Taxation Law: Arthur Murray Principle and RIP Pty Ltd

HI6028 Taxation Law
Trimester 1, 2018

Contents
Part A.....................................................................................................................................................2
(a) Arthur Murray (NSW) Pty Ltd v FCT (1965)114 CLR 314...............................................................2
Facts of the case............................................................................................................................2
Issues.............................................................................................................................................2
Conclusion of the case...................................................................................................................3
b) Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item
(iv)......................................................................................................................................................5
Part B.....................................................................................................................................................6
Nature of trading stock......................................................................................................................6
Adjustments in reported profit..........................................................................................................6
Deductions available on expenditure................................................................................................7
References.............................................................................................................................................9

Part A
(a) Arthur Murray (NSW) Pty Ltd v FCT (1965)114 CLR 314.
The decision in the Arthur Murray Pty Ltd V FCT case law is about the meaning of the
income derived by a taxpayer which becomes taxable in Australia. The facts, issues and
conclusion of the case are explained as follows:
Facts of the case
Arthur Murray (NSW) Pty Ltd is the taxpayer in this case, which is a registered company in
United States. The company is engaged in the business of providing dance lessons to the
students across Sydney and Melbourne in Australia. The contractual arrangements of the
company are such that the students are required to pay for 1200 lessons during the lifetime
with five, ten or fifteen hour lessons spread during the year in full or substantially at the time
of entering into the contract. Also the contract was not cancellable. However refunds were
made by the company for satisfactory explanations by students. The company used to prepare
its accounts using the accrual method of accounting in which the advanced payment for
contracts were not recorded as income at the time of receiving the payment rather than were
constituted as income at the end of the months in corresponding to the number of lessons
provided during the month. He advance amount was recorded as unearned deposit at the time
of receipt. The Commissioner of Taxation included the amount received in the revenue
rather than earned deposits included by the company. On the objection made by the taxpayer
the case was reported to Board for review and the Board also supported the assessments made
by the Commissioner. The taxpayer hen appealed to the High Court of Australia. The matter
in front of the court was whether the commissioner was justified in treating the amounts
actually received by the taxpayer as assessable income irrespective of whether or not the
dancing lessons were provided by the company to the students or not (Barwick, et.al, 2017).
Issues
The issues which are involved in the case include the differences in the Australian taxation
system and US taxation system. Under the Australian legislation, the tax is imposed on the
taxable income arrived after deducting the allowable deductions from the assessable income.
Apart from this, the major issue of the case is that when could be the receipt of a business or
a company is considered as the income derived of the taxpayer. Under the Income Tax