Taxation Law Case Study: RIP Pty Ltd

TAXATION LAW 1
Taxation Law
Student’s Name
Institutional Affiliation

TAXATION LAW 2
Taxation Law
Part A
Facts, Issues, and Conclusion
Facts
RIP Pty Ltd is a private corporation that is a resident of Australia and its primary business
is being a funeral director. In addition to the funeral premises, the company has office facilities, a
chapel, an assembly area, professional rooms and motor vehicles to be able to complete the
operations successfully. On June 2016, RIP Pty Ltd reported a net profit of $2.45m which came
from fees payable after thirty days, under insurance contracts, those received from RIP Finance
Pty Ltd and any amounts paid under a funeral plan which the clients are required to make
periodic contributions in order to be able to meet any funeral costs in the future. The company
has an ‘Easy Funeral Plan’ where the price is fixed and as soon as the money is paid, the client is
guaranteed a comfortable funeral arrangement upon his or her death. However, if the price is not
fully paid by the time the person passes away, the fees of the deceased would be payable under a
‘net 30 days’ invoice or under an insurance contract with the amount being non-refundable. By
the end of the financial year ended 30th June, RIP’s Easy Funeral Plan had a credit balance of
$225,000. Additionally, it is expected that the clients may die abroad, no funeral services may be
provided or their remains may not be recovered, thus amounts paid to the Easy Funeral Plan may
not be drawn upon which may cause refund issues.
Issue
The issue here is that by the end of 30th June, the firm transfers any amount from the Easy
Funeral Plan in connection with defaulting members. As at that date, the Forfeited Payments

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Account had a credit balance of $16,200. The issue, here, is how the amount in the Forfeited
Payments Account should be treated for the purposes of taxation.
Conclusion
For this case study, the decision of Arthur Murray(NS) Pty Ltd V FCT (1965) 114 CLR
314 can be used. In this case study, Arthur Murray sold dancing lessons which were to be paid
for in the future. On assessing the taxpayer to determine whether this constituted assessable
income, the commissioner concluded that the amount was received in advance for services not
yet earned and thus it would not be liable to tax (Barkoczy, 2010, n.d.).
This case of Arthur Murray can be used to form a decision in this case study since the
company was providing funeral services after death and thus it applies to the accounting
treatment of amounts in the ‘Easy Funeral Plan’. However, there are some instances where the
client could contribute to an ‘Easy Funeral Plan’ to pay in advance for their funeral costs in
future. Ideally, by the financial year ended 30th June, the ‘Easy Funeral Plan’ had a credit balance
of $225,000. As seen in the decision made in Arthur Murray’s case, this amount received in
respect to the provision of funeral services has not yet been earned until future obligations for the
funeral has been discharged and therefore it is not liable to taxes (Barkoczy, 2010, n.d.). This
means that the amount of the ‘Easy Funeral Plan’ should not liable to taxes.
When RIP Pty Ltd derives its income generally other than funeral business, it would be
seen that the company is not carrying on its ordinary business activities and therefore any
amount realized from this would not be included in the taxable income. However, if the
corporation derives its income from its funeral services and related activities, this amount would
be considered to be from ordinary business activities, thus it would be included and thus liable to
taxes due to the fact that it is allowable for tax purposes (Barkoczy, 2010, n.d.). The

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commissioner or any taxpayer does not have a choice in the method of accounting for tax since
the respective law must be followed when preparing the statement of taxable income of RIP Pty
Ltd. Another scenario may occur when the client dies abroad. In such a scenario, the amount in
the ‘Easy Funeral Plan’ of $225,000 should be included in the assessable income since it is
evident that the obligations for the funeral arrangements will be discharged (Barkoczy, 2010,
n.d.).
Advice on the Tax Treatment of $16,200 in the ‘Forfeitures Payments Account’
According to section 104-150 of the ITAA 1997, when a deposit is forfeited and a
taxpayer makes a capital gain, the capital gain would be the deposit less the deposit less any
expenses in relation to the sale. However, when the taxpayer makes a capital loss, the capital loss
would be computed as the expenditure in relation to the sale less the deposit forfeited. According
to taxation ruling 97/19 Para 7, a CGT provision applies to the effect that a forfeited deposit may
be considered as a capital gain in certain circumstances. In this case study, RIP Pty Ltd had
$16,200 in the ‘Forfeitures Payments Account’. This amount of $16200 that was paid by
defaulting members would be considered as a capital gain and thus it should be included in the
assessable income under sec 104 -150 of ITAA 1997and TR 97/19. Therefore, the capital gain
attributable to RIP Pty Ltd would be computed as the deposit by the members who defaulted
payment less any expenditure associated with the sale, that is, the funeral services. However,
since RIP Pty Ltd is not incurring any expenses for this amount, the capital gain would just be
the deposit by the defaulted members, that is, $16,200.
Part B
Part a