Tax Laws for Assessable Income and Accounting Methods

Running head: TAX LAWS
Tax Laws
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TAX LAWS
Part A
Section A
The Case
It has been provided through the provisions of section 25(1) of the Income Tax Assessment Act
1936 that the assessable income based in which a tax payer has to pay tax in Australia consists of
both directly and indirectly derived gross income with respect to all sources where the person in
an Australia resident for taxation purpose or form only Australian sources where such person is
not Australian resident for tax purpose. The court in the case of Arthur Murray (N.S.W.) Pty.
Limited v. Commissioner of Taxation of the Commonwealth had considered the issue in relation
to the meaning of income derived.
The Case Facts
In this case the taxpayer is Arthur Murray (N.S.W.) Pty Limited which had been provided the
licence form a United States company and had indulged in the course of providing dancing
lessons in Melbourne and Sydney. In such purpose the clients got into a contact to take the
lessons for five, ten or fifteen hours in a time span of one year. In addition the company also
provided for a lifetime 1200 lessons in relation to the business. For such lessons payments had to
be made on either a one time basis or an advance followed by instalments to be made while
taking the lessons. It had been provided through the terms of the contract that it is not at all
divisible and no refunds would be provided. The refund would however be made in situation
where it is justified to do so. There had been certain refunds made by the tax payer irrespective
of the contract where they found it justified to do so. A particular method of appropriating the
receipt had been adopted by the tax payers in context which is generally called the "accruals' or

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TAX LAWS
"earnings" method. They used to not treat the money which has been provided as an advance for
taking the lessons as revenue. The account to which they had been credited was known as
“Unearned deposits - untaught lessons account". As with time lessons had been provided they
had been recorded by the tax payer and appropriate money had been taken out from the unearned
deposit account and was transferred to the "earned tuition account" at the end of each month.
Accordingly the taxpayer did not feel obliged to treat the money which has been received by the
taxpayer in advance as an income generated in the year in which such money had been received.
They were only considered as income for the year in context if lessons in relation to them had
been provided and the money had been moved to the earned tuitions account. Thus as a result of
this system the amount which was received by the tax payer as advance accumulated over the
year and had to be carried forward to the next year. An assessment in relation to the year ended
30th June, 1954, 1955 and 1956 had been issued by the commissioner of taxation (the other party
in the case). In this assessment the commissioner made an attempt to include the amount which
had been received by the tax payer as advance deposits in the income of the same year in which
they had been received instead of the amount which the taxpayer showed in relation to their
accounting system. An objection had been raised by the Taxpayer for such inclusion to the board
of review which upheld the assessment of the commissioner. However not being satisfied with
such decision the taxpayer made a claim in relation to the commissioner’s assessment to the
High Court.
The issue which the court had to consider
The court had to consider in the given situation that whether the amount which had been paid to
the tax payer in advance for taking the lessons and which had been treated by the tax payer in the
“Unearned deposits - untaught lessons account" are to be considered as the income for the year