Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 is a landmark judgment dealing with taxation in Australia. The case deals with the methods to determine assessable income of a taxpayer within the jurisdiction of Australia. The above mentioned case dealt with a company which was concerned with a giving dance classes for a certain amount of money and the fees were different for every hour (Woellner et al. 2012). The fees kept on varying. The dance classes could be taken in a year by prior appointment and the basic hours of the tuition in the course was 5, 15 or 30. Again, there was another option of taking the tuition for a time of 1200 hours which could be taken at any time of life span of the person. (Basu 2016) In case anyone wanted to make payments in advance, it could be done in the form of instalments or paid in lump sum amount. In such cases, the company paid a large amount of discount. For example, in the cases of the course spanning for 1200 hours, there was an instant reduction of the fees. If the student did not enrol of the course, there would be no right given to the student to claim any refund. Therefore, to claim the benefits, a payment had to be advanced. The company maintained two accounts, and the money would be transferred to two separate accounts, depending on whether the payment has been made (Aroney et al 2015). In cases the payment was not made, the fees would be credited to “Uneamed deposits-Untaught lessons account” and in cases when the payment was made, the fees would be transferred to “Eamed Lessons Account”. The tuition class had a different notion about making the determination of the assessable income. They followed the basic principle that the money received for untaught classes were not supposed to be calculated in the assessable income and the money would be counted as assessable income when it was received for the taught classes. This problem of determination of assessable income was handled by the Commission wherein it was declared that there shall be no difference between the money in Uneamed deposit and the eamed deposit and the income received shall be treated as an assessable income (Ahmadu and Hughes 2017). This conflict was then taken up by the Court where the conflict to be resolved was whether the view of the commissioner regarding the assessable income had the strong backing of legislature or not. The conflict was regarding the assessment of the income and what would be considered the assessable income (Barnett and Harder 2014). The view forwarded by the Commissioner was the advanced income should be counted as assessable income whereas the view of the company as different, which differed vastly from that of the Commissioner’s.
The court decided that the company was right and that the advanced money received by the company shall not be considered as assessable income. The appeal made by the Commissioner was rejected. The court held that the advanced money to be considered as the assessable income, it is important that the money advanced for the purpose be utilised. Therefore, for the advanced money to be considered as assessable income, the company has to provide the tuition. The judges relied heavily on the judgment delivered in the case of Carden (1938) 63 CLR 108 the court had held that it is important to consider the purpose of the income and how it has been utilized (Burton 2017). The court made a few remarks regarding the way the income has to be calculated and said that in cases when the company is dealing in goods and services, the advance payment has to be calculated for that year. The concept of “come home” means that the advanced money will not be treated as assessable income till it has been utilized by the company.
Taking into consideration the provisions of section 6-5(4) of the Income Tax Assessment Act, for an income to be considered as on which tax can be considered, it is important to check from where the income has been received and then the receipt of the tax coming from the person shall be considered as a derived income of that person. The calculation has to be dependent on the income received in one year. There are two methods that can be applied in calculating the income-the earning method and the receipt method. The calculation shall be dependent on the tax payer, the method he wants to employ in calculating the tax. The receipt method can be employed in calculating the income which has been received through investment. This has been mentioned in the Taxation Ruling. Again, the taxation ruling mentions that the income received from business shall be calculated through the process of earning method.
Applying the above mentioned laws and regulations related to assessment of income to the factual situation in relation to RIP. The RIP Company receives the money from services if funeral or undertaken. Therefore the source of income in case of RIP Company is earning through the services of funeral or undertaker. Therefore, going by the fact scenario, the company has earned a profit of $ 2.45 in the year 2016. Therefore the company receives income through different other services including funeral services. The company follows the policy of calculating the fess when an invoice of 30 days has been sent by the company to the External Insurance Company and also sent to its customers. The same thing happened here as the above mentioned cases wherein the fees was advanced by the customers and the customers paid the money in advance. As has been said earlier and reinforced by the taxation rules, money advanced from a business undertaking is calculated through the process of earning method. In this case, the income received by the company is through the process of instalments and it is to be calculated as revenue because the money advanced is for the purpose of funeral services. The company also raised the invoice after a completion of 30 days of providing funeral services. Without waiting for the completion of the time period, the company should calculate the assessable income. The company is also involved in the process of giving ideas about future plan schemes. The suggestion to the company in the given scenario is that the company should start making the calculations instead of waiting for the generation of the revenue receipt. This scheme also helps the company in getting more revenues and the plan benefits the revenue of the company. Therefore, the scheme is received by the company in advance. The future service providing is promised by the company, that is, the company makes a promise that the funeral services will be provided in the future for a payment that has been advanced in the present (Lombard 2017). The company also follows a strict principle of no refund. In its policy, it has clearly mentioned that there shall be nor refund of the income that has already been advanced by the customer. Therefore, all the money that has been advanced by the customer and received by the company shall not be refunded. All the money received by the company is transferred to another account. The money is received on the Forfeited Account which also faces a problem of failure to receive the payment. A failure has been noted by the company in cases of dealing with payments made in instalments. The company is not liable for the failure on the part of the board and also the company has the power to direct the forfeited amount in the form of an income and the company shall not incur any liabilities. Therefore it is duty of the company to give the services in return of the money they receive. In cases where there is a failure to make payments by the customers, the company shall not be held liable (. The company is not responsible for the failed payments by the customers. The company is not wrong in giving services to customers who have failed to make the payments in instalments.
Applying the same principles as have been held in the case of Arthur Murray (NSW) Pty Ltd V FCT it was held that there shall be a limitation on the way the company treats the income and how it treats the money advanced. In the above mentioned case, it was held that the money received shall not be treated as income until the company provides the service for which the money has been advanced. Therefore, service has to be provided for which the money has been paid by the customer. There is also a cap on the time frame in which the fees need to be treated. The treatment of the fees has to be done in the same year. The facts of the landmark judgment and the case in question are similar in the sense that the money was received by the company in the present and the services were provided by the company in the future. The similarity in the two cases is that the money was received in the present for the services that would be met in the future. Another point of similarity in the factual scenario and the case is that in both the cases the money was transferred to an account which was separately kept for this purpose. In the present case, the advanced money was kept in a separate account. In the case of Arthur Murray (NSW) Pty Ltd V FCT, the money was transferred to Unearned deposits – Untaught Lessons Account. Therefore the same judgment shall apply as has been applied in the case of Arthur Murray (NSW) Pty Ltd V FCT which held that the year in which the income is received should be the year when the money has to be assessed (Tondani 2016). Therefore the income received in the year should be calculated in that year itself. That money received has to be calculated under the heading of assessable income.
There are two methods that can be employed in calculating the tax received from a tax payer. The processes are mentioned in the ITAA by which an eligible taxpayer’s money has to be calculated in Australia. The two methods are defines as the receipt method and the income method. The method applied in understanding which rule to apply, the calculation shall vary from case to case. In some cases, the receipt method is used and in some the income method is applied. The Commissioner shall apply either the method in computing the tax. The receipt method is applied to calculate the actual or the constructive income received in that one particular year. The method calculation is again dependent on the way the cash is received-either the cash received basis is applied or the cash basis. For an income to be considered derived income from a person, it has to be seen as money that has been received from a person who is an eligible tax payer in Australia. This shall therefore be considered as derived income from a person advancing money. Alternatively, the other method is using the earning method and it shall be used in cases where there is a recoverable debt and an actual earning.
The facts point towards the fact that the company was involved in a scheme called the future plan and this ensured that the customers would advance the money in instalments and based on that the company shall promise to provide services of funeral in the future. The policy of the company is that there shall be no refund and also that if the money advanced by the customers fails; the amount shall be transferred to a forfeited payment account. The company shall not be held liable if the remaining amount of money is not paid by the customer. Hence, the forfeited fees of$16200 have to be calculated as assessable income of the company wherein the forfeited amount shall be transferred.
A trading stock can be defined as an item used for the purpose of carrying out the business, and it has been manufactured or acquired. This definition is found in section 70-10of the ITAA which shall also include exchanging and selling goods. The definition of trading stock does not include in its ambit any expenditure. According to the provisions of section 70-25 of the ITAA, the expenditure for getting a trading stock should not regard expenditure of any capital. Therefore, in the present case, the casket that is used by the company along with other accessories in the normal course of its business to derive business should not be treated by the company top derive business income but should include them as capital assets.
According to section 8-1 there is a scope for the general deduction of expenses in cases of assessable income of a customer. The taxable income shall not include the expenses that have been calculated for the purchase of trading stock. They shall be considered deductible from the taxable income. Section 8-1 states that such expenses will be held as necessary for helping the business grow and prosper. Therefore, in the fact scenario, the payment will be held as an advance in the light of 2016.
Any income which is received by a taxpayer in that particular income year shall be treated as ordinary income. This has been laid down in section 6-5 of the ITAA. The dividends advanced to the company shall be calculated and therefore all dividends given to the company shall also be counted as taxable income. In such cases, a person can also claim franking credits on the dividends. Therefore, RIP, by virtue of paying franking dividends shall be entitled to receive franking credits. Again, as laid down in section 100-25, advance payments provided by rental storage shall not be held as capital asset. The advance payment has included in its ambit the rental storage whereby such rent can be subject to a deduction. The assessable income does not include long services leave and therefore they cannot be said to be part of the assessable income. This is according to section 83-80. Therefore, by the same rule, the three month long leave which has been paid by Rip has to be taken as an expense and shall not be counted as advance.
In cases when the taxpayer bears the expenses in the aim of getting the assessable income, in such cases, the income shall be counted as deductible against the assessable income. Section 100-25 of the ITAA 97 lays emphasis on land and building and the provisions relate to the taxes related to the same. The expenses incurred by the taxpayer in connection with land and building are not allowed to be deducted under section 8-1 of the Act. Capital expenses cannot be deducted. Therefore, the expenses incurred for the construction of the parking lot and equipment are of capital nature and cannot be counted under general deduction.
References
Ahmadu, M.L. and Hughes, R., 2017. Commercial Law and Practice in the South Pacific. Taylor & Francis.
Aroney, N., Gerangelos, P., Murray, S. and Stellios, J., 2015. Foreword, Preface and Chapter One of The Constitution of the Commonwealth of Australia: History, Principle and Interpretation.
Barnett, K. and Harder, S., 2014. Remedies in Australian private law. Cambridge University Press.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
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.
Lombard, M., 2017. Everything producers need to know about tax: current affairs. FarmBiz, 3(2), pp.10-11.
Tondani, D., 2016. Complexity of Personal Income Tax Design: An Index of Measurement. Journal of Public Finance and Public Choice, 27(2-2009), p.137.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012. Australian taxation law. CCH Australia.
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