Taxation Law and Practice: Case Study Analysis and Income Assessment

This article provides a case study analysis of Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314 and discusses the computation of taxable income by the tax commissioner and the tax payer. It also covers the assessment of income for RIP Pty Ltd and answers questions related to trading stock, advance payments, and general deductions.

Running head: TAXATION LAW AND PRACTICE
Taxation Law and Practice
Name of the Student:
Name of the University:
Authors Note:

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Part A
Part i
“Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314”
Case specification
The business conducted by the taxpayers was depicted to provide dance training to the
students and providing them with various types of the discounts which are seen to be based on
the various types of consideration for making the payment in advance. Tax payer and the student
entered into the agreement that laid down the condition that under no circumstances there will be
refunding of the amount of tuition fees that is paid by them. It is sufficiently provided and
expressed as per the agreement the students and taxpayer that the amount that is received in
advance would be transferred to the suspense account created by taxpayer. The description of
suspense account is given by the accountant as the account of untaught lessons-unearned
deposits. Amount that is paid by the students in advance for the dancing lessons is transferred
from suspense account to the revenue account after the dancing lessons have been imparted to
students. According to the agreement between both the parties, the amount that is received in
advance should not be refunded to the students. However, in practice if the dancing class is not
completed or if the student does not complete the dancing sessions, then the advance fees
received are refunded to the student by the tax payer (Zhou et al. 2014).
The amount of tuition fees that are paid by the students after the dancing lesions have
been successfully imparted to the students are treated as income derived by tax payer. Therefore,
the amount of assessable income of the tax payer does not incorporate the amount of tuition fees

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paid in advance. Hence, for the computation of the assessable income by the tax payer, it takes
into account only the fees or income that is received by the tax payer on successful completion of
dance class. The tuition fees received for which the dancing class has already been provided are
used for assessing the taxable income during particular year by the tax payer. On the contrary,
the assessment TI by the tax commissioner was done as per “section 25(1) of The ITA Act
1997”. Based on this the sum of tuition fees received in advance is considered as ordinary
income (NGUYEN 2016).
Case issue:
The issue presented in the case is that there is a difference between the basis of
computation of taxable income by the tax commissioner and the tax payer. This is so because the
difference evolves in the inclusion of prepaid fees for the taxable income in taxable income
assessment. It was presented before the court of law to pass the judgment on whether the amount
of prepaid tuition fees should be included in the computation of taxable income (Australian
Government 2015).
Concluding the case
It can be discerned that the high court has given the verdict that the fees has been
received by the services provided in advance for which the service yet to the offered, this should
not be taken into account for computing the assessable income.
In addition to this, it was also highlighted by the court of law that both that parties that is tax
payer and student entered into agreement that the amount of tax fees received in advance will not
be refunded. However, the tax payer did not adhere to this agreement and refunded the amount to

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the student for which dancing class is not provided (Flynn 2017). Therefore, according to the
specifics of the case, the assessable income should not take into account the amount of prepaid
fees in the year of receipt because there is a probability that in event of not providing dancing
class, the fees received in advance have to be refunded. In this regard, the judgment was passed
by high court that income was derived by the tax payer for which service has been provided in a
particular year and the advance fees is received for which the dancing class is not provided. It
was upheld in the judgment that the tax payer has followed an appropriate accounting treatment
in relation to assessing the taxable income (Zhou et al. 2014).
a)
(i)
As stated in agreement with “section 6-5(4) of the ITA Act” the amount to be received
by the tax payer or any amount is received on as per tax payer, then it is considered as income. In
addition to this, as per section “6-5 of the ITA Act 1997”, the income needs to be considered
with assessable income. The computation of taxable income involves use of two primary method
that is receipt method and earning method. It is required by the tax payer to adopt such method
that reflects tax payer income in an appropriate manner. It is mentioned in the taxation Rule 98
/1in, Para 19as per general rule that it is appropriate to use receipt method for calculating income
if income is derived by employees or if the income is derived from any other sources along with
any income that is derived from investment (Healey 2015). It is taken into account that the
application for the earning procedure for income assessment based on “Para 20 of the TR 98/1”
in case the income is resultant from involvement in any form of the manufacturing consideration

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or any trading activities. It should be accounted that for the purpose of computing tax, it is
considered appropriate to employ earning method (Austen, Sharp and Hodgson 2015).
(ii)
From the given case study, it can be ascertained that RIP Pty Ltd is involves in carrying
out business offering funeral and other similar services. For the FY June 16, total profit that is
reported by company amounted to $ $2.45 million. The services were provided to the customers
under several options by way of providing funeral services (Langham and Paulsen 2017). They
relied on using different methods for collection of fees that are listed below:
 Net invoice of 30 days is issued by company to their customers for collecting the fees
 Fees were also received by company from external assurance company by issuing an
invoice of net 30 days.
 Credit was provided by RIP Pty limited under the plan of repayment installation that
helped company to receive the fees.
 Based on the easy future plan, fees were discerned to be considered by the company in
advance which is in installment basis
Based on the present assessment of the case earning method is considered to be most
suitable method. The income generated is the net result of the funeral service provided by
RIP, therefore it needs to be treated as revenue. The company has adopted the procedure
of raising net 30 days invoice after the service in funeral has been provided. It is not
supposed on part of company to wait for generating actual receipt of revenue after the
invoice is raised and income is generated and is treated as revenue (Australian and Of
2014).

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In funeral services, the advance fees received are nonrefundable. If under the scheme, the
member is not able to make the payment of all installments, then already paid fees are forfeited
and the same account to transfer to another account named “Forfeited payment account”.
Amount of forfeited fees should be immediately recognized by company as income. The reason
is attributable to the fact that company is under no liability for providing funeral services under
the scheme to the discontinued members. It can be inferred from the above analysis that income
received by RIP Ltd from funeral services is treated as income (Australian Taxation Office
2017).
(b)
Given the case of Arthur Murray, for providing service to customers, income is derived in
the particular year. According to general rule, it is also stated that recognition of fees received
should be done as income. Under the future plan of RIP LTD, for offering funeral services fees
are received in advance. Fees that are received in advance are actually considered as received
during any particular year. The accounting treatment of RIP Ltd complies the case of Arthur
Murray as both as the same principles. Therefore, the fees received in advance by company
should not be treated as received (ATO 2015).
(c )
For taxation, “there are two methods that are used for accounting income as per taxation
Rule 98/1”. Received method is known as method of receiving cash as under this method of
accounting income, company received constructive income and the amount received as income
should be treated in actual. Earning method is also known as credit method or accrual method
where there is creation of recoverable debt account when the income is derived. Tax payer has

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the legal right to claim the accent if the task as per the agreement is performed. Henceforth, it
can be stated that for accounting income assessment for taxation, the tax payer as well as
commissioner can employ earning method (Freebairn 2016).
Answer to requirement ii)
An easy future scheme is run by RIP Ltd where customers are required to make advance
payments for rendering funeral services in future. Under such scheme, the fees earned by
company are not refunded. In this regard, an amount of $ $16200.00 are the amount that should
be forfeited as it is treated as income in any particular year (Australian Taxation Office 2014).
Part B
Answer to Question i
As per 70-10 of the ITA Act 1997 the trading of stock is considered as any item which is
acquired by business in their ordinary course. In addition to this, it is considered as per the use
based on selling exchange, manufacturing and selling. Moreover, the various types of financial
agreement need to be considered as per the different types of the depictions which are seen to be
considered with the CGT assets shown in the trading stock definition. Therefore, accessories
purchased are used in the ordinary course should by RIP Pty Ltd. Similarly, the payment made
for the general deductions are included under “8-1 of the ITA Act 1997” which are based on the
consideration for the deduction. The inference for procuring of trading stock is allowed in the
year the trading stock is incorporated in the stock of the company. Outstanding advance payment
of $25000.00 for procuring stock needs to be delivered as per the income in next year. It is

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suggested based on above analysis that for year 30 June, 2016, prepaid amount is treated as an
advance income (Koutsis and Cullen 2015).
Answer to question ii
Any resident taxpayer income needs to be treated as OI according to section “6-5 of the
ITA Act 1997”. The company will be able to take franking credit in the form of dividends that
are fully franked. Hence, amount paid in advance for rent should not be recognized as capital
assets. Under section8 of The ITA Act 1997, the advance rent includes rent of four months of the
current income this rent is allowed as general deduction. Moreover, as per section 83-80 of the
ITA Act 1997, the unused long service leave should be included in the assessable income. In this
case, RIP Pty Ltd paid a three-month long service leave in advance this advance should be
treated as expense and not as advance for the income year 30 June 2016 (Australian Taxation
Office 2015).
Answer to Question iii
As per the various types of the considerations for the “section 8 of the ITA Act 1997”,
the taxpayer producing assessable income can claim general deductions. The consideration of the
CGT assets comprises of land and building as provided in “section 100-25 of the ITA Act
1997”. These expenses should be treated as general deduction rather it should be treated as
capital (Koutsis and Cullen 2015).

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References list:
ATO (2015) Simplified depreciation rules | Australian Taxation Office, ATO. Available at:
https://www.ato.gov.au/Business/Small-business-entity-concessions/In-detail/Income-tax/
Simplified-depreciation-rules/.
Austen, S., Sharp, R. and Hodgson, H. (2015) ‘Gender impact analysis and the taxation of
retirement savings in Australia’, Australian Tax Forum, pp. 763–782.
Australian Government (2015) ‘Australian Taxation Office’, Registerting for GST. Available at:
https://www.ato.gov.au/Business/GST/Registering-for-GST/.
Australian and Of (2014) ‘Is Working from Home Good Work or Bad Work? Evidence from
Australian Employees*’, Australian Journal of L Abour Economics, 17(2), pp. 163–190.
Australian Taxation Office (2014) ‘The ATO and large business’, in Corporate Tax Association
Annual Convention.
Australian Taxation Office (2015) Yearly reports and returns | Australian Taxation Office,
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returns/.
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https://www.ato.gov.au/Individuals/Medicare-levy/.
Flynn, M. (2017) ‘Distinguishing between income and capital receipts: a search for principle’,
Journal of Australian Taxation, 2(3), p. 155. Available at:

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