Problem Question: Australian Tax Law

Introduction

RIP Pty Ltd is the residential undertaker business. The company procures around $2.45 net profit in 2016. The company has made a fixed contract with the clients. In this regard, Easy Funeral Plan has been introduced by RIP Pty Ltd. If the plan member can’t pay the whole amount at the death, the amount received won’t be transferred. The company has also credited to the ‘Forfeited Payments Account’ arose from the default of scheduled payment of the plan members. The Arthur Murray case has been considered to solve this given case. The company has also occurred some major expenses and expenditures over multiple years. The tax treatment is also the crucial issue. For the tax purpose, the relevant information from Australian Taxing Office has been provided in the report to maintain balance in the taxable income over years.

Part A

i) Briefly describing the facts, issues and conclusion in RIP Pty Ltd Case

According to S6(1) of ITAA 1936, an Australian resident is the person or the company residing in the Australia and whose permanent residence is in the Australia. So, ITAA 1936 requires an Australian individual or business to be the resident of Australia (Abdullah, Patterson, & Pegg, 2015).

So, RIP Pty Ltd is the Australian Residential Company doing the business of funeral director. All the local rules and regulations are applicable for RIP Pty Ltd. RIP Pty Ltd will need to pay tax to the Australian Government properly on the basis of its worldwide taxable income and thus the residency determination is very crucial (Wolff, 2014).

It has been found from Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 that Arthur Murray is the American Dance Studio that avails dance classes for the pupils. Arthur Murray requires advance payment in this regard (Abdullah, Patterson, & Pegg, 2015). The refund conditions weren’t existed at Arthur Murray. Unearned Deposits accounts have been maintained for this advance payment. FCT had assessed Arthur Murray for the receipt of advance fees. Varzaly, (2015) has rightly noted in its research article in the Journal of Eur Bus Org Law Rev that the court decides not to regard this advance receipt as income in the current year. So, the High Court of Australia decides to consider receipt that has been earned in the current year must be recognized as taxable income.

a) Advising RIP Pty Ltd when income is derived (i) generally, and (ii) when it derives its income from funeral services and related activities

Varzaly, (2015) has stated in its research ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’ that the income must be recognized when it is earned. Practically unearned receipt has no viewpoint of considering it as income and thus for tax implications. Since RIP Pty Ltd consider that the members defaulting on continuing schedule payments in the Easy Funeral Plan are considered as defaulting embers, the ‘Forfeited Payments Account’ will be considered. This account balance has been $16,200 at 30 June. RIP Pty Ltd can’t consider this account balance as income immediately. But, it can consider it as income at the end of the year if the company’s book-keeping method is formed in such a way. Then, it would be regarded as ‘Reported Income’ not the ‘Taxable Income’. As these defaulting members are not expected to continue repaying the arrears, the current balance of the ‘Forfeited Payments Account’ will be considered miscellaneous income at the end of the year if its book-keeping method supports it (CHISHOLM, 2004). Generally, the instalments fees receipt from the members investing in the ‘Easy Funeral Plan’ must be recognized net of required costs at the end of the year. It can derive its income from funeral services and related services when the members have contracted to contribute the ‘Easy Funeral Plan’. Even though the Arthur Murray case has come to the point that the court disregard to consider the advance payment as income immediately, the case of RIP Pty Ltd may be supporting with its evidence of book-keeping differently in this regard to consider income from the fund. As RIP Pty Ltd has made fixed price contract with the plan members, any default of the scheduled payment will be considered as the ‘null and void’ of the contract if the contract involving this condition is established with the regulation of the government of Australia (Gray, 2009).  

b) Explanation: Does the Arthur Murray principle apply to the company’s accounting treatment of amounts in Easy Funeral Plan?

From the case of Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 it is explored that Arthur Murray has built two principles emphasizing the signification of refund (Abdullah, Patterson, & Pegg, 2015)-

i) Emphasizing the signification of refund: the receipt can’t be considered as derived income since it could be refunded;

ii) Matching contractual obligations (Tyacke & Webb, 2007)

The principles of Arthur Murray can’t be completely applied to RIP Pty Ltd’s case regarding the accounting treatment of the amounts n Easy Funeral Plan. According to Gray, (2009), the High Court of Australia decides Arthur Murray should refund the amount of advance that has not been earned. In the Arthur Murray case, the idea from the court’s decision was that if a student doesn’t attend in the dancing class of Arthur Murray from the middle point of the contract, the company must refund the half amount to the student and this refunded amount won’t be derived as income (Lucadou-Wells & Bourke, 2015). Likewise, RIP Pty Ltd must refund the amount receipt from the defaulting members net of fees. Rationally, the company may incur some costs from conducting this fund so the refundable amount should be net of fees and charges (Wolff, 2014).

It has been understood from the case analysis report conducted by Tyacke & Webb, (2007) that the contractual obligations under Arthur Murray and RIP Pty Ltd are not quite similar. In case of Arthur Murray, the company received advances from the students and didn’t refund to the students who stops continuing classes (Gray, 2009). But, in case of RIP Pty Ltd, the members can’t make scheduled payment in the Easy Funeral Plan fully at the death or decease, the Fund won’t be refundable under the repayment plan. Since it becomes the conditions of the contract made with the plan members, the ‘Forfeited Payments Account’ should be recognized as taxable income as the company reports income from it.

c) Does the Commissioner or any taxpayer have a choice in the method of accounting for tax?

It has been found from the Deakin Law Review titled as ‘Litigiousness in Australia: Lessons from Comparative Law’ conducted by Wolff, (2014), the taxpayer or commissioner has the choice regarding Cash basis accounting and Accrual basis accounting primarily. According to EY, (2015), the tax provisions in these methods of accounting differ slightly. When the taxpayer reports income on cash basis in an income year, the taxpayer must have to pay tax on that income. Again if the taxpayer follows accrual basis accounting, it has to pay tax over all the earned income whether received or arrears (CHISHOLM, 2004). So, the commissioner or any taxpayer has the choice in the method of accounting for tax. But, the Australian Tax Authority requires that the tax accounting should be followed by either local GAAP or IFRS (Quilter, 2009). In the given case, RIP Pty Ltd being the taxpayer has the ability to make a choice in the method of accounting for tax since it has freedom in maintaining its book-keeping record whether under Local GAAP or IFRS (Lucadou-Wells & Bourke, 2015). 

ii) Advising the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv)

It has been found from the Carden’s Case (1938) 63 CLR 108 that the advance payments for the entire fixed course of service will not only be regarded as income but also be subject to the tax payment (CHISHOLM, 2004). Carden’s Case also expresses that the receipt are completely unaffected by the legal restrictions. The understanding of Dixon J. over Carden’s Case (1938) 63 CLR 108 comes that the decision of the receipt whether to recognize as earnings or not depends on the judgment of the court (Quilter, 2009).

In the case of Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314, it is found that the commissioner has made the practical assessment over the receipt of fees that occurred at the end of the or at the beginning, there is no distinguish (Davis & Phillips, 2003). The tax must be paid over the fees receipt from the customers. The commissioner has decided that the receipt must be earned to consider it as taxable income (ATO, 2016). The judicial court of Australia decides that whether the income is not earned but received or the income is earned but not received is regarded as income depends on the book-keeping methods of the company. If RIP Pty Ltd decides to consider ‘Forfeited Payments Account’ as asset and income; and the disposal of the underlying asset, the tax must be repaid to the tax authority. If the member has the right to get repaid under the contract, the forfeited amount must be refunded to the defaulting member (Barwick & Kitto and Taylor, 1965). Then there will be no taxation. Since the company has credited to the ‘Forfeited Payments Account’ with $16,200, this amount must be taxable to the Tax Authority of Australia.

Part B

Advice for requirement (i)

Since caskets and accessories are used for the continuous operations of RIP Pty Ltd. they will be referred as trading stocks. The expenses occurred for these trading stocks must be expensed against the income (Lipton & Herzberg, 2006). From the case of Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314, it has been stated in the Arthur Murray Principle that advance payments for the goods and services will be derived or charged against income when the goods will be delivered or services will be provided (Quilter, 2009). The principle also added that there is no provision for the refund. From this case law, it can be decided that the advance payments of $25,000 for caskets and accessories made by RIP Pty Ltd. will be derived at the delivery date of August 2016.

Institute of Public Accountants of Australia allows the taxpayer who wants to alter the treatment for advance payments towards either deferral method or full inclusion to income to receive automatic consent for doing that under the Revenue Procedure (Barwick & Kitto and Taylor, 1965).

According to Australian Taxation Office, (2016), the taxpayers report on an annual basis regarding prepaid expenses, these prepaid expenses could be charged against income in the Income Statement within a single business year. So, RIP Pty Ltd. can report the prepaid expenses as general expenses for the tax purpose. 

Advice for requirement (ii)

In item (i) it has been stated that RIP Pty Ltd has received $21,000 cash dividend from RIP Finance Pty Ltd. Since RIP Finance Pty Ltd. has already paid corporate tax on the derived income from investment, the investors like RIP Pty Ltd. don’t need to pay tax for the dividends received. For the tax purposes, the dividend received from RIP Finance Pty Ltd. will be free from corporate tax charged (McQueen, 2009).

The provisions for tax authority of Australia state that the taxpayer can apportion the prepaid expenditure over 10 years or eligible service period for the tax purpose (Australian Taxation Office, 2016). In items (iii) it has been stated that RIP Pty Ltd paid $57,000 on 1 March 2006 for the storage space rent for two years in an advance. This lease will expire at 28 February 2018. RIP Pty Ltd has expensed $9,500 and capitalized $47,000 without the consideration of tax purpose. Since the law permits RIP Pty Ltd to expense the whole amount in an apportioned approach over the two year period, RIP Pty Ltd can recognize expense of $28,500 in each year. With this tax purpose, the company will now pay less tax in the first and higher tax in the second year compared to the existing reporting (McQueen, 2009).

In the item (iv) of Part B, it has been found that the RIP’s managing director was paid in advance with $22,000. RIP has charged it as ‘Provisions for Long Service Leave Account’ with the entire amount. Since the law of government requires that the prepaid expenditure can be apportioned, RIP Pty Ltd charge one-third to pay tax in 2016 and two thirds in the next consecutive months of its reporting year 2017 from the tax consideration (Australian Taxation Office, 2016). With this consideration, RIP will enjoy tax deductions for one month equivalent payment in 2016 and two month equivalent payment in 2017.

Advice for requirement (iii)

According to Lipton & Herzberg, (2006), the Australian Taxing Office requires the prepayment expenditure to be apportioned over the eligible service period. In the item (v), the overall expenditure for constructing the purpose built facility can apportioned over years so that the depreciation can be charged over years under the straight-line method. The expenditure $1.25 for land can be recognized in the taxable period of 2014 for the tax purpose. The expense of $50000 must be charged against income of 2014 (Australian Taxation Office, 2016). The overall expenditure over 2014 and 2015 must also be apportioned over the eligible service period.

Conclusion

The High Court of Australia decides to consider receipt of Arthur Murray that has been earned in the current year must be recognized as taxable income. As RIP Pty Ltd has made fixed price contract with the plan members, any default of the scheduled payment will be considered as the ‘null and void’ of the contract if the contract involving this condition is established with the regulation of the government of Australia. Since it becomes the conditions of the contract made with the plan members, the ‘Forfeited Payments Account’ should be recognized as taxable income as the company reports income from it. RIP Pty Ltd being the taxpayer has the ability to make a choice in the method of accounting for tax since it has freedom in maintaining its book-keeping record whether under Local GAAP or IFRS.  If RIP Pty Ltd decides to consider ‘Forfeited Payments Account’ as asset and income; and the disposal of the underlying asset, the tax must be repaid to the tax authority. For the tax purpose, RIP Pty Ltd. can apportion its overall prepaid expenditures over the eligible periods to maintain tax balance over years.

References & Bibliography

• Abdullah, N., Patterson, I., & Pegg, S. (2015). Organisers’ and Residents’ Views about the Benefits and Costs: The Case of Monsoon Cup International Sailing Regatta, Malaysia. International Journal Of Sport Management, Recreation & Tourism, 17, 46-66. http://dx.doi.org/10.5199/ijsmart-1791-874x-17d
• ATO. (2016). Choosing an accounting method. Retrieved September 9, 2016, from Australian Taxation Office: https://www.ato.gov.au/Business/GST/Accounting-for-GST-in-your-business/Choosing-an-accounting-method/
• Australian Taxation Office. (2016, May 26). Deductions for prepaid expenses 2016. Retrieved September 8, 2016, from ATO: https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2016/?page=6#Taxpayers_carrying_on_a_business_incurring_deductible_business_expenditure
• Barwick, C., & Kitto and Taylor, J. (1965). High Court of Australia. Retrieved September 8, 2016, from Jade: https://jade.io/article/65872/section/139995?asv=gloss widgets
• CHISHOLM, J. (2004). PRACTISING LAW IN AUSTRALIA IN 2010. Deakin Law Review, 9(2), 302. http://dx.doi.org/10.21153/dlr2004vol9no2art245
• Davis, R. & Phillips, A. (2003). Prague: A Novel. World Literature Today, 77(2), 98. http://dx.doi.org/10.2307/40158045
• EY. (2015). EY: Building A Better Working World. Retrieved September 9, 2016, from http://www.ey.com/AU/en/Services/Tax/Tax-Accounting
• Gray, A. (2009). State-Based Business Licensing in Australia: The Constitution, Economics and International Perspectives. Deakin Law Review, 14(2), 165. http://dx.doi.org/10.21153/dlr2009vol14no2art140
• Lipton, P. & Herzberg, A. (2006). Understanding company law. Pyrmont, NSW.: Lawbook Co.
• Lucadou-Wells, R. & Bourke, J. (2015). Teaching Business Law: Some Ethical Dimensions from Australia. Procedia – Social And Behavioral Sciences, 209, 102-108. http://dx.doi.org/10.1016/j.sbspro.2015.11.264
• McQueen, R. (2009). A social history of company law. Farnham, Surrey, England: Ashgate Pub.
• Quilter, M. (2009). The company law notes. Pyrmont, N.S.W.: Thomson Reuters.
• Tyacke, N. & Webb, T. (2007). The patentability of business methods in Australia and the United States – The difficulties continue. Computer Law & Security Review, 23(4), 370-374. http://dx.doi.org/10.1016/j.clsr.2007.05.002
• Varzaly, J. (2015). The Enforcement of Directors’ Duties in Australia: An Empirical Analysis. Eur Bus Org Law Rev, 16(2), 281-319. http://dx.doi.org/10.1007/s40804-015-0013-z
• Wolff, L. (2014). Litigiousness in Australia: Lessons from Comparative Law.Deakin Law Review, 18(2), 271. http://dx.doi.org/10.21153/dlr2013vol18no2art39