In this particular case, it has been found out that the taxpayer was engaged in conducting the business where he was providing dancing lessons as well as even offered discounts to the students who used to pay fees in advance (Vann 2014). In addition to that, the discount was made available to the student so that they feel encouraged to pay the fees in advance. However, the agreement was done between the taxpayer as well as students where it was already declared that there would be no refund initiated for the prepaid tuition fees. In such case, the taxpayer transferred the fees that he received in the advance into the suspense account and that was treated by the taxpayer as unearned deposit untaught lessons accounts. Furthermore, after providing dance lessons to the student, the taxpayer got involved in transferring the relevant fees from suspense account to revenue account. Therefore, based on the agreement, it can be seen that there was no need for the taxpayer to refund the prepaid tuition fees in actual practice, but the taxpayer had refunded the fees of the students based on the uncompleted lessons (Shetreet and Turenne 2013).
Here, the taxpayer treats the prepaid tuition fees as income derived and this was done after the dancing lessons that was completely provided to the students (Saad 2014). In addition to that, there was no inclusion of prepaid tuition fees in the assessable income of the taxpayer. However, at the time of calculating the assessable income, it was noted that fees were included for which tuition was already conducted for a given year. Therefore, the Commissioner of Tax actually was involved in calculating the assessable income on receipt basis as well as included the prepaid tuition fees as ordinary income under Section 25 (1) of the ITA Act 1197.
Both the taxpayer as well as the commissioner of tax were involved in calculating the assessable income of the taxpayer quite differently as it both differs in treatment of prepaid tuition fees. In addition to that, the issue that took place before the court needs to be resolved and it is hence important to evaluate the fact whether assessable income of the taxpayer should include prepaid tuition fees or not (Robson 2014).
At the end of the case, it was concluded that the high court had held a general rule that says if fees are received in advance for a service but not yet been provided, then this type of fees will not be included in the assessable income. In that way, the high court declares that there will be agreement between the taxpayer as well as student where it will be mentioned that there will be no refund generation against the prepaid fees. In actual practice, this was not followed as the taxpayer had refunded the fees of the students if not the lessons are taken by the student. However, the taxpayer did not involve in including tuition fees as income in the year of receipt as there exist a possibility that the taxpayer might have to refund the advance fees provided tuition is not provided by the taxpayer. In this judgment, the high court was of the opinion that the taxpayer derived income from providing service in the year where the dancing lessons are provided but not in a single year and in that way advance fees were received. Therefore, the judgment took place where the accounting treatment followed by the taxpayer were considered appropriate.
The ITA Act 1997 in section 6-5 (4) explains that if an amount is received by the taxpayer or in that case anyone on behalf of the taxpayer, then these amount received should be treated as income derived (Paturot, Mellbye and Brys 2013). In addition to that, this income derived for a given year needs to be included in the assessable income of the taxpayer as mentioned in the Section 6-5 of the ITA Act 1997. Furthermore, there are mainly two types of method that are used for calculating the income for the purpose of tax and these methods are earning methods as well as receipt method. It is the taxpayer who decide over selecting any one method that suitably reflect the income of the taxpayers. In Taxation Rule 98/1in , it is mentioned in Para 19 based on general rule where if income is derived from investment, then this income will be derived from sources other than business income as well as income derived by an employee, then in these cases, it will be suitable to calculate receipt method of calculating income. In the Taxation Ruling TR 98/1, it is properly mentioned in Para 20 that it is suitable to calculate income on earning basis provided the income is derived from business of trading or in that case manufacturing (Passant 2016). Therefore, it can be seen that for the purpose of tax, the earning method is treated as one of the suitable method for computing income.
The RIP Pty Limited had been engaged in the business where they were involved in providing funeral as well as other related services. The company enjoys profit around $2.45 million for year ending 30th of June 2016. In addition to that, RIP Pty Limited will be providing funeral services as well as engages in earning its revenue from their customers under different options. Therefore, there are several methods adopted by RIP Pty Limited where they involve in collecting fees from the customer and these methods are mentioned below with proper justification:
Under the general rule, it can be seen that the earning method can be treated as one of the most suitable method for calculating income derived from the business. As far as RIP Pty Limited is concerned, the company involved in providing funeral services and the income derived from the business will be treated as revenue. However, the process adopted by RIP Pty Limited is that after the funeral service is rendered, the company will be raising a net 30 days invoice. After that, RIP Pty Limited should be treating the income derived as revenue after the service is rendered and the net 30 days invoice will be raised and should not wait for the actual receipt of revenue (Mortimore and Dickfos 2014).
RIP Pty Limited involves in running a scheme of easy future plans. As per this scheme, the fees are received in advance by RIP Pty Limited with the promise that they will be providing funeral services in the near future (McClure, Lanis and Govendir 2016). In addition to that, the advance fees received under this easy future plan scheme is actually non-refundable. The fees that are already paid to the company are forfeited and transferred to a separate account named as Forfeited Payment account if any member fails to pay all the instalments under the easy future plan scheme. RIP Pty Limited need to directly treat this forfeited fees as income as the company has no liability further to provide the funeral services to the discontinued members under this easy future plan scheme. Therefore, RIP Pty Limited involves in deriving the income by providing the funeral services (MacDonald 2012).
In this case of Arthur Murray, it can be seen that the income is derived for the year where the service is rendered to the customers. Based on the general rule, the case can be presented in a way where the fees received in advance should be treated as income in the year where the service was rendered (Kenny 2013). As far as easy future plan of RIP Pty Limited was concerned, the company involved in receiving fees in advance and in future where they will be providing funeral services. In addition to that, RIP Pty Limited includes the fees received in advance and treat it as income in the year where the fees was actually received. The situation in this case of Arthur Murray was quite similar to that of RIP Pty Limited where the principle held in the case of Arthur Murray is applicable in the accounting treatment of RIP Pty Limited. However, RIP Pty Limited should not involve in including any fees received in advance and treat it as income in the year. The advance fees that are received but the company should include advance fees and treat it as income in the year where the company will be providing the funeral services (Gaal 2013).
Under the Taxation Rule 98/1, it was mentioned that there are two methods of accounting of income for the purpose of tax. The two methods are earning method as well as receipt method. To explain each of the method in detail, the receipt method is also termed as cash basis or cash received basis as in this method, the income is derived in the year the actual or constructive income is received (Ferran and Ho 2014). It was properly mentioned in the Section 6-5 (4) of the ITA Act 1997 that if a taxpayer or anyone on behalf of the taxpayer receive the income, then it is treated as income derived. The other method known as earning method and this is also termed as accrual method or in that case cash and credit method. As far as earning method is concerned, income is derived as it is earned and a recoverable debt is created in that case. If the task that is needed to be performed under the agreement had been performed completely, then the taxpayer can legally claim that the amount is treated as recoverable debt. However, it can be seen that the Commissioner as well as Taxpayer can select the earning method or receipt method for calculating income for the purpose of tax (Athanasiou 2014).
RIP Pty Limited engages in running a scheme and the name of the scheme is easy future plan. In this particular plan, the customers are needed to pay fees as advance instalment and in that the company makes an agreement that they will be providing funeral services in future (Fegan and Stephens 2012). In addition to that, the advance fees paid by the customers are actually treated non-refundable. Furthermore, if a customer fails to pay all the advance instalments, in that case the partial fees received will be forfeited as well as transferred to an account known as Forfeited Payment Account. In that way, RIP Pty Limited will have no liability that the customer did not involve in paying the complete fees. However, the fees are non-refundable as well as RIP Pty Limited has no liability for providing funeral services in the future based on the given fact. It is suggested to RIP Pty Limited that the forfeited fees of $16200 should be considered as income in the year with the forfeited fees (Dzhumashev 2014).
In this particular question, it is mentioned that the trading stock is treated to as anything that is actually manufactured or acquired in the ordinary course of business as well as used for manufacture, sell or exchange of goods as given in the Section 70-10 of the ITA Act 1997. In addition to that, the CST assets as well as financial agreements are properly defined while mentioning about trading stock (Courtney 2014). It is properly mentioned in the Section 70-25 of the ITA Act 1997 that the amount incurred for trading stock should not be of capital nature. However, the caskets as well as accessories purchased by the RIP Pty Limited are used in the ordinary course and should be considered as trading stock as well as not of capital assets.
It is mentioned in the Section 8-1 of the ITA Act 1997 where it is allowed for some general deductions as well as amount paid for the purpose of purchasing of trading stock in buying RIP Pty Limited and it is allowed for deduction in this given section. In addition to that, the deduction for purchase of trading stock will be allowed in the year where the trading stock becomes a part of the stock in hand of RIP Pty Limited (Brody et al. 2014). It is mentioned in the Section 8-1 of the ITA Act 1997 where the general deduction is done as per the section as it is allowed for expenses because it becomes essential to carry out the business as well as produce assessable income. As far as RIP Pty Limited is concerned, the company prepaid an amount of $25000 for making the purchasing of stock that is being delivered during the next income year. As per the above discussion, it is understood that the prepayment amount should be treated as advance for the income year 30th June 2016.
It is properly mentioned in the Section 6-5 of the ITA Act 1997 that any income that is received by resident taxpayer, then this income will be included in the ordinary income. In addition to that, the dividend that is received by the company need to be included in the taxable income (Brabazon 2015). Furthermore, RIP Pty Limited will be able to take franking credit as the dividends are fully flanked. In this way, the advance payments made for the rental storage cannot be included in the list of capital assets as mentioned in the Section 100-25 of the ITA Act 1997. However, the amount paid in advance for rent cannot be treated as capital assets. To explain in detail, the advance takes into account rent for four months of the current income where the rent is allowed as general deduction as mentioned in Section 8 of the ITA Act 1997. However, the unused long service leave cannot be included in the assessable income as mentioned in the 83-80 of the ITA Act 1997. As far as RIP Pty Limited is concerned, the company paid three-month long service leave in advance where the advance need to be considered as expense and not as advance for the income year 30th of June 2016.
The Taxpayer can claim for the fact as general deductions under Section 8 of the ITA Act will be producing assessable income. In addition to that, a list of CST assets will be mentioned in the Section 100-25 of the ITA Act 1997 that takes into account land as well as buildings. Furthermore, the expenses incurred by the taxpayer for land and building cannot be included as general deduction as mentioned under Section 8 of the Act. However, the treatment of expenses will be of capital nature as well as cannot be under general deduction (Barnett and Harder 2014). Therefore, the expenses related to construction of onsite parking as well as expenses for equipment and expenses of landscaping will be considered as capital expenditure and not as a general deduction.
References
Athanasiou, A. 2014. Changing from cash to accruals accounting. Taxation in Australia, 48(8), 459.
Barnett, K., and Harder, S. 2014. Remedies in Australian Private Law. Cambridge University Press.
Brabazon, M. 2015. Australian International Taxation of Attributed Trust Gains. Australian Tax Review, 44(3), 141-166.
Brody, E., Breen, O. B., McGregor-Lowndes, M., and Turnour, M. 2014. 5 An Unrelated Income Tax for Australia?. Performance Management in Nonprofit Organizations: Global Perspectives, 17, 87.
Courtney, W. 2014. Contractual Indemnities. Bloomsbury Publishing.
Dzhumashev, R. 2014. Corruption and growth: The role of governance, public spending, and economic development. Economic Modelling, 37, 202-215.
Fegan, T., and Stephens, M. 2012. Taxation of entities. Concise Collection of Tax Fundamentals, A, 31.
Ferran, E., and Ho, L. C. 2014. Principles of corporate finance law. Oxford University Press.
French, R. 2013. Law-complexity and moral clarity. Brief, 40(6), 25.
Gaal, J. 2013. CGT Small Business Reliefs: The Comprehensive Practitioner’s Handbook. CGT Small Business Reliefs: The Comprehensive Practitioner’s Handbook, xxviii.
Kenny, P. L. 2013. Aligning Income Tax Laws with Accounting Rules: A Simplified Tax System Case Study. Available at SSRN 2340888.
MacDonald, A. 2012. Introduction to taxing of trusts. Concise Collection of Tax Fundamentals, A, 51.
McClure, R., Lanis, R., and Govendir, B. 2016. Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia: An Expose.
Mortimore, A., and Dickfos, J. 2014. Using schemas to demonstrate the methodology of solving complex tax problems: A case study. Journal of the Australasian Tax Teachers Association, 9(1), 230.
Passant, J. 2016. Tax and the Forgotten Classes-A Snapshot of History.Available at SSRN 2721266.
Paturot, D., Mellbye, K., and Brys, B. 2013. Average personal income tax rate and tax wedge progression in OECD countries.
Robson, A. 2014). Australia’s carbon tax: An economic evaluation.Economic Affairs, 34(1), 35-45.
Saad, N. 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Shetreet, S., and Turenne, S. 2013. Judges on Trial: The Independence and Accountability of the English Judiciary (Vol. 8). Cambridge University Press.
Vann, R. J. 2014. Hybrid Entities in Australia: Resource Capital Fund III LP Case. Tax Treaty Case
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