GST Registration and Input Tax Credits for Unique Furniture Business

2150AFE Taxation Law Workshop Goods and Services Tax Capital Gains Tax

Sara Greene – Question 1 Sara Greene has the been operating her business Unique Furniture since 1 July 2022. She is concerned as to whether she should register for GST based on her current turnover. She advises you of the following turnover.. Sara anticipates that Unique Furniture will achieve the following turnover in June 2023 – Furniture sales in Australia $20, 000. Required: Determine whether Unique Furniture should be registered for GST. Business turnover July 2022 to May 2023 Furniture sales in Australia 80,000 Interest earned on business bank account 2,000 Furniture sales - exported to New Zealand 10,000 Anticipated business turnover July 2023 – May 2024 Furniture sales in Australia 60,000 Interest earned on business bank account 1,500 Furniture sales – exported to New Zealand 15,000

Sara Greene – GST registration Unique Furniture is carrying on an enterprise s9-20(1) as a series of activities are carried on in the form of a business. These activities are primarily the manufacture of furniture which are sold for a profit (s23-5[a]). To determine if Unique Furniture meets the registration turnover threshold (s23-5[b]) we must use the current GST turnover s188-15 (11 months prior to the current month + the current month) OR the projected GST turnover s188-20 (current month turnover + projected GST turnover in the forthcoming 11 month period) Unique Furnitures current GST turnover (s188-15) is $80,000 + $10,000 + $20,000 = $110,000 – exceeds the $75,000 s23-15 (1)(b) Unique Furnitures projected GST turnover (s188-20) is $20,000 + $60,000 + $15,000 = $95,000 – if realised this would also exceed the $75,000 threshold s23-15 (1)(b). $110,000 + $95,000/2 = $102,500 NOTE: the interest earned on the bank account is NOT include because financial supplies are input taxed (s118-20[1][b]).

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Sara Greene – Question 2 and 3 Sara rents a house at Greenslopes to be closer to the city. Sara pays $660 per week in rent. What portion of the rent paid will be able to claim as an input tax credit for GST? Sara cannot claim an input tax credit for the rent paid for the house because Sara would be using the house for private use and not in connection with her enterprise s188-15[1][c]. Also, there would not be an input tax credit available on the acquisition of the residential rent because it is classified as an input taxed supply s40-65 and no GST is charged when the supply is made. Sara rents a warehouse to manufacture the furniture for her business. The space is large enough for her to operate her office and showroom. Sara pays the landlord $3850 per month in rent. What portion of the rent paid will be able to claim as an input tax credit for GST? Unique Furniture would be entitled to claim an input tax credit (s7-1[2]) for the commercial rent as the invoice would be determined as a creditable acquisition provided that Unique Furniture is registered for GST (s23-5). The $3850 is the price of the supply (s9-75). To determine the input tax credit available, calculate 1/11 of the price: $3,850/11 = $350

Sara Greene – Question 4 and 5 Sara pays water rates on the warehouse that she rents. The water rates for the December 2022 quarter were $550. What portion of the water rates will be GST? Sara cannot claim an input tax credit on the acquisition of the water rates because it is classified as GST Free supply s38-285 and no GST would have been charged by the water authority. Sara’s friend Lucas is a doctor and operates his own business as a medical practitioner. Lucas pays $4400 for electricity. Can Lucas claim an input tax credit for GST component of the electricity? Lucas is providing a GST free service as a medical practitioner s38-7. He will not charge GST on the service provided to his clients. He is entitled however to claim input tax credits (s7-1[2]) on all creditable acquisitions (s11-5) he makes to provided the medical service to his clients provided his enterprise is registered for GST (s23-5).

Sara Greene – Question 6 and 7 Sara’s business bank account is with the Commonwealth Bank (CBA). The CBA charge the Unique Furniture $10 per month in bank fees to operate the account. What portion of the $10 bank fee will relate to GST? The bank fee would be a considered an input taxed supply (s40-25) as it is a financial service provided by the CBA to Unique Furniture (ie the cost of keeping the bank account open). The CBA would not charge GST on the bank fee and no input tax credit would be available to Unique Furniture because it is not considered a creditable acquisition. The CBA incurs a total of $330,000 in electricity fees for all branches in Australia in the December 2022 quarter. The invoice from the electricity provider shows that $30,000 relates to GST. Has the CBA made a creditable acquisition in the acquisition of services from the electricity provider? Can the CBA claim an input tax credit for the GST charged when completing the Business Activity Statement? The CBA is providing financial services which are input taxed supplies s40-5. Although the electricity would be a taxable supply (s9-5), it would not be considered to have been acquired by CBA for a creditable purpose because they are making supplies that are input taxed (s11-15[2][a] and therefore not input tax credit is available to the bank.

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Sara Greene – CGT step 1 - 3 Sara disposes of the following assets during the income tax year. Sara signs a contract to sell her Woolworths shares on 28 June 2023 for $45,000. The ownership of the shares transferred to the buyer on 10 July 2023. Sara originally paid $20,000 for the shares when she purchased them on 15 March 2001. She also paid stamp duty of $300 and a brokerage fee of $700 on the day she made the purchase. Sara acquired a painting second hand for $450 on 30 November 2021. It was sold for $7000 on 2 January 2023. The painting was acquired by Sara to hang in her living room. She paid $50 to insure the painting. Sara also acquired a caravan for $9,000 on 1 August 2021 to use for holidays. To Sara’s surprise the caravan sold for more than the purchase price which she thought might be due to the restrictions in available rental properties. She sold it for $25,000 on 31 May 2023 for cash. Required: Advise Sara whether she has any capital gains or losses as a result of the sale of the three items in the 2022/23 income year. Ensure that you quote relevant law to support your argument. Griffith Business School

8 Step 1 – Did a CGT event happen in the income year?  Yes, Sara disposed of her shares by selling them. CGT event A1 occurs because there is a change of ownership in the shares as the title has passed from Sara to the buyer: s 104-10(2).  CGT event A1 occurred when Sara entered into the contract for the disposal of the shares, which was on 28 June 2023 s 104-10(3).  Therefore a CGT event has occurred in the current income tax year (2022/23). Sara Greene - shares

9 Step 2 – Did the CGT event involve a CGT asset or was there a capital receipt?  The shares are a CGT asset as they’re a kind of property : s 108-5(1)(a). Other asset as they are an investment and not within the definition of a personal use asset.  Sara acquired the shares on 15 March 2001 when she entered into the contract to buy them, or if there was no contract, when she became the owner (when the title passed to her): s 109-5(2).  Therefore the shares are a post-CGT asset as they were acquired after 19 September 1985. Sara Greene - Shares

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10 Step 3 – Does an exemption apply to the shares? The shares are a post-CGT ‘other asset’. There are no exemptions that would apply so that Sara could disregard the resulting capital gain or loss on the disposal. Sara Greene – shares

11 Step 1 – Did a CGT event happen in the income year?  Yes, Sara disposed of painting by selling it. CGT event A1 occurs because there is a change of ownership in the painting as the title has passed from Sara to the buyer: s 104- 10(2).  CGT event A1 occurred when the ownership of the painting transferred to the buyer (no contract), which was on 2 January 2023 s 104-10(3).  Therefore a CGT event has occurred in the current income tax year (2022/23) . Sara Greene – painting

12 Step 2 – Did the CGT event involve a CGT asset or was there a capital receipt?  The painting is a CGT asset as it’s a kind of property : s 108-5(1) (a). Collectable because asset as it’s kept for Sara’s personal use and enjoyment.  Sara acquired the painting on 30 November 2021 when she became the owner (when the title passed to her): s 109-5(2).  Therefore the painting is a post-CGT asset as it was acquired after 19 September 1985. Sara Greene - painting

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13 Step 3 – Does an exemption apply for the painting? The painting is a collectable asset with a cost base of $450 (s110-25(2). A capital gain or loss is disregarded if the cost of a collectable asset is $500 or less [s118-10 (1)(2)] The cost base of $450 < $500, therefore the CG or CL will be disregarded and will not be included in the calculation of NET CAPITAL GAIN for the tax year. Sara Greene – painting

14 Step 1 – Did a CGT event happen in the income year?  Yes, Sara disposed of the caravan by selling it. CGT event A1 occurs because there is a change of ownership in the caravan as the title has passed from Sara to the buyer: s 104- 10(2).  CGT event A1 occurred when the ownership of the caravan transferred to the buyer (no contract), which was on 31 May 2023 s 104-10(3).  Therefore a CGT event has occurred in the current income tax year (2022/23). Sara Greene – caravan

15 Step 2 – Did the CGT event involve a CGT asset or was there a capital receipt?  The caravan is a CGT asset as it’s a kind of property : s 108- 5(1)(a). It’s a personal use asset as it is kept for Sara’s personal use and enjoyment.  Sara acquired the caravan on 1 August 2021 when she entered into the contract to buy it, or if there was no contract, when she became the owner (when the title passed to her): s 109-5(2).  Therefore the caravan is a post-CGT asset as it was acquired after 19 September 1985. Sara Greene – caravan

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16 Step 3 – Does an exemption apply? The caravan is a personal use asset. A capital gain or loss is disregarded if the first element of the cost base (purchase price) is less than $10,000 (s118-10[3]). The cost base of the caravan is $9,000 < $10,000, therefore any CG or CL will be excluded from the NET CAPITAL GAIN calculation. Sara Greene - caravan

17 The shares are a CGT ‘other’ asset and no exemptions apply. Any CG or CL will be included in the Net Capital Gain for 2023. The painting is a CGT ‘collectable’ asset. The acquisition cost was <$500, therefore any CG or CL on the disposal of the painting will be disregarded. The caravan is a personal use asset (PUA). The acquisition cost was < $10,000, therefore any CG on the disposal of the caravan will be disregarded. Sara Greene – CGT summary for next week

W5 2150AFE GST CGT 1 Sara Greene answer

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