In the present case, the taxpayer was engaged in the business of providing dancing lessons to students. If the students provided the company with advance payments then the students became eligible for discounts. It was clearly agreed between the taxpayer and the students that the advance tuition fees received by the institution will not be refunded back to them. In respect of the advance payments received by the entity, it opened up a separate suspense account called “unearned deposits-untaught lessons account”. After the due lessons were provided to the students that taxpayer transferred the amount into revenue account from the suspense account. Thought the agreement expressly stated that the advance fees would not be refunded back to students, in actual scenario the taxpayer paid back the tuition fees to the students who did not complete the classes (Burkhauser et al. 2015).
The taxpayer treated the payment received from the students as income only after the lessons have been provided to them. Due to this reason, the prepaid fees received from the students were not included in the assessable oncome of the assessee. The fees corresponding to which the due lessons have been provided was only treated as income for deriving the taxable income for the year. However, the commissioner made use of the cash basis method of computing taxable income and thus included the prepaid tuition fees in the ordinary income of the assessee. This was done under the provisions of the section 25(1) of ITAA 1997.
It was found that for finding the assessable or taxable income of the taxpayer the commissioner and the taxpayer used two different methods to calculate the same. The difference in their computation arose because of the differential approach towards the prepaid tuition fees. Hence, the main issue in front of the court was to determine whether the prepaid fees should be included in the taxable income or not (Lederman 2015).
Conclusion of the case
As per the direction of the High court, it is a general rule that if no product has been delivered or service has been provided corresponding to an advance fees received by the taxpayer then the same should not be included in the taxable income of taxpayer for that year. It was observed by the court that thought the agreement said that the advance will not be paid back to the students in case they fail to complete the class, in actual practice the same was not followed. Hence, it was not proper on the part of the taxpayer to include the prepaid amount received in hos total income, as there existed a possibility of refunding the same if the lessons were not duly delivered to the students. Hence, High Court concluded that it is to be assumed that the taxpayer received the income in the year in which he provided the service and not the year in which he received the advance payments (Saad 2014). It was ascertained that the accounting treatment concluded by the taxpayer was appropriate.
As per the provisions of the section 6-5(4) of the ITAA 1997, any amount that is derived by the taxpayer or is received by someone else on behalf of taxpayer then the same should be included or be considered as income derived. Further, the income that is derived by the taxpayer must be included in his assessable income for the year under the provisions of the section 6-5 of the ITAA 1997. Earning method and receipt method are primarily the two kinds of method that are prevalent for calculating the income of the assessee for the purpose of calculation of the tax. Such method should be adopted by the taxpayer that properly reflects the income of the taxpayer. For using the receipt method, certain incomes are being stated (Richardson et al. 2015). They include income derived from investment, income that has been derived from sources other than business and the income that is derived during employment. The same has been stated in the Taxation Ruling 98/1 in para 19. In the para 20 of the TR 98/1, is stated that the income that is derived from trading or manufacturing. The earning method is considered to be the most appropriate for tax purposes in general cases.
The services provided by RIP Pty. Ltd were centered on funeral and other related services. For the year ended 30 June 2016, the company reported a profit of $2.45 million. Various options were being provided by the company to its customers to make the payment. The customers could make the payment to it in the following ways:
For calculating the income derived from the business conducted by the company, earning method is the most appropriate one. In the present case of RIP Pty. Ltd., the income is recognized only after the corresponding service has been provided by the company. The issues a net 30 days invoice after the funeral services have been provided by it (Chen 2017). The income that is derived by the company should be recognized by the company as an income only after the service has been provided. In addition to that, the net 30-day’s invoice has been raised and it should not wait for the actual receipt of the income.
An easy plan is being exercised by the company under this scheme advance payments are being received by the customers with the promise of delivery of the funeral services in the future. The fee that is received under the scheme is not refundable by the company. A forfeited payment account has been opened up by the company for transferring all the installments that have been received from a customer if he fails to pay the rest of the amount that has been forfeited (Ferraro 2016). As the customers failing to pay, the installments are no longer the member of the company there is no liability on the part of the company to provide them with future funeral services and hence the amount that is being forfeited by the company should be immediately recognized as income. Based on the above discussion it can be concluded that the company derives its income only after the funeral services have been provided by it.
As per the case of the Arthur Murray, a conclusion was drawn that the income will be derived by the company only after the service is being provided to the customers. In the case, it was stated that it is a general rule that the income that has been received in advance will be treated as an income only if the services are being provided. In the case of the RIP Pty. Ltd., it is observed that the company receives the payment in advance and the service is provided by it in the future. As per the practice of the company, the fees received as advance is being included in the income of the company in the year in which the advance fees are received by it (Evans et al. 2016). The principles that were held in the case of Arthur Murray are also applicable in the case of RIP Pty. Ltd. the reason being that the circumstances was similar in both the cases. Hence, the fees that are received by the company in advance should be included in its income not in the year in which it is received but in the year in which the services are actually provided by the company.
As per the provisions of the Taxation Ruling 98/1, there are two ways of calculating the income for the tax purposes. The methods are earning method and receipt method. The other name often receipt method is cash basis, the reason for this is that under this method the income is accounted for in this method when the actual receipt takes place or the constructive income is being derived. As per the provisions that are being stated out in the section 6-5(4) of ITAA 1997, any amount that is received by the taxpayer or anyone on behalf of the taxpayer should be considered as an income derived (Gobena and Van Dijke 2016). The other method for the calculation is the earning method also known as the accrual method. Under the provision of this act, the income is derived when the same is earned and a recoverable debt is being created. If the agreement provides for the performance of any act by the taxpayer and the same has been performed by him and he is legally eligible to recover the amount then it is termed as recoverable debt. Hence, an conclusion can be drawn that that it is the choice of the commissioner and the taxpayer to select any method for calculating the tax payable by the taxpayer (Guglyuvatyy and Evans 2015).
In the case of the RIP, the company is running an easy plan. As per the conditions of this plan, the company receives advance payments from the customers and the customers and promises them to provide funeral services in the future. The fee that is paid as advance by the customers is non-refundable by the company. A separate ‘forfeited payment account’ has been opened up by the company for transferring the amount of the installments that have been forfeited due to the non- payment of the full amount by the customer (Thornton 2017). The company will have no liability in respect of the customers in the future, as the customer did not pay the entire fees. Hence as per the fees, the company is not liable to refund the forfeited money and need not provide any service in the future. The company is therefore advised to include the forfeited amount of $16200 as income in the year in which the same has been forfeited (Tran?Nam and Evans 2014).
As per the provisions of the section 70-10 of the ITAA 1997, a trading stock is referred to as the stock that has been manufactured, or acquired in the ordinary course of business primarily for the purpose of selling or exchanging the goods in the future. The definition FO the trading stock includes the CGT assets and the financial agreements that are held by the company. Further, in the section 70-25 it is if the amount in respect of the trading stock must not be including any amount that is of capital nature (Brooks 2018). Hence, the caskets and the accessories that are being purchased by the company should be included and traded as trading stock and not as capital expenditure.
Under the provisions of the section 8-1 of the ITAA 1997, various general deductions are available for the company for the amount that has been incurred by the company for the purpose of carrying out the business. Hence, the trading stock that is acquired by the company is to be allowed ads deduction under this section. The year, in which the trading stock of the company becomes the stock in head of the company, the same year the deduction in its respect is made available to the company (Chohan 2016). It is expressly stated out in the provisions of the section 8-1 of the ITAA `1997 that general deductions will be available for the customers in respect of the expenditure that is incurred by the company to carry out the business and produce assessable income. A stock that amounted to $25000 was being purchased by the company and the delivery of the same would have been made in the next year. Based on the deduction it can be concluded that the advance received by the company will be considered as pre-payment for the year ended 30 June 2016 (Gillitzer et al. 2017).
As per the provisions of the section, 6-5 of the ITAA 1997 any income that is being received by the taxpayer must be considers as an ordinary income. Hence, the amount in respect of the dividend received by the company must be included in the taxable income of the company. The dividends received by the company are completely franked; this makes it eligible for availing the franking credit. As per the provisions of the section, 100-25 of the ITAA 1997 the advance paid in respect of the rental storage must not be included in the list of the capital assets as mentioned in the section (Enste 2018). Hence, no capital asset treatment is to be conducted in respect of the amount that is paid in advance. Under the provisions of the section 8 of the ITAA 1997, the advance rets that is being paid for four rental months will be allowed as general deduction. As per the provisions of this section, 83-80 of ITAA 1997 the unused leave of the company must be included in the assessable income FO the company. In case of the company there is a three month long unused advance and the same should be treated as an expense and not as an advance for the year 30 June 2016 (Torgler 2016).
As per the provisions of the section 8 of the ITAA, many general deductions can be availed by the company for the purpose of providing assessable income. Land and building is included in the provisions of the section 100-25 in which the list of the capital assets of the company are being given (Chapman et al. 2016). As per the provisions of the section 8 the expenditure incurred by the taxpayer in respect of the land and building shall not be included as general deduction under the section 8. The expenses will have to be treated as capital expenditure and not as general deduction. The list of the expenses include the expenditure incurred for onsite parking, expenses incurred in respect of purchase of equipment etc. these expenses must be treated as capital expenditure and not as general deduction.
Reference
Brooks, C.S., 2018. Metal recovery from industrial waste. CRC Press.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Chapman, S., Alpers, P. and Jones, M., 2016. Association between gun law reforms and intentional firearm deaths in Australia, 1979-2013. Jama, 316(3), pp.291-299.
Chen, S., 2017. Do Investors Value Corporate Tax Return Information? Evidence from Australia.
Chohan, U.W., 2016. The Panama Papers and Tax Morality.
Dyreng, S.D., Hoopes, J.L. and Wilde, J.H., 2016. Public pressure and corporate tax behavior. Journal of Accounting Research, 54(1), pp.147-186.
Enste, D.H., 2018. The shadow economy in OECD and EU accession countries–empirical evidence for the influence of institutions, liberalization, taxation and regulation. In Size, Causes and Consequences of the Underground Economy (pp. 135-150). Routledge.
Evans, C., Lignier, P. and Tran-Nam, B., 2016. The tax compliance costs of large corporations: An empirical inquiry and comparative analysis.
Ferraro, R., 2016. Tax education: First graduands to receive GDATL. Taxation in Australia, 50(10), p.594.
Gillitzer, C., Kleven, H.J. and Slemrod, J., 2017. A Characteristics Approach to Optimal Taxation: Line Drawing and Tax?Driven Product Innovation. The Scandinavian Journal of Economics, 119(2), pp.240-267.
Gobena, L.B. and Van Dijke, M., 2016. Power, justice, and trust: A moderated mediation analysis of tax compliance among Ethiopian business owners. Journal of Economic Psychology, 52, pp.24-37.
Guglyuvatyy, E. and Evans, C., 2015. Administrative approaches to tax dispute resolution: alternative perspectives from Australia and Russia. J. Comp. L., 10, p.365.
James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280.
Lederman, L., 2015. Report for the European Association of Tax Law Professors 2015 Congress “Tax Penalties as Instruments of Cooperative Tax Compliance Regimes”.
Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Thornton, M., 2017. How the Higher Education’Industry’Shapes the Discipline of Law: The Case of Australia.
Torgler, B., 2016. Tax compliance and data: What is available and what is needed. Australian Economic Review, 49(3), pp.352-364.
Tran?Nam, B. and Evans, C., 2014. Towards the development of a tax system complexity index. Fiscal Studies, 35(3), pp.341-370.
Wilkins, R., 2015. Measuring income inequality in Australia. Australian Economic Review, 48(1), pp.93-102.
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