Case Facts
Discuss about the Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314.
During the relevant years, the involvement of the company can be seen in the business for providing the tuition of dancing and received fees of different amount based on each hour. As per the case, the available basic tuition courses were of 5, 15 and 30 hours of the private tuition to be taken on appointment on a time span of one year. The payment used to be made in advance, in the form of installment and discount is provided for the immediate payments.
The payment of the fees used to be immediately credited in the books of the company based on their receipts under the account name of ‘Unearned Deposits- Untaught Lesson Account’. The amounts of the above-mentioned account were similar to the lessons taught and they were transferred periodically to the account named ‘Earned Tuition Account’. The company made the income tax returns based on the footings that are the fees; the fees received in advance was exempted from the income tax during the time of the receipts. The commission used to do the income assessment by taking into consideration the fees received in advanced as they were supposed to be considered as income in case they were received in the income year (Kenny 2013).
The taxpayer did treat the prepaid of the tuition as income as it was obtained and it was also recorded in the books of the account after the completion of the lessons. Apart from this, the prepaid sum of the tuition fees was no included in the income of the taxpayer. However, while calculating the income, the fees were found that was included in the assessable income during the year it was received. For this reason, the taxation commission concluded that the tax payer did obtain the assessable income as prepaid fees during the year of providing the tuition or the year in which the company obtained the fees. Based on “section 25 (1) of the ITAA 1997”, the receipts of the prepaid tuition fees did develop an ordinary income (Somers and Eynaud 2015).
The main issue in this case is to determine whether the taxpayer obtained the prepaid tuition fees during the year in which received or not. This issue of this case demands the assessment of the aspect that whether the taxpayer’s taxable income develops a prepaid tuition fees or not.
Issue
Conclusion
The main objective of this case involves in understanding that whether income of the taxpayer in the form of prepaid fees was taxable or not. According to the verdict of the court of law, the received fees of tuition in advance but yet to be received would not be a part of the taxable income of the person (Somers and Eynaud 2015). Apart from this, the count also mentioned that there would be an agreement between the taxpayer and the student about the fact that no refund would be possible against the advanced fees. However, in actual, the taxpayer was supposed to refund the advanced fees in case there is no tuition provided to the student. According to the verdict of the count of law, the taxpayer did not include the tuition fees as the income in the year due to the probability to refund the money in case there was no tuition provided to the student by the taxpayer. For this reason, in the presence of all these facts, the taxation commission passed the final verdict that the tuition fees that were obtained by the taxpayer do not possess any characteristics of being income until the rendering of the service (Somers and Eynaud 2015).
- i)As per 6-5 of the ITAA 1997, the sum must be treated as the income in case the person receive any amount in the behalf of the taxpayer. Moreover, the requirement for the taxpayer is to include any derivation in such income in the taxable income in respect of the taxation law of 6-5 of the ITAA 1997 (Richards 2014).
Two methods are there for the computation of income for the purpose of taxation income and they are earning method and receipts method. The taxpayer is needed to choose the method based on the suitability. As per 98/1, it is involved with the income ascertainment on the based on the receipts or earnings methods. As per Subsection 6-5(2) of the ITAA 1997, the taxpayer is required to include the gross amount of their taxable income for the derived gross amount (Jones 2017).
As per the taxation ruling of 98/1, the receipts method is the most appropriate method to ascertain the income obtained from investment. However, exemption of this rule is there. The earning method is regarded as the most suitable method to determine the income generated from manufacturing or trading business. As per the general rule, the earnings method is considered as the most suitable method to treat the income for the purpose of taxation.
- ii) As per the case study of RIP, the business has been engaged in providing the funeral related services. In the year 2016, the net profit of the company was $2.45 million. In addition, the company has other sources of income that is to provide credit to their customers with the conduction for payment with 30 days span. For treating the income of RIP for assessment, it is crucial to take into consideration the earnings method as per Subsection 6-5(2) of the ITAA 1997. In order to provide the appropriate reflex to income, earnings method can be considered as the most appropriate method (Norbury 2014).
From the later instances, the advance receive of the fees by the company can be noticed. The treatment of easy future plan’s advance fees received is done as non-refundable. One has the option for the forfeiture of advanced fees payment and the Forfeited Payment Account receives this transfer when failure from the person can be seen for the payment of all installments as per the plan. For this reason, it is required for RIP to consider the receipts of the forfeit fees as income due to the non generation of further liability under the easy future plan.
- As per the principle ofthe case of “Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314”, a person is needed to consider the advance income received as income of the year in that the service is provided (Barnett and Harder 2014). According to RIP’s easy future plan, the receiver of the fess is done in advance basis and the future funeral services would be provide by the organization. As per the approach of the case law, instead of setting the hard and fast regulations, the company is required to provide appropriate weightage in the taxpayer’s situation. Thus, the determination of the income is required to be done as per the accounting method in order to provide the correct reflection of the income during the year (Barnett and Harder 2014).
Conclusion
According to the court of law in “Federal Commissioner of Taxation v Dunn (1989)”, there is a need for the determination of circumstances of occupation, the process to carry on the business along with the process to keep the books of the account (Dirkis and Bondfield 2013). It needs to be mentioned that RIP Pty Ltd is needed to take into consideration the exact same mechanism for their books of accounts. Thus, there is similarity in the cases of RIP and Arthur Murry. For this reason, the applied principles in the case of Arthur Murray can be applied in the case of RIP Pty Ltd for doing the accounting treatment. Thus, there is not any requirement for the organization for the inclusion of advance fees received so that they can be treated as the receipts in the year. Hence, the requirement for RIP is to record the advanced fees received in order to consider them as income for the company (Dirkis and Bondfield 2013).
- As perTR 98/1, this rule is applicable for the taxable individuals and the companies; earnings or receipts method should be used for ascertaining the assessable income. As per Subsection 6-5 (4) of the ITAA 1997, the accounting receipt method is regarded as the income of the taxpayer either continuously or in breaks (Joseph 2017). As per the regulation of this section, the person needs to obtain the income in case the payment is not done originally (Joseph 2017).
The earnings method is considered as the credit method or the accrual method and as per this method, the taxpayer obtain the earnings when it is earned.. In this scenario, one important assertion is that it will be possible for the commissioner and the taxpayer to select the earnings method or the receipts method for the computation of income for the purpose of assessment (Joseph 2017).
According to RIP Pty Ltd, one needs to consider the advance partial fees received for forfeiture if the failure of the customer is there for the advance payment of installments. The next process involves in the transfer of this amount to the Forfeited Payment Account. The received fees of RIP Pty Ltd were non-refundable. Thus, based on the whole scenario of this case, the suggestion can be bought forward that the forfeited amount of $16,000 will be held as income (Leighton-Daly 2013).
According to section 70-10 of the ITAA 1997, the trading process is regarded as to produce, manufacture and acquire anything so that they can sell them for earning money (Blissenden 2015). As per section 70-25 of the ITAA 1997, trading stock sum is not capital in nature. The non-inclusion of GST assets can be seen in the trading stock and they are uncovered under Section 275-105. The main purpose of the purchase of caskets and accessories by RIP is the ordinary course of busienss; thus, it is held as trading stock instead of capital assets (Blissenden 2015).
Methods of Income Computation for the Purpose of Taxation
As per Section 8-1 of the ITAA 1997, the sums that are developed at the time of the purchase of the trading stock will be subjected to deduction (O’Connell, Martin and Chia 2013). Accordingly, in case of RIP Pty Ltd, the company is required to hold the purchase of trading stock as allowable deduction. In addition, it will be possible for RIP Pty Ltd to claim allowable deduction related to the trading stock that form the part of stock in hand. According to section 8-1 of the ITAA 1997, an individual is allowed for the claiming of deduction for assessable income. RIP Pty Ltd paid $25,000 as prepaid expenditure of the trading stock. Thus, it is required to hold this prepayment sum as advance for the income year ended June 2016 (O’Connell, Martin and Chia 2013).
As per Section 6-5 of the ITAA 1997, income from the ordinary sources refers to the income derived from the ordinary sources (Richards 2014). It is the responsibility of the business organizations to pay tax on the income that is gained from the dividends. In the case of RIP, evidence can be seen for the income received from the dividends. For this reason, in case of RIP, the income from dividend that the company has received by paying franking dividend should take away the credit of franking as the dividends are fully franked (Richards 2014).
According to section 100-25 of the ITAA 1997, it is not the part of the capital asset that is referred to the advance payment associated to the rental storage (Blissenden 2015). Similarly, by taking this law as reference in the case of RIP Pty Ltd, it would not be a part of capital storage asset that the amount is received from the rental. According to the further evidence in the case of RIP Pty Ltd, the advanced rent payment would be a part of the current income related o the sum of four months; thus, the rent will be considered as general deduction according to Section 8 of the ITAA 1997 Act (Brink 2015).
Business organizations make some payments for long-leave services or employment termination and they are subject to PAYG withholding. The Australian Taxation Office entitles the employees for long service leave tile the end of the service period. Moreover, based on the employment terms, the long service leaves can be accrue (Saunders and Stone 2018). According to Section 83-80 of the ITAA 1997, the unusual long service leave is not the part of assessable income. A taxpayer can get the opportunity of tax offsetting for the unused amounts of the payment of long service leaves for ensuring that the income tax amount is not more than 30% according to the subsection (2) of section 83-85 of ITAA 1997 (Saunders and Stone 2018). Similarly, for RIP Pty Ltd, the payment of the company for long service leave for three months is needed to be held as expenses for the income year ended 30 June 2016.
Applicability of Principles Established in this Case
section 8-1 of the ITAA 1997 provides the authority to the tax payers for the claiming of deduction that is associated to the un-incurred expenses for deriving the taxable income of the taxpayer. Moreover, 100-25 of the ITAA 1997 mentions about certain GST assets and the land and building is needed to be considered (Butler and Skandakumar 2014). In case of RIP Pty Ltd, the incurred expenditure by the taxpayer related to the land and building forms the part of capital asset and it is not allowed for general deduction. Thus the requirement is to hold the incurred expenditure as capital expenditure and there is not allowable deduction allowed in the provided case. Similarly, the expenditure related to the onsite car parking by RIP Pty Ltd along with the expenditure on the equipment and landscaping will be required to be held as capital expense that is not subject to deduction as per section 8-1 of the ITAA 1997 (Butler and Skandakumar 2014).
References
Barnett, K. and Harder, S., 2014. Remedies in Australian private law. Cambridge University Press.
Blissenden, M., 2015. The income tax and CGT consequences of property disposals. Taxation in Australia, 49(7), p.385.
Blissenden, M., 2015. The income tax and CGT consequences of property disposals. Taxation in Australia, 49(7), p.385.
Brink, S., 2015. An evaluation of the income tax treatment of client loyalty programme transactions by South African suppliers. Journal of Economic and Financial Sciences, 8(1), pp.145-164.
Butler, D. and Skandakumar, K., 2014. TR 2013/D7-apportioning SMSF expenses. Taxation in Australia, 48(8), p.455.
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French, R., 2013. Law-complexity and moral clarity. Brief, 40(6), p.25.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.
Joseph, S.A., 2017. Taxing Sovereign Wealth Funds: Looking to Singapore for Inspiration. Fed. L. Rev., 45, p.17.
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Norbury, M., 2014. Tax cases: Are the winnings of Shamus award the commissioner’s?. Taxation in Australia, 48(7), p.384.
O’Connell, A., Martin, F. and Chia, J., 2013. Law, policy and politics in Australia’s recent not-for-profit sector reforms. Austl. Tax F., 28, p.289.
Richards, R., 2014. Taxation: Employee share schemes. Law Society Journal: the official journal of the Law Society of New South Wales, 52(3), p.40.
Richards, R., 2014. Taxation: Employee share schemes. Law Society Journal: the official journal of the Law Society of New South Wales, 52(3), p.40.
Saunders, C. and Stone, A. eds., 2018. The Oxford Handbook of the Australian Constitution. Oxford University Press.
Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO’s proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.
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