for input tax credits. GSTR 2013/1 indicates the ATO’s view on such an omission. It will be acceptable if there is a second document that shows the supplier’s ABN. It is not sufficient to expect the ATO to look up the business register to check the seller’s ABN. Therefore, providing MP Pty Ltd can also provide the ABN of Computers Plus Pty Ltd, the invoice will be a valid tax invoice.

The fourth GST issue is to determine whether MP Pty Ltd must report on monthly or quarterly tax periods. This depends on its annual GST turnover. Every registered entity has tax periods applying to it (s. 7-10 GST Act). Businesses that have GST turnover at or above the tax period turnover threshold of $20m will have monthly tax periods for GST (s. 27-15 GST Act). The figures provided show one month of supplies by MP Pty Ltd. Not including its input taxed supplies, based on the information provided, and assuming this is a representative month, MP Pty Ltd will be over the $20m threshold and will therefore have to report GST on a monthly tax period (i.e. submit its BAS on a monthly basis).

The final GST issue is the appropriate tax period for submission of the BAS. GST obligations are generally reported on an accrual basis, attributed to the earlier of either the tax invoice or payment. MP Pty Ltd will be required report its net amount in accordance with s. 17-5 GST Act. GST will therefore be payable in May 2019 for MP Pty Ltd taxable supplies in April 2019 (note: the due date for monthly BAS is usually the 21st day of the month following the end of the taxable period).

The invoice date for the computers is 5 May 2019, so the apportioned amount of the input tax credit for the computers will be claimed in the BAS for May 2019 (assuming MP Pty Ltd can provide the ABN of the supplier).

Therefore, they have a net amount for the May BAS: GST payable (from taxable supply of new residential premises) less input tax credits claimable (proportion of input tax credits for creditable acquisition of computers). Q13 Ted owns a milk bar. The fridge he uses to store soft drinks broke down earlier this year. He contacted his friend Sam (an electrician), to repair the fridge. Sam spent two hours fixing the fridge. Same’s ordinary hourly rate is $110 per hour. However instead of paying Sam $220 for his services, Ted and Sam agreed Ted would provide him with soft drinks worth $220. Assuing both parties are registered for the GST, advise them both of the GST implications of this arrangement. Would your answer be different if Sam repaired the fridge without charge? a) Issue 1: Whether taxable supplies involved? 1. Sam to Ted: Involved - Repair of fridge – it is a taxable supply (s.9.5) - Consideration (s.9-15)  soft drinks - GST payable by Sam (s.9-40) = 220 X 1/11 = $20 2. Ted to Sam: (instead of money, Ted provides soft drinks) - Taxable supply Involved - When consideration is not money, more than one supplies - Providing money as consideration is not supply [s.9-10(4)] - Providing soft drink is taxable supply $20 required by Sam, also $20 required by Ted; Both are taxable supply b) Issue 2: whether input tax credits can be claimed 1. For Ted: Can claim - soft drinks are not GST free (Div 38) - GST component of the monetary value of soft drink  fulfils ITC requirement including creditable purpose - Ted can claim ITC if Sam issues a valid tax invoice 2. For Sam: Cannot claim - Provided consideration for soft drinks (electrician service) (s. 11-5) - Creditable purpose (s.11-15) Yes / No? (depends on who consume, if Ted, No) (acquisition of soft drinks does not relate to carrying on electrical biz) Soft drink is more for personal consumption; therefore cannot claim input tax credit. ** Own consumption is not able to claim input tax, but for business consumption can claim input tax

Q14 Amelia and Rebecca are good friends who both enjoy purchasing clothing bargains on the Internet and via stores, including from second-hand charity stores. Rebecca also has a friend who makes clothes and is based in New Zealand. Amelia and Rebecca think it would be a good business idea to purchase cheap clothing and on sell the clothing at marked-up prices. They plan to source clothes from the Internet, and from second-hand stores around Melbourne and also from Rebecca’s friend in New Zealand. In addition to buying and selling clothing, Amelia and Rebecca plan to offer a service to customers whereby they search for unique clothing items that are requested by customers, and then charge a service fee as well as charge for the clothing.

They created an internet site and also rent a storage area and a shop from which to operate. They call their business ‘Out There.’ During the 2015/16 financial year sales are slow but in the 2016/17 financial year business picks up significantly and ‘Out-There’ has sales revenue averaging about $8,000 per month. The business continues to grow in the 2017/18 financial year. Also during 2017/18 Amelia and Rebecca buy a new dry cleaning Machine to save money on dry cleaning costs associated with ‘Out There.’ The dry cleaning Machine cost $8,800 (GST incl). The dry cleaning Machine has an effective life of 5 years. Advice Amelia and Rebecca of any GST issues that arise from these facts. 1. Issue 1: Are Amelia and Rebecca carrying on an enterprise or is this a hobby / recreational pursuit? - Definition of enterprise (s. 9-20); apply rule and draw likely conclusion 2. Issue 2: Are they making taxable supplies? - Yes, if they are registered or required to be registered (s.9-5) - Monthly sales  $8,000  Required to register (s23-5) - Must pay GST (s.9-40) (if they’re not registered  must register within 21 days of reaching threshold) - Failure to register will entail penalties besides paying GST 3. Issue 3: Can they claim input tax credits? - If they’re registered, they can claim ITC on: The purchased clothes (s.11-5) The purchase of cleaning machine (ITC=$8,800 X 1/11 = $800)...