The case related to Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 is about the Australian Taxation law. The given case aims to analyze the determination of the assessable income related the tax payer`s income. The company in question carried out dance classes and charged the different student on an hourly basis. The basic tuition fee which was prevalent was based on a minimum package of five, fifteen or thirty hours of dance hours which could be completed in a year (Arthur Murray NSW). Additionally, the dance student could have used 1200 hours of dance anytime during their lifetime. The payment structure of the dance class was very simple whereby the students made advanced payments or could pay a lump sum of amount. In the latter option, the students were offered discounts based on their convenience. This is an attractive method whereby the different customers are often lured against the life time offer but then they are seldom able to complete it. For this reason, the company is often able to make additional profits for the given purpose.
An example could be given that in case the advanced payments were made the 1200 hour package could be purchased by a discount of 300 pounds. The students could not claim a refund when an instant payment was made and this could lead to additional problems. In contrast to this, there were times when the company made a refund (Lang 2014). The system of accounting followed in the given scenario comprised of addition of the fees to unearned deposits section once it was received and transferring them from time to time to the “Earned Tuition Account”. The income tax was paid on the latter account and the money which was earned under the untaught lessons were not counted as earned income and they became an assessable income which could be received later on.
The problem arose when a claim was made by the commission stating that the money received was needed to be assessed in the same year and there could not be the presence of the two stated accounts. This hot involved with the Section 25(1) of the ITA 1197.
The tax payer as well as the commissioner got together in order to analyse the assessable income of the given tax payer in different methods and hence, their treatments were quite different from one another. Additionally the given case was discussed before the court and for this reason it became important to analyse whether the assessable income of the given dance classes should be inclusive of the prepaid tuition fee or not (Becker, Reimer and Rust 2015).
The case presented at the end of the proceedings, stated that the court had come up with a new rule. This new rule stated that as the fees was received in advance and it was not for the service which had already been provided, the income was not required to be used in the assessable income component. Furthermore, the court stated that there needs to be a presence of an agreement between the tax payer which is the dance company and the student which shall state that the fees is not refundable in cases the student fails to take the lessons (Hemmings and Tuske 2015).
Like stated earlier, the refund was generally paid but then the dance class considered that the received money was not included in the fees received as they might have to refund it back (Besley and Persson 2013). Hence, in order to solve the given issue the court ordered that the dance class earned their revenue by providing the dance service in the year where the dance was provided but not in the single year and it was in this manner that the advanced fees was received (Linde et al. 2014). Hence, it was decided that the accounting procedures being followed currently by the taxpayer was appropriate and could be continued with.
The Income Tax Act of 1997, it has been stated that if a given amount is earned by a tax payer then such an amount should be given the designation of income derived. It was also stated that if any income had been provided for a single year then it needs to be included in the given domain only. This has been mentioned in the Section 6-5 of the ITA Act 1997.
However, there exists two different methods for calculating the income and the tax which has to be made by the tax payer. The given methods are the earning method and the receipt method. It depends upon the tax payer on which method do they have to apply in the given scenario. It depends on the suitability of the payer.
In the paragraph 19, of the Taxation Rule 98/1 it had been stated that in case there exists a scenario whereby the income of the tax payer is earned out of an investment or it has been earned from other sources which cannot be termed as business income then this earning will be calculated under the receipt method of calculating the income (Auerbach and Hassett 2015). In the paragraph 20 of the Taxation Rule of TR 98/1, it had been mentioned that the income can be calculated on earnings basis when the income is earned by manufacturing or business related operations (Hemmings and Tuske 2015). Hence, in case the tax method is concerned then the earnings method is considered to be more suitable.
The company RIP Pty Limited is involved in the funeral business and other related services to the consumers. The company performs well and is earning around $2.45 million every year when estimated at the end of the year on June 2016. As the company provides a wide variety of services to the different customers, it uses different methods of calculating the income as well as calculating the tax (Jacquet, Lehmann and Van der Linden 2013). It adopts different methods of collecting customer fees and therefore these methods have been elaborated on in the following scenario:
If the general rules were followed, it could have been observed that the earnings method was the primary method for calculating the income. In the scenario of RIP Pty Limited the company engages in the funeral operations and the income thus derived can be treated as the revenue received (Piketty 2014). However, the company raises a 30 day invoice and hence the company needs to treat this income after the service has been given and during the next 30 days the invoice shall be raised and traditionally the company does not need to wait for the actual receipt received then (Piketty and Saez 2013).
The company also has a scheme which is referred to as the easy future plans. As a part of the given plan, the company offers the customers with a promise that it will be providing the different customers in the near future. The advanced fees which is paid under the given category is not refundable (Kaplow 2015). The fees paid under this given category is forfeited and transferred to a separate account under the heading Forfeited Payment in the situation where the customer is unable to provide the instalments (Barkoczy 2016). The company is required to treat the given figure as an income because the company has no further liability to provide future funeral services in such a scenario. Hence, the company derives services through this.
In the case of Arthur Murray, the income which was received and calculated accordingly for the year in which the service was actually provided. Although the general rule states that the fees received in advance is required to be treated as the income itself. Same is the case of RIP Pty Limited the company took advanced payment from the different customers. Hence, the principle which was valued and upheld in the case of Arthur Murray is applicable to the operations of RIP Pty Limited as well. However, it is wrong on the side of RIP Pty Limited to involve receiving the amount received as fees. In the given situation the company needs to ensure that it is counting the income in the year where the funeral services actually take place.
The Taxation Rule 98/1, methods of the accounting income which were present as the purpose of tax were two. The methods involved were the earnings method and the receipt method.
The receipt method is a method, which is used for the cash receiving basis and the income which is received or arrived at is the real income in nature and is commonly known as the constructive method of income calculation (Barkoczy 2016). The Section 6-5 (4) of the ITA Act 1997 stated that if a scenario arises that when the tax payer makes the income, he needs to pay the tax accordingly. The second method is the earnings method which states that the method can be either cash or credit payment method and runs on an accrual basis. This means that the income is earned and derived the same time where the sales takes place and the recoverable debt account may be formed simultaneously (Egger, Radulescu and Strecker 2013). In a scenario where the task which was required to be done is completed on time then the tax payer can make a claim and the amount shall become recoverable. However, there is no strict rule and any method of collecting can be applied and used properly.
The company RIP Pty Limited runs a scheme whereby the scheme allows the people to invest in an easy future plan. Under this plan the customers who are paying the fees under the easy future plan will be saving for their funeral for the future. However, the amount which is being paid by the investors is considered to be non-refundable in nature. The next condition on the given amount is that if a situation arises whereby the given authority is unable to pay the concerned fees then in such a situation, the fees which has been received at that point of time is forfeited and transferred to the Forfeited Payment section (Gans 2016). The company holds no liability that the customers had initially paid a certain percentage of the fees. Furthermore, the company shall not refund and not provide funeral services along. Hence, for this purpose it has been suggested that the forfeited fees of of $16200 needs to be treated as an income in the year along the forfeited fees.
A trading stock is popularly defined as an item which has been obtained for the purpose of business operations and for carrying out the different activities. The section 70-10 of the ITAA 1997 states that a trading stock can be described as one which is popularly used for selling or manufacturing of the services and goods acquired during normal operations. The expenditure which has been incurred for the trading stock cannot be put into the category of a capital expense as it is purchased for the daily activities (Piketty and Saez 2013). The given set of rules have also been stated in the provisions of section 70-25 of the ITAA 97. It has been stated that in case of RIP limited the caskets and the other products with it which the company makes use of for its daily activities to derive income have to be treated as trading stock and the capital assets cannot be used as they are not considered in the current scenario (Colonna and Marcassa 2013).
The section 8-1, of the ITAA 97 provides the scope of the general expenses which can be deducted from an individual. The given section states that the trading stock expense is a considerable deduction which is made from a taxable income. It states down that the decision may be kept on hold and may be only done when in that specific year, the trading stock converts into a stock for the chosen enterprise Except for the trading stick expenses, if any other expenses have been incurred for the business operations then it needs to be involved in the operational process of the business is treatable and deductible under the Section 8-1.
Furthermore, in the same context the company has paid around $25000 in the form of the prepaid when they tried to initiative the stock production which was not due until next year Hence, the considering payment would be based in relation to the Year 2016 and the above discussion can be considered.
The Section 6-5 states that the income which is earned by the tax payers tends to be treated as the normal income under the ITAA 1997 act. Furthermore, the taxable income of the given enterprise would also take into consideration the dividends given out. Although the tax has already been paid in this reference, a franking credit may be received by the firm which assists the firm and helps in the claim management. Hence, in a similar manner, RIP Limited should be given the change of attaining franking credits in the form of fully franked dividends.
The provision of sections 100-25 of the Income Tax Act states that the advance payments being made for longer period of time can be done. Furthermore the rental storage need not be treated as a capital income but a regular income. Hence, general discussions will be made accordingly.
The rules of 83-80 state that the long services of ITAA 1997, should not be taken as a part of the assessable income. Hence, in case a three month long leave is adopted by the firm then the advance is taken as an expense and not advance.
When the tax payer conducts certain expenses while engaging in the calculation or coverage of the assessable income then it is a law that the given tax, shall be deductible under the provision of section 100-25 of the ITA 1997. The given legislation states that the provisions related to land would be dealt by it. Very often there might exists a situation whereby the tax payer had to pay a certain percentage of money in the process, it shall be deducted from his paying and they are reduced.
However, if an individual has incurred the expenses in relation to the building and land then it cannot be deducted under 9-1 point of the act. Although the given rule has been passed, it becomes increasingly important for the enterprise to ensure that the expenses are not capital in nature. Hence, when the parking lot was constructed, all the expenses related to it for various activities like equipment’s and landscaping will not undergo any deduction although being capital in nature.
References
Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.
Besley, T. and Persson, T., 2013. Taxation and development. In Handbook of public economics (Vol. 5, pp. 51-110). Elsevier.
Colonna, F. and Marcassa, S., 2013. Taxation and labor force participation: The case of Italy.
Egger, P., Radulescu, D. and Strecker, N., 2013. Effective labor taxation and the international location of headquarters. International tax and public finance, 20(4), pp.631-652.
Gans, J., 2016. Modern criminal law of Australia. Cambridge University Press.
Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.
Jacquet, L., Lehmann, E. and Van der Linden, B., 2013. Optimal redistributive taxation with both extensive and intensive responses. Journal of Economic Theory, 148(5), pp.1770-1805.
Kaplow, L., 2015. Myopia and the effects of social security and capital taxation on labor supply. National Tax Journal, 68(1), p.7.
Lang, M., 2014. Introduction to the law of double taxation conventions.
Linde Verl Piketty, T., Saez, E. and Stantcheva, S., 2014. Optimal taxation of top labor incomes: A tale of three elasticities. American economic journal: economic policy, 6(1), pp.230-71.
Piketty, T. and Saez, E., 2013. A theory of optimal inheritance taxation. Econometrica, 81(5), pp.1851-1886.
Piketty, T. and Saez, E., 2013. Optimal labor income taxation. In Handbook of public economics (Vol. 5, pp. 391-474). Elsevier.
Piketty, T., 2014. Capital in the 21st Century.
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