Background of Case Study
The facts, in this case,are that the taxpayer is running the business of providing dancing classes and takes fees from those that need to get dancing tuitions from the taxpayer on the basis of each hour. It can be evident from the case that core tuition classes which were accessible to the interested ones were in different hours; 5, 15 and 30 as per their need. Further, the appointment of the taxpayer was required to be taken for the tuitions in the time period of one year(Braithwaite, 2017). Interested persons who joined classes from the taxpayer must make payment in advance of the overall fees in two means which were; instalments and lump sum amount. Along with this, variable discounts sum were offered by the taxpayer on urgent payment made on tuition courses. The taxpayer on the reported receipt of fees by crediting the Unearned Deposits of the non-rendered lesson services in the company’s books of account. The total sum has been credited to the account book stand in an order with the dancing courses that have been taught from time to time moved the entire amount by placing Earned Tuition Account on the credit side (Katic and Leigh, 2016). Additionally, the returns of income tax was documented by the corporation on the basis of foot notes, stating that the obtained sum was provided on advance basis which were not held as assessable income at the time of receipt.
The commissioner of tax on performing the suitable evaluation and analysis assumed that the fees earned from providing tuitions were found as income in the hand of the receiver (taxpayer) at the time when the fees were actually derived.
The treatment of the prepaid amount of course fees will be done as income gained by the taxpayer,and the same sum was recorded in the books of accounts after the completion of dance classes when impairment was done by the taxpayer to the students. In addition to this, there was rarely any inclusion of tuition fees paid in advance in the assessable income of the taxpayer (Cao and et al., 2015). At the period of conducting the calculation of assessable income,it was held that that the chargers were inclusive in the taxpayer’s taxable income wherein the taxpayer earned the income. According to the verdict of the court of law, the taxable income was gained as an advance fee for tuition by the taxpayer in the year when the services were rendered. By considering the laid “section 25 (1) of the ITAA 1997”, the total sum which was paid in advance as the fees for lessons mutually formed ordinary income.
Treatment of Prepaid Fees as Income
In the present case, the issue is that if or if not the amount paid in advance of prepaid fees was obtained by the taxpayer was found as earning (Vegh and Vuletin, 2015). The present issue engaged in this cited case if to identify or if not the amount paid in advance that was obtained by the taxpayer was referred as taxable income.
The conclusion can be drawn that, the main intention was to earn a better understanding of whether the advance fees have the traits of income and perhaps it might be referred for the purpose of assessment. As per the taxation commissioner’s verdict, the fees for tuition was obtained as a prepaid sum by the taxpayer in regards to the services which were not provided yet. On the other hand, the amount paid in advance cannot be referred for assessment purpose.
By considering the law court decision, there might be a contract between the taxpayer and learner that the prepaid sum would not be refunded. However, in the current case the taxpayer made the advance fees refundable that was obtained when the tuitions were not rendered(Jacob, 2018). It was also stated by court’s decision that, the same fees will not be included by the taxpayer in the financial year when the fees were obtained, as there was a highlikelihood that the in case if no lessons would be provided to learners then the fees might be refunded to them. The decision of the taxation commissioner found that the taxpayer received the fees for providing tuitions on an advance basis , which will retain no traits of incomes until the tuitions are taught to the students.
Under the “section 6-5 of the ITAA 1997”, the profit margins held by the taxpayer in return for their rendered services will be assessed as income (Faccio and Xu, 2015). Moreover, the income receipt as per the section would be entitled to tax on the basis of fundamental concepts given by the “section 6-5 of the ITAA 1997”.
Generally, there are two key processes that are considered while computing income meant for taxation; earnings and the receipt methods. Further, an individual taxpayer in context with suitability might not select these methods. Taxation ruling of TR 98/1” is a standard which is involved when income was been determined by making use of either earnings method or the receipt income (Damajanti and Karim, 2017). It is compulsory under the subsection 6-5 (2) of the ITAA 1997 for the individual taxpayer to involve and consider the net sum from their assessable income.
Earning Method vs Receipt Method of Accounting
In accordance with the “Taxation ruling of TR 98/1,”the method of receipts which records income is considered as the most suitable method regarding the derived income from the investment made. Regardless of this, there are some exceptions. Further, the exceptions show that the income method is assessed as the appropriate means of determining business earnings derived from the trading or manufacturing business (Boadway and Tremblay, 2016). On the other hand, th
Evidently from the situation of the RIP Pty Ltd, the corporation is involved with offering services regarding the funeral items and filed a net income of the total of $2.45 million. In addition, the company derived income by offering amenities to a customer invoicing within the time period of 30 days. In context with the Taxation ruling of TR 98/1 as well as the subsection 6-5 (2) of the ITAA 1997, the income gained from the activities and operations by the corporation under the earning method should be assessed. By considering the situation of earning method of RIP Pty Ltd, the best suitable aspect is to manage the income flow during accounting year.
From the case study and its evidence, it is suggested that the business received earnings on the basis of prepaid fees. Thus, with the facilitated plants provided by RIP Pty Ltd, the company obtained prepaid fees assessed as non-refundable (Burda and Weder, 2016). A general rule is stated that the prepaid amount that is obtained by the corporate is fortified and transferred into the Forfeited Payment Account. Forfeited fees resulted in, that is obtained is found as income and no further regulations emerge to offer the funeral service, given that the activities are removed as per the easy future plan.
The principles placed by the Arthur Murray (NSW) Pty Ltd v FCT (1965) case, illustrated that whatever kind of payment made in advance and received by the taxpayer is assessed as earning within the financial year, in which the earning is gained in relation with the provided services. Proving essential citations to the case of RIP Pty Ltd that the derived fees by the company from their easy plans are stated as the fees that are obtained as a prepaid sum by the business with the rendered future funeral related services (Peiros and Smyth, 2017).Given in the “taxation ruling of TR 98/1”sufficient weight must be given in the case of the taxpayer and adequate accounting methods must be placed while offering the appropriate findings of the income that is gained at the year.
Treatment of Trading Inventory and CGT Assets
In the same way, the taxation commissioner declared that it is essential to identify the occupational state and the conduct of business along with the maintaining of books of accounting.
The total sum of fees gained is filed under corporate account books by the RIP Pty Ltd, and it is held as income in the derived year.
The case of Arthur Murray (NSW) Pty Ltd v FCT (1965) is implemented in the present event of RIP Pty Ltd in relation with the accounting treatment (Shaw, 2017). Besides, the RIP Pty Ltd is embedded by restrictions of managing track of gained fee sum on the basis of advance in the account book while considering the sum as income for the service related funeral provided by the company.
In accordance with the“Taxation ruling of TR 98/1”, better understandings are offered in relation to the applicability of rulings for individual taxpayers as well as enterprises for the purpose of the tax. For this ruling, there is a requirement to be in receipt method or earning method of accounting for identifying the assessable income.
Under“subsection 6-5 (4) of the ITAA 1997” the receipt method of accounting states that income received by the taxpayer is on the fair basis or constructive basis while earnings method income is only gained when the taxpayer earns the same (Viola and Saraiva, 2015). Along with this, ruling enables taxpayers to opt from one of the two provided methods so that they are able to measure the income which is entitled to tax for the taxation purpose.
By considering the case of RIP Pty Ltd case study, the failure of the customer to pay the instalmentamount had led to the forfeiture ofadvance given by them. Therefore, there isa shiftof advanced payment to the Forfeited Payment Account (Scholes, 2015). In the situation of RIP Pty Ltd, it is been precisely stated that the corporation acquired the fees which is not refundable, and can be computed that the sum of $16,200 shall not be assessed as income.
Provided under section 70-10 of the ITAA 1997, trading inventory given to the manufactured products in a business course, which would be found with the purpose of putting the same into sale in the market. On the other hand, section 70-25 of the ITAA 1997 explains that the expenses which are incurred during the demeanour of trading inventory should be based on the nature of capital.
Conclusion
Under“section 275-105 of the ITAA 1997”, CGT assets are not considered by trading assets, as the sections do not cover the same (Nechaev and Antipina, 2016). taking the case of RIP Pty Ltd into account, the caskets as well as the accessories bought in the ordinary business course would be amended as trading inventory and the same will not be considered for the purpose of capital assets.
The definition provided by the “section 8-1 of the ITAA 1997”expenses that an individual or entity incurs while purchasing trading stock isstated as an allowed deduction.By considering the case of RIP Pty Ltd the accessories and caskets purchased in the regular course of business will be referred as the permissible deductions. Moreover, claim deductions are also obliged to RIP Pty Ltd for the trading stock item be purchased at the regular business course and the inventory that is retained as closing stock in hand.
The affirmative aspect of “section 8-1 of the ITAA 1997” enables an individual from their assessable income for claim deduction regarding the incurred amount while generating taxpayer’s taxable income(Cooper and et al., 2016). As shown in the case of RIP Pty Ltd, the sum of prepaid expense been incurred while purchasing trading stock will be entitled as allowable deductions as per “section 8-1 of the ITAA 1997”, as it was regarded to the taxable income derivation. Further, the prepaid sum would be referred as the amount paid in advance at the year ended 2016.
As the definition provided under “section 6-5 of the ITAA 1997’ a person deriving income from the regular sources is applicable for assessment on the basis of general concepts. As per the ATO, a resident company based in Australia that gains dividend from the sources of Australia is bounded with obligations of disclosing the same during the tax return is filed(Boadway and Tremblay, 2016).
Determining the situations of RIP Pty Ltd, a dividend earning was derived that was also inclusive in the franking credits. It is clear by seeing the case of RIP Pty Ltd the company received the dividend income must divide the franking credits from the dividends since they are entirely franked.
As illustrated under the 100-25 of the ITAA 1997, the advance sum obtained held from the rental storage would not be subjected to the capital assets.. It is evident in the situation of RIP Pty Ltd, citing to section 100-25 of the ITAA 1997, it can be explained that the sum of rental storage that is obtained would not be regarded as capital assets (Benzell, Kotlikoff and LaGarda, 2017).Furthermore, the payment that is received in advance by the RIP Pty Ltd is held as a component of the present income in the basis of 4 months,and the rent is entitled togeneral deductions according to“section 8-1 of the ITAA 1997”.
Payments regarding the long service payments or leave in relation to the employment end is entitled to withholdings of PAYG tax. According to the ATO, an employee is usually referred as the claim for the long-service leave from the time when the services are rendered by the employee (Evans, Minas and Lim, 2015). Likewise, conducting the later accumulation of long-service leave will be based on the rendered services by the worker. As per the “section 83-80 of the ITAA 1997, the sum which is not entitled to the long service leave will not be considered for the computation of assessable income.
As stated by “subsection 83-85 of the ITAA 1997”, an individual who is obliged to the claim deduction of tax regarding the long service leave sum that is not used is needed to ensure that payment of the amount of income tax on the long-service would not cross 30% (Hardy, 2016). By considering the findings of RIP Pty Ltd case, sum of the long-related-service of three months by the corporation based on prepaid manner and the same payments will be said as expenditure for the end of June 2016.
In accordance with the “section 8-1 of the ITAA 1997”, a taxpayer is entitled to claim for deduction regarding any incurred loss or outflows from the income which is taxable up to the scale that expenditure which are occurred in the positive limbs along with earning the assessable income of taxpayer (Doerrenberg, Peichl and Siegloch, 2017). Additionally, “Section 100-25 of the ITAA 1997” is related to capital gain taxes assets,i.e., the land and building.
Representing from the business affairs of RIP Pty Ltd, the incurred expenditures for the fixed assets are referred as the capital expense constructing the portion of the capital asset. These expenses are not permitted or held for deductions, withregards to the asset’s cost base.
The expenses held by the RIP Pty Ltd on the construction and tool, as well as on on-site parking will be retained within capital expenses and the same will not be assessed under allowable deductions under “section 8-1 of the ITAA 1997”.
References
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