This present case is based on the Arthur Pty ltd. where it has been observed that that group has professed certain business related to the dancing class. Further, it has been observed that all the students have to enter into a contract with the company regarding the period of dance class. Further, the group was providing discounts to the students and the reason behind the same was to motivate all the students so that they feel affordable to come and join the dance class. The agreement that has been signed in between the students and the group stated one term where it has been mentioned that no refund regarding the prepaid fees could be done. Further, it has been stated that the nature of the contract is full and not divisible. It is a non-cancellable document. However, it has been mentioned by the authority that in case of a justified situation, the claim for refund can be taken into place and exceptional steps could be taken there. There were two accounts named suspense account and revenue account. All the money after receiving from the students was transferred to the suspense account and after the lessons had been over, certain amount transferred to the revenue account from the suspense account. Therefore, under this process, it has been observed that there was no need to refund the amount to the students. The group was the taxpayer and they are treating the tuition fees as their income. The fees become income when the dancing course was completed. The taxpayer adopted a method where not all the monies were received in advance in the form of payment credited to the general revenue. Rather all the amount was credited to the untaught lessons account. During the year end, considerable amount was regarded as untaught lessons account and Commission of Tax has actually received assessable income and the prepaid tuition fees as general income under section 25(1) and Income Tax Assessment Act 1997.
According to the rules regarding the assessable income, it has been observed that if any fees have been received in advance, the same could not be held as an assessable income and therefore, the fees received by the dance group on advance should not be regarded as assessable income. Further, it has been held by the High Court Australia that the taxpayer should make certain declarations to the students regarding the fact of refunding the money. According to this, it has been held by the High court that the taxpayers should make a clear statement that no refund will be made by the authority. However, an adverse situation has been observed where the authority had declared that in certain circumstances, money could be refunded and this has made a violation to the rules of assessable income. This provision of refund has created certain complexities regarding the yearend balance sheet of the group. It has been observed that the group has failed to involve the tuition fees as their income, as they have a dilemma regarding the refund provision. Therefore, an intervention of the High Court to determine the facts of the assessable income becomes necessary in that case. It has been held that the income that is received by the taxpayers should be assessed from the year they have started to commit business (Burton 2017). The court has appreciated the accounting treatment made by the taxpayers to that effect.
Certain provisions of the Income Tax Assessment Act 1997 have been involved in this case. According to section 6.5 (4) of the Act, if any amount has been received by the taxpayer or by anyone who are acting on behalf of the taxpayer, should be treated as income. Further, the income should be included under the provisions of assessable income after a specific period. In addition to this, there are two types of processes present to calculate the taxable income named earning method or receipt method (Charles 2017). The taxpayer has to choose any of the method for their income to be assessed according to the nature of their income. According to the Taxation Rule 98/1 (Para 19), if any income has been made from investment, it will be regarded as income other than the business income. Further, receipt method should be applied in all that cases here the income has been derived by the employees. In addition to this, it has been mentioned under Para 20 of the rule that calculation of taxable income depends on the source of income and it is to be decided whether the income has been derived from trade or manufacturing business (Ciconte et al. 2016). Further, in case of computing income, one of the most suitable processes is earning method. Therefore, it can be stated that the method of computing income will be applied in this present case.
The case related to the RIP Pty Ltd involves with a business relating to the funeral service and it has been observed that the company has conducted all the ceremony and works related to the funeral ceremony. The profitable income of the company was reached $2.45 million for the period of June 2016 (Edwards, Schwab and Shevlin 2015). The revenue amount of the company has been derived from its customers in the form of different situations. However, all the monies are collecting by the company with proper justification that includes as follows:
From the above-mentioned plans, topic relating to the earning method has been observed that can be regarded as most suitable plan for the business professed by the company. Considering the case, it has been observed that the main business of the company evolved with conducting funeral ceremony and the company is deriving its revenue from the business (Gale, Samwick and Center 2014). It has been observed that the company is providing a thirty days invoice notice to all its customers after the completion of funeral ceremonies. After the period of thirty days, the company will treat the income as revenue and will submit another thirty days invoice and all the advance installment fees will be come under the provision of the easy future plan. According to the provision of the future plan, certain promises are generated by the company to the customers that they will conduct all the funeral program in future event. In addition to this, it has been confirmed by the company that all the money giving under the future plan are non-refundable (Gitman, Juchau and Flanagan 2015). All the advance money paid to the company are transferred to the forfeited account and company has started to use this forfeited account as part of their income and the company has regarded that all the services provided by the company under the easy future plan does not required to bear any future liability regarding the same. In such circumstances, it has been observed that the company earns from the funeral services only and therefore, all these monies are regarded as income of the company.
In this case, certain comparisons have been made regarding the dance group of Arthur Murray and RIP Pty Ltd. in case of Arthur Murray, income has been derived from the year when services are provided to the customers. The subject matter of the case is based on the judgment made in Federal commissioner of Taxation v Flood (1953) 88 CLR 492, where it has been observed by the court “commercial and accounting practice on the question of what constitutes a proper deduction from income has been declined”. According to this rule, the allowable deduction is required to be determined first and process of commercial practice could not be allowed here in this case. Not all the advances taken by the company regarding the funeral ceremony in respect of the customers should be regarded as income.
This part has discussed with various methods of the income assessment sections, it has been observed that certain provisions of the Taxation Rule 98/1, and section 6.5 of the Income Tax Assessment Act 1997 has been followed in this case. A close interpretation of the provisions of Taxation Rule reveals the two main methods regarding the taxable income such as earning method and receipt method (Halim et al. 2015). According to the main ethics of receipt method, when the cash is received in the form of actual or constructive income, it will fall under the definition of receipt method. It has been stated under section 6.5 (4) of the Income Tax assessment Act 1997 that when a taxpayer or any person receives on behalf of the taxpayer certain amount, that will be treated as income. Another method is named as earning method. According to this method, the income should be earned and a recoverable amount should be created in this case. This method can be regarded as cash and credit method. If the taxpayer has entered any agreement, the taxpayer can claim the amount mentioned in the agreement as their recoverable debt (Percival et al. 2017). However, it is the discretionary power of the Tax Commissioner or the taxpayer to consider the amount either earning method or receipt method and in this case, any of the method should have to be determined to assess the taxable income.
Regarding the subject matter of the case, it is to be mentioned that RIP Pty Ltd has professed its business under the scheme of easy future plan. According to this scheme, the customers to this company have to pay advance money for any future funeral custom and an agreement should be come into force regarding the same with the customers (Posner 2014). They are restricted to claim any refund regarding the payable money under the scheme. In addition to this, it has been mentioned that in case of any customer has failed to pay the advance money, he is required to be regarded as forfeited money holder and all his monies will be transferred to a forfeited account. Therefore, the company will have no liability in case of failure to pay the amount by the customers (Robinson, Stomberg and Towery 2015). In case the money of the customers transferred to the forfeited account, the company shall have no liabilities regarding the commission of any future funeral customs for those customers. however, according to the provisions of section 6.5 (4) of the Act, it can be stated that as the money has been received by the company, the same should be treated as income and all the forfeited fees of the company are required to be considered as income in this case.
The present subject matter of the case is based on the principle of trading stock. According to this principle, trading stock is something that has been manufactured or obtained during general course of business (Stout and Blair 2017). Further, it has been mentioned that anything that has been used for manufacturing process or the process of sell or exchange of goods are also come under the purview of section 70.10 of the Income Tax Assessment Act 1997. According to this definition, the matter of CST assets or the financial agreements are fall under the definition of trading stock. Further, certain obligations have been mentioned under section 70.25 of the Act where it has been mentioned that the nature of the trading stock should not be capital (Tran and Zhu 2017). According to the requirements of this issue, it can be observed that all the caskets and other accessories bought by the company (RIP Pty Ltd) are forming part of their business and none of the natures is capital. Therefore, these can be treated as trading stock.
Apart from the abovementioned provisions, certain deduction provisions have been mentioned under the Income Tax Assessment Act 1997. According to section 8.1 of the Act, if any general deductions have been allowed by any provision or any amount has been paid to purchase the trading stock, certain amount could be deducted. Therefore, considering the amount payable in case of RIP Pty Ltd., it can be stated that certain amount of money ought to be deducted from the company as they have bought product for their business that considered as their trading stock. Further, according to the provisions of the Act, where certain expenses are required to operate the essentials of the business, the provision regarding general deduction will be applied (Smith et al. 2016). The amount payable for the trading stock should be regarded as income and therefore, all the prepaid amount for trading stock of the company should be treated as income and assessed within June 2016.
This portion of the question is based on the notion of ordinary income and commencement of advance income. The relevant provision regarding the same is section 6.5 of the Act where it has been mentioned that when the residential taxpayer has received an income, the income will be regarded as ordinary income. In this case, dividends are included under the taxable income. According to the case of RIP Pty Ltd, it can be stated not all the advance payment made by RIP Pty Ltd. for the rental storage should be fall under the provision mentioned under section 100.25 of the Act. Further, it has been mentioned under this section that advance payment for rent could not be treated as capital assets. In addition to this, long service leave will not fall under the provision of the assessable income (Posner 2014). Therefore, the long leave advance payment made by the company will not be treated as assessable income in this case.
The main fact of the case is to consider whether the building equipments are fall under the category of capital expenditure and whether that will form a part of the general deduction. According to section 100.25 of the Act, subjects related to land and buildings will fall under the category of CST assets. General deduction for this asset will not be considered under section 8 of the Act. These materials will be considered as capital expenditure.
Reference:
Burton, M., 2017. A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. J. Austl. Tax’n, 19, p.50.
Charles, A.R., 2017. The new property. In Theoretical and Empirical Studies of Rights (pp. 81-135). Routledge.
Ciconte, W., Donohoe, M., Lisowsky, P. and Mayberry, M., 2016. Predictable uncertainty: The relation between unrecognized tax benefits and future income tax cash outflows.
Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The Accounting Review, 91(3), pp.859-881.
Federal commissioner of Taxation v Flood (1953) 88 CLR 492
Gale, W.G., Samwick, A.A. and Center, U.B.T.P., 2014. Effects of income tax changes on economic growth. Economic Studies, https://www. brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Sa mwick. pdf.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Halim, H.A., Ahmad, N.L., Katmun, N. and Jaafar, H., 2015. Understanding and Attitudes towards Self-Assessment Taxation System: The Case of Malaysian Non-Accounting Undergraduates Students. Global Review of Accounting & Finance, 6(2), pp.110-122.
Percival, R.V., Schroeder, C.H., Miller, A.S. and Leape, J.P., 2017. Environmental regulation: Law, science, and policy. Wolters Kluwer Law & Business.
Posner, R.A., 2014. Economic analysis of law. Wolters Kluwer Law & Business.
Robinson, L.A., Stomberg, B. and Towery, E.M., 2015. One size does not fit all: How the uniform rules of FIN 48 affect the relevance of income tax accounting. The Accounting Review, 91(4), pp.1195-1217.
Smith, F., Smillie, K., Fitzsimons, J., Lindsay, B., Wells, G., Marles, V., Hutchinson, J., Hara, B.O., Perrigo, T. and Atkinson, I., 2016. Reforms required to the Australian tax system to improve biodiversity conservation on private land. Environmental and Planning Law Journal, 33, pp.443-450.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.
Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.
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