The facts surrounding the case is relevant to the question that are few and simple. During the relevant years the company executed the business of providing course of tuition in dancing and derived fees of variable amount each hour. The case describes that the basic tuition courses that was available comprised of 5, 15 or 30 hours of the private tuition to be taken following the appointment inside the span of one year. The payments related to the course fees was generally made in advance either as the lump sum or in the form of instalment with a variable amount of discount is allowed for making an immediate payment.
In the books of the company the fees that were received were immediately credited following their receipt under the account named as the “Unearned Deposits- Untaught Lesson Account”. The amount from that account was corresponding to the lessons taught and was on periodical basis transferred to the credit of the account named as the “Earned Tuition Account”. The income taxation-law returns were made by the company based on the footings that the fees that was received in advance of the tuition does not formed the part of the taxable income during the time of receipt. The commission following the relevant assessment on viewing the fees that was received in advance of the tuition had the nature of income in the hands of the recipient from the moment when it was received in the income year.
The taxpayer treated prepaid the tuition fees in the form of income that is obtained and the same was recorded in the books of accounts following the completion of the dancing lesson that was provided to the students. Furthermore, there was no such inclusion of the prepaid sum of tuition fees in the taxable income of the taxpayer. However, during the calculation of the taxable income, it was found that the fees which was involved in the computable proceeds during the year in which it was received. Hence, the taxation commissioner held that the taxpayer obtained the assessable income in the form of prepaid dancing lessons charges during the year in which the course lesson was delivered or when the fees that were obtained. The receipt of prepaid tuition fees constituted an ordinary income based on “section 25 (1) of the ITAA 1997”.
The issue surrounding the case is that had the taxpayer obtained the advance amount of dues during the income year in which it was received? The issue surrounding the case required the vital assessment of the fact whether the taxable income of the taxpayer constituted a prepaid tuition fees?
The objective of the case was to understand whether the income that comes home to the taxpayer in the form of prepaid was held as taxable. The court of law in its decision held that the given the fees that is received in advance for the services but yet to be provided then such receipt of fees does not form the part of the taxable income. The court of law held that there would be an agreement among the student and the taxpayer, to clearly mention that the no refund is possible against the prepaid fees. However, in the real situations of this case the fees were refunded by the taxpayer if no tuitions or lesson is provided to the student. The court of law passed its verdict that the taxpayer did not included the tuition fees as the income during the year of receipt since there was the probability of refunding the same if no tuition is provided to the students by the taxpayer. The taxation commissioner held that the tuition fees that was obtained by the taxpayer does not carries the character of income until the services are rendered.
Meaning “section 6-5 of the ITAA 1997” any sum that is reived by a person or on behalf of the taxpayer, conversely the sum that is received must he regarded as income. Furthermore, derivation of such income is required to be counted in the chargeable earnings of an individual in respect of “section 6-5 of the ITA Act 1997”.
There are two methods of computing the income for assessment purpose and this comprises of earnings methods and receipt method. The taxpayer based on the suitability is required to decide upon the selection of the method. The taxation ruling of 98/1 is associated with the ascertainment of income based on receipts or earnings method. Subsection 6-5(2) of the ITAA 1997 requires a taxpayer to include the gross amount in their taxable income for the gross amount derived.
The “taxation ruling of 98/1” states that the receipt methods is held as the suitable way of ascertaining the earnings obtained from the investments. However, there are exceptions to this rule. This includes that the earnings methods are usually considered the suitable method of determining the business income generated from the trading or manufacturing business. As the general rule the earnings scheme is regarded as the best technique of treating the returns for levy purpose.
The circumstance of RIP provides that the business has been engaged in providing the services related to the funeral. As evident during the year ended 2016 the firm recorded a net income of $2.45 million. The company also derives income through other means by providing its customers the facilities of credit to pay the invoices within the span of 30 days. To treat the income of the RIP for assessment it is vital to consider the earnings method with reference to subsection 6-5(2) of the ITAA 1997. The earning method of accounting is regarded as the correct method for RIP Pty Ltd to substantially provide the appropriate reflex of income.
In the later instances it is noticed that the company usually receives fees in advance however the advance fees that is received under the easy future plan is generally held as non-refundable. Usually fees that are paid in advance are forfeited and transferred to the Forfeited Payment Account given that any person that fails to pay all the instalment under the easy future plan. Consequently, RIP Pty ltd is required to consider the receipt of forfeited fees as the income since no further liability originates to offer the services related to funeral for the discontinued operations under the easy future scheme.
Meaning the explanation that is provided in Arthur Murray any type of advance payment is income when the services are provided. As per the situations that is highlighted in the case study of RIP the company usually obtained the income from the Easy Funeral Plans where the company would be providing the funeral service to its clients in future. The case law approach states that the instead of setting down the hard and fast rules appropriate weightage is required to be provided in the situations of the taxpayer and the income should be determined in accordance with the accounting method to provide the right reflection of the income during the year.
The Federal Court in “Federal Commissioner of Taxation v Dunn (1989)” held that the circumstances of the occupation and how the business is carried on along with how the books of account were kept should be determined. Denoting the situation of the RIP in the books of the accounts of the company the fees were recorded when it is received. Signifying the situation of the Arthur Murray it can be stated that evidences obtained is identical in RIP. Therefore, the principles of the Arthurs Case is applicable to understand the accounting record keeping for RIP Pty Ltd. Nevertheless, the company is not required to include the fees received in advance and treat the same as income during the year of receipt. Importantly, RIP is required to record in the books of accounts the fees that is received in advance and consider the same as income in respect of the funeral services provided.
The taxation ruling of TR 98/1 explains that the ruling is only applied to the individuals and entities for the assessment and should use the receipts or the earnings system of tax bookkeeping to ascertain the taxable earnings. Quoting the meaning of “Subsection 6-5 (4) of the ITAA 1997” it lay down that amounts are usually obtained by the taxpayer as constructive receipts or derived actually. The impact of the subsection represents that the earnings is considered as made by the individual even though the sum is not originally paid but it dispensed based on an individual direction.
The method of earnings is regarded as the accrual technique or the credit system. In this method the income is acquired by the taxpayer when it is earned. The taxpayer might have the recoverable amount of debt even though when they cannot be legally enforced for the recovery of the debt. An important assertion in this respect is that the commissioner and the taxpayer will be able to select the earnings method or the receipt method for computing the income relating to the assessment purpose.
The case study highlights that the given the circumstances that the customers have failed to pay the advances then a portion of the fees is forfeited. These amounts of the forfeited fees are relocated under an account named as Forfeited Payment Account. It is learned from the case study that RIP has obtained non-refundable forfeited sum of $16,200. RIP is required to treat this as earnings.
According to “section 70-10 of the ITAA 1997” trading refers to everything that a business produces, manufactures and acquires for the purpose of selling or exchange. Section 70-25 of the ITAA 1997 states that any sum that is occurred in the trading stock must not be in capital nature. The trading stock does not include the CGT assets that are not covered under “section 275-105” that is owned by the obeying retirement fund or conforming with the agreed deposit funds. RIP has purchased caskets and has also purchased accessories. However, the caskets and accessories is a trading stock and should be prohibited from being held as held as capital assets.
According to section 8-1 of the ITAA 1997 any sum that is occurred in the purchase of the trading stock will be required for deductions. Similarly, in the case of RIP Pty Ltd, the purchase of trading stock will be held as allowable deductions. Furthermore, RIP Pty Ltd will be able to claim allowable deductions relating to the trading stock throughout the year in which the trading stock was purchased or where the trading stock forms the part of stock in hand. In the same way, “section 8-1 of the ITAA 1997” provides an explanation where deductions is allowable from chargeable income. similarly, for the RIP Pty Ltd a prepaid expenditure of $25,000 was paid for the purchase of trading stock therefore, the prepayment sum must be held as advance for the income year ended June 2016.
“Section 6-5 of the ITAA 1997” defines that income derived by the residents through the ordinary sources will be held as income from ordinary concepts. Furthermore, a company deriving income from dividends is required to include the same in their taxable return. As evident in the situation of RIP Pty Ltd the company derived a dividend income and in return franking was attached with the dividend. Therefore, in case of RIP the dividend income that they receive from the company that is paying the franked dividend should take away the franking credit since the dividends are fully franked.
Accordingly, the taxpayers are prohibited from taking into the consideration the prepaid rental payment as capital asset. It must be noted that the provision of “section 100-25 of the ITAA 1997” should be applied in the situation of RIP Pty Ltd to exclude the rental storage as capital asset. Meaning the “section 8-1 of the ITAA 1997” prepaid rent is an expense to derive income and the amount should be allowed as deductions.
A PAYG withholding is applicable for the long service leave. According to the Australian taxation office an employee is usually held entitled to long service leave till the end of the period of service. Furthermore, the long service leave can then accrue based on the tem of the employment. The unused amount of long service leave is not a taxable income in respect of the “provision 83-80 of the ITAA 1997” . Tax offset is allowed the unused sum of long service leave. As explained in “subsection (2) of the 83-85 of the ITAA 1997” the taxpayer should ensure that the unused long service leave should not be greater than 30% of the taxable income. During the income year of June 2016 the three-month long service that is paid in advance is held as allowable deductions.
There is certain list of CGT assets that are stated in the “section 100-25 of the ITAA 1997” and takes into the consideration the land and building. Concerning the state of affairs of RIP Pty Ltd an expenditure relating to the land and building was incurred by the taxpayer and this forms the part of the capital asset which is not allowed as general deductions. Correspondingly, the disbursement expenses for onsite car parking that was sustained by the RIP Pty Ltd along with the payments on the landscaping and equipment is a capital expense that is not acceptable as allowable deduction under “section 8-1 of the ITAA 1997”. The expenditure incurred will be held as capital expenditure and no allowable deductions is allowed in this case.
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