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Provisions for determining assessable income

Discuss about the Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314.

The leading character of this case is Arthur Murray who develops a dance group and admitted students by entering into certain contracts with them. according to the case study, it has been observed that the group has generated certain courses on periodic manner. The company to attract the students such as they have the facilities to provide the course fees on installments basis has adopted certain tactics. Further, it has been observed that they are providing discounts to the student with the intention to get their trusts. In the case, the dance group has been regarded as the taxpayers and in the contract agreement; the company has mentioned certain payment process. According to this provision, the students who are giving advance payment are restricted to claim for any refund of their money. However, there is an exceptional provision where it has been mentioned that if the group has failed to provide all the classes mentioned in the course procedure, the student can make legitimate claim regarding the refund of the money. There was no scope of partial contract and the nature of the contract was non-cancellable. Considering the brief of the case, it has been observed that there were two accounts present such as suspense account and revenue account. The payment made by the student at the first instance transferred to the suspense account and after the completion of the course, certain amount will transfer to the revenue account. The process of account transfer reveals the fact that there is no scope for refund of money. The taxpayer regarding the transfer of money to the general revenue has adopted certain methods. It has been observed that not all the money is credited to the general revenue account. In the annual balance sheet of the company, it has been observed that the taxpayer has shown all the amounts of advance money under the untaught lessons account and it has been observed that untaught lessons account reflects the considerable amount. There is a requirement to assess all the monies under the structure of assessable income stanza and the advance fees are fall under the provision of general income mentioned under section 25(1) of the Income Tax Assessment Act 1997.

According to the facts of the case it has been observed that all the income kinds are to be assessed differently and the commissioner of tax and the taxpayers are under an obligation to calculate the amount of advance tuition fees. Further, it is to be assessed whether the advance payment made by the student to the group fall under the provision of the assessable income or not.

Case analysis: Arthur Murray Dance Group

Conclusion:

According to the definition of the term assessable income, total money earned by an individual for a tax year will fall under the definition. Therefore, it can be stated that the matters relating to the advance payment or advance income will not fall under the category of assessable income. It can be stated that not all the advance payment made to the group will fall under the provision of assessable income. Further, there are certain biased statements made by the group in the contractual agreement. In the words of the High Court, it has been stated that the group should have to mention that no money would be paid to the student in the form of refund. However, according to the agreement, the exceptional provision states in case the dance group has failed to provide all the contracted terms to the student, they can legitimately ask for refund of their payment to the company. According to the balance sheet produced by the group reflects the fact that all the tuition fees has not been fall under the income segments and regarding the provision of refund sector, the total advance payment could not fall under the provision of assessable income. However, the system of accounting treatment made by the group has been appreciated by the High Court (Burton, 2017).

In these parts, certain provisions, regarding the Income Tax Assessment Act has been discussed. The first provision of the case has discussed about section 6.5 (4) of the Act where definition of income has been given. According to this section, any amount received by the taxpayer or by any person received the amount because of the taxpayers are regarded as income. A condition states income will be regarded as assessable income after maintaining certain provisions and after the completion of certain times more specifically one year. The calculation process of taxable income can be divided into two terms such as earning method and receipt method. It is depended on the individual what they are choosing as their method for assess their income. In addition to the tax rule 98/1 Para 19, certain differences have been made between the income from business and income from investment (Gitman, Juchau & Flanagan, 2015). According to the terms of the Act, if any income has been derived from the employees, the same will be assessed by applying the receipt method. Further, according to Para 20 of the same rule, it can be stated calculation of the taxable income based on the sources of income. In this case, the source of income is required to be assessed. Considering the base of every income sources, it can be stated that the process of computing income will fall under the category of earning method. Therefore, the process of earning method will apply in this case.

Case analysis: RIP Pty Ltd


Considering the brief facts of the case, it can be stated that the main source of business of RIP Pty Ltd is to deal with the funeral ceremonies. It has been observed that the company has bough many accessories for the betterment of their business and further, the company has made certain payment structure. According to the annual balance sheet of the company, it has been observed that total profit gained by the company reached up to $2.45 million in June 2016. Therefore, it is required to assess all the income structure within relevant criteria. The company obtains all the payment under certain structure and certain rules are maintaining by the company regarding the same (Ciconte et al., 2016). At the first glance of the case, it has been observed that the company has generated certain invoice to its customers and issuances of the invoice notice are extracted from the external insurance company. Further, it has been observed that the company under the shadow of repayment installment plan has provided certain credits. In addition, certain easy future plans have been generated by the company where the clients are obliged to make advance payment to the company and the company will provide future funeral ceremony to the clients. Considering the total amount of profitable money, it can be stated that the company is deriving its revenue from the same. Further, according to the general vision of the company, the company has sent certain invoices. The invoices are sent to the customer when the management of the company has completed the funeral ceremonies. According to the money management plan of the company, it has been observed that invoices are given for settling the money and after the completion of the period, the installment fees come under the purview of easy future plan and in this way, the company makes all the income out of the of the assessable income (Gale, Samwick & Center, 2014). According to the definition of the assessable income, advance income will not fall under the provision of the assessable income, as there is a scope to refund the amount. However, in this case, certain terms have been given by the company to all the clients where it has been mentioned that the company will not be liable to make any refund and the company will not be responsible for any future event where the clients will fail to make any further payment to the company under the advance payment plan. Therefore, in the absence of refundable provision, the advance income paid to the company fall under the assessable income category.

Conclusion


This part deals with the assessable income of the dance group and the funeral company. According to the case analysis of the Arthur Murray, it can be stated that the contractual agreement of the taxpayer includes a section where it has been mentioned that the company will give back all the advances made to the company in case of any legitimate claim made by the student. Therefore, it can be stated that not all the advance payment of the company falls under the assessable income. However, in case of the RIP Pty Ltd, it can be observed that the company has mentioned specifically that all the advance payment made to the company under easy future plan will not be refunded by the company and therefore, it can be stated that advance payment made to the company falls under the category of assessable company (Robinson, Stomberg & Towery, 2015).

In this case, certain provisions of taxation rule and Income Tax Assessment Act have been applied. Considering the provisions of the brief statement of the case, it can be stated that provision of the taxable rules are applied for settling the matter regarding the taxable methods and there are two types of taxable methods have been provided under rule 98/1 Para 19 of the Taxation Rule. The types are earning method and receipt method respectively. All the actual or constructive incomes are fall under the category of receipt method. It has been assured by the provision mentioned under section 6.5 (4) of the Act that when certain amounts are received by the taxpayer or by certain individuals, the same will be regarded as income. Further, when a person earns certain amount, it will assess under the earning method. Under this method, certain income is recoverable in nature (Peiros & Smyth, 2017). Another name of this method is cash and credit. According to the rule of the income process, an individual can claim for the recoverable and a provision regarding the same should be mentioned in the agreement entered between the parties in case of any agreement or contract. Considering the case of Arthur Murray, the Tax Commissioner or the taxpayer should have to determine the acceptable and applicable method so that the assessment of the taxable income can possibly made.

According to the subject matter of the case of RIP Pty Ltd, it can be stated that the main business professes  by the company is conducting funeral ceremony. However, it has been observed that certain methods have been taken by the company to gain advance payment from the parties. in this case, the company has introduced the system of easy future plan, where the parties are required to make advance payment for subsequent event. however, it has been observed that the company has stated certain terms to all its clients. It has been stated that in case of all the future payment, if any client has failed to make complete payment, the company will not be responsible to meet all  the requirements regarding funeral ceremony and no matter of refund will be given by the company. Therefore, it has been observed that the company will not appreciate the provision of refund and all the payments of the company will fall under the criteria of assessable income. Further, all the forfeited accounts of the company will fall under the provision of income.


A brief definition of trading stock has been given in this case. The term trading stock denotes anything that can be manufactured or can be derived in course of business or any commercial purpose. Further, any goods that used as manufacturing process or goods on sale or exchange will come under the shadow of trading stock. The general definition of the term has been provided under the provision of section 70.10 of Income Tax Assessment Act 1997. All the matters related to the CST assets and financial agreements are lied under this definition. Further, there should no capital form regarding the capital income in this case. This provision has been given under section 70.25 of the Act. According to the case study of RIP Pty Ltd it can be stated that all the accessories bought by the company have come under the provision of the trading stock, as all the essentials of the trading stock have been met in this case. The nature of the accessories is goods and they are not capital on casual formation. Apart from the abovementioned provisions, certain deduction provisions have been mentioned under the Income Tax Assessment Act 1997 (Symes, 2016). 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.

An idea regarding the ordinary income and advance payment is the main matter of discussion in this part. It has been mentioned under section 6.5 of the Act, income get by the taxpayer is renamed as ordinary income and these types of income include dividends as well. Considering the facts of the case, it can be stated that the company as advance payment for rental storage has made certain payment. This mentality of the company falls under the provision of section 100.25 of the Act (Taylor, Richardson & Taplin, 2015). Further, the term advance payment does not come under the provision of the assessable income. The same provision has been applied in the case of the long leave advance payment. Therefore, it can be stated that the long leave payment made by the company could not be assessed as permutable in this case.

In this case, the main issue is to determine whether the subject related to the building equipments and land falls under the provision of capital expenditure and whether the provision regarding the general deduction will apply on the building equipments or not. In the rules mentioned under section 100.25 of the Act, building and land falls under the category of CST assets (Enste, 2018). Further, according to section 8 of the Act, general deduction rules will not be applicable on CST asset. Therefore, it can be stated that issue relating to the provision of general deduction will not apply on the building equipments.

References:

Brown, C., Handley, J., & O'Day, J. (2015). The dividend substitution hypothesis: Australian evidence. Abacus, 51(1), 37-62.

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, 50.

Ciconte, W., Donohoe, M., Lisowsky, P., & Mayberry, M. (2016). Predictable uncertainty: The relation between unrecognized tax benefits and future income tax cash outflows.

Enste, D. H. (2018). The shadow economy in OECD and EU accession countries–empirical evidence for the influence of institutions, liberalization, taxation and regulation. In Size, Causes and Consequences of the Underground Economy (pp. 135-150). Routledge.

Gale, W. G., Samwick, A. A., & 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., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Peiros, K., & Smyth, C. (2017). Successful succession: Tax treatment of executor's commission. Taxation in Australia, 51(7), 394.

Robinson, L. A., Stomberg, B., & 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), 1195-1217.

Symes, C. F. (2016). Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Routledge.

Taylor, G., Richardson, G., & Taplin, R. (2015). Determinants of tax haven utilization: evidence from Australian firms. Accounting & Finance, 55(2), 545-574.

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