Arthur Murray carried the licences from the company of United States to conduct the business of giving lessons relating to dancing to the people in Sydney and Melbourne. There were pupils that signed onto the contract to take lessons that ranged from five hours to fifteen hours and was spread over the one year time period (Auerbach and Hassett 2015). The contract also contained the agreement of providing a lifetime series of twelve hundred classes. The payments that was made to Arthur Murray was either made based on the full amount upon the signing of contract or through the substantial deposits based on the instalment basis during the lesson course (Black 2017). The contract provision also contained that the agreement was not divisible with the students would be entirely held in charge of the tuition amount that is laid down in the contract. The contract was non-refundable and non-cancellable.
The licence that was carried contained that the taxpayer conducted would conduct its business based on the provision that if the students makes the request for refund then in such situations refunds were only provided when there was any form of justifiable reasons behind the justification (Buchanan and Consett 2016). As the matter of fact even though the contract was non-cancellable and non-refundable but refunds were made to the students in the year of income on the circumstances when the student that failed undertake the prescribed number of lessons and provided the satisfactory reasons for discontinuation of tuitions.
A method was adopted by the taxpayer for accounting purpose. The method was known as the “accruals” or the “earnings methods” where all the money that is received in the form of advance payment based on the lessons to be rendered were not credited under the general revenue immediately (Burton 2017). As an alternative these amounts were credited to the account that was known as the “Unearned deposits” for the untaught lessons. As and when the lessons were given by Arthur Murray the instructor was required to enter into the records sheet that was maintained in accordance with the names of the pupils. At the end of each month the amounts that were corresponding the number of lessons that were provided were transmitted into the account that was known as the “earned teaching account” (Clarke 2017). Therefore the money that was received by the taxpayer was not treated as by the taxpayer as having been earned till the lessons were provided or in fact given by the taxpayer. The accounting practices adopted by Arthur Murray required carrying a considering sum of amounts that were recorded in the “earned deposits account” to be carried forward into the subsequent financial year.
The commissioner of taxation carried out the assessment for relevant years of 1954, 1955 and 1956 which also included income where the amounts that were originally received by the taxpayer during those years instead assessing those amounts that have been earned in respect of the accounting methods adopted by taxpayer (Cooper 2015). The taxpayer bought forward the objections regarding the assessment of the income but the objection was disallowed. The board found that the cash that were received represented a gross proceeds of the taxpayers business and was regarded as the element of the receipts. Further appeal was made by the taxpayer in the high court of Australia.
The issue revolves around determining whether the taxpayer had derived the prepaid amount of tuition fees during the year of income in which the tuitions were rendered or alternatively the year in which the fees were received by the taxpayer.
The high court of Australia held that the no such income was derived by the taxpayer until the services were rendered by the taxpayer. The court of law in its decision stated that the purpose was to discover what gains have come home to the taxpayer that have not only been received by the taxpayer but also possess the nature of home coming for the taxpayer (Cooper 2017). The court in its decision stated that the as per the established principles of accounts and commercial practices the amounts that were received in advance of goods that is sold or services that is rendered are not entered into the revenue account until the sales happens or the services has been rendered.
The court of law in “Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314” held that the income that was received by the taxpayer for the advance of services being provided might not be viewed as income until and unless the services are rendered or the income is earned (Jones 2017). In the meantime the income that was received was credit into the suspense account and it was only transferred into the income statement when the services were discharged. Hence, no income has been derived until the taxpayer renders the services.
A very clear explanation has been provided under “S-6-5 of the ITA Act 1997” where any taxpayer that receives income upon their behalf then such income that is received would be considered as the derivation of income as the whole (Joseph, Walpole and Deutsch 2015). In addition to this, derivation of income should be considered for assessment based on the provisions laid down under“S-6-5 of the ITA Act 1997”. The taxpayer possess the choice of choosing between the cash (receipts) basis and the earnings (accruals) basis at the time of accounting for income (Krever and Mellor 2016).
The two methods usually differ based on timing of the transactions along with the sales and purchase that are included into the account of the taxpayer (Murray and Wright 2015). A taxpayer is required to select among the two methods which is appropriate under the circumstances of taxes. As held in “Carden v Federal Commissioner of Taxation” the court of law held that the methods of accounting provides a substantially correct reflection of the taxpayer’s true income (Peiros and Smyth 2017).
The cash methods is usually considered as the appropriate method for the individual taxpayers such as those deriving salaries or earnings wages and some professionals that are in sole practice (Richards 2014). While the accrual methods on the other hand is considered as appropriate for majority of the businesses. Following the common rule of Taxation Ruling of TR 98/1 earnings methods is viewed as the appropriate for accounting for business receipts and the business must follow this method (Stantcheva 2017).
Moving towards the case of RIP Pty Ltd the company is indulged in providing a funeral services and makes a net profit of $2.45 million. Major part of the company’s earnings were received from the customer receipts that took the funeral services of RIP Pty Ltd. The company often provided the customers with the facilities of paying the invoices on a thirty day credit term and often received fees based on instalments under the easy future plans. The principle of Arthur Murray is only implemented if the payments that is received as the advance or kept under the unearned account by the taxpayer and are not treated in the form of income till it is earned (Stewart 2017).
Based on the evidences of the case study it can be stated that RIP Pty Ltd receives fees from its customers in advance along with the provision of the services that is agreed to provide in the later events. The company has adopted the accounting method of recording the fees in advance and it is transferred into the earned account only when the amounts is eventually received (Van Niekerk 2016). The accounting practices that has been adopted by the RIP Pty Ltd is identical to that of Arthur Murray principles. Moreover, the RIP Pty Ltd should keep the record books where the receipts of the prepaid fees that is received as advance and the same should be held as income that is derived by the company in accordance with the easy funeral plans.
Meaning the explanation that has been stated in the “Taxation Ruling 98/1” it can be stated that the there are two main way through which the accounting profits are held liable for taxation purpose (Pinto 2013). The taxpayers has the choice of selecting between the two methods at the time of accounting for income based on the cash (receipts) basis or the earnings (accruals) basis.
The cash basis of accounting methods states that the income is derived only when it is received by the taxpayer either constructively or actually. Cash accounting is usually used for non-business income that is derived from the provision of knowledge or the exercise of the skills that are possessed by the taxpayers (Tan, Braithwaite and Reinhart 2016). While the accruals method or the earning methods is derived when it is earned. The instance of derivation takes only when the income is derived or on the event of creating a recoverable debt. As stated under the “Taxation ruling of TR 98/1” the cash method is held as the appropriate one for the individual taxpayers while the accruals method is considered as the most appropriate method for business (Middleton 2015). The taxpayers can chose from any of the two methods to reflect the correct taxable income.
A scheme was started by RIP Pty Ltd which was named as the Easy Future Plan where the customers of the RIP Pty Ltd were often required to pay instalments. In turn, RIP Pty Ltd promised its customers to render services related to funeral (Saad 2014). The fees that was received by the company were the advances from the customers were entirely not allowed for refund. The moneys that were obtained from the customers were completely forfeited by the company and it was transferred into the forfeited payment account on the instances of customer’s failures to pay the amount. This result the company to cease the future services since the customers failed to offer full payment. A suggestions in this regard can be made to RIP Pty Ltd that is should not offer services to the customers where the money received from the customers are forfeited. The sum of $16,200 represents the forfeited amount. The forfeited sum should be held as the income for RIP Pty Ltd.
Meaning the “section 70-10 of the ITA Act 1997” the definition of trading stock comprises of the goods that are acquired by the business to conduct manufacturing or selling the goods in the market (Tan, Braithwaite and Reinhart 2016). Mentioning the explanation of “Section 70-10 of the ITA Act 1997” Capital assets along with the financial instrument forms the portion of the trading stock in the form of asset. However, an important explanation provided under “section 70-25 of the ITA Act 1997” requires a taxpayer to not include any form of capital assets into the trading stock (Peiros and Smyth 2017). Similarly in the case of RIP Pty Ltd the trading stock items comprised of the items such as caskets and accessories that were bought in by the business for the purpose of resale. Therefore this items should be viewed as the component of trading stock rather than classifying the same as the capital assets.
The company also incurred cost which required them to pay for the purchase of trading stock. Meaning the explanation of “S-8-1 of the ITA Act 1997” a taxpayer on incurring expenditure relating to the derivation of assessable income will be allowed to claim an allowable deductions (Auerbach and Hassett 2015).
Taking account of the current state of affairs for RIP Pty Ltd paid the advance for the purchase of trading stock that cost the company $25,000. Therefore, it is worth mentioning that the prepaid amount that was paid by the RIP Pty Ltd is ought to be held as advance for deriving during the year ended 30th June 2016.
Referring to the meaning of the “Section 6-5 of the ITAA 1997” an individual taxpayer who is an Australian resident deriving income from the Australian sources would be classified as the ordinary income (Joseph, Walpole and Deutsch 2015). The receipt of dividend by RIP Pty Ltd must be included into the assessable income of the company. The dividends are held as fully franked and business can claim the franking credits from thereon.
Referring to the “S-100-25 of the ITA Act 1997” where a business that makes an advance payment of rent should be disallowed from being considered as the capital assets. It is worth mentioning that the expenses of advance payment of rent would not qualify as the capital assets (Buchanan and Consett 2016). The present case study of RIP Pty Ltd provides that the advance rent that is paid by the business relating to the period of four months would qualify as the overall deductions in terms of “S-8 of the ITA Act 1997”.
Referring to the provision that has been stated under “S-83-80 of the ITA Act 1997” it is found that unused amount of long service leave should be considered for PAYG Withholding (Burton 2017). Referring to the explanation stated by the ATO the employers are obligatory required to make the contributions into the long service leave of the employee for the services provided. It is worth mentioning that the description of “S-83-80 of the ITAA 1997” provides that the any form of unused sum of long service leave is not entitled to chargeable income.
The taxpayer in agreement with the provision stated under “subsection 83-85 of the ITAA 1997” provides that a person can claim the permissible deduction relating to the unused sum of long service leave. An important factor stated “subsection 83-85 of the ITAA 1997” is that the long service leave should not exceed the thirty per cent of the taxable earnings of the taxpayer (Stewart 2017). Evidently in the case of RIP Pty Ltd the long service leave was paid by the company to the employee relating to the period of three months and these amount of payments would be considered as expenses for the year 2016.
The positive limbs of “section 8-1 of the ITAA 1997” provides an elucidation that where an expenses has been incurred by the taxpayer during the year income relating to the derivation of taxation income then a deduction is held allowable in this respect (Jones 2017). Referring to the explanation of “S-100-25 of the ITA Act 1997”.
The instance suggest that RIP Pty Ltd during the relevant income year occurred expenses that are were related to the architectural designs. The expenses for the architectural design is a capital expenses. Denoting the expenses of “S-100-25 of the ITAA 1997” these expenses would be classified as the cost base of the assets (Stewart 2017). Therefore, the expenditure on the onsite car parking and building equipment would not be allowed for deductions “section 8-1 of the ITAA 1997” since it is a capital expenses.
Reference List:
Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.
Black, C., 2017. The Attribution of Profits to Permanent Establishments: Testing the Interaction of Domestic Taxation Laws and Tax Treaties in Practice.
Buchanan, R. and Consett, E., 2016. Section 974-80 ITAA97: The current state of play. Tax Specialist, 19(5), p.217.
Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. J. Austl. Tax’n, 19, p.50.
Clarke, D., 2017. Private mineral royalties in resource sector: M and A transactions-another taxable commodity. Australian Resources and Energy Law Journal, 36(1), p.82.
Cooper, G.S., 2015. The defective jigsaw. Austl. Tax F., 30, p.783.
Cooper, G.S., 2017. The news 97480-more obscure than ever. In Australian Tax Forum (Vol. 32, No. 4, p. 709). Tax Institute.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.
Joseph, S.A., Walpole, M. and Deutsch, R., 2015. Taxation of Sovereign Wealth Funds-A Suggested Approach. J. Australasian Tax Tchrs. Ass’n, 10, p.119.
Krever, R. and Mellor, P., 2016. Australia, GAARs–A Key Element of Tax Systems in the Post-BEPS World.
Middleton, T., 2015. Banning, disqualification and licensing powers: ACCC, APRA, ASIC and the ATO–regulatory overlap, penalty privilege and law reform. Company and Securities Law Journal, 33, pp.555-580.
Murray, I. and Wright, S., 2015. The taxation of native title payments for Indigenous groups and resource proponents: convergence, divergence and reform. UW Austl. L. Rev., 39, p.99.
Peiros, K. and Smyth, C., 2017. Successful succession: Tax treatment of executor’s commission. Taxation in Australia, 51(7), p.394.
Pinto, D., 2013. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.
Richards, R., 2014. Taxation: Employee share schemes. Law Society Journal: the official journal of the Law Society of New South Wales, 52(3), p.40.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Stantcheva, S., 2017. Optimal taxation and human capital policies over the life cycle. Journal of Political Economy, 125(6), pp.1931-1990.
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.
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.
Van Niekerk, D.P.E., 2016. The taxation of illegal income: an international comparison (Doctoral dissertation, University of Johannesburg).
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