HI6028 Taxation Law: Arthur Murray Case and RIP Pty Ltd's Tax Implications

HI6028 TAXATION LAW
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Contents
Part A....................................................................................................................................................3
Part B.....................................................................................................................................................7
References...........................................................................................................................................10
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Part A
(a) Arthur Murray (NSW) Pty Ltd v FCT (1965)114 CLR 314.
The choice in the Arthur Murray Pty Ltd V FCT case law is all about the significance of the
revenue derived by a taxpayer and that gets taxable in Australia. The facts, conclusion, and
issues of the case are discussed as follows:
Information about the situation when Arthur Murray (NSW) Pty Ltd is the taxpayer in this
instance, that is a registered organization of United States. The company is interested in the
company of offering dance lessons to the pupils across Melbourne and Sydney in Australia.
The contractual plans of the company are so that the pupils have to pay for 1200 lessons
throughout the lifetime with 5, 10 or maybe 15-hour lessons spread throughout the entire year
in total or considerably during the time of entering into the agreement. Additionally, the
contract wasn't cancellable. However, refunds were created by the organization for
satisfactory explanations by pupils. The company utilized to make its accounts with the
accrual approach of accounting where the sophisticated transaction for contracts wasn't
captured as earnings in time of getting the transaction instead of having been constituted as
income at the conclusion of the weeks in corresponding to the number of courses offered
throughout the month. He prior quantity was captured as unearned deposit in time of receipt.
The Commissioner of Taxation provided the total amount received in the revenue instead of
gained deposits included by the business. On the objection created by the taxpayer the case
was reported to Board for evaluation and also the Board additionally supported the
assessments made by the Commissioner. The taxpayer then appealed to the High Court of
Australia. The issue before the court was if the commissioner was justified in managing the
quantities in fact obtained by the taxpayer as assessable earnings regardless of whether the
dance courses have been supplied by the organization to the pupils or otherwise (Barwick,
2017), et.al.
Problems
The problems that are associated with the case are the variations in the Australian taxation
program as well as US taxation system. Under the Australian legislation, the tax is required
on the taxable income come after deducting the allowable deductions from the assessable
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income. Aside from this, the main concern of the situation is the fact that when may be the
receipt of a company or a business is viewed as the revenue derived from the taxpayer. Under
the Income Tax Assessment Act of Australia. The Act states the amount received isn't an
income and doesn't explain the revenue derived further. Hence the matter is relying upon the
common law or even any decided case law.
Conclusion of the situation In this instance it had been held by the court which the revenue
earned by the taxpayer business is going to be the earnings for which the services happen to
be provided whether or not the total amount for the upcoming agreement is obtained by the
organization in advance. The court described the common business and accounting concepts
to decide the problems. The Carden's situation couldn't be put on to this situation since the
matter of the simple fact was reverse. Nevertheless, the declaration of the court in Carden's
situation was utilized as the foundation that stated the taxable amount is going to consist of
the revenue that is received and attained by the taxpayer.
• Advise RIP Pty Ltd when revenue is derived when and generally it derives the income of it
is from related activities and funeral services.
Based on the provisions of Section 25(1) of Income Tax Assessment Act 1936 65, profits are
derived mostly by a resident taxpayer of Australia as he earns disgusting earnings indirectly
or directly from all of the options in Australia. RIP Pty Ltd is providing funeral services to
the clients of it is on agreement foundation that innovative payment is acquired from the
customers. The organization follows accrual basis of accounting for capturing the receipts of
its. Under this process, the receipts are in the assessable earnings of the taxpayer as and once
the services are supplied by the manufacturer as well as revenue is really generated. RIP ltd is
going to derive the income of it is from related and funeral activities once the services are
furnished as per the conditions of the agreement rather than charging the revenue to gross
revenue once the bills from the consumers as prepayments is received for upcoming service
contracts. The business RIP Pty Ltd is utilizing the accrual time frame of accounting for
capturing the income of its and consequently the organization is encouraged to demand its
earnings on the gross earnings corresponding to the funeral services offered on the clientele
on periodical foundation. The business is encouraged to transport the total amount to
unearned deposits when it's received and also on the provision of solutions to the buyers later,
the total amount shall be captured as the earnings of the organization for that period. In this
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particular manner, airers4you is going to be in a position to capture as well as provider for the
income of its in accordance with the accounting policies and principles.
• Does the Arthur Murray process affect the company 's accounting therapy of quantities in
Easy Funeral Plan? Explain.
As per the Arthur Murray principle, when a company makes income partly for a contract
where later solutions are being provided and also payments are obtained ahead of time, then
simply in that case the revenue shall be recognised by the organization in the accounts of its
when it's in fact earned and never if the quantity for the exact same is obtained from the
consumers under the agreement. The simple Funeral Plan of RIP Pty Ltd is like the
consumers of the organization have to spend the fixed quantity of the agreement in advance
for the deluxe funeral offerings being furnished on the demise. The contract price tag isn't
refundable by the company in case these types of services aren't availed by the customers
after death or even if the buyer dies abroad advertisement is not able to claim the products
through the business. Nevertheless the amount gotten by the organization is positive, though
just how much can't be looked at as the gross revenue for the period since the organization is
after accrual time frame of accounting. The specifics of RIP Pty Ltd resemble which of
Arthur Murray situation and consequently the concept totally is true for RIP Pty Ltd. RIP Pty
Ltd shall capture the total amount collected under the simple Funeral Plan as the level of
unearned deposit and transport the total amount on the revenue once the funeral solutions
under the pa are supplied to the buyers.
• Does the commissioner or maybe any additional taxpayer have a decision in the way of
accounting for tax?
Exposed to essential accounting policies, you will find 2 methods of accounting utilized by
the business entities. The foremost is the cash time frame of accounting and also yet another
could be the accrual time frame of accounting. Underneath money foundation revenues are
recognized once the money is acquired for all the services offered whereas below accrual
foundation, the revenue is recognised when it's in fact earned by supplying the solutions
(Tuske and Hemmings, 2015). The Arthur Murray case supports the accrual time frame of
accounting for the recording f advance payments received for later contracts as revenue
whereas the Carden's case law recognises the cash foundation for capturing the advance
receipts. In the situation of Commissioner of Taxes (S.A) v Executor, Agency and Trustee
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business of South Australia Limited, the healthcare practitioner submitted the tax returns of
his on the foundation of money process of accounting as well as the court held that the
assessable income of his includes the amounts obtained in annually and won't include
amounts attained but not received. In this particular manner, Cardens' case law supports yet
another view from the Arthur Murray process. In the specified situation of RIP Pty Ltd, the
another point of view that can be considered by the Commissioner to tax the gross receipts of
the organization may be the dollars time frame of accounting where the gross receipts will
likely be incorporated in the assessable earnings of the taxpayer in the entire year where the
revenue would be obtained without on proportionate foundation in the entire year of offering
services. In this particular manner the Commissioner or maybe some additional tax [payer
have a decision associated with an alternative accounting technique then Arthur Murray
process that is the use of money basis of accounting as per the Carden's situation.
b) Advise the organization of the tax treatment of 1dolar1 16,200 in' Forfeited Payments
Account' in product (iv) As the organization uses the accrual time frame of accounting, the
advance payments that are obtained under the agreement by the organization for the funeral
offerings being provided later, are transferred by the organization on the Unearned deposits
account. The total amount that pertains to the services offered by the organization are
recognised as revenue and also the quantity which pertains to the services not advertised
aren't refunded and consequently transferred to' Forfeited Payments Account'. For the present
season, the business carries a balance of 1dolar1 16,200 in this specific account. This
particular quantity can't be recognised a revenue since it's not truly attained by giving the
solutions to the buyers. It's an extraordinary gain on the business and can be incorporated in
the statement of detailed earnings of the organization for the entire year. Consequently, this
particular amount is going to be the gain for the business and can develop the part of
extensive cash flow which is taxable and also contained in the assessable earnings of the
taxpayer.
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Part B
The recommendations on the business RIP Pty Ltd on the foundation of tax legislation as
well as case laws may be supplied as follows:
Dynamics of trading stock Based on the section 11c of Income Tax Assessment Act 1977, a
trading stock is described as tangible resources or the physical that are both acquired or
perhaps constructed by a company for doing the company pursuits which connect to selling
or manufacturing at the later on phase (Collier, 2015). It provides all of those materials that
can be utilized to create the products to be offered to the buyers or even arranging for the
services that are to be offered to the consumers by the company. RIP Pty Ltd is interested in
the company of supplying funeral services to the buyer under different payment plans and
most of the facilities required. The range and the caskets of accessories that are used by the
organization in giving the funeral services would be the materials for the company utilized to
conduct the company and can be therefore regarding when the trading stock. Similarly, the
assortment of accessories will in addition help in giving the funeral services by the business
and can be thus regarded as the trading inventory of the business. However, the organization
created advance payment for buying caskets and accessories and also availed the lower price
of advance transaction through this point won't impact the setting of these things as trading
inventory. Consequently, the things will likely be captured as listing by the business
regardless of the time of purchase. Furthermore, the valuation of the listing will additionally
be produced as per the provisions of AASB hundred two regardless of the total amount spent
on buying inventory.
The total amount that is spent on buying inventory for the company is an allowable business
deduction under section 8 1 of Income Tax Assessment Act 1977
Changes in reported income The reported revenue is an amount that is the number of earnings
provided by the organization in the books of it is of financial statements and accounts given
to the stakeholders. This particular amount would be the number of net earnings estimated as
well as found by the entity to the stakeholders of its. The quantity of reported profit varies
from the level of net profit estimated by the organization for tax reasons (Woellner, 2012),
et.al. The assessable money is definitely the total benefit for tax reasons that is estimated by
permitting the deduction of several of the company expenses. Consequently, the reported
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benefit is adjusted for allowable deductions and expenses for tax purposes. The changes in
the found benefit of RIP Pty Ltd for several goods are discussed as follows:
• The company received a dividend of 1dolar1 21,000 from RIP Finance Pty Ltd. The
quantity of dividend is entirely franked meaning the tax on the dividend has been paid out by
RIP Finance Pty Ltd prior to distribution of quantity of dividend to the shareholders of its
Thus the completely franked dividend obtained by the shareholders isn't taxable. The
shareholder gets franking credits corresponding to the quantity of tax paid on the earnings by
the business distributing the dividend. Therefore, the quantity of tax payable is usually
decreased by the quantity of franking credits by the taxpayer that is the shareholder getting
the dividend. As per the provisions of ITAA 1977, the quantity of franking recognition is
often utilized to lessen the level of tax payable through the level of dividend needs to be
incorporated in the assessable earnings of the shareholder. Therefore, the quantity of total
franked dividend needs to be incorporated in the noted benefit of the organization, therefore,
the level of franking recognition on the divided as well as being reported a decrease in the
quantity of tax payable by the organization.
• The company paid the quantity of lease rent for the time of 2 years in advance and
consequently the level of 1dolar1 57,000 is viewed as the prepaid lease rent expense. The
quantity of 1dolar1 57,000 is for 2 years from that the quantity of 1dolar1 9,500 relates to 4
weeks up to thirty June 2016. Consequently, in the financial statements of the business the
quantity of expense as much as thirty June 2016 is necessary to be noted as per the accrual
time frame of accounting. The remaining amount could be capitalised as lease and can be
charged out of the benefit in the succeeding years on proportionate foundation following the
accrual phone. Thus, no adjustment is necessarily being made in the noted benefit of the
business.
• The quantity of night service has to be payable by the organization to the director is a future
responsibility for the business. As per the accounting policies &principles concepts the
company is necessary making provision for the responsibility that is payable in potential. The
director of the organization started the long service leave of his for which the total amount is
going to be expected to be paid after 3 months. Consequently, it's a liability along with
provision is necessary to be made. Thus no adjustment is necessarily being produced in the
reported net benefit of the business. The total amount is correctly reported.
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Deductions accessible on spending The expense incurred by the company in operating the
company activities is described as business expenditure that is permitted as deduction out of
the benefit for the company as per the provisions of Section 8 1 of Income Tax Assessment
Act 1977. However, just the revenue costs of the company are deductible and additionally the
capital business costs aren't permitted as deduction out of the benefit of the company under
the bad limb of the Act. The business built a built center for the accommodation of the
employees of its that is a company expense for the business. It paid 1dolar1 250,000 for the
architectural style that is a capital cost not deductible from the earnings of the present 12
months. Likewise, the acquisition of land amounting to 1dolar1 1.25 million as well as the
demolition of developing amounting to 1dolar1 50,000 is additionally a capital cost not
deductible from the earnings of present-day season.
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References
 ATO 2018, Deductions for prepaid expenses 2010-11. [online] Available at:
https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2010-11/?page=3
[Accessed 24th May 2018].
 Austill, 2018. INCOME TAX ASSESSMENT ACT 1997 - SECT 70.110You stop
holding an item as trading stock but still own it. [online] Www5.austlii.edu.au.
Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s70.110.html
[Accessed 24 May 2018].
 Austlii, 2018. INCOME TAX ASSESSMENT ACT 1997. [online] Available at:
http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1997240/
[Accessed 24th May 2018].
 EDD, 2012. Information Sheet, Employment Development Department, State of
California, pp 6-12. Available at: http://www.edd.ca.gov/pdf_pub_ctr/de231eb.pdf
[Accessed 24 May 2018]
 Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.
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