Discuss about the Income Law and Practice for Taxpayers Struggle.
In Australia and, almost every part of the world, taxpayers struggle (dislike) to cope with all the laws governing taxation. However, the enactment of regulations and policies covering taxation help them avoid facing the wrath of tax evasion. Taxes help the government run national errands, meaning that it must find ways of making the citizens pay. For a democratic nation, such as Australia, laws act as the best measures for finding a common ground between the law and taxpayers. In Australia, the ITAA (Income Tax Assessment Tax) handles all the issues related to tax paying and evasion (Australian Government, 2016). This paper will review the Australian Taxation Law, with the sole focus on how it should help the taxpayers run their errands.
Summary of the Case
Taxpayers collide with the law on many occasions, especially the matters related to payment of taxes. Usually, the taxpayers find it hard to discern what amount of their income is subject to taxation or feel that the law deducts much money from them. They hold that taxes exceed what they should pay. According to the ITAA (Income Tax Assessment Tax), assessable income refers to the money taxed after making the deduction of expenses such as maintenance fee. Evaluating assessable income requires one to understand all the deductions to make from it, just as the law stipulates. An example includes the allowable deductions, such as the expenses incurred when making income (maintenance cost). In general, the ITAA has many provisions that regulate the errands of taxpayers. This paper reviews a case study of RIP Pty. Ltd, with the sole focus on demonstrating how tax regulations affect taxpayer companies. In addition to that, it also provides a set of considerations to make when dealing with taxation issues, including the various deductions that the Taxation law encompasses (AUSTLII, 2016).
Facts of the Case
The Arthur Murray /NSW Pty Ltd v FCT /1965 115 CLR 314 Case helped to shed light on numerous issues related to the derivation of income tax from membership fees. The primary point of the case was whether membership fee is a constituent of the taxpayer’s assessable income as stipulated under section 6-5 of the Income Tax Assessment Act 1997 (Krever, 2014). Specifically, the case focuses on membership fee applicable to the dancing lessons as some clients preferred to make advance payments for their dancing classes. The most intriguing issue is the fact that even if the client fails to attend the dancing classes, the fee is both nonrefundable and non-transferable. However, as part of the company’s goodwill, it could reimburse some clienteles. However, it is the responsibility of the company to decide how to handle these funds. Issues
Given the nature of this case, many issues arose, first of which, was the fact that the taxpayer provided its members with unlimited access to the dancing classes as long as the course remained operational. For that reason, the client had the right to decide when to begin the dancing classes. Secondly, the Company did not have any regulation limiting the period during which the course would last. For that reason, Murray was not liable for cutting down the classes before the clients began their attendance. Thirdly, the taxpayer company receives a one-off payment from the member when he/she lodges an application for enrolling for the dancing classes. Most importantly, one should note that the school was to grant the client the freedom to attend the dancing classes for the entire session for paying the one-off membership fee. Finally, it is also imperative to note that the member did not have the right to decide to cancel his/her membership or request for a refund from the taxpayer company (Krever, 2014).
The High Court felt that the money received in exchange for the services to be provided in the future are not earned until the discharge of the obligations for which they are to be paid takes place. The receipts will require the character of the income that the taxpayer derive as they are earned.
Relevance of the case today
The Arthur Murray principle applies to all prepaid fees paid to accrual businesses for services to be delivered in the future. The Arthur Murray Accounting recognizes receipts applicable in the future. However, the provision is yet to be extended to businesses operating on a cash basis, or those which receive interest in advance. In addition, the principle does not apply to prepaid consumers.
If it happened today
The statutory law has not changed since the ruling of the Arthur Murray case, and therefore, the Court will come to the same conclusion.
Conclusion
In light of these facts, one can conclude that membership fees paid to the taxpayer income are part of his/her assessable income for the year that the taxpayer company received it. According to section 6-5 of the ITAA 1997, the taxpayer’s assessable income is inclusive of membership fees paid within the same income period (one year). The Court’s decision (May 3, 2004) relieved Murray Arthur of taxes on accrual payments for the future delivery of services. Similarly, the decision made concerning the Murray case acted as a blueprint for the taxpayers who receive accrual payments for services expected of them in the future.
When to derive Income
According to the ITAA, the taxpayer was to derive income from offering the desired services to the member. The Act also provides that Ordinary Income is only transferable to the account following its derivation. In this case, calculating the taxpayer’s ordinary and commercial business was to take place in a manner that revealed the actual income earned by the taxpayer. For that reason, the membership fees acted as income received, but not earned (Krever, 2014). In essence, the taxpayer observed the law by refunding part of the pay to the member to cover the damages if it failed to deliver the agreed services. In turn, the derivation of income can only take place after the delivery of the service to the client.
Application of the Arthur Murray Principle
For that reason, the Arthur Murray Principle applied to RIP’s Easy Funeral Plan. For starters, the Easy Funeral Plan acted as a fixed price contract which guaranteed the member a grand funeral after the completion of the full payment. In other words, if the client passes on without paying all the charges, the Court sends the bill to the estate of the deceased and pays all the impending balance in a span of one month (30 days). Failing to do that means the amount paid by the client becomes nonrefundable and non-transferrable. According to the Arthur Murray Principle, the taxpayer’s assessable income should reflect the taxpayer’s income (Krever, 2014). In addition to that, the taxpayer can only derive proceeds from the membership fees after offering the agreed services to their client. Therefore, one can deduce that the income is not derivable as Company’s services are less likely to benefit the customer after breaching the contract.
The choice of the method of Accounting for tax
Since the commissioner and the taxpayer had no say in the method used to account for taxes, they relied on section 6-5 of the ITAA of 1997 for guidance on taxation laws. The legislative system makes the laws, while the Commissioner ensures that they remain operational. Moreover, the Murray scenario demonstrated that a taxpayer can challenge the tax laws if he/she finds them unfair (Krever, 2014). In such a scenario, both the taxpayer and the commissioner should rely on the law to guide them on matters regarding the payment of taxes. Often, these laws change over time when the situation requires the introduction of new provisions.
Since the membership fees paid by the client remains in the account of the company, it can reserve the decisions to deal with these funds as it deems fit. Most importantly, one should note that every rule has particular implication on the errands of the company. For starters, the Company could opt to refund the fees to their clients as an act of goodwillKrever, but this approach means that the money belongs to the received, and not earned account, meaning it does not form part of the assessable income (Krever, 2014). Alternatively, the company could decide to categorize these earnings as belonging to it. In this case, the company will treat them as received but not earned funds, meaning that they do not become part of its assessable income.
In this case, drawing a conclusion on the payment of taxes from the 16,200 USD in the company’s forfeited account requires one to use some guidelines. According to the Easy Funeral Plan contract, the client stands to lose the rights to receive the paid amount if he/she fails to complete the payment before death, and the left estate is unable to settle the remaining deal within 30 days. The pay becomes part of the company’s income after covering all the applicable damages, provided that the Company pays taxes on the paid amount.
The Nature of Trading Stock
Usually, a significant percentage of the assessable income includes the deductions made from it. They include expenses incurred to gain or produce assessable income, or those used in carrying out businesses aimed at generating income. However, the costs considered capital in nature do not fall in the same docket as allowable deductions. The RIP case involved many expenses deductible from the assessable income as outlined in the provisions of Section 8 of the ITAA 97. The following are some of the factors used to determine if an expense is deductible or not. For example, those incurred during the generation of income are allowable deductions (Federation University of Australia, 2016). In other words, the caskets and other accessories needed by RIP to carry out its business such as secular icons are allowable deductions. In this case, the company ordered accessories worth 25,000 for running their businesses, the installment of which it paid in June 2016. Since the Company paid less amount during the delivery of the items than the marked price, it benefited from the discount. In the Coles Myer Finance Ltd v FCT case, the Court considered the rebate an allowable discount, even though the deduction of the discount should spread throughout the term of the bill (Federation University of Australia, 2016). According to the Australian law, this formula refers to as the ‘straight-line apportionment.’ In some cases, the term of the bill might exceed one year. The Division 16E of the ITAA 36 holds that the Court can use a compound recognition formula when the provisions of the bill pass one year (Federation University of Australia, 2016). Therefore, apportion dictates that the deduction is spread out, and refuses to make discount an allowable deduction.
Adjustments to be made on the company’s assessable income
It also holds that a company should make several adjustments on its assessable income. It is also important to note that these policies underlie the taxation law of Australia. For starters, the company should include the amount of 47, 500 USD as part of its assessable income. This value is part of the 57,000 USD made as payment for a two-year lease for the company’s property. Usually, the balance (9,500 USD) is deductible from the assessable income. Expenses such as contract are part of allowable deductions, except when these costs are capital in nature. According to the taxation law of Australia, assessable income is inclusive of expenses that are of a capital nature (Federation University of Australia, 2016). Secondly, the company should omit the 22,000 USD spent by the firm to pay for its director’s service leave. The deduction is applicable for leaves endorsed by the employer (Federation University of Australia, 2016). In this case, the leave offered by the company was also approved by it. Finally, the company should include 21,000 USD to its assessable income as the law states that the assessable income should reflect the taxpayer’s income (Federation University of Australia, 2016). Therefore, one can deduce that the dividends received by the company from RIP Finance Pty Ltd formed part of its assessable income.
In November 2013, the Company decided to build a purpose facility for its business practices, and those costs formed part of its assessable earnings. In the W Thomas and Co Pty Ltd Vs FCT case, the Court held that expenses such as the acquisition of land and putting up the facility were capital in nature, and part of the assessable income (Federation University of Australia, 2016). In general, the Australian courts recognize such expenses as part of allowable deduction if the initial business premises are unfit to carry out business operations. In addition to that, the fact that the new facility used materials of a higher and more advanced quality disqualifies these costs as allowable deductions. For example, after the purchase of the property, the Company spent a further 50,000 USD to demolish the existing property. However, there was no evidence to prove that the building matched its business practices, meaning that the expenses were inclusive in the company’s assessable income. In general, maintenance costs are the only expenses considered allowable deductions. The other charges, such as those used to pay for the architectural designs, acquire land, construction and the cost incurred to demolish the existing buildings on the acquired land, are capital in nature and form the part of the assessable income.
References
AUSTLII. (2016). INCOME TAX ASSESSMENT ACT 1936. Retrieved from Commonwealth Consolidated Acts: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/
Australian Government. (2016). Income Tax Assessment Act 1997. Retrieved from Federal Register of Legislation: https://www.legislation.gov.au/Details/C2013C00082
Federation University of Australia. (2016). Income Tax Law and Practice. Retrieved from Federation University of Australia.
Krever, R. (2014). Australian taxation law cases 2014 : a guide to the leading cases for commerce and law students. Pyrmont: Thomas Rheuteurs.
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