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Part A

Describe about the Income Tax for Assesable Business Income.

Income tax is payable on assessable income of the party and is divided into statutory income and ordinary income (Ault and Arnold, 2010). The present report explains the standard norms needed to be espoused by organisations to comply with the Australian tax law. The different sections of the Income Tax Assessment Act 1997 are discussed in a detailed manner with relevant case laws.

Solution (a)

Relevant laws:

As per the Income Tax Assessment Act 1997 sec 6-5, the assessable income includes the ordinary income obtained during the relevant year (Australian Taxation Office, 2015). The verdict in the case of Brent vs. FC of T71ATC 4195, was that in the lack of applicable provisions for the determination of the derived income; the income is derived through the application of common and commercial principals of deriving income.

Conclusion:

Based on the above Law findings, the income derived by RIP Ltd. from RIP Finance is income obtained generally. In addition to this, the income obtained from the funeral plan shall be considered as activity from the funeral and pertinent activities.

Facts:

RIP Pty Ltd. is a private company carrying out the business of undertaker/funeral director. It operates out of its premises consisting of office facilities, professional rooms, assembly area and a chapel. It also has a fleet of vehicles as other assets. It earns its fees from RIP Finance Pty. Ltd. which gives credit to clients on an installment basis. If the customer pays the consented amount then the company organises deluxe funeral arrangements. However, if the customer fails to pay the agreed amount in full then it is billed as fee obtained from RIP Finance Pty Ltd. or as fee payable under an invoice of thirty days as per the instalment repayment plan.

Relevant Law:

Case law: Arthur Murray (NSW) Pty Ltd. vs. FCT (1965) 114 CLR 314 (Full High Court). Arthur Murray involved a taxpayer who was involved in the business of providing dance lessons. The taxpayer usually charged fees in advance of his courses. As the learners did not have any legal rights to claim refunds, the taxpayer made refunds occasionally. The taxpayer accounted such advance income as ‘unearned deposit’. The court concluded that the money obtained for services which will be given in the future shall be entailed in the assessable income of the year in which they are received and not in the year in which they are earned.  

Solution (a)

Conclusion:

The verdict declared in the Arthur Murray case is applicable to RIP Ltd. because the present case is also a case of income earned by funeral services. It is not applicable on any other income earned in that year (CCH Australia Staff, 2012). The case mentioned above will be applicable as the taxpayer is obtaining his fees on a prepaid basis and he is not making any refund if the student is unable to avail the lessons in the times to come. A similar concept is applicable to the clients to have stopped making payments and the company cannot expect them to make up for arrears.

The Rule 8 and 9 of Taxation Ruling (TR 98/1) define two methods i.e. cash basis and accrual basis.

Cash Basis –

This is otherwise known as the receipt basis method. Income is said to be derived from this method when the taxpayer receives cash or any cash equivalent. An organisation having a turnover of less than $2 million can adopt this method. The period that this method covers, is the period during which the purchases and sales are being made (Evans and Jacobs, 2010). The apparent benefit of this technique is that the cash flow can be aligned in a better way with business activity statement liabilities and therefore it becomes easier to manage the flow of cash.

This method is applicable in any of the below-mentioned cases:

If the income tax accounting is carried out on a cash basis,

A small business which can be sole proprietor, partnership, company or a trust, making an aggregate turnover of less than $2 million in a year,

A company which pays tax on a cash basis because of the applicability of the suitable law.

Accrual Basis –

Under this technique, income is considered to be derived when it is earned. Income shall be realised only when the products have been delivered or a service has been provided or debt against income exists; rather than merely being based on receipt of income like in the cash method.

Illustrations –

Cash method – Mr A is an employee who obtained three months’ salary of the next year in advance. If cash method is used then the salary of the future three months will be derived as his income even though he has not served for it (Heffernan and Boyd, 2010).

Accrual method – Mr B has a business of selling magazines. He comes with a subscription scheme in which the customers will pay in advance for year 2 and earn a rebate of 20% (Jacob and Jacob, 2013). Under accrual basis, even though Mr B is receiving the subscription fee for the second year, still for income tax purposes, only the amount received in year 1 will be accounted as assessed income.

Solution (b)

Relevant Law:

The Income Tax Act 1997, sec 104.150, compiled in the case of Forfeiture of deposit, CGT event HI. If an individual, organisation or an entity has received a deposit from a customer and the customer has surrendered it because the sale or any other related transaction has not been initiated, then in such cases it can be stated that the negotiations failed the amount of deposit (Kazmierska-Jozwiak, 2015).

As per section 1A, the amount being transferred to the surrendered account is decreased by the below mentioned:

Compensation that the company pays can be recognised as repayment of the entire deposit, or

The money that the client pays

As per section 1A, forfeited proceeds may also include property. Nonetheless, any amount that can be decreased in not included in the deposit. Besides this, the event takes place when the money is forfeited (Kobetsky, Brown and Gillies, 2015). Lastly, the capital gain is earned if a deposit is greater than the expenditure. If the deposit amount is less, then this amounts to a capital loss.

Facts:

The amount is paid to RIP Pty Ltd. by the customers under the funeral plan to meet their funeral costs in future. If the obligation fails to be met then the deposited amount gets forfeited. Easy Plan Funeral’s balance amounts to $225,000.

Conclusion:

With regards to Section 104.150, the amount shall be forfeited because it has been deposited in the concerned account owing to the non-fulfillment of the obligation and hence the books of RIP Pty Ltd. will record a capital gain of $225,000.

How is trading stock treated:

Relevant law –

Income Tax Assessment Act 1997, section 70.10 defines trading stock. As per the definition is given in this section, trading stock comprises of everything which is manufactured, produced, acquired, which is held to manufacture, exchange or sell during the normal course of business (Passant, 2014). However, in the case of shares and livestock, special considerations need to be kept in mind.

Livestock is considered as stock if they are abreast in the main production business. As far as shares are concerned, their inclusion in trading stock is dependent on the frequency of the number of transactions and the significance of the resources produced from the activity.

Common Tax Treatment –

If the closing stock amount is greater than the opening stock, then the difference is assessable.

If the opening stock is greater than the closing stock, then the difference amount is deductible (Lanis and Richardson, 2013)

Solution (c)

Cost of purchase is subject to a deduction

Facts:

Three different caskets types, together with various accessories and secular and religious coins are the closing stock of RIP Pty Ltd. The organisation gains substantial rebates on advance purchases. 

Conclusion:

The accessories and caskets are held by the business for the fulfilment of its business duties and not for exchanging or selling in the normal course, hence they are entitled to be included in the trading stock. The verdict given in the case of Ballarat Brewing Co. Ltd. vs. FCT is applicable in the current case, relating to the fact that correct reflection of expenditure is done to acquire the accessories and caskets. As per the referred case, the amount recorded in the books will be subsequent to the discount obtained i.e. net amount to demonstrate the actual reflection.

If the accessories and caskets are put under the asset head then the amount of $25000 shall be recorded on the asset side and debtors shall be created for this amount for an advance against the capital assets. If they are recorded as an expense then it will be recorded as a prepaid expense.

How is the dividend income obtained during the year treated –

As per ITAA36, sec 44, dividends are accounted for when paid and as per section 6(1), the term paid implies something which is credited or distributed. As per section 44(1), dividend payments are not revocable if the company declares them (Prince, 2013). Therefore, the dividend must be formed a component of the assessable income of its receipt and the company cannot revoke them. Thus, the cash dividend of $21,000 obtained from the RIP Finance Pty Ltd shall be included in the company’s assessed income.

Solution (iii)

Treatment for rent of storage space paid during the year –

Relevant Law:

As per the provisions of the taxation law of Australia, a business or an individual is qualified to claim rental expenses which are of revenue nature (Richardson and Wright, 2014). Nonetheless, in respect of capital expense, any reduction in the value of capital work can be declared as a deduction.

Facts:

$57000 was paid as two-year rent of the storage space on 1st March 2016. The lease ends on 28th February 2018. In the given situation, $9,500 were treated as expensed and $47,500 capitalised in final accounts.

Conclusion:

Taking into account the Act’s provisions, $9,500 shall be allowed as a deduction in that very year. Nonetheless, the deduction of $47,500 cannot be claimed right away in two years as per capital expenditures’ fall in value.

2. Solution

Treating amount debited as Long Service Leave account

Relevant Law:

Income Tax Assessment Act, sec 83.70 overviews this aspect. This section’s subdivision is applicable to leaves of the following types i.e. apart from annual leave which needs compliance with section 83.10 (Taylor and Richardson, 2013). As per the relevant section:

  • Long service leave includes extended leave, furlough and long leave
  • Any other service that carries the same meaning as discussed in the above point (Marshall, Smith and Armstrong, 2010)
  • If the employer is involved in a scheme of arrangement for leave, he does not conform to the conditions of Common Wealth Law and State of Territory Law.

Facts:

RIP Pty Ltd’s MD was paid in advance an amount of $22,000 for a long service leave of 3 months. This was recorded as provision for long service leave.

Conclusion:

With regards to section 83.7 and 83.8, it can be said that the amount paid to the MD was payment pertaining to long service leave. The whole amount of $22,000 shall be treated as assessable income of the employee.  

Relevant Law:

An entity can claim a deduction for the construction cost of building under the capital work deductions head. It entails:

Building an extension, refurbishment in a building

Improvement meant for environment safety (Thomson, 2014)

Improvement infrastructure like fences, walls etc.

Facts:

The company decided to build a purpose built facility. The preliminary expenses for architectural design amounted to $250,000. A new land costing $1.25m was bought in 2015 and $50,000 were paid toward demolishing expenses. Building the new premise cost $2.5m.

Conclusion:

The company can claim 4% of the money incurred as allowance with reference to Division 43 of ITAA 1997 (Other capital expenses, 2016). Nonetheless, the building needs to qualify under the provision of section 43-150 of the ITAA 1997 to claim this allowance.

Conclusion

The company is responsible for making sure compliance with all the relevant provisions of the Income Tax Assessment Act 1997. Non-abidance of law may result in dire consequences for the company including imprisonment and fine.

References

Ault, J. H. and Arnold, J. B., 2010. Comparative Income Taxation: A Structural Analysis. Kluwer Law International.

Australian Taxation Office. 2015. What to include in your assessable income. [Online]. Available through: <https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/>. [Accessed on 12 September 2016].

CCH Australia Staff. 2012. Australian Master Tax Guide 2012. CCH Australia Limited.

Evans, S. and Jacobs, K., 2010. Accounting: an unâ€ÂAustralian activity? Qualitative Research in Accounting & Management, 7(3), pp.378 – 394.

Heffernan, J. M. and Boyd, T., 2010. Property taxation and mass appraisal valuations in Australia – adapting to a new environment. Property Management, 28(3), pp.149 – 162.

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

Kazmierska-Jozwiak, B., 2015. Determinants of Dividend Policy: Evidence from Polish Listed Companies. Procedia Economics and Finance, 23, pp. 473-477.

Kobetsky, M., Brown, C., Peacock, C., Fisher, R., Villios, S. and Gillies, P., 2015. Income Tax: Text, Materials and Essential Cases. Federation Press.

Lanis, R. and Richardson, G., 2013. Corporate social responsibility and tax aggressiveness: a test of legitimacy theory. Accounting, Auditing & Accountability Journal, 26(1), pp.75 – 100.

Marshall, R., Smith, M. and Armstrong, R., 2010. Ethical issues facing tax professionals: A comparative survey of tax agents and practitioners in Australia. Asian Review of Accounting, 18(3), pp.197 – 220.

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 6th September 2016].

Passant, J., 2014. The Minerals Resource Rent Tax: The Australian Labor Party and the continuity of change. Accounting Research Journal, 27(1), pp.19 – 36.

Prince, B. J., 2013. Tax For Australians For Dummies. John Wiley & Sons.

Richardson, G. and Wright, C.S. 2014. Corporate profiling of taxmalfeasance: A theoretical and empirical assessment of tax-audited Australian firms. eJournal of Tax Research. 12(2), p.no. 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),12-25.

Thomson Reuters, 2014. Australian Tax Legislation 2014: Income Tax Assessment Act 1997: Div 768 to end, Income tax assessment regulations 1997, Taxation Administration Act 1953, Tax agent services, Crimes (taxation offences), Fringe benefits, Financial transaction reports, Pending legislation. Income Tax.

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