As evident from the above stated case it is understood that the taxpayer carried on the business of providing its client with the dancing business and also provided discount to its student that were ready to pay the fees to the taxpayer in advance (Barkoczy, 2014). Furthermore, the primary objective for providing the clients with the discount was to promote the clients to pay the fees in advance. There was also an agreement between the taxpayer and the students that took lesson that there would be no form of refund for the fees paid during the course of the contract.
The fees that were received by the taxpayer was transferred into the separately maintained account that was known as the unearned deposit untaught lesson account. In order to further provide the evidences of the case facts the taxpayer followed the procedure where the fees that were received in advance were transferred into the revenue account as soon as the lessons were imparted to the pupils (Brokelind, 2014). According to the given agreements between the taxpayer and the students, it is noted that the taxpayer was also required to refund its students the fees that were taken in advance due to the non-providing of dancing lessons. A satisfactory reasons were stated by the taxpayer during the course of refund.
As evident from the above stated case study the taxpayer had initially followed the policy where the fees that was received in advance was identified and considered as income following the completion of the lessons that were provided to the student (Coleman & Sadiq, 2013). As a result of this, the taxpayer did not included any amount into the taxable income since the fees that were received were in advance. The taxable income is only computed by the taxpayer when the lessons that were imparted by the taxpayer to the students was completed. The amount form the unearned revenue accounting was transmitted as and when the lessons of dancing were completed by the taxpayer. In addition to this, the taxable income of taxpayer was computed based on the receipts method and the same was for assessed by the taxation commission.
The taxation commissioner assessed the income of the taxpayer and took into the consideration the amount of fees that were received during the income year since these fees were received by the taxpayer in advance (Grange et al., 2014). According to the “section 6-5 of the ITAA 1997” ordinary income constitutes income from the ordinary concepts and hence the calculation of tax that was made by the taxpayer was entirely different from the one determined by the taxation commissioner.
The above stated case facts identifies the issues where the taxpayer together with the assessment commissioner were engaged in the assessment of the taxable income of the taxpayer in numerous ways (James, 2015). On viewing the results that were gained from the case it was noticed that the commissioner demanded the tax which was higher than the tax that was calculated by the taxpayer. However, the taxpayer objected the assessment bought forward by the taxation commissioner and appealed in the high court of Australia for further assessment of prepaid income that was received by the taxpayer.
On arriving the conclusion the judgement of the Australian High Court was based on the general rules where the fees that were received by the taxpayer as advance cannot be included into the taxable income of the taxpayer (Kenny, 2013). The contractual agreement that was formed by the students that took lessons from the taxpayer was that no kind of refund would be allowed however in actual scenarios refunds were made by the taxpayer on a justifiable grounds. The court of law stated that there was probability of refunding the fees and due to this reason the taxpayer cannot include the fees that were received in advance into the taxable income (Krever, 2013). In the judgement provided by the high court stated that the taxpayer derived the income in the year when the lessons for dancing were imparted and not in the year when the advance were received. Therefore, the court of law held that no income was derived by the taxpayer and upheld the bookkeeping treatment of fees that was received by the taxpayer.
As evident from the description stated under the “section 6-5 of the ITAA 1997” when the taxpayer receives any amount by himself or on behalf then the amount that is received by the taxpayer will be considered as the amount that derived by the taxpayer wholly or exclusively (Morgan et al., 2013). In addition to this, income that is derived by the taxpayer is taken into the considerations as the taxable income of an individual on the basis of the provision that were stated in “section 6-5 of the ITAA 1997”. To compute the taxation income there are usually two common methods namely the earnings method and the receipts methods (Murphy & Higgins, 2016). For an individual taxpayer is necessary for them to account for their taxable profits based on the either of the methods in order to reflect the correct figures of income.
According to the taxation ruling of “Taxation Ruling 98/1” under paragraph 19, there are different classes of income under the receipts methods (Pope et al., 2017). As evident from the taxation rulings receipts method of accounting is regarded as the appropriate method of accounting for the income. In addition to this the taxation ruling provides that given the income is generated from the trading activities or the manufacturing activities then these income should be accounted by employing the earnings methods. Hence, it is noteworthy to take into the consideration the earning method as well since it is regarded as the most appropriate method of computing the tax.
Considering the circumstances of RIP Pty Ltd it is understood that the company offers its clients with the funeral service. During the year ended 2016, the business reported a net profit of $2.45 million. The major part of the revenue was derived by the RIP Pty Ltd by providing its customers with the funeral events. There are different way of collecting fees from the customers and below listed are some of the ways through which RIP Pty Ltd collected fees from its customers;
As evident from the stations of the RIP Pty Ltd the principles that has been stated in the case of Arthur Murray can be implemented during the year in which the company has obtained the income as the fees that is received from the customers. In compliance with the rules of the common law, any kind of money that is received in advance will be held as the income (Woellner, 2013). The facts that was received the case of RIP Pty Ltd where the company applied the easy funeral plans to receive the fees from the customers in advance along with the provision of providing the service in the future. The practice that is followed by the company is based on deriving the fees from the customers in advance. Therefore the principles that were adopted by the Arthur Murray was identical to that of the RIP Pty Ltd. However, a recommendations can be provided by stating that the fees that is received in advance should not be recorded in the year of receipt (Stewart, 2017). The company should record the fees during the year in which the funeral services are provided by the company to its customers.
Referring to the provision that is stated in the “Taxation Ruling 98/1” it is understood that there are namely two main methods of accounting for the business profits this includes the earnings methods the receipts methods (Peiros & Smyth, 2017). In accordance with the principles of the receipts methods the accounting income are based on the cash basis or cash received. In accordance with the receipt methods the accounting profits that is derived by the business is usually the income that is received constructively.
In agreement with the “section 6-5(4) of the ITAA 1997” it is held that the income only derived when the amount is received by the taxpayer. There is also another method of determining the business profits derived in the year of income and for determination of tax as well (Buchanan & Consett, 2016). This methods is known as the earnings methods. Earnings method is also regarded as the credit method or alternatively it is known as the accrual method. In accordance with the given provision, it is noticed that the income that is derived would be considered as the income as and when earned also results in the creation of the recoverable debt. For a taxpayer it is necessary to take into the consideration the necessary actions depending upon the agreement of the contractual performance. As understood from the above stated analysis, it can be stated that the taxpayer as well as the commissioner are able to make choice from the two method in computing the tax liability.
As evident from the scenario of the RIP Pty Limited the company commence an easy future plan. The plan accompanied the scheme that the customers were required to pay the fees in instalment and in turn RIP Pty Limited would be promising the customers with the funeral service in the upcoming future. The fees that was received by RIP Pty Limited from its customers were regarded as the non-refundable. The entire amount of money that was received by the company from the customers with the help of instalment scheme would be forfeited by the company (Krever & Mellor, 2016). The fees would be transmitted to the separated account books of the company that was named as the Forfeited Payment Account on the vent of failure by customer to pay the fees in advance. RIP Pty Limited would not be considered liable for rendering the future service given the customers does not pay the amount completely. A recommendations can be provided to the company by stating that the fees that were identifies as forfeited fees should be considered as income. Similarly the forfeited sum of $16,200 must be considered as income for the concerned year and should be forfeited simultaneously.
With reference to the “Section 70-10 of the ITAA 1997” trading stock is regarded as an item that is purchased for the purpose of resale (Bankman et al., 2017). Under “section 70-10 of the ITAA 1997” trading is not held as the CGT assets. Similarly in the situation of the RIP Pty Limited the purchase of the trading stock such as the caskets and accessories will be regarded as the trading stock and cannot be classified as the capital assets.
However, business can claim deduction under “section 8-1 of the ITAA 1997” any amount that are in the form of the outgoing or expenses will be considered for deductions since the amount are incurred in the derivation of the assessable income (McDaniel, 2017). The prepaid amount of the trading stock that is paid by the RIP Pty Limited would be considered as the allowable business deductions under “section 8-1 of the ITAA 1997” since the expenses incurred are in respect of the derivation of the assessable income.
All the resident taxpayer under the provision stated under the “section 6-5 of the ITAA 1997” that income which is derived would be considered as the taxable income. Moreover, business receiving income as the dividend is required to declare the same into the taxable income for assessment purpose (Schenk, 2017). The income under “section 6-5 of the ITAA 1997” constitutes ordinary income. It is noticed that dividends are entirely franked and as a result the business would be able to claim the franking credits.
According the description that is stated in the “section 100-25 of the ITAA 1997” any form of advance payment that is needed to be paid by the business could not be classified as the capital asset (Schmalbeck et al., 2015). Similarly in the current situation of RIP Pty Limited the advance payment of rent would not be classified as the capital asset. As an alternative the expenditure would be considered as the business outgoings for the payment of rent which cannot be classified as the capital asset. According the provision stated under the “section 8-1 of the ITAA 1997” an individual taxpayer is allowed to claim deductions from their assessable income relating to any outgoings that is occurred in gaining the assessable income. Therefore the payment of advance rent by the RIP Pty Limited would be considered as the allowable general deductions under “section 8-1 of the ITAA 1997”.
Referring to the explanation that is made in the “section 83-80 of the ITAA 1997” the unused amount of the long service leave should be considered into the taxable income of the business (Nossaman & Wyatt, 2016). Evident in the situation of the RIP Pty Limited the company has made an advance payment to as this would enable the employee to serve three months for the company.
In compliance with the explanations that has been provided under the “subsection 83-85 of the ITAA 1997” these kinds of provision provides the taxpayer with the facilities of making a claim for the allowable deductions associated to the unused sum of long service leave. It is worth mentioning that the provision of the long service leave that is paid to the employee qualifies as the business deductions. The provision of the long service that is paid to the employee should not be greater than the 30% of the employees assessable income. Taking into the consideration the situation of the RIP Pty Limited it can be stated that the company has made contribution in the long service leave of the employee for a time span of three months. These payments would be classified as the business expenditure and the same must be treated as the advance for the income year of 2016.
The taxpayer can claim the general deduction from their assessable income in relation to the amount incurred in deriving the assessable income (Schenk, 2017). The expenditure that is incurred by the RIP Pty Limited for the land and building constitutes the capital expenditure and cannot be allowed as deductions. The expenses incurred in the construction of the onsite car parking would be classified as the capital expenditure which is non allowable deductions under “section 8-1 of the ITAA 1997”.
Reference List:
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income Taxation. Wolters Kluwer Law & Business.
Barkoczy, S. (2014) Foundations of taxation law.
Brokelind, C. (2014). Principles of law: function, status and impact in EU tax law. Amsterdam: IBFD.
Buchanan, R., & Consett, E. (2016). Section 974-80 ITAA97: The current state of play. Tax Specialist, 19(5), 217.
Coleman, C., & Sadiq, K. (2013) Principles of taxation law.
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.
James, M. (2015) Taxation of small businesses.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Krever, R., & Mellor, P. (2016). Australia, GAARs–A Key Element of Tax Systems in the Post-BEPS World.
McDaniel, P. (2017). Federal Income Taxation. Foundation Press.
Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage Learning.
Nossaman, W. L., & Wyatt Jr, J. L. (2016). The Conflict of Laws between States in Taxation of Trusts. TRUST ADMINISTRATION AND TAXATION, 3.
Peiros, K., & Smyth, C. (2017). Successful succession: Tax treatment of executor’s commission. Taxation in Australia, 51(7), 394.
Pope, T. R., Rupert, T. J., & Anderson, K. E. (2017). Pearson’s Federal Taxation 2018 Corporations, Partnerships, Estates & Trusts. Pearson.
Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.
Schmalbeck, R., Zelenak, L., & Lawsky, S. B. (2015). Federal Income Taxation. Wolters Kluwer Law & Business.
Stewart, M. (2017). Australia’s Hybrid International Tax System: Limited Focus on Tax and Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer, Cham.
Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.
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