Assessable Income And Taxation Of Prepaid Fees And Funeral Services Revenue

Case of dance class provider offering discounts for advance fees

Discuss about the Conceptual Issues and Empirical Evidence.

In this case, the taxpayer provided dance classes as a business activity and offered discount to the students providing fees in advance. The main aim of providing the discount is to encourage the student to pay fees in advance. It was expressively provided in the agreement between the student and the taxpayer that the fees received in advance shall not be refunded. The fees that was received in advance by the taxpayer was transferred to a separate suspense account namely “unearned deposit untaught lesson account”. The taxpayer followed the process of transferring the fees from suspense account to revenue account after the dance lessons are provided to the student (Chan, 2015). In accordance with the agreement the taxpayer was not required to refund the advance fees receipt from the student however in practice the taxpayer usually refunded the fees of the student not completing the dancing lesson.

The taxpayer followed the policy of recognizing the fees received in advance as income after the lessons are provided to the student. Therefore the assessable income of the taxpayer did not include the fees received in advance. The taxpayer calculated the assessable income after including only the fees of the student to whom dancing lessons has been provided during the year. On the other hand, the assessable income was calculated on receipt basis by the Commissioner taxation. The Commissioner while computing the assessable income of the taxpayer included all the fees received during the year that includes fees received in advance. Therefore the ordinary income under section 6-5 of the Income Tax Assessment Act 1997 computed by the taxpayer was different from the income determined by the Commissioner of taxation (Mangioni, 2015).

In this case, the issue is that the taxpayer and the Commissioner has computed the assessable income differently. As a result of this the tax payable demanded by the Commissioner was more than the amount computed by the taxpayer. Therefore the issue before the Court was to ascertain whether the prepaid amount received by the taxpayer should be included in the assessable income.

The High Court it its judgment held that as per the general rule the fees that is received in advance for the service that has not been provided yet should not be included in the assessable income. It was further held by the High Court that although there was an agreement between the student and the taxpayer that the advance fees shall not be refunded however in practice the agreement was not followed. In such case the taxpayer cannot include in its assessable income fees received in advance because there are possibilities that fees could be refunded. The high court provided the judgment that the taxpayer derives income in the year the dancing lesson is provided and not in the year the fees is received. The court therefore upheld the accounting treatment of fees received by the taxpayer.

Case of funeral service provider receiving revenue under easy plan

As per the provisions of the section 6-5(4) of ITAA97 if the taxpayer is in receipt of any amount or anyone receives an amount on behalf of the taxpayer then the same will be considered as an income derived. In addition to that, the income so derived will be included in the assessable income pf the taxpayer as per the provisions of the section 6-5 of the ITAA 1997. Earning method and the receipt are the two methods of calculating the income for the purpose of tax. Only such method must be adopted by the taxpayer, which reflects the income of the taxpayer in the most appropriate way possible. For using the receipt, certain classes of the income have been defined in the Taxation ruling 98/1 para 19. In the ruling, it has been if receipt method is suitable in case the income is derived from investment, from sources other than the business and the income that is derived by way of employment by the employee (McClure et al., 2017). As per the provisions of the TR 98/1 para 20 if the income is derived from trading or manufacturing then the same should be computed using the earning basis. The earning method is considered to be the most appropriate one for the purpose of taxes.

The funeral and other services are being provided by RIP Pty. Ltd. For the year ended June 2016, the reported net profit of the company amounted to $2.45 million. Under several options, the company was earning revenue from its customers in return of the services that has been provided by it relating to funerals. The various ways adopted by the customer for the purpose of collecting the fees are as follows:

1. From the external insurance company a net 30 days invoice was being issue by the company for the purpose of getting the fess.
2. A net 30 days invoke was also being issued to the customers of the company for the collection of the fess.
3. Credit is also provided by the company under a repayment instalment plan. The company was also able to received fees from this.
4. Under the easy future plan, the company was also able to received fees as instalment in advance.

In case of the income that has been generated from the business earning method is the most appropriate method to determine the income for the purposes of the tax. In the present case of RIP Ltd., the company received income from the provisions of the funeral services and hence the same must be recognised as revenue. As per the procedure that had been made applicable by the company a net 30 days of invoice was being raised after the conclusion of the funeral (Burkhauser et al., 2015). As per the policy, FO the company revenue was being recognised by it only after the funeral service has been provided and a net 30 days invoice has been raised by it and no waiting time is being recognised for the actual receipt of the revenue.

High Court rulings on prepaid fees and assessable income

As per the business policy, of the company it runs an easy plan. Under this scheme, the payment for the funeral services are being received by the company In Advance the Company promises to provide funeral services to the customers later on in the future. The fee that is received by the company in advance under the easy plan is not refundable. The company in respect of the amount that is being forfeited if the member fails to regularly pay the instalments of the company has opened up a separate forfeited account. The company should immediately record the amount received from the forfeiting the instalments that have been paid by the member till date (Ward, 2018). The reason for this is that due to the non-payment of the instalment the corresponding person is no longer a member of the company. Hence, the company has no liability of providing funeral services in the future. Hence, for the conclusion it can be said in respect of the provision of the funeral services the company is deriving the income.

As per the facts of the case of Arthur Murray it was being concluded that in the year in which the service was being provided the income was also derived from the customers. The general of the law states the year in which the service was being provided in that year the amount that is received in advance is also recognised in the income. As per the information received in the case of RIP Pty. Ltd. the easy plan of the company involves the receipt of the fess in advance and the provision of the service later in the future. As per the practices of the company the fees that are received by it in advance will be recorded in the accounts only after the same is actually received (McGee et al., 2016). The facts of the case of RIP Pty. Ltd. are similar to that of the case of Arthur Murray. Hence the circumstances of the Arthur Murray case are also applicable on the RIP Pty. Ltd. Therefore the company must ensure that it does not record the fees in the year of its receipt but in the year in which the actual funeral services is being provided to the customers.

As per the provisions of the Taxation Ruling 98/1 there are two ways of accounting the profits that is going to be used for the purpose of taxation. Earning method and the receipt method are the two methods. The receipt method is also called as cash basis or cash received basis. Under the provisions of this method the income is derived when the amount in its respect is actually received or the income is being constructively received. According to the provisions of the section 6-5(4) of the ITAA 1997 an income is said to be derived if the taxpayer or anyone on behalf of the taxpayer receives the income. There is also another method for computing the accounting profit for the purpose of determining the tax. The method is known as the earnings method. The method is also called as the credit method or the accrual method (Byron, 2015). As per the provisions of this method the income is derived when the same has been earned and a recoverable debt has been created on its respect. If certain action needs to be performed to claim the amount as per the agreement and the taxpayer has performed it, he can claim the amount legally and the same is termed as recoverable debt. Hence it can be concluded that the commissioner and the taxpayer can choose from both the methods for the purpose of calculating the tax.

Two methods of accounting for profits for taxation

Easy future plan is s scheme that is being run by RIP Pty. Ltd. As per the terms of this plan, the customers are to pay regular instalment payments and in return the company promises them to provide funeral services in the future. The fee that is received by the company from the customer in advance is non-refundable. In case of failure on the part of the customer to pay the amount in respect of the instalment, all the money that has been received from the customer till date is being forfeited by the company and the same amount is being transferred to a separate account that is opened up by the company named as “Forfeited Payment Account”. The company is not liable to provide the future services as the customers did not provided the full payment (Fullarton, 2017). As the company is no longer to provide services to the customers whose money has been forfeited by the company it is advisable that the company recognises the forfeited fees amounting to $16200 is being recognised as an income in the year when the amount has been forfeited itself.

Anything that has been acquired or is being manufactured by the company for the purpose using the same for the manufacturing selling and exchanging the goods is termed as trading stock as per the provisions of the section 70-10 of the ITAA 1997. Within the meaning of the trading stock the CGT assets and the financial instruments have also been included. However as per the provisions of the section 70-25 of the ITAA 1997 no item of capital nature should be included in the definition of the trading stock (Fry, 2017). Hence the expenditure that is incurred by RIP Pty. Ltd. in respect of the caskets and the accessories for the purpose of using them in the course of carrying out the business must be considered as trading stock and not capital assets.

As per the provisions of the section 8-1 of the ITAA 1997, the amount that is paid by RIP Pty. Ltd. in respect of the purchasing the trading stock is allowed as deduction under this section. The year, in which the trading stock becomes the part of the stock in hand of the company, the same year deduction in respect of the trading stock becomes an allowable deduction. Under the provisions of the section 8-1 of the ITAA 1997 it is stated that general deduction will be available in respect of the expense that are incurred by the company for the purpose of carrying out the business and for generating assessable income (James et al., 2015). As per the facts of the present case the company paid an advance in respect of a stock in trade that needs to be delivered in the next year amounting to $25000. As per the discussion the prepaid amount should be treated as an advance for the [purpose of income in the year ended 30^th June 2016.

As per the provisions of the section 6-5 of the ITAA 1997, all the income that is being received by a resident taxpayer must be included in his assessable ordinary income. Hence the amount of the dividend that is received by the company must be included in the taxable income of the company. Due to the fact that the dividends are fully franked the company is eligible for taking franking credit. As per the provisions of the section 100-25 of the ITAA 1997 the advance payments that are being paid by the company in respect of the rent should not be included in the list of the capital asset (Kaplan, 2015). Hence the expenditure in respect of the advance payment of the rent shall not be treated as capital asset. The advance rent that has been paid by the company for a period of four months in advance are available as general deduction under the provision of section 8 of the ITAA 1997. As per the provisions of the section 83-80 the unused long service leave should be included in the assessable income of the company. In the present case RIP Pty. Ltd paid and advance payment in respect of a three-month long service leave in advance. The same should be treated as an expense and not as an advance for the year ended 30^th June 2016.

As per the guidelines of the section 8 of the ITAA 1997 the taxpayer is eligible for claiming general deductions for the purpose of determining the assessable income. Land and building has been included in the list of the capital assets as stated out under the provisions of the section 100-25. However, the expenditure incurred in respect of the land and building should not be included in the assessable income under the provision FO the section 8 of the act (Moretto et al., 2014). The expenditure in respect of the acquisition of the land and building must be treated by the company as a type of capital expenditure and not as revenue or general deductions. The capital expenditure of the company comprise of expenditure in respect of construction of onsite parking, the expenditure incurred for the acquisition of the equipment and the expenditure incurred for the purpose of landscaping and hence these expenditure incurred by the company are not to classified as general deduction (Tran-Nam,2015 ).

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