Background
The business conducted by the taxpayers was depicted to provide dance training to the students and providing them with various types of the discounts which are seen to be based on the various types of consideration for making the payment in advance. Tax payer and the student entered into the agreement that laid down the condition that under no circumstances there will be refunding of the amount of tuition fees that is paid by them. It is sufficiently provided and expressed as per the agreement the students and taxpayer that the amount that is received in advance would be transferred to the suspense account created by taxpayer. The description of suspense account is given by the accountant as the account of untaught lessons-unearned deposits. Amount that is paid by the students in advance for the dancing lessons is transferred from suspense accounting to the revenue account after the dancing lessons have been imparted to students. According to the agreement between both the parties, the amount that is received in advance should not be refunded to the students. However, in practice if the dancing class is not completed or if the student does not complete the dancing sessions, then the advance fees received are refunded to the student by the tax payer (Zhou et al. 2014).
The amount of tuition fees that are paid by the students after the dancing lesions have been successfully imparted to the students are treated as income derived by tax payer. Therefore, the amount of assessable income of the tax payer does not incorporate the amount of tuition fees paid in advance. Hence, for the computation of the assessable income by the tax payer, it takes into account only the fees or income that is received by the tax payer on successful completion of dance class. The tuition fees received for which the dancing class has already been provided are used for assessing the taxable income during particular year by the tax payer. On the contrary, the assessment TI by the tax commissioner was done as per “section 25(1) of The ITA Act 1997”. Based on this the sum of tuition fees received in advance is considered as ordinary income (NGUYEN 2016).
The issue presented in the case is that there is a difference between the basis of computation of taxable income by the tax commissioner and the tax payer. This is so because the difference evolves in the inclusion of prepaid fees for the taxable income in taxable income assessment. It was presented before the court of law to pass the judgment on whether the amount of prepaid tuition fees should be included in the computation of taxable income (Australian Government 2015).
Methods for Computing Taxable Income
It can be discerned that the high court has given the verdict that the fees has been received by the services provided in advance for which the service yet to the offered, this should not be taken into account for computing the assessable income.
In addition to this, it was also highlighted by the court of law that both that parties that is tax payer and student entered into agreement that the amount of tax fees received in advance will not be refunded. However, the tax payer did not adhere to this management and refunded the amount to the student for which dancing class is not provided (Flynn 2017). Therefore, according to the specifics of the case, the assessable income should not take into account the amount of prepaid fees in the year of receipt because there is a probability that in event of not providing dancing class, the fees received in advance have to be refunded. In this regard, the judgment was passed by high court that income was derived by the tax payer for which service has been provided in a particular year and the advance fees is received for which the dancing class is not provided. It was upheld in the judgment that the tax payer has followed an appropriate accounting treatment in relation to assessing the taxable income (Zhou et al. 2014).
As stated in agreement with “section 6-5(4) of the ITA Act” the amount to be received by the tax payer or any amount is received on as per tax payer, then it is considered as income. In addition to this, as per section “6-5 of the ITA Act 1997”, the income needs to be considered with assessable income. The computation of taxable income involves use of two primary method that is receipt method and earning method. It is required by the tax payer to adopt such method that reflects tax payer income in an appropriate manner. It is mentioned in the taxation Rule 98 /1in, Para 19as per general rule that it is appropriate to use receipt method for calculating income if income is derived by employees or if the income is derived from any other sources along with any income that is derived from investment (Healey 2015). It is taken into account that the application for the earning procedure for income assessment based on “Para 20 of the TR 98/1” in case the income is resultant from involvement in any form of the manufacturing consideration or any trading activities. It should be accounted that for the purpose of computing tax, it is considered appropriate to employ earning method (Austen, Sharp and Hodgson 2015).
Analysis of Case Study
From the given case study, it can be ascertained that RIP Pty Ltd is involves in carrying out business offering funeral and other similar services. For the FY June 16, total profit that is reported by company amounted to $ $2.45 million. The services were provided to the customers under several options by way of providing funeral services (Langham and Paulsen 2017). They relied on using different methods for collection of fees that are listed below:
- Net invoice of 30 days is issued by company to their customers for collecting the fees
- Fees were also received by company from external assurance company by issuing an invoice of net 30 days.
- Credit was provided by RIP Pty limited under the plan of repayment installation that helped company to receive the fees.
- Based on the easy future plan, fees were discerned to be considered by the company in advance which is in installment basis
Based on the present assessment of the case earning method is considered to be most suitable method. The income generated is the net result of the funeral service provided by RIP, therefore it needs to be treated as revenue. The company has adopted the procedure of raising net 30 days invoice after the service in funeral has been provided. It is not supposed on part of company to wait for generating actual receipt of revenue after the invoice is raised and income is generated and is treated as revenue (Australian and Of 2014).
In funeral services, the advance fees received are nonrefundable. If under the scheme, the member is not able to make the payment of all installments, then already paid fees are forfeited and the same account to transfer to another account named “Forfeited payment account”. Amount of forfeited fees should be immediately recognized by company as income. The reason is attributable to the fact that company is under no liability for providing funeral services under the scheme to the discontinued members. It can be inferred from the above analysis that income received by RIP Ltd from funeral services is treated as income (Australian Taxation Office 2017).
Given the case of Arthur Murray, for providing service to customers, income is derived in the particular year. According to general rule, it is also stated that recognition of fees received should be done as income. Under the future plan of RIP LTD, for offering funeral services fees are received in advance. Fees that are received in advance are actually considered as received during any particular year. The accounting treatment of RIP Ltd complies the case of Arthur Murray as both as the same principles. Therefore, the fees received in advance by company should not be treated as received (ATO 2015).
For taxation, “there are two methods that are used for accounting income as per taxation Rule 98/1”. Received method is known as method of receiving cash as under this method of accounting income, company received constructive income and the amount received as income should be treated in actual. Earning method is also known as credit method or accrual method where there is creation of recoverable debt account when the income is derived. Tax payer has the legal right to claim the accent if the task as per the agreement is performed. Henceforth, it can be stated that for accounting income assessment for taxation, the tax payer as well as commissioner can employ earning method (Freebairn 2016).
Conclusion
An easy future scheme is run by RIP Ltd where customers are required to make advance payments for rendering funeral services in future. Under such scheme, the fees earned by company are not refunded. In this regard, an amount of $ $16200.00 are the amount that should be forfeited as it is treated as income in any particular year (Australian Taxation Office 2014).
As per 70-10 of the ITA Act 1997 the trading of stock is considered as any item which is acquired by business in their ordinary course. In addition to this, it is considered as per the use based on selling exchange, manufacturing and selling. Moreover, the various types of financial agreement need to be considered as per the different types of the depictions which are seen to be considered with the CGT assets shown in the trading stock definition. Therefore, accessories purchased are used in the ordinary course should by RIP Pty Ltd. Similarly, the payment made for the general deductions are included under “8-1 of the ITA Act 1997” which are based on the consideration for the deduction. The inference for procuring of trading stock is allowed in the year the trading stock is incorporated in the stock of the company. Outstanding advance payment of $25000.00 for procuring stock needs to be delivered as per the income in next year. It is suggested based on above analysis that for year 30 June, 2016, prepaid amount is treated as an advance income (Koutsis and Cullen 2015).to
Any resident taxpayer income needs to be treated as OI according to section “6-5 of the ITA Act 1997”. The company will be able to take franking credit in the form of dividends that are fully franked. Hence, amount paid in advance for rent should not be recognized as capital assets. Under section8 of The ITA Act 1997, the advance rent includes rent of four months of the current income this rent is allowed as general deduction. Moreover, as per section 83-80 of the ITA Act 1997, the unused long service leave should be included in the assessable income. In this case, RIP Pty Ltd paid a three-month long service leave in advance this advance should be treated as expense and not as advance for the income year 30 June 2016 (Australian Taxation Office 2015).
As per the various types of the considerations for the “section 8 of the ITA Act 1997”, the taxpayer producing assessable income can claim general deductions. The consideration of the CGT assets comprises of land and building as provided in “section 100-25 of the ITA Act 1997”. These expenses should be treated as general deduction rather it should be treated as capital (Koutsis and Cullen 2015).
References list:
ATO (2015) Simplified depreciation rules | Australian Taxation Office, ATO. Available at: https://www.ato.gov.au/Business/Small-business-entity-concessions/In-detail/Income-tax/Simplified-depreciation-rules/.
Austen, S., Sharp, R. and Hodgson, H. (2015) ‘Gender impact analysis and the taxation law of retirement savings in Australia’, Australian Tax Forum, pp. 763–782.
Australian Government (2015) ‘Australian Taxation Office’, Registerting for GST. Available at: https://www.ato.gov.au/Business/GST/Registering-for-GST/.
Australian and Of (2014) ‘Is Working from Home Good Work or Bad Work? Evidence from Australian Employees*’, Australian Journal of L Abour Economics, 17(2), pp. 163–190.
Australian Taxation Office (2014) ‘The ATO and large business’, in Corporate Tax Association Annual Convention.
Australian Taxation Office (2015) Yearly reports and returns | Australian Taxation Office, Yearly reports and returns. Available at: https://www.ato.gov.au/Business/Yearly-reports-and-returns/.
Australian Taxation Office (2017) Medicare levy, Medicare Levy. Available at: https://www.ato.gov.au/Individuals/Medicare-levy/.
Flynn, M. (2017) ‘Distinguishing between income and capital receipts: a search for principle’, Journal of Australian Taxation, 2(3), p. 155. Available at: https://search.informit.com.au/documentSummary;dn=200001233;res=IELAPA%0Ahttps://search.informit.com.au/documentSummary;dn=200001233;res=IELAPA.
Freebairn, J. (2016) ‘Taxation of Housing’, Australian Economic Review, 49(3), pp. 307–316. doi: 10.1111/1467-8462.12172.
Healey, S. (2015) ‘Federal Budget.’, Taxation in Australia, 49(11), p. 662. Available at: https://search.ebscohost.com/login.aspx?direct=true%7B&%7Ddb=bth%7B&%7DAN=103072611%7B&%7Dsite=ehost-live.
Koutsis, C. and Cullen, R. (2015) ‘The Sojitz case: implications for landholder duty and TARP.’, Taxation in Australia, 49(9), pp. 563–565. Available at: https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=101858143&site=ehost-live&scope=site.
Langham, J. and Paulsen, N. (2017) ‘Invisible taxation: fantasy or just good service design?’, Australian Tax Forum, 32(1), pp. 129–174. Available at: https://esc-web.lib.cbs.dk/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=122365921&site=ehost-live&scope=site.
NGUYEN, H. K. (JONATHAN) (2016) ‘a Question of the Integrity of the Dividend Imputation System When Corporate Tax Rate Changes: an Australian Study.’, Journal of Australian Taxation, 18(1), pp. 43–70. Available at: https://esc-web.lib.cbs.dk/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=121632130&site=ehost-live&scope=site.
Zhou, Z.-H., Chawla, N. V., Jin, Y., Williams, G. J. and Office, A. T. (2014) ‘Big Data Opportunities and Challenges: Discussions from Data Analytics Persoectives’, Computational Intelligence Magazine, IEEE, 9(November), pp. 62–74. doi: 10.1109/MCI.2014.2350953.
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