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(Doc) Assignment - Taxation Law

   

Added on  2021-05-31

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Page1Assignment-Taxation Law

Page2Table of ContentsFacts: Part A................................................................................................................................................2Question 1...............................................................................................................................................3A.Advise RIP Pty Ltd when income is derived (i) generally, and (ii) when it derives its income from funeral services and related activities......................................................................................................3Does the Arthur Murray principle apply to the company’s accounting treatment of amounts in Easy Funeral Plan? Explain.................................................................................................................5Does the Commissioner or any taxpayer have a choice in the method of accounting for tax?.....6B.Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv).7Facts: Part B................................................................................................................................................8Question 2...................................................................................................................................................9Advise the company about the following:...............................................................................................9The nature of trading stock, generally, whether the caskets and accessories would be trading stock for tax purposes and how the amount of $25,000 is treated for tax purposes...........................................9What adjustments (if any) should be made to the company’s reported profit for tax purposes in regard to items (b), (c) and (d).................................................................................................................9What deductions (if any) are available for expenditure set out in item (e). Explain.......................10References.................................................................................................................................................11Facts: Part ARIP Pty Ltd is a resident private company carrying on the business of undertaker/funeraldirector. It operates out of premises comprising office facilities, a chapel and assembly area andprofessional rooms. Its other assets include a fleet of motor vehicles. For the year ended 30 June2016 the company reported a net profit of $2.45m. Its income arises from the provision offuneral services financed as follows:

Page3Fees payable under a ‘net, 30 days’ invoice.Fees payable under several external insurance contracts to which bills are issued under a‘net, 30 days’ arrangement. For instance, some funeral costs are paid by the TransportAccident Commission, others are paid out of private life assurance plans.Fees received from RIP Finance Pty Ltd, a company providing credit under aninstallment repayment plan.Amounts paid under a funeral plan in which clients make periodic contributions to meetfuture funeral costs. ‘Easy Funeral Plan’ is a fixed price contract. When the agreedamount is paid, the client is guaranteed a ‘deluxe funeral arrangement’. If the contractprice in not fully paid at date of death, the deceased’s estate is billed under (i) or (iii),above. The amount is not refundable or transferable. At 30 June the credit balance EasyFuneral Plan is $225,000. From time-to-time amounts paid pursuant to the Easy FuneralPlan are not drawn upon. The clients might die abroad or remains not be recovered andno funeral service is provided. No refund issues arise.At 30 June, the company transfers from Easy Funeral Plan amounts estimated to havearisen in connection with defaulting members (ie, members who have ceased makingscheduled payments and who are not expected to make up arrears). These are credited toa ‘Forfeited Payments Account’ that has a balance at 30 June of $16,200.Question 1A.Advise RIP Pty Ltd when income is derived (i) generally, and (ii) when itderives its income from funeral services and related activities.According to Section 25(1) of the Income Tax Assessment Act, 1936-1965(Commonwealth), "the assessable income of a taxpayer include the gross income deriveddirectly or indirectly from all sources, in the case of a taxpayer resident in Australia, orfrom all sources in Australia in the case of a non-resident taxpayer".Here the meaning of the words "income derived" had been considered by the High Courtof Australia in Arthur Murray (N.S.W.) Pty. Limited v. Commissioner of Taxation of theCommonwealth.

Page4In the aforesaid case, the RIP Pty Limited to is engaged in providing funeral services. Ithas various plans for its services. The company has provided the provisions that it canreceive its payment of fees in full or in installments. Here, the company has received itsfees in terms of installments. The company has not yet received any full considerationamount till now. Thus, on the basis of the definition provided by the Income TaxAssessment Act, the assessable income of a taxpayer include the gross income of theorganization. This case can be better understandable with the case law of the Arthur Murray (NSW)Pty Ltd v FCT (1965) 114 CLR 314. According to the Arthur Murray (NSW) Pty Ltd vFCT (1965) 114 CLR 314 case, Arthur Murray (N.S.W) Pty limited holds a license froma company based in United States. The company was engaged in providing dancinglessons in Sydney and Melbourne. Some of the students entered into a contract to takedancing lessons from the aforesaid company. The classes offered by the company weregenerally of five, ten and fifteen hour in a period of one year. Accordingly, paymentswere made by the students and contract was signed. The contract mentioned that it canoccasionally provide about 1200 dancing classes. Most of the payments were made in fillor by deposit of substantial amount followed by the installments paid during the course ofthe lessons provided. The provisions of the contract states that it is not divisible and the student have theresponsibility to pay the full tuition fees set forth. No refunds and No cancellation of thecontract. The main issue of this case was if the taxpayer received the pre paid fees in the year inwhich the dancing classes were provided or the year in which the fees were meant to bereceived.The court in the aforesaid case held that no income had been derived until the servicesrendered.This case law can be applied in the aforesaid case i.e. the case RIP Pty Limited is as well.Here, the company has been receiving money from its clients in terms of full payment orin installments under various plans. The company has not yet provided any services to itsclients. According to the nature of the business, the client or one of its family members

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