Taxation Law Case Study and Analysis

This article provides a case study and analysis of Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 and RIP Pty Limited. It covers topics such as trading stock, prepaid expenses, and dividends. The article explains the relevant sections of the ITAA 1997 and provides insights into the tax treatment of these items.

Running head: TAXATION LAW
Taxation law
Name of the Student
Name of the University
Author Note

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Part A
Question 1
Facts of the case: Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314
With respect to the case, it can be seen that the taxpayer was responsible for
conduction of the business, as he was responsible in giving the lessons for dancing to the
students at a discount. Additionally, the available discount to the students also allowed them
to be encouraged to clear the fees on an advanced basis. Nevertheless, the agreement that was
present in between the students and the taxpayers was based on the fact that there will be no
refund that will be issued for the tuition fees that were paid in advance. With respect to the
case, the amount that was collected as fees was transferred by the taxpayer in to the suspense
account, as it was treated as an unearned deposit for the lessons that had to be provided.
Moreover, after completing the lessons for dance, the taxpayer was responsible for
transferring the fees from the suspense to the revenue account respectively. Thus, according
to the agreement, it can be stated that there was no need in refunding the tuition fees that was
paid in advance to the taxpayer but had to give the fees to the students for the dance lessons
that was left as uncompleted.
The tuition fees that are paid in advance has been treated by the taxpayer as an income
that has been derived after the dancing lessons have been provide to the students in a
complete manner. Additionally, the prepaid fees for the tuitions was not included in the
income of the taxpayer that needs to be assessed. Nevertheless, during the time of calculating
the income that is taxable, it had to be noted that the fees for the tuition has already been
included in the present year. Thus, the Commissioner of Tax who is responsible for
calculating the taxable income was also involved in calculating the income that needs to be

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assessed based on the receipts also included the tuition fees paid in advance under the
ordinary income slab of Section 25 (1) of the ITAA 1997.
Case issues
The commissioner of Tax as well as the taxpayer was responsible in calculating the
income that needs to be assessed for the taxpayer in a different manner due to the treatment
of the fees for advance tuition lessons. Additionally, the issue also took place under the direct
supervision of the court, which had to be resolved so that the evaluation of the fact regarding
the income that is assessable for the taxpayer is inclusive of the advances fees or not.
Conclusion of the case
The case can be concluded based on the application of the general rule issued by the
High Court that the fees that are received in early payment for the services that are yet to be
provided, then the fees will not be assessed under the assessable income group for the
taxpayer. It can be stated that the high court has declared that there is an agreement between
the students and the taxpayer where it has been mentioned that there will be no refunds
regarding the fees that has already been paid. In practice, it can be seen that that the taxpayer
did not follow this and the fees were refunded to the students for the dancing lessons that
were kept incomplete. Moreover, the taxpayer did not show it as an income in the present
year as a receipt, as he thought there was to be refund if the dancing lessons were not
provided to the students in a complete manner. The judgment of the high court was in the
favour of the taxpayer, as it was derived from the income that was present for the dancing
lessons in the present year and the fees that were received in advance by the taxpayer. Thus,
the judgment that had happened was followed by an accounting treatment by the taxpayer,
which was considered as suitable.

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A)
(i).
The section 6-5 (4) of the ITAA 1997 clearly states that the amount received by the
taxpayer or on behalf of the taxpayer has to be treated as an income and has to be shown as
an income derived in the accounting books. Additionally, the income that has been derived in
a particular year has to be included in the income that will be assessed for the taxpayer as it
has been stated in the section 6-5 of the ITAA 1997. Moreover, there are two types through
which the income can be calculated for the purpose of tax and are known as receipt method
and the method of earning. The taxpayer is the one who gets to decide regarding the method
that needs to be selected so that the income of the taxpayer can be reflected in a better way
(Basu 2016). According to the The Taxation Rule 98/1 in, it is stated in the Para 19 that on
the basis of the general rule if the income from the investment is derived, then it has to be
provided under the sources tab apart from the business income and in the income derived
through the employees as well. It si also appropriate in using the method of receipt in
calculating the income level of the taxpayer. Under the Taxation Ruling TR 98/1, it has been
mentioned in Para 20 that it is appropriate in calculating the income based on the earning
method so that the income that has been gained from trading business or manufacturing
business can be assessed. Thus, in calculating the taxable income, the method of earning is
one of the appropriate methods that helps in assessing the income level of the taxpayers
(Lang 2014).
(ii).
RIP Pty Limited was providing services that were related to funeral along with other
as well. The net profit of the company was coming to be $2.45 million for the financial year
ending on 30th June 2016. Additionally, apart from the funeral services, the company was also

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engaged in earning level of revenue through various options from the customers as well.
Thus, the company can take up different methods that will help them in collecting the fees
from the customers and the methods have been provided along with justifications:
 The company gained its fees by issuing an invoice for a period of 30 days for the
External Insurance Company
 The company also issued invoice for 30 days to the customers for its activities with
respect to collection of fees
 RIP Pty Limited also provided an instalment plan for repayment of the credit
 The company also collected fees as an instalment from the customers who registered
themselves under the future plan (Becker, Reimer and Rust 2015)
In the general rule, it can be stated that the method of earning has to be treated as an
appropriate mode for the income to be calculated that is coming from the business. With
respect to RIP Pty Limited, they are involved in burial services and the income that is
generated from this business needs to be treated as a revenue for the company. Nevertheless,
the process that was adopted by the company will help in providing burial services at a period
of 30 days for the invoice that will be sent to the customers. The company has to treat the
amount as a revenue for the services that has been provided by them by issuing an invoice for
30 days and not waiting for the actual revenue receipt (Chalmers et al. 2013).
The company is also involved in running a business that provides easy future plans to
the customers. This scheme allows the company in receiving the fees on an advanced basis
with the promise that they will be providing funeral services to the customers in the near
future. Additionally, the fees that are received in advance under this scheme is not refundable
and can be transferred or forfeited under an account known as Forfeited Payment Account if
some of the customers fail in paying the instalments under the scheme. The amount that is

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realized through this account has to be directly shown as an income, as they are not liable in
providing the burial services to those customers who have faulted in the future plan scheme.
Thus the income of the company is derived through the burial services that they are providing
to the customers (Edge 2017).
(b).
With respect to the case of Arthur Murray, the income that is derived during the year
is through the services that has to be rendered to the customers. Under the general rule, it can
be seen that the fees that has been gained in an advance has to be treated as an income for the
year for the services that has been rendered by them. The future plan of the company
involved the collecting of the fees in an advance for the services to be provided in the future
to the customers (Tran-Nam, Evans and Lignier 2014). Additionally, the collection of the fees
in an advance has to be treated as an income for the year when it has been received. In this
case, it can be seen that Arthur Murray was almost similar to RIP Pty Limited, as the
principle of the case is applicable in the same manner as that of RIP Pty Limited.
Nevertheless, RIP Pty Limited was not involved in collecting the fees in an advance and
show it as an income in the accounting books. The fees that was collected by the company
was treated as an income when they will be providing the funeral services to the customers
(Althaus, Bridgman and Davis 2013).
(c).
There are two methods of accounting the income of the company for taxable purpose
according to the Taxation Rule 98/1. These methods are known as receipt and earning
method. The receipt method is also known as cash or cash received basis and the derived
income is the constructive or the actual income that is received by the company. Under
Section 6-5 (4) of the ITAA 1997, it can be seen that the taxpayer or on behalf of the the
taxpayer who receives the income has to be treated as an income that has been derived. The

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other type is known as earning method or accrual method (Harris 2013). This method shows
that the derived income as earned and the debt that can be recovered is present in this method.
The task that needs to be done as per the agreement, the taxpayer can claim the amount as a
debt that can be recovered. Moreover, the Commissioner and the Taxpayer has to select the
earning method so that it can help in calculating the income for the taxable purposes (Evans,
Lignier and Tran-Nam 2013).
Question ii.
RIP Pty Limited runs a scheme known as easy future plan, where the fees have to be
paid in advance as an instalment to the company in lieu of a promise that they would provide
funeral services to the customers in the future. Additionally, the fee for these services are
non-refundable in nature. Moreover, when the customers fail in providing the instalments, the
amount that has been already received will be forfeited and transferred in to the Forfeited
Payment Account. This will make the company not liable to the customers in providing the
services due to the non-completion of the fees. Thus it can be suggested that the fees of
$16200 that has been forfeited has to be treated as an income for the year (McGregor-
Lowndes and Crittall 2017).
Part B
(i).
In this question, it can be seen that the trading stock has to be treated as anything that
are being manufactured as well as acquired during the business course that is being used in
manufacturing process along with the exchange or sale of goods as mentioned under the
section 70-10 of ITAA 1997. Additionally, the CST assets along with the financial
agreements needs to be defined in a proper manner when the trade stock will be mentioned.
Under section 70-25 of the ITAA 1997, ot can be seen that the amount for the stock of trade

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needs not be capital in nature. Nevertheless, the accessories and the caskets that are
purchased by RIP Pty Limited will be used in ordinary course and needs to be considered as a
stock of trade and not as capital assets (Woellner et al. 2016).
Under section 8-1 of the ITAA 1997, it has been allowed for general deductions along
with the amount that has been paid for fulfilling the purchase of trading stock by RIP Pty
Limited and can be shown as a deduction in this section. Additionally, the deduction for
purchasing the stock-in-trade will be ini the year when it becomes stock in hand for the
company. Under the section 8-1 of the ITA Act 1997, it can be seen that the deduction has to
be done as expenses when it is necessary for the business to show it as an income that can be
assessed. For the company, it is necessary for the prepaid amount of $25000 to purchase the
stocks that will be delivered in the following assessable year. From the discussion, it can be
stated that the payment of the amount in an advance needs to be treated as an income that is
given in an advance for the year ending 30th June 2016 (Graetz and Warren 2016).
(ii).
Under the section 6-5 of the ITA Act 1997, it has been mentioned clearly that the
u=income that has been received by the taxpayer who is a resident will be treated as an
ordinary income. Additionally, the dividend that is received needs to be included under the
taxable income group by the company. Moreover, RIP Pty Limited will get an allowance of
franking credit on the dividends, as they are flanked fully. This will help in making the
payments in advanced for the storage rents, which cannot be included in the capital assets of
the company under the section 100-25 of the ITAA 1997 (Edge 2017). Moreover, the
advance amount that will be paid for rent purposes cannot be treated as a capital asset. In
details, the advance that will be provided in to the account for rental purposes for a period of
four months will allow the company for general deduction under section 8 of the ITAA 1997.
With respect to RIP Pty Limited, the company has paid for the services for a period of three-

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months in advance and it will be considered as an advance for the income year ending on 30th
June 2016 (Woellner et al. 2016).
(iii).
The claim can be done by the taxpayer as the general deduction under Section 8 of
ITAA 1997 as the income that is assessable in nature. Additionally, the CST assets that are
mentioned in Section 100-25 of the ITAA 1997 considers buildings and lands as well.
Moreover, the expenses of the taxpayer cannot be treated as a generat deduction in the
section. Thus, the expenses, which are related to parking and equipment along with the
landscape expenses needs to be considered as expenses under capital and not under general
deduction (Lang 2014).

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Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
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