Application of Taxation Laws in Rip Pty Ltd
(a)
Factual background
In the case of Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 the dispute before the court related to the assessment of income heads and how they are to be differentiated and distinguished when filing taxes. Mr. Arthur Murray owned a performance group which periodically offered various courses which required the students to make payments as fees at regular intervals (Mumford, 2017). There were also discounts provided for the same. The contract between the dance group and the student prescribes various payment procedures and the dance group is regarded as the tax payers. The contract provides that in case of an advance payment the students would not be entitled to any refunds except in cases where the dance group fails to provide the number of classes guaranteed under the contract. The facts and circumstances also provide that that the company had a revenue account and a suspense account. The money was first taken in the suspense account and was subsequently partly transferred to the revenue account. It is pertinent to note that under Section 25 (1) of the Income Tax Assessment Act, 1997 advance payments made are construed as general income (Chardon, Freudenberg & Brimble, 2016).
Issue
The issue before the court in this case was the determination of whether the commissioner of Income Tax or the taxpayers were under an obligation to calculate the amount of advance payment. Moreover, it needed to be determined if the payment by the students would fall under the head of assessable income.
Relevance
As envisaged in the provisions of the Income Tax Assessment Act, 1997 all revenue earned by a company as income would form a part of the assessable income. The entire amount of advance payments made to the company would not constitute a part of the assessable income as determined by the court because the entire amount does not make it to the general revenue account of the company (Dowling, 2014). This system of accounting was determined by the court to be a valid and was accepted as a legitimate mode of determination of tax liabilities (Bazley et al., 2013).
(a) (i)
The facts and circumstances of the case clarify that Rip Pty Ltd was engaged in the business of funeral services. The company’s balance sheet reveals that the reported profit of the company for the assessment year ending in June 2016 was $2.45 million. It can be further noted that the company provided invoices for all its transactions. It can be further stated that the company under the guise of repayments has made various credit transactions. The clients of the company are also required to make advance payments to the company in lieu of future funeral services booked by them and the same would not be subject to refunds. Thus it can be inferred that this forms a part of the company’s revenue for the assessment year (Endres & Spengel, 2015). Under general provisions of the act any advance payment made would not form a part of the assessable income of the company however if the company has specifically eliminated the possibility of refunds then the same would form a part of the assessable income of the company. Thus in the absence of a chance of refund advance payments would also form a part of the company’s assessable income.
Treatment of Advance Payments
(a) (ii)
Rule
Section 6.5 (4) of the Income Tax Assessment Act, 1997 defines income in relation to the provisions of the act (Saad, 2014). This section states that any amount earned by the taxpayer within the assessment year would be construed as income. The payable tax liabilities of the company can thus be divided into two methods earning method and receipt method. Further in Para 19 of tax rule 98/1 income for business and income from investment has been distinguished. It has also been stated in Para 20 of the tax rules 98/1 that the calculation of taxable income depends on heads of income they have been earned from (Deutsch, 2014).
Conclusion:
Thus in case of Rip Pty Ltd the determination of the source of income or income heads needed to made. Thus through the underlying income heads it can be inferred that Rip Pty Ltd’s taxable income would be determined through the receipt method. To conclude, the rule laid down in Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 would apply to the case of Rip Pty Ltd.
(a) (iii) As per the Income Tax Assessment Act, 1997 and the allied tax rules it can be stated that calculation of taxable income can be undertaken through two methods. This is laid down in Para 19 of tax rule 98/1 which provides for the earning method and the receipt method (Fittler, 2013). As set out in the provisions of Section 6.5 (4) of the act when a person earns any amount it would be considered income (Picciotto, 2015). Any income that is earned would be assessed under the earning method which is also known as cash and credit method. This method is employed when there is a part of the income which would be recoverable. This means that the income that is earned through agreements which have a specific refund clause. Thus in such a case the taxpayer or the tax commissioner would not have a choice for the method chosen and would have to apply the earning method as the receipt method cannot be applied in a case where a part of the income earned is recoverable.
1 (b) Rip Pty Ltd is a company that is engaged in the business of providing funeral services. The company also takes advance payments in case of pre-booked funeral services. These services are not subject to any form of refund especially in the event that the client failed to make full payment of the same (Dobra & Dobra, 2013). In such a case where the client has failed to complete all payments or for some other reason does not require the funeral services the same would not be refunded and all amounts paid would be forfeited by the company. In such a case the forfeited amount would be considered as forfeited income and the same would form a part of the assessable income of the company.
Treatment of Forfeited Payments
Part B
(a) According to taxation laws stock in trade would include anything that is or can be manufactured which would form a part of the company’s business activities or commercial transactions would form a part of the stock in trade of the company. This has been set out in Section 70.10 of the Income Tax Assessment Act, 1997. Considering the facts and circumstances of Rip Pty Ltd it can be inferred that all accessories acquired by the company would fall under the provision of stock in trade due to the presence of all the elements that determine stock in trade. As per Section 8.1 of the Income Tax Assessment Act, 1997 provides for deductions in lieu of the costs incurred in acquiring such accessories (Eccleston & Woolley, 2014). Analyzing Rip Pty Ltd’s case certain deductions should be allowed due to the purchase of stock in trade. The act also provides for deductions based on expenses incurred by the business and the same would be applicable for Rip Pty Ltd’s case. The amounts payable for the stock in trade however would be treated as income and the same would be assessable for the year ending in June 2016.
(b) The definition of income prescribed in Section 6.5 (4) of the act includes any form of earning by the taxpayer. As per the act income received from dividends would also for a part of ordinary income of the taxpayer (McGee, Devos & Benk, 2016). This dividend however is based on advance payment rentals that have been paid by the clients. However as per the act advance payment does not form a part of the assessable income of the company (Harris, 2013). Thus in this case the long leave payment would not be considered a part of the company’s assessable income.
(c) In the case of Rip Pty Ltd it can be stated that expenditure incurred in acquiring land and building equipment must be considered as capital expenditures. It is to be determined if the same would fall under a deduction as envisaged in the act. It has been clarified in Section 100.25 of the act that land and building fall under the definition of CST assets of the company (Miller & Oats, 2016). Section 8 of the act provides that CST assets would not be calculated as a part of the general deductions prescribed under the act. Thus, the general deduction provisions would not apply to land and building equipment gathered by Rip Pty Ltd.
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