Taxation Law For Legislation And Commentary

Legal Law

Discuss about the Taxation Law for Legislation and Commentary.

The current report is being drafted on the Taxation laws of Australia. Light is drawn on essentials that are required to be entered or omitted while calculating the income of a taxpayer. Income tax is charged on the income earned by the assessee further broadly classified into two categories, ordinary income and statutory income. The current case indicates provisions in relation to income received in advance and the stock traded in context to the funeral business. Significant case laws are cited to prove the correlation between the applicable sections and law, which is apt to the current case. Application of relevant facts suitable case wherever found necessary to prove the point of the answer.

As per the section 6.5 of Income Tax Assessment Act 1997, an ordinary income is a part of assessable income, which is derived throughout the income year.

In the case of Brent V FC of T71ATC, it was articulated that wherein any specified provision is not mentioned regarding the determination of derived income, applying of commercial and ordinary principals will derive the income assessed (Linney, 2012).

• The income, which is derived by RIP LTD from RIP Finance, shall be the income derived in general.
• The income that is been derived from its funeral plan will be taken as an activity. Such activities are referred as funeral and associated activities.

RIP Pty. Ltd is a resident private company, which carries on its business of undertaker/funeral director. Fess is generated by the company from RIP finance Pty Ltd who under the instalment repayment plan provides its customer credit facilities. Deluxe funeral arrangements are guaranteed to the client wherein the agreed amount is paid. If the determined charge of the contract is not paid in complete then in such a case it is billed as fees payable under an invoice of 30 days or fees received from RIP finance Pty Ltd. under the instalment repayment plan.

In the case of Arthur Murray (NSW) Pty Ltd. V FCT (1965) CLR 314 (High Court), the dance classes were taken by the taxpayer and prepaid basis was chosen as a means of recovering fees. In the event of future services, no refund was offered to its customers (Rowland, 2014). The income earned from classes for future prospects was accounted by the taxpayer as “unearned deposit” account. In this case, the court provided its verdict elucidating that the amount received by the taxpayer for services that are to be offered in future years will be a part of the assessable income for the year in which it is received and not for the year in which it is actually earned.

Facts

In the current situation, Arthur Murray case shall be applicable to the company. As the company is receiving fees on the prepaid basis for which the taxpayer makes no refund if the client is unable to avail the services in future. A similar notion is applicable for those customers who cease to make payments and are unable to repay their arrears.

The respective two methods are clearly elucidated under Rule 8 and Rule 9 of the Taxation Rulings (TR 98/1):

Cash Basis: It is also known as receipt basis. Under this method, taxpayer derives income when he receives cash or cash equivalent amount. Any company who has a turnover of less than $2 million can avail this method. This method covers the period during which actual sales and purchases are being made (Martorano, 2014). The merit of employing this method is that it can better align the flow of money with the business activity and its statement liabilities. Thus overall making it easier for managing the cash flows. The cash method is applicable in following instances:

Any small business which might be an individual, company, partnership firm or a trust whose aggregate turnover is not more than $2 million (Charlesworthand Marshall, 2011).

Wherein the income tax is calculated on the basis of cash method.

A type of enterprise who is directed by any respective law to pay taxes on the basis of cash method.

Accrual Method: Herein, income is considered received when it has actually been earned. Income will be realised only when the services or goods are actually been delivered or debts are incurred against the income and not just merely because of receipt of income as done in cash basis (Sørensen and Johnson, 2010).

Cash Basis: Mr N is employed who receives a salary for two months in advance for the next year. Herein, the salary of two months shall be deemed to be received even if the services pertaining to such salary is not rendered.

Accrual basis: Mr P has a business of selling telephone. In the current year, a scheme is offered to customers to make payment in advance for the next year and avail the benefit of rebate of 20%. On the basis of accrual method, though the fees are received for next year, the fees in relation to current year will only be accounted for assessment of income of the taxpayer.

As per theSection 104-150 of Income Tax Assessment Act 1997, forfeiture of deposit CGT event H1. This is applicable in a case wherein an individual or entity or organisation has received any deposit from you and they forfeit the same for the reason that prospective sale or any other transactions have not proceeded (Taylor and Richardson, 2013).

Pertinent Law

For instance;

Mr X has decided to sell off its land. Before commencing upon the contract of sale, the prospective buyer pays Mr X $1000 which is a holding deposit for 2 months. In any circumstance, the negotiating contract ceases to occur and in such case, the deposit is forfeited by Mr X.

According to 1A the following components need to be reduced from the amount, which is being deposited:

• Amount repaid by Mr X, or
• Compensation paid by Mr X that can be considered as a repayment of complete or part of the deposit.

Also, 1A specifies that the proceeds which are being forfeited may be in form of property (Tse, and Krol, 2015).

As per 1B, deposit can’t be reduced by any part of payment that can be deducted.

As per subsection 2, the time of the event is when the deposit is forfeited.

As per subsection 3, a capital gain can be made if a deposit is more than the expenditures incurred in context to the prospective sale or any other transactions. Subsequently, the capital loss is said to be made wherein the deposit is less.

As per subsection 4, the expenditure may include giving property, but it does not include any amount, which is received as recoupment and is not a part of your assessable income as well (Whiteford, 2010).

The amount received by RIP Pty Ltd from its client under the funeral plan for any future costs in relation to the funeral. In case if the complete agreement is not met then the amount deposited shall be forfeited. $225000 is the amount that remains of Easy Plan funeral.

As per the Section 104-150, the company has the right to forfeit the amount that has been deposited on account of incompletion of the obligation and $225000 should be written down as capital gained in the books of RIP Pty Ltd.

Applicable Law

Trading stock is defined by 1997 The Income Tax Assessment Act’s Section 70-10. As per the section trading stock involves all that is made, produced or bought which is used for the purpose of manufacturing, sale or exchanging in the ordinary course of business (Jacob and Jacob, 2013). Cases involving livestock and shares need to be considered for special issues.

Livestock is considered to be a part of stock only if they are burdened animal only for the purpose of primary production in the business. In the case of shares, it is a part of trading stock only if there are a frequent number of transactions and considerable resources are developed from such activity.

Instance

• Deduction referring to the cost of purchase is permitted.
• If closing stock’s amount becomes more than closing stock’s amount then the difference is valuable (Pintoand et.al., 2011).
• If opening stock’s amount is more than the amount of closing, the resulting difference is deductible.

Facts:

There are three types of caskets, which include a range of accessories considered as religious and secular possessed by RIP Pty Ltd as closing stock. The company has also procured a significant amount of discount on its advance purchases.

As the company has acquired the caskets and accessories for its fulfilment of obligation and not for the purpose of selling or exchanging it in the ordinary course of business thus this will not be a part of the stock.

The case law of “Ballarat Brewing Co, Ltd V FCT” is applicable to the current situation as for the facts; it correctly reflects the expenditure made in reference to the acquisition of caskets and accessories. According to this case, the amount calculated in the books of accounts shall be the amount after discount availed. The net amount shall be the correctly reflected (Rowland, 2012).

$25000 will be shown under head assets, but only if the casket and accessories come under the head of assets. Thus, equivalent to the amount under the head of capital assets, debtors account will be created.

If this is considered as expenditure, then it will be accounted as prepaid expenses.

Treatment of dividend income earned during the year

As defined under section 44 of Income Tax Assessment Act, Assessment of dividends is made when it is paid and as per the section 6 (1) the word “paid” includes sum i.e., distributed or credited by the company. Further, the section 44 (1)(a) must be read in reference to dividend payment (Crawford and Sawang, 2011). The company cannot revoke dividend once declared. Thus, dividend forms a part of assessable income when it is received and can’t be revoked by the company.

Hence, in the current situation RIP Finance Pty Ltd declared a cash dividend of $21000, which will be part of the assessed income of the company.

Treatment regarding rental of storage space to be paid during the year:

Applicable law:

In context to the provisions specified in Australian taxation laws, an individual or any business is eligible to claim any rental expenses, which are of revenue nature. Though, in context to the capital expenses, it has been clearly mentioned one is entitled to claim deduction wherein there is any declining value of capital work.

Facts:

On 1^st March 2016, an amount of $57000 was paid as 2 years’ rent for storage space. The lease is about to get expired by 28^th February 2018. In this situation $9500 amount was taken as a part of the expense and remaining $47500 is to be capitalised in financial accounts.

As per the provisions specified under the Act, $9500 will be permitted to get deducted in the same year. Though, certainly, one cannot claim the deduction of $47500 immediately and avail it in proportionate of two years as per the declining value of capital expenditure.

Treatment of trading stock

Treatment of the amount being debited from Long Service Leave Account

Income Tax Assessment Act’s Section 83-70 herein deals with the accounting of Long Service Leave provisions. The subset of this section is applicable to the leave off following categories but other than the annual leave which is to comply with the provisions of section 83-10 (Other capital expenses. (2016)). As per this section:

Long leaves, extended leaves and furlough are a part of the long service leave.

Any other service which has the same implication as of above mentioned in part (a) is ordinarily available.

If the employer has been availing any scheme of arrangement for leave, the employer is not bound to comply with the Law of Common Wealth and State of Territory Laws, related to the leave as aforementioned in section 83-70.

Section 83-8 is considered for dealing with taxations belonging to vacant long service leave payment (Pintoand et.al., 2011). As per this section, payment is recognised to post 14^th August 1993 period will be 100% part of assessable income of employee.

The MD of RIP Pty Ltd was given an advance pertaining to Long Service Leave of $22000 for 3 months. This amount is considered for the provisions of service leave account.

In reference to Section 83-7 and 83-8, it can be observed that the amount given to an employee is related to the long service leave and the total amount. As part of the assessable income of the employee, the total amount of $22000 will be a part of it. Thus, the treatment done herein is correct.

The deduction that is applicable in relation to customer costs for a building it can be claimed under the head of capital work. It includes the following:

• Building or the preliminary extensions, enhancements to a building.
• Enhancement made in the structure of building such as maintaining the wall and fences (Pintoand et.al., 2011).
• The improvement made to safeguard the environment.

Thus, all this assessment can help in claiming for the capital expenditure made by them regarding the extension of the building. Furthermore, distinctive rates of deduction shall be applicable from the time when the work has started. Division 43 of ITAA 1997 shall cover the provisions of this law.

According to the decision made by the company’s Board of directors to resort to and construct a purposeful built in facilities. In the year 2013, $250000 was paid over as a preliminary expense for architectural designing. The land was subsequently acquired in the year 2014 that costs around $1.25 million along with $50000 was given as expense incurred for demolishment. Construction for new house commenced from 1^st September 2014 incurring a sum of $2.5 million. Operations began on 1^st August 2015 and an onsite parking cost was calculated as $125000 which was completely built by 30^th September 2015 and the over landscape site resulted in a sum of $40000 which was completed on 31s of January 2016.

As per the given situation, the business is eligible to claim for 4% as allowances for construction work as in reference to the Division 43 of ITAA 1997. However, in order to avail this allowance the building is required to be qualified as per the provisions of Section 43.150 of ITAA 1997.

Conclusion

The organisation herein has been applying all the relevant norms of the ITAA 1997. Any non-compliance of the statutory laws will result in varied penalties and punishments for the company and its representatives (Rowland, 2012).

It can be very well articulated from the current report that standard norms of the Taxation laws of Australia are followed requisitely by the organisation. The prevalent sections and provisions are elaborated for a detailed explanation of the sections. Suitable Case laws have been cited to present the facts and judgement of law, which has helped, in ascertaining the treatment made by the organisation.

References

Charlesworth, S. and Marshall, H. (2011). Sacrificing workers? The curious case of salary sacrificing in non-profit community services in Australia.International Journal of Public Sector Management. 24(7).pp.673-683.

Crawford, J. & Sawang, D. (2011). R&D in Australia: The new R&D tax incentive. Taxation in Australia, 46(4), p.145.

Jacob, M. & Jacob, M. (2013).Taxation, dividends, and share repurchases: Taking evidence globally. Journal of Financial and Quantitative Analysis. 48(04), Pp.1241-1269.

Linney, S. (2012). Changing the face of regulatory projects in Australia. Taxation in Australia, 46(10), p.468.

Martorano, B. (2014).The Impact of Uruguay’s 2007 Tax Reform on Equity and Efficiency. Development Policy Review, 32(6).Pp.701-714.

Rowland, N. (2012). Keeping you up to date with the latest in tax. Taxation in Australia, 47(2), p.62.

Rowland, N. (2014). Furthering excellence in the tax profession. Taxation in Australia, 49(3), p.119.

Sørensen, P.B. & Johnson, S.M. (2010). Taxing capital income: options for reform in Australia. In Melbourne Institute, Australia’s Future Tax and Transfer Policy Conference (pp. 179-235).

Taylor, G. & 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.

Tse, J. & Krol, C. (2015). Tax transparency in Australia: Cutting through the BEPS noise. Taxation in Australia, 50(2), p.80.

Whiteford, P. (2010). The Australian Taxâ€ÂTransfer System: Architecture and Outcomes. Economic Record, 86(275), pp.528-544.

Pinto, D.and et.al. (2011). Australian Taxation Law Select: legislation and commentary. CCH Australia.

Other capital expenses. (2016). [Online]. Available through<https://www.ato.gov.au/business/income-and-deductions-for-business/depreciating-assets/other-capital-expenses/>.[Accessed on 6^th September 2016].