In the given case the taxpayer is giving dancing lesions to the students. The taxpayer had different sessions for dancing training purpose. Fees received by the taxpayer is fully paid for a selected period and such payment is non- refundable (Tran-Nam, Evans and Lignier 2014). Further the taxpayer creates a separate suspense account under the head “unearned deposit-untaught lessons accounting”. The fees transferred to revenue account only when the taxpayer has provided the dancing classes. Further it is also observed that the taxpayer refunded the tuition fees on which the student had not exercised the lessons.
After providing the dancing lesions the taxpayer recognised the tuition fees as “income derived”. Therefore the assessable income does not include the advance payment received by the taxpayer (Tan, Braithwaite and Reinhart 2016). The income arise on provided dance lesions to the students, form part of calculation of assessable income by the tax payer. Whereas the commissioner of tax treated the advance inflow as assessable income of the tax payer in accordance of ITA Act 1197.
In the given case there is a contradiction between the commissioner of tax and the taxpayer in respect of computation and treatment of pre-paid tuition pees received (Saad 2014). The proceedings in court had started on the issues of commissioner of tax who has taken the pre-paid expenses as a revenue on receipt basis and therefore he included that in assessable income as an ordinary income and the assesse only include the precedes on provided classes.
Conclusion of the case:
The court assed that in the given case according to substance over from principal of accounting standards the substance of any item will we given more importance than the form of the item for that reason the pre-paid advances received in advance will not be included in the assessable income. Though there is a contract between the parties to the contract that the advance money paid is not refundable such practice is not followed by the taxpayer and there are significant chances that the taxpayer will repay the dues to the students who has not attain the classes. Therefore the taxpayer did not included the amount of tuition fees that have been received in advance as ordinary income but recorded as a liability as there is a probability that situations might occur where the taxpayer will return the advance money without forfeiting that. The High court conclude that the accounting adjustment of the taxpayer is correct and such adjustment hold reasonable grounds where the taxpayer might repay back the dues to the student who did not attained the classes of dancing.
In accordance of the ITA Act 1997 in section 6-5(4) receipt of any amount or consideration as in form of income or described in any form of manner by the taxpayer or any party on his behalf or related parties will held as income (Richardson and Lefroy 2016). The tax payer need to choose the most appropriate method of computation of income In between “earning methods” and the “receipt method” .Receipt method is appropriate where the income sources are based on investment or sources of income other than business process according to the Taxation Rule 98 /1in, Para 19 as per general rule. In case of the taxpayer is caring on a treading or manufacturing business then it is advisable that the earning basis need to be followed according to the para 19 of TR/1.for the computation of tax is noted that earning method is the most appropriate method for computation of income (Miller and Oats 2016).
RIP PTY LTD reported a profit of $2.45 million by the year ending 30 June 2016 by providing funeral and related services to the customers. The revenue of the company generated by providing various options to the customers (McGee, Devos and Benk 2016). Rip LTD applied the following process to recognise the revenue from the company
Income of the business should be computed on earning method according to the general rule therefore the revenue recognised for providing funeral services by RIP Ltd is an income. The company deals with a delayed payment policy for the service provided by them but the income are to be recognised on very few moment the service is being provided on accrual basis.
The Company provides a distinct policy to the customers where the customer may pay in advance in many instalments and the company will provide the service on a future date (Austen, Sharp and Hodgson 2015). Such deposit of advances received by the company from the customers who avail such easy future plan policy are not refundable in nature. Further if the customer fails to pay the due instalment the earlier payment will be forfeited by the company. Such receipts of forfeiture will be credited in the “forfeited payment account”. The RIP Ltd is advised to record the forfeited amount as the income when the customers did not continue the scheme and therefore the liability of the company towards the customers will not be accountable (Mangioni 2015).
In Arthur Murray’s case the statement given by the court provides the income will be recorded in the year of service provided (James, Sawyer and Wallschutzky 2015). Advance received will also be recognised in the year of service as per general rule. RIP Pty Ltd represents a scheme “easy future plan” where the interested customers will avail the service in future date. Fees that are actually received will be taken as income of the company when they actually received that. In the given case RIP Pty Ltd must consider the case of Arthur Murray as the circumstance are very much similar and corresponding with the situation. Principles need to be followed for the accounting treatment as per the judgement. The company must recognise the advance received for the funeral services only after the fulfilment of the service duty not before that.
There are two methods of accounting for the tax purpose “earning method” and “receipt method” according to the taxation rule 98/1 (Hufnagel 2016). In “receipt method” the income is recorded in the year it is actually received in cash, the income arise on the receipt of the cash will be called cash or receipt basis. If the taxpayer or any one on the behalf receives any consideration then such income will be treated as the income as per section 6-5(4) of the ITA act 1997 .There is an also different mode of computation where the payment received creates an liability. After providing the product or the services the company can recognise the cash as in form of income such mode is known as accrual basis or credit or due basis. Mode of determination of the method lies on the decision of the tax commissioner.
A scheme is provided to the customers who are willing to avail funeral services from RIP Pty Ltd where the customer pays on instalments and later the funeral service will be provided to them (Gans 2016). This will not create burden to the customers as the stream of cash flow is maintained as the customer are not to require to pay at one-shot more customers will be attracted towards the scheme. The company is providing in the name of “Easy Future Plan” with a condition if the customer fails to pay any of the instalment, the money already paid in form of instalments will be forfeited by the company and the forfeited amount will be treated as an income of the year ended. In the given case RIP Pty Ltd forfeited instalments of $16200.00 which will be treated as an income of the company as there is no liability to be borne by the company (Evans, Lignier and Tran-Nam 2016).
As per the provisions of the section 70-10 of ITAA 1997. The treading stock contains the goods that are held for treading or providing services i.e. CGT assets and there financial agreements. An item of capital nature should not be included in the treading stock as the treading stock is revenue in nature. Casket and the accessories are to be treated for the ordinary consumption of the business nature (Edge 2017). Therefore such expenses of the RIP Pty Ltd is to be considered as treading stock not a capital asset.
The section 8-1 of the ITA act 1997 deals with the deduction of a firm or the company allowable trading stocks are acquired to provide services or manufacturing or to sell therefore such expense is an allowable deduction as such expenses is required to carry on the business (Cook and Natalier 2016). Any expenses relating to the consumption of any material or service of the business to earn income should be deducted from the assessable income. The amount paid by RIP Pty Ltd for the supply of casket and accessories will be supplied in the next assessment year and therefore such expenses is not contributing in the assessable income of current year. Therefore the payment of $25000 to the supplier is to be treated as an advance and such payment will be deductible in the next year (Cobiac et al. 2017).
Any income received by the taxpayer will form part of the ordinary income of the tax payer even if such income does not arise from general business course according to the section 6-6-5 of the ITA Act 1997. Income from dividend will be accountable as a business income. As the dividends are fully franked the company may avail franking credit (Barkoczy 2016). The advance payment of rental storage can be deducted to the extent it is related to the current financial year and such expenses is not be capital in nature as per the section 8 of the ITA Act1997, the payment by RIP Pty Ltd for rental storage associated with the consumption of current year to the extent of four months therefore deduction allowed is up to four months’ rent. The advance will be allowed as deduction for the next year. RIP Pty Ltd has given advances for three months long leave service such advance will be treated as an expenses not an advance as such payment is made for unused long services under section 83-80 of the ITA act 1997.).
Under section 8 of the ITA Act the taxpayer will avail deduction under general expense for generating assessable income (Basu 2016). Land and building are to be treated as CGT assets according to the section 100-25 of the ITA ACT 1997. If any expense in relation of acquisition of land and building will be treated as an expenses towards capital utilisation of the resources except in the case the taxpayer is engaged in real estate business under section 8 of the ITA act. The expenses relating to the development or construction of onsite parking expenses or purchase of equipment etc. will be treated as capital expenditure not as general expenditure. Only the expenses of general nature is allowed as deduction further capital expenses will be added in the value of particular capital asset (Berns 2017).
Reference List
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Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
Berns, S., 2017. Women Going Backwards: Law and change in a family unfriendly society. Routledge.
Cobiac, L.J., Tam, K., Veerman, L. and Blakely, T., 2017. Taxes and subsidies for improving diet and population health in Australia: a cost-effectiveness modelling study. PLoS medicine, 14(2), p.e1002232.
Cook, K. and Natalier, K., 2016. Gender and evidence in family law reform: A case study of quantification and anecdote in framing and legitimising the ‘problems’ with child support in Australia. Feminist Legal Studies, 24(2), pp.147-167.
Edge, P.W., 2017. Religion and law: An introduction. Routledge.
Evans, C., Lignier, P. and Tran-Nam, B., 2016. The tax compliance costs of large corporations: An empirical inquiry and comparative analysis.
Gans, J., 2016. Modern criminal law of Australia. Cambridge University Press.
Hickman, K.E., 2015. Administering Tax Complexity Versus Simplicity.
Hufnagel, S., 2016. Policing cooperation across borders: comparative perspectives on law enforcement within the EU and Australia. Routledge.
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.
Mangioni, V., 2015. Land tax in Australia: Fiscal reform of sub-national government. economics.
Marett, P., 2018. Information law in practice. Routledge.
McGee, R.W., Devos, K. and Benk, S., 2016. Attitudes towards tax evasion in Turkey and Australia: A comparative study. Social Sciences, 5(1), p.10.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Richardson, B.J. and Lefroy, T., 2016. Restoration dialogues: improving the governance of ecological restoration. Restoration Ecology, 24(5), pp.668-673.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.
Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.
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