The taxpayer involved within this case is licensed from United States as the company which organized the lessons for dancing for the pupil situated in Sydney and Melbourne. Now the taxpayer has given the students which will ensure that they are getting proper lessons for the dancing skills (Athanasiou, 2014). The time period for these lessons was scheduled for fifteen hours and this time period was distributed within a whole year time span. The learner was enrolled under the business of the taxpayer who was required to sign the contracts associated with different rules and regulations. The rule which was introduced into the contract is completely non- refundable and also the learner who enrolled for the yearly course were clearly made responsible for the course fees that they had to pay for the dance classes. The main point of the contract was that the amount paid by the learner was not cancellable and also the taxpayer is also not liable to return that money once the payment is done.
The section of the contract highlights that any request coming from the learner related to refunds will only be entertained if the causes are genuine and from the justified bases (Brody et al., 2015). However, the organization violated this contract and they have failed to provide the refunds to the students who were unable to attend all the classes during the whole year, the organization provided explanation for this actions and they denied to return the money the learner paid for the classes.
The accrual” method of accounting was accepted by the taxpayer, so the full amount was paid by the learning at the beginning of the course but there was not recorded in the books of account of the organization. Instead of recording this transactions the taxpayer has kept the amount in “Unearned deposits”-“Untaught Lessons Account” (Courtney, 2014). Now the instructors for the dancing classes were supposed to take down the names with their corresponding paid amounts for the dancing classes during the beginning of the classes.
At the end of corresponding each month a comparable amount was gained upon imparting the dancing lessons was reflected into the account called “Earned Tuition Account”. Accordingly, the amount was not considered as an income capital until the learner has got the lessons from the organization (Fegan & Stephens, 2012). Now after one income year has been passed, the sum gathered in the account named “Unearned Deposits-Untaught Lesson Account” was considered as additional to the following year as well.
According to the taxation commissioner issued an assessment of the amount which was dependent on the year of income along with the assessable income. This income was ultimately received by Arthur Murray in every end of the year. The taxpayer raised his objection against the assessment which taxation commissioner rose for checking the Board of Review (Ferran & Ho, 2014). This review arranged by the board stating that the liquid money which the tax payer is getting for the business is considered as the gross pay for the entire business process and also this amount was highlighted as the assessable gains in the year where this amount were collected from the learners in advance for purpose of providing dancing lessons to them. These facts directed the taxpayer to appeal in High Court of Australia. This description highlighted the facts about the case.
The issue determines around weather the taxpayer has genuinely obtained the advance payment for the tuition fees which they received during the year where dancing lessons were supplied?
The Australian high court stay reliant on the standards stated in “Federal Commissioner of Taxation v Flood (1953)” where the law court did not pursue the commercial and different accounting rehearsal those will combine the deductions of income (French, 2013). The court of law on highlighting the decision in the case of “Arthur Murray” stated that the amount received by the taxpayer as the prepaid amount of tuition fees could be taken as derived until the tuition is provided to the learners. The verdicts of the court advises the receipt which was actually made is important in relation with the business and the taxpayer is responsible to consider the amount received as the tuition as net capital income for the year (Gaal, 2013). The decision approved by the Australian high court, the taxpayer is also liable for paying the money back to the learner for the failure of providing regular classes to the learner. The decision of the court highlighted that the taxpayer could not consider the advance payment as income until they are providing the services to the learner for their development.
As stated under “section 6-5 of the ITAA 1997” when the taxpayer gains any income then the amount which is derived by the taxpayer will be considered for assessment. The income which gained by the taxpayer must be considered for getting assessed according to the “section 6-5 of the ITAA 1997”. To calculate the business earnings there are significant methods. The method includes receipt method and earning method (Saad, 2014). This is important for the taxpayer to follow this method as this will reflect the efficient income for the taxpayer for each income year. This can be considered that the receipt method as most genuine method in determining assessable income per income year. According to the provision stated in paragraph 19 of the “Taxation Ruling 98/1” it explains if the gaining of any taxpayer is derived from any other manufacturing services then the amount collected will be recorded according to the earning method. Henceforth, the earning method must be selected as the genuine method for calculating the amount of tax payable for the taxpayer.
This can be considered that the case of RIP Pty Ltd which is a funeral service providing company and gains around $2.45 million as their net profit each income year, identified majority of the revenues are gained by providing services to their valuable customers. The customers were provided with the facilities of paying the amount for utilizing their service are highlighted as follows:
Noticing the circumstances of RIP Pty Ltd the principles of Arthur Murray can be applied in the year where the company gained the fees from their customers. According to the common law any form of money which is collected in advance will be kept as income capital (Shetreet & Turenne, 2013). Now the evidences from the case study suggests that the RIP Pty Ltd follows the practice where the fees is collected in advance and this gets recorded when the company receives the amount. The instances collected from the case, suggested that the standards adopted is same with the case of Arthur. It is suggested that RIP Pty Ltd must not record the fees in the income year when it is collected. However, the company is advised to record the fees when the funeral services are actually provided by the company to their customers by different means.
Denoting the provision stated in the taxation ruling of the “Taxation Ruling 98/1” two procedures has been defined in keeping track of the business profits and the same is applicable in the taxation determination (Vann, 2014). For determination of the accounting profit and tax there are two procedure that is taken into the considerations this includes the earnings methods and the receipt methods. Based on the above stated method an individual taxpayer obtaining the income is considered based on the amount that is received and based on the constructive receipts.
Referring to the explanation made in the “section 6-5(4) of the ITAA 1997” an income is regarded as obtained when the taxpayer originally gains the income (Barkoczy, 2016). There is also alternative methods of determining the accounting profit ant the taxation of the business and this method is regarded the earnings method. Referring to the above stated explanations an argument can be bought forward by stating that the income that is obtained by the taxpayer is identical to the income that is obtained from the recoverable debt. The taxpayer is required to take into the considerations of taking actions since the income that is obtained is reliant on the agreement and the execution of the contract (Basu, 2016). Therefore it is vital to stated that the taxation commissioner and the individual taxpayer can account for either receipts or the earnings method to determine the tax liability:
A business of providing the easy funeral was commenced by the RIP Pty Ltd which required the customers of the company to pay the amount of the scheme in parts and later the company imparted the funeral service to its customers. RIP Pty Ltd obtained the fees from the customers based on the stipulations that the fees would not be refundable. On account of any failure of the customers the fees were forfeited into the separate Forfeited Payment Account (Feld, 2016). The forfeited sum of payment from the failure of the customers enable the taxpayer to shift the amount in the separate company accounting books known as the Forfeited Payment Accounts. The company in its declaration stated that it cannot be considered liable for imparting any form of services to the customers that fail to pay the money as a whole. Evidently in the situation of the RIP Pty Ltd the forfeited amount of $16200 would be held as income for the year in which the fees was received by the company.
In accordance to the guidelines stated in the “Section 70-10 of the ITAA 1997” it can be stated that the trading stock refers to the business items that is obtained with the objective of resale or exchange in the market during the income year (Fleurbaey & Maniquet, 2017). Referring to the guidelines provided under the “section 70-10 of the ITAA 1997” trading stock cannot be considered as the item of the CGT assets. In addition to this an individual taxpayer under the “section 70-25 of the ITAA 1997” is prohibited from including the amount that are having the characteristics of capital in the trading stock (Miller & Oats, 2016). Taking into the considerations the evidences that has been obtained from the case study of the RIP Pty Ltd it can be stated that the company reported expenses on the caskets and the other types of accessories that was used in the business. Therefore, RIP Pty Ltd is required to consider those items as the trading stock instead of classifying those items as the business assets.
The case study of the RIP Pty Ltd provides that the trading stock constitute a component of business deductions that can be availed under the “section 8-1 of the ITAA 1997” (Murphy et al., 2016). Taking into the considerations of the situation of RIP Pty Ltd it is noticed that the business made an advance payment of trading stocks that valued $25,000. Referring to the explanation made under the “section 8-1 of the ITAA 1997” RIP Pty Ltd can claim an allowable deductions since the amount was entirely incurred by the company for acquiring the trading stock the purpose of purchase and sale during the accounting year ended June 2016.
Referring to the definition provided under the “section 6-5 of the ITAA 1997” the major part of the income that is obtained by the taxpayers is regarded as the ordinary income based on the ordinary concepts (Pope et al., 2017). In addition to this, “section 6-5 of the ITAA 1997” explains that an Australian deriving income from the Australian sources shall be accountable for the assessment. Similarly in the situation of RIP Pty Ltd the receipt of dividend income would be considered as the computable returns. The dividends that is received by the company is fully franked. Therefore, RIP Pty Ltd can take away the franking credits that attached with the dividend.
Referring to the definition that is stated under “Section 100-25 of the ITAA 1997” an explanation can be bought forward by stating that the any type of advance payment that is made any commercial shall be prohibited from being held as the capital asset (Tan et al., 2016). Similarly, the payment of the advance rent could not be classified as the capital asset. As evident in the situation of RIP Pty Ltd an advance payment was made by the company and based on the general rules of the “section 8-1 of the ITAA 1997” these expenditure can be claimed as the allowable deductions for the business.
According to the statement made by the Australian taxation office it is the accountability of the employer to make a contribution in the employee long service leave entitlement in respect of the services rendered by the employee during the course of the employment. The taxation office also lay down that the employer making contribution in the long service leave entailment of the employee shall be subjected to the PAYG Withholding (Woellner et al., 2016). Referring to the guidelines provided by the Australian taxation office based on “section 83-80 of the ITAA 1997” the taxation income of the employee should be more than the long service leave since it held as the non-assessable unit.
In compliance with the explanations that is made under the “subsection 83-85 of the ITAA 1997” the provision the long service can be availed by the taxpayer as the allowable deductions since it is associated to the derivation of the assessable income. It is worth mentioning that “subsection 83-85 of the ITAA 1997” provides that any type of long service leave that is paid by the employer should not be greater than 30% of the employees assessable earnings. The long service contributed by the RIP Pty Ltd constitutes business expenses and cannot be classified as advances for the year ended June 2016.
Referring to the description provided under “section 8-1 of the ITAA 1997” an individual taxpayer can claim an allowable deductions relating to the expenditure that is occurred in the derivation of the assessable income (Pope et al., 2017). The expenditure that is reported by the company is held as capital nature relation the expenses occurred for land and building.
Expenses associated to the architectural design is regarded as the capital expense. Based on the provision stated under the “Section 100-25 of the ITAA 1997” such expenditure is added into the cost base of the asset and not allowed as the allowable deductions. Therefore, RIP Pty Ltd would not be able to avail deduction under “section 8-1 of the ITAA 1997” for the expenses incurred on the land and building, onsite parking and architectural design because they are capital expenditure.
Reference List:
Athanasiou, A. (2014). Changing from cash to accruals accounting. Taxation in Australia, 48(8), 459.
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Basu, S. (2016). Global perspectives on e-commerce taxation law. Routledge.
Brody, E., Breen, O. B., McGregor-Lowndes, M., & 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.
Fegan, T., & Stephens, M. (2012). Taxation of entities. Concise Collection of Tax Fundamentals,
Feld, A., (2016). Federal Taxation of State Tax Credits.
Ferran, E., & Ho, L. C. (2014). Principles of corporate finance law. Oxford University Press.
Fleurbaey, M., & Maniquet, F. (2017). Optimal income taxation theory and principles of fairness. Journal of Economic Literature.
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.
Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage Learning.
Pope, T. R., Rupert, T. J., & Anderson, K. E. (2017). Pearson’s Federal Taxation 2018 Corporations, Partnerships, Estates & Trusts. Pearson.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Shetreet, S., & Turenne, S. (2013). Judges on Trial: The Independence and Accountability of the English Judiciary (Vol. 8). Cambridge University Press.
Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), 329-344.
Vann, R. J. (2014). Hybrid Entities in Australia: Resource Capital Fund III LP Case. Tax Treaty Case Law.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.
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