Describe about the Taxation for Divident Policy.
Income tax is the most significant source of income in Australia and is imposed at the federal level. It is levied on three sources of the individual: business income, capital gain and personal income. The taxable income of an assessee is assessed in calculated in an abroad sense after applying allowable deductions against it. The report consists law relating to taxation applicability on funeral income and trading stock. The applicable law has been explained and the relevant sections and case law have also been discussed in the report. The connectivity between facts of questions and relevant case laws has been included in the report for a better understanding.
Facts of the case:
The fee received by RIP Ltd. is payable under 30 days invoice and the income through RIP Finance Pty Ltd who provide finance to the company is received under instalment repayment plan. The other income is received through the funeral plan in which client make a timely contribution to meet their funeral cost. In case the amount is not paid them time and completely, the received amount is retained by the company.
Applicable Provisions:
As per section 6(5) of Income Tax assessment act, assessable income comprises income according to ordinary concepts called ordinary income. In case a person is an Australian resident than the income derived directly or indirectly from all the sources is included in assessable income (Barkoczy, 2016). The facts of case Brent v FC of T71 ATC 4195 are related to the facts of question which concludes that in absence of specific provisions, the ordinary commercial and trading principals will be applied.
Hence, according to the above provisions the income through RIP Pty Ltd. will be treated as income generally and the income relating to the funeral plan will be treated as income from the funeral and related activities.
(b) Case law: Arthur Murray (NSW) Pty Ltd. v FCT (1965) 114 CLR 314 (Full High Court)
Arthur Murray who was involved in the profession of giving dance lessons received payment regarding its services in advance. The students were not having a contractual right to receive a refund in case they are not able to attend classes in future. The return filed to be the assessee included all the income on receipt basis (Prepaid Income – Arthur Murray Case, 2012). The court concluded that the income received in advance should be included in assessable income subject to the contingent part that is refunded in case the taxpayer is not able to provide the services.
Conclusion
As the receipts received from the funeral plan are not refunded to the client in case they are not able to pay further receipts; it is same as in the case of Arthur Murray. Hence, the case law will be applied to income under the funeral plan and not to other income earned by the taxpayer because the relevant facts are similar to that part only.
(c) There are two methods available for accounting to an assessee: a cash basis and non-cash basis (accruals). In case the total turnover of a business is less than $2 million, the taxpayer can use either method of accounting.
Cash Basis: This accounting method can be applied in the case of individual, partnership, trust or company when the aggregate turnover is less than two million or the taxpayer account for tax on a cash basis or in case the assessee has asked to be allowed to account on a cash basis (Barrett, 2012). The advantage available in this system is a flow of money is better aligned with the activity statement liabilities which makes easy to manage cash flow. It can be clearer with an example- Mr Y who is a sales manager has received a salary of one month for next year in advance. As cash basis is applied the salary of one month will be included in assessable income even the services have not been rendered yet.
Non-cash Basis: This method is used mainly by large business. In this system, the financial statement covers the period in which tax invoice has been issued or received. It can be said that in this method income and expenses are recorded when the bill is issued or received and not when the bill is actually paid (Taylor and Richardson, 2013). The drawback available in this method is that the revenue is being tracked and not the cash which is difficult for small business. For example- Aryan carries a business of set-top boxes and in case the customer pays in advance for more than one year, an additional discount of 10% is provided. In this case, even though the amount is received for more than one year, the amount relevant to the present year will only be included in assessable income.
Section 104.150 of Income Tax Assessment Act 1997 deals with forfeiture of deposit: CGT event HI. According to the above section CGT event, HI comes into existence when a deposit paid is forfeited because a prospective sale or other transaction does not proceed. It includes the amount repaid by you or compensation that can be reasonably regarded as repayment for total or part of deposit (Taylor and Richardson 2013). According to (1A), the amount is transferred to forfeited account after reducing the amount repaid by the client and compensation paid by the client which can be regarded as repayment for all the deposit.
The payment can include giving property. As per section 103.5 (1B); the deposit is not reduced by the portion of payment that can be deducted (Richardson and et.al. 2014). The capital gain will arise in case deposit is more than expenditure in the case with prospective sales or other transaction and capital loss vice versa.
Conclusion:
In the present question, total obligation is not met by RIP Ltd and the amount is transferred to forfeited account. The balance available in Forfeited account is $16200 during the year. Hence, provision of section 104.150 will be applicable to the balance available in forfeited account.
Case Law Ballarat Brewing Co. Ltd v FCT
It has been concluded by the high court in Australia that only the discounted price should be assessed on the taxable income of a trader regarding sales. The case involved sales of trading stock with a discount for prompt payment, but the discount was almost allowed even though the terms on which it was offered were not met(The Ballarat Brewing Company Limited v. Commr. of Pay-roll Tax (Vic.)., Supreme Court of Victoria, 28 August 1979.Wolters Kluwer, 2012). The decision, in this case, is limited to the cases where all the facts are similar and for the general proposition that trader may include sales in taxable income after giving the effect of the certainty of not receiving the total amount of sales in each transaction. The available exception to the general proposition is that virtual certainty exists on the basis of past experience that the amount of discount will not be received by the trader.
Conclusion
In the present case, as the caskets and accessories were acquired by the company for business purpose and not for selling to another party, it will be included in trading stock according to section 70.10 of Income Tax Assessment Act 1997. The general tax treatment of the section will be applied in which deduction is allowed regarding the cost of purchase. In case the value of closing stock is more than opening stock the difference is assessable and in another case the difference is deductible (Grant and McLarty, 2014). As per the decision of prescribed case law, the amount of stock will be accounted after deduction of discount. The objective behind it is presenting the correct reflection of expenditure done for acquiring the stock.
(ii) Provisions of section 44 of Income Tax Assessment Act 1936 are applied regarding taxation treatment of dividend. According to the provision, the dividend is assessed when paid and it includes distributed as well as credited. A dividend should be recognised only when they are non-revocable by the company (Dividend policy, 2013).
Therefore, the dividend income will be included in assessable income of the taxpayer in the year in which it is received or credited to the account of the taxpayer (Taxation of Dividend, 2014).
(iii) Treatment for rental paid for storage space during the year.
According to the provision of Australian taxation law, business or individual is allowed to claim rental expenses in revenue nature (Woellner and et.al. 2012). Decline in value of capital cannot be claimed as a deduction. An amount of $57000 was paid by the organisation as rental of two years. As per the given facts, $9500 was expensed and $47500 was capitalised in accounts. Hence, according to the provision, the amount of $9500 will be charged as revenue expenditure and the remaining cannot be claimed as a deduction as per decline as it is a decline in the value of capital expenditure.
The managing director of RIP Ltd commenced long service leave for three months and the same was paid $21000.
Provision and Conclusion
According to the provision of 83.7 of Income Tax Assessment Act which consists provision relating to long service leave. The subsection of the above section will be applied to leave which has to comply with a provision of section 83.1. According to the section long leave, furlough and extended leave are also held in long service leave. In case an employee is complying the norms of commonwealth law and state of territory law (Jansen and Vuuren 2016).
As per the provisions of section 83.7 and 83.8, which is a part of the employee and the amount paid will be included in assessable income of the taxpayer. The total amount of $22000 will be included while assessing income i.e. $22000.
Answer (v)
The deduction that can be availed under head capital expenditure consists extension or improvement of building, renovation in the structure of the building, improvement in environmental protection. The deduction rate 2.5% and 4% will be applied according to date on which work was started (Binning and Young, 2015).
In above case, the organisation will be entitled to claim a deduction of 4% of the amount incurred for construction work according to Division 43of ITAA 97 (Waller, 2012.). The another criteria necessary for claiming the deduction is that the company should ascertain is that whether the building is qualified as per Sec 43-150 of ITAA 1997.
The explanation of the relevant section of Income Tax Assessment Act has been provided in the report. Penal provisions are available in case the law is not followed. Research and analysis of relevant cases are done so that it could be connected with the report. The report consists details regarding relevant case laws has been described in the report. The report presents the standard norms to be followed by the organisation in compliance with taxation law of Australia.
References:
Books & Journal
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Barrett, J. 2012. Democratic discourse, taxation and hypothecation. J. Austin. Tax’n.14. P.89.
Binning, C. and Young, M., 2015. TALKING TO THE TAXMAN ABOUT NATURE CONSERVATION_Proposals for the introduction of tax incentives for the protection of high conservation value native vegetation.
Grant, D. and McLarty, R.. 2014. Business focus. Oxford University Press.
Jansen van Vuuren, D., 2016. Valuing specialised property: cost vs profits method uncertainty. Journal of Property Investment & Finance. 34(6).
Richardson, G. and et.al. 2014. Corporate profiling of tax-malfeasance: A theoretical and empirical assessment of tax-audited Australian firms. eJournal of Tax Research, 12(2), P.359.
Taylor, G. and Richardson, G. 2013. The determinants of thinly capitalised tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation. 22(1).Pp.12-25.
Waller, V. 2012. The challenge of institutional integrity in responsive regulation: Field inspections by the Australian taxation office. Law & Policy, 29(1). Pp.67-83.
Woellner, R. And et.al .2016. Australian Taxation Law 2016. Oxford University Press.
Woellner, R. and et.al. D., 2012. Australian Taxation Law Select: legislation and commentary. CCH Australia.
Online
Dividend policy: (2013) [Online] Available through. < https://www.emeraldinsight.com/doi/abs/10.1108/03074350710715773>. [Accessed on 14th September 2016].
Prepaid Income – Arthur Murray Case. (2012). [Online]. Available through < https://www.stptax.com/tax-tips/prepaid-income-arthur-murray-case/>. [Accessed on 14th September 2016]
Taxation on Dividend. (2014) [Online] Available through. < https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s44.>. [Accessed on 14th September 2016].
The Ballarat Brewing Company Limited v. Commr. of Pay-roll Tax (Vic.)., Supreme Court of Victoria, 28 August 1979.Wolters Kluwer. (2012). [Online]. Available through < https://www.iknow.cch.com.au/document/atagUio551703sl16860459/the-ballarat-brewing-company-limited-v-commr-of-pay-roll-tax-vic-supreme-court-of-victoria-28-august-1979>. [Accessed on 14th September 2016]
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