Considering the subject matter of the case, it can be stated that the main theory of the case is based on the Arthur Murray’s dance company. The main motto of the company is to admit the students in the dance classes and take money from them on advance or spot payment. In this task, it is required to make tax assessment for the company by considering all the aspects of the annual tax report and income and expenditure criteria for the company. However, before that it is required to discuss about all the operational works of the company. Like other companies, this company has taken certain steps to deal with their business profit in their own way. The students are required to enter into a contract with the company at the time of admission and there were certain terms in that contractual agreement. The students have two options for their payment criteria (spot payment and advance payment). Further, the company has made certain refund provisions for the students. All the programs taken by the company was based on various courses. It has been stated by the company that if the company has failed to complete any of the program, the company will refund the money to the students who have made advance payment. This is the only refund provision and the plea for refund should be legitimate in nature. `Additionally, the contract entered in between the company and the students could not be cancelled. There were two accounts for the company. When the students are paying the money to the company, the amount go to the suspense account and when the terms of the course has been over, all the money go to the revenue accounting. All the monetary transaction of the company has been maintained through the annual balance sheet of the company and the record book could understand the assessable income of the company. Different rules have been set up in case of the advance payment. After the payment regarding the advance money, the monies are going in the untaught lessons account.
Considering the subject matter of the case, following issues have been cropped up. It is to be determined what are the taxable income of the company and whether all the advance payment made to the company has been assessed by the tax commissioner or not.
According to the income settlement record of the company, it has been observed that the company has asked for two types of payment such as spot payment and advancement payment. It is therefore required to calculate all the earned money gained by the company. One of the most important part of the Income Tax is assessable income. The tax will levy on those incomes that can be assessed. Total sum gained by an individual in one tax year is known as assessable income and the individual should have to give tax on those incomes. However, there are certain exceptions to this rule. The nature of the income should be complete and therefore, it can be stated that the process of advance payment should not be a part of the complete payment. Further, in the annual balance sheet of the company, there should be no provisions of refund. However, from the profile of this company, it has been observed that there was such provision and the company had promised to the student to give their money if the company could not able to complete their course after certain period. Therefore, it can be stated that there is no certainty that all the advance payment could be assessed thoroughly and they are not complete in nature. It is obvious to state that the advance payments could not assessed under the assessable income.
The present subject matter of the case is based on the taxation and the Income Tax Assessment Act 1997 deals all the tax related matters. In this part of the solution, both general and related activities done by the RIP Pty Ltd has been discussed. Considering the business criteria of the company, it can be stated that the company is dealing with the matters like conducting funeral ceremonies and other co-related issues. This company has also certain plans regarding their total income and expenditure. In this case, a clear definition of income should be discussed. According to section 6.5 (4) of the Act, when some amount of money has been paid to or gained by an individual or by some other people on his behalf, is recognized as the income. The income can be divided in two ways such as earning method and receipt method. When certain amount has been earned by an individual through certain job or other processes that known as earning method. On the other hand, when someone receives certain profit through any business that can be assessed as receiving method. According to these definitions, it can be stated that those money earned by a business could be held as earning process and could be assessed as earning method. Therefore, the income gained by RIP Pty Ltd could be assessed through earning method and the process should follow the provisions of the Income Tax Assessment Act 1997.
In this case, two companies have been mentioned and each company’s income process has been mentioned. Arthur Murray deals with dance process and RIP Pty Ltd is dealing with funeral ceremonies. Apart from conducting funeral ceremonies, it also delivers certain funeral accessories such as casket and other products. Like other companies, it has also taken certain processes by which the company can earn certain profits and retain their name in this competitive world. Like the other discussing company, this comp[any has also mentioned two payment style for the customer. It has been observed that the customers are requested to make advance payment so that they can get certain future delivery from the company. In that case, the customers can get certain discount from the company. However, according to the norms of the company, the customers who become the part of the advance payment scheme could not claim for refund from the company. Further, in case of any delay payment from the sides of the customers, the company will be no longer liable to the customers and the contract with the customer will be repudiated. According to the final balance sheet of the company, the total profit of the company was $2.45 million for the year 2016. In addition to this, it has been observed that the company has secured certain invoice plan for the customers and the company has chalked out certain repayment installation plan. The company has set up its entire plan for the benefit of the customers and facilities have been given to them. The future plan of the company has certain restriction and the customers are required to follow all the rules strictly. However, the company has not set out any refundable provision for the customers and therefore, it can be stated that the nature of all the payment, whether full or advance are complete and according to the provision of the Income Tax Assessment Act 1997, all these incomes are taxable in nature.
According to thorough study of the case, it can be stated that both the companies have earned certain amount of profit and it is necessary to assess all the income that come under the purview of the assessable income tax. According to the business process of Arthur Murray, it can be stated that the company has chalked out certain plan for the betterment of its business and to attract the eyes of the students, it has planned for refundable money to all the students who could not enjoy all the benefits of the company. Therefore, it has been understood that the nature of income for the company is incomplete. Thus, the money come from the advance payment will not make part of the assessable income tax.
However, different scene has been observed in case of RIP Pty Ltd. According to the policies of the company, it has been noticed that there are certain provisions relating to the advance payments for the customers. Management, the company has not made any refundable provisions for its customer and therefore, all the money have been counted as the income and complete. Considering this, it can be stated that the company’s income will be assessed as its income.
Further, there are certain other provisions applied in this case. according to the provision of tax rule 98/1 Para 9 of the Act, assessable income can be proceed by maintaining either earning method or receipt method. An overview of these methods have been made in the previous occasions and according to this, the income that derived from earning could be renowned as earning method and those originated by receiving will be treated as receipt method. Further, the profit gained by the company either through advance payment or through spot payment will be known as complete payment. The reason behind the same is that there is no refundable payment provision. Therefore, the money obtained by the company will be redressed as their income and complete. This provision attracts the provision of section 6.5 (4) of the Act 1997 and the money earned by the company will be assessed under the earning method. The other name of the earning method is cash and credit. It is the responsibility of the company to make all the assessment and give tax according to the fair calculation process. A company should have to think for the betterment of the company after giving tax. It is also the duty of the Arthur Murray’s company to check all their income under any acceptable income tax assessment process.
This part of the case is dealing with the forfeited money. The company RIP Pty Ltd is dealing with the funeral program and delivering other accessories to the customers. However, certain steps have been taken by the company to make certain changes to the company so that the company can retain its reputation in the competitive world. Further, the company has given certain concentration over its business policies and made certain steps for the development of the company. It has been observed that the company has offered certain advance payment from the company. Regarding the advance payment, the company has not provided any refundable provision and the parties to this facility should have to enter into a contract; where it has been mentioned that the company will no longer bound to provide the future delivery to the customers once they have failed to pay any of the terms of the future payment. This tendency proves the fact that the nature of the income is complete and will be assessed accordingly. Further, the company has transferred all its advance money ($16,200) to a forfeited account. It is no doubt to state that this account will also come under the purview of assessable income.
The main discussing matter for this part is trading stock. Anything that forms a part of the manufacturing process or that makes a part of the exchange or sale of goods is regarded as trading stock. According to the provisions of the Income Tax Act, the nature of the trading stock should not be capital income and a general provision of the term has been discussed under section 70.10 of the Act. Nature of the stock has been mentioned under section 70.25 of the Act and according to the provisions of the section, it can be stated that any types of accessories can come under the light of the trading stock. Consider the provisions of the RIP Pty Ltd, it can be stated that the funeral accessories delivered by the company will form part of the trading stock, as the nature of the accessories is not capital income. Further, it has been observed that the accessories bought by the company have fulfilled the provisional approaches of the section 70.10 of the Income Tax Assessment Act 1997. These accessories can form a part of the exchange or sale of goods. In these cases, the general deduction process is applied and according to this, it can be stated that the general deduction process will also be applied on these trading stocks of the company. According to the proper assessment, it has been observed that company has earned $25000 from all these trading stock and therefore. It can be stated that this could be regarded as the income of the company and the provision of the general deduction process will be applied on them. It can be stated that this $25000 can be treated as the income of the company and the calculation of the income should be as under:
|
Particulars |
Amount |
Section |
|
|
Production of stock |
$25,000 |
section 8-1 of the ITAA 97 |
|
|
Advance Payment |
Nil |
of Section 6-5 of the ITAA 1997 |
|
|
Payment for next year |
$25,000 |
This part deals with certain suggestions of the company so that it could make certain adjustments and an idea regarding ordinary income has been made in this case. The ordinary principle of income will be applied in the case of ordinary income and therefore, similar definition of the income will be applied in the case of ordinary income. There is an additional provision of the ordinary income. In this case, dividends are inserted. Advance payments are excluded from the provision of income, as they are uncertain in nature and incomplete thereby. However, all the advance payments where there is no option for refund will be come under the purview of income. Therefore, the company has to make certain adjustment in their income facilities. Further, the company has been engaged in certain long leave payment process. There are also certain uncertainty regarding these payments and therefore, it can be stated that this could not be treated as assessable income. According to the case study, the company has received a dividend of $21000. This will be regarded as the income of the company, as dividends are held as a part of the ordinary income. The amount of the rental storage will not form part of the income, as it comes under the shadow of long leave payment. The long leave payment could be refunded and it will not be defined as income.
This part of the case is based on the general deduction process. Certain building equipments and land has been mentioned in the case and according to the provision of the Income Tax Act, building and land come under the purview of Central Sales assets. Building could fall under the provision of the capital expenditure. In the words of section 8 of the Act, the facilities of general deduction will not imposed on the CST assets. Therefore, it can be stated that building equipments will be excluded from the general deduction.
Reference:
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Brown, C., Handley, J. and O’Day, J., 2015. The dividend substitution hypothesis: Australian evidence. Abacus, 51(1), pp.37-62.
Bulman, G.B. and Hoxby, C.M., 2015. The returns to the federal taxation credits for higher education. Tax Policy and Economy, 29(1), pp.13-88.
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.
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.
Gale, W. G., Samwick, A. A., and Center, U. B. T. P. 2014. Effects of income tax changes on economic growth. Economic Studies, https://www. brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Sa mwick. pdf.
Gale, W.G., Samwick, A.A. and Center, U.B.T.P., 2014. Effects of income tax changes on economic growth. Economic Studies, https://www. brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Sa mwick. pdf.
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.
Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.
O’Connell, A., 2017. Investing in the Future—Taxation Issues. In Bridging the Entrepreneurial Financing Gap (pp. 178-198). Routledge.
Symes, C.F., 2016. Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Routledge.
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