Case Facts
Discuss about the Taxation Law and Practice for Arthur Murray (NSW) Pty Ltd V FCT (1965).
In the case the taxpayer was engaged in the service of providing dance classes. For the students who were paying the fees to the taxpayer in advance were awarded with significant discounts. The main purpose of commencing the system of discount was to inculcate the habit of paying fees on time. As per the agreement entered into by the students and the taxpayer the money that has been received by the taxpayer in this respect will not be refunded back to the students at any case. The taxpayer also opened up a suspense account in respect of transferrign the amount received from the students as advance. After the requisite lesson s were being provided by the tutor the same amount were beign transferred to the revenue account of the taxpayer. In reality thought if the students did not complete their lessons the amount that had been received from them as advance were returned back to them.
Only after the provision of the requisite lessons the amount received from them was being treated as a revenue. Even after that the tax commissioner indulged in including the advance money received in the assessable income of the taxpayer as per the receipt method. The same was being done under the provisions of the sections 21(1) of the ITAA 1997.
The main issue of the case is the different method of the computing taxable income that was being used by the taxpayer and the commissioner. Hence the amount of advance received by the taxpayer was being treated differently by the taxpayer and the commissioner.
Conclusion to the Case
As per the decision of the court the amount of advance that was received by the copany taxpayer from the students was in resepect of the services that had not yet been provided by the taxpayer and hence the same must not be included in the assessable income of the taxpayer. The court laid emphasis on the fact that in rality the taxpayer returned the money it has received as advance to the students correspondign to which no classes were had been provided by him. As per the direction of the court there is significant chances that the advance that had been received by the taxpayer will have to be refunded to the students in the future. Hence the same should not be included in the assessable income of the taxpayer.
Issue of the Case
For the purpose of taking into consideration any amount within the purview of the income that has been produced, the provisions of the section 6-5 of the Income tax assessment Act 1997 is being made applicable. Under the provisions of this section if any amount is being received by the assesse or any person on behalf of assesse then the same would be considered to have been generated by the tax payer in the normal course of business. As per legal provision there are two methods for the purpose of computation and recognition of the amount that has to be included in the taxable income of the taxpayer. It is the responsibility of the taxpayer to determine the most appropriate method for the purpose of determining the tax liability of rate relevant tax year. As per the general principle that are prevalent in case of income that has been generated by the taxpayer by way of income from salary, income from investment, income from other sources and in any other way except from the business that is being carried out by the taxpayer, the receipt method is used for the purpose of computation of the tax liability. Inc. case the income that is being generated by the taxpayer has accrued from the business that is being carried out by him then such amount shall be computed using the earning method. The guidelines in respect of the method that is to be used for the purpose of calculating the income of the tax payer has been laid out in Para 19 of the Taxation Ruling 98/1. As per the general convention and practice the earnings method is considered to be the most appropriate method for the purpose of calculation of the amount that is taxable in case of the taxpayer.
In the present case the company RIP Ltd engaged itself in the provision of funeral related services. For the year ending June 2016 the profits that are earned by the entity amounted to $2.45 million. In exchange of the services related to the funeral that were being provided by the company, revenue was being collected by the company. For the purpose of collecting the revenue the company made use of various methods and schemes. They are being mentioned below:
- A net 30 days invoice was being issued by the company for the purpose of recovering the amount due from the insurance company.
- A net 30 days invoice was also being put to use by the company for the purpose of ensuring prompt payment on the part of the customers.
- Another company by the name of the RIP Finance Pty. Ltd. Engages in the provision of a system of credit that has been initiated under the repayment instalment plan. Under this scheme the finance company also engages in providing fees to the RIP Ltd.
- Another scheme that has been initiated by the company is referred to as the Easy Future plan. Under this scheme the customers of the company engage in the repayment of the amount due to the customer in instalment.
It is a general convention that the companies must make use of the earning method for the computation of the taxable income. The income that is receivable by the company in respect of the funeral services that are being provided by it should be considered as taxable income of the entity. As per the method that has been applied by the company, a net 30 days invoice is selected for the purpose of receiving the payment from the customer. Hence, immediately after the provision of the services by the company the invoice is being issued by it. The income that is to be received after the expiry of the 30 days, is immediately recorded as income in the books of the company. This is done even if he amount in its behalf is not received by the entity.
Conclusion to the Case
Under the other method of the company called as easy future plan, the customer can make the payment in advance. The services in the respect of the amount of payment received by the customer will be provided in future. If the customer fails to provide or pay all the instalments, then the amount that is received from him till date will be forfeited. The amount that has been forfeited is not refundable to the customers. For the purpose of recording of the amount that has been forfeited by the company a separate account is being opened by it named as “Forfeiture Payment Amount”. As the amount that is being forfeited will never be repaid to the customer the fame must be treated by the company as income immediately after the same has been forfeited.
In the case of Arthur and Murray it was being decide by the court that the amount that has been received by the company will be taxable as soon as the service is being provided by the company. As per the terms of the Easy Future plan rolled out by the company the advance payment is received from the customer prior to the provision of the service. RIP Pty Ltd. Engages in the recognition of the income only after the corresponding amount has been received by the company. Hence the principle that has been stated out by Arthur Murray is considered to be valid in this case. Hence the amount that has not yet been received by the company must not be considered by it as revenue.
Under the provisions of the taxation ruling 98/1 there are two procedures under which the tax of the taxpayer can be computed. One of the method is the receipt method and the other method is called as earning method. As per the provisions of the section 6-5(4) of ITAA 1997, the amount that is received by the taxpayer or the same is collected on behalf of the taxpayer, will be treated as assessable income. As per the earnings method the income can be recognised as assessable income on beign produced immediately. As per the agreement that has been presented for consideration the taax payer and the commissioner can both use the earning method.
Under one of the schemes that was beign inititaated by the RIP Pty. Ltd. Company the customers of the company can pay the amount due to them in instalments and receive the funeral service in future. The money that is apid as instalments to the company is non-refundable in nature. At any time if the customer fails to pay the amount the entire money received by him will be forfeited. The amount that is forfeited by the company will be transferred to a separate account called “forfeited account”. As the amount is non-refundable the same should be included in the taxable income of the assesse. The amount of such income amounted to $16200 for the year ended 2016.
Different Methods of Computing Taxable Income
The provision of the section 70-10 lays down the provisions in respect of the definition of the trading stock. Any article or the product that has been produced in the normal course of business or any article that has been utilised for the purpose of manufacturing of any other product y the entity or any article that facilitates the selling and the exchange of other products is known as trading stock. Any income that has been earned by the entity by way of utilising the trading stock of the company will not be considered as capital in nature. These are the guidelines that have been issued under the provisions of the section 70-25. As the same provisions are to be followed by the RIP Ltd. All the other accessories that were being bought by the company including the caskets are to be treated as capital assets and not as trading stocks for which the company can claim deduction.
The amount that the entity spends on the acquisition of the stock in trade or gaining the possession of the stock in trade in the course of carrying out the business processes of the company, must be considered as expenditure that are incurred by the company for which general deductions are available. Section 8-1 of the income tax assessment act 1997 elucidates the matter in details and makes general deduction available for the stock in trade of the company. The deduction in respect of the trading stock of the company is received by the company in the same year in which the same is being recorded in the company as stock in hand. For those expenses which are essential for carrying out the business and also to generate assessable income, general deductions are allowed only for such expenses in section 8-1 of the ITAA 1997. An advance payment has been made by the company in respect of the stock that is supposed to be delivered in the next year. The amount that has been paid by the company in this respect amounted to $25000. Therefore as per above discussion and study, the company must recognise the prepaid amount as advance for the year 30 June 2016.
For the purpose of ascertaining the ordinary income of an entity, as per the guidelines of the section 6-5 of the ITA Act, all the income that is earned or received by the entity under normal circumstances must be clubbed together. The company due to the applicability of this section must ensure that the income earned by way of dividend must be included in the ordinary income of the entity. Due to the fact that the dividends of the company are fully franked the company is eligible for the receipt of franking credit. The expenditure that has incurred by the company in respect of advance payment for the rental storage should not be included as a capital asset (Cassidy 2017). The reason for this is that the same is not included in the list that has been provided in under the provision of the section 100-25 of the act. The company must recognise the amount that has been received by it by the means of advance payment for four months in the present taxable income of the company for the current tax period. The reason for this is that the as per the section of 83-80 for the purpose of ascertaining the assessable income of the company the unused long services must be recognised. Therefore, in this case, RIP has paid a long service leave for duration of three months in prior. For the year ended June 2016 the same must be treated as an advance rather than being treated as an expense.
In respect of generation of any sort of assessable income if any expenditure has been incurred the same will be allowed as deduction as per the provision of section 8 of the act. Land and Building that have been acquired by the entity must be treated as a capital expenditure by the entity and not as revenue expenses for which the company can claim general deductions. The guidelines with respect to the treatment of the expense have been given out in the provisions of the section 8 of the ITA 1997. The expenses that have been incurred by the company in respect of onsite parking, landscaping expenses and equipment expense, are accordingly will be treated as capital expenses.
Reference
Bates, N., Callander, E., Lindsay, D. and Watt, K., 2018. Labour force participation and the cost of lost productivity due to cancer in Australia. BMC public health, 18(1), p.375.
Endres, D. and Spengel, C. eds., 2015. International company taxation and tax planning. Alphen aan Den Rijn: Kluwer Law International.
Miller, T., Kim, A.B. and Holmes, K.R., 2015. 2015 Index of economic Freedom. Washington DC: The Heritage Foundation.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.
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