Taxation Law and Practice: Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314

Running head: TAXATION LAW AND PRACTICE
Taxation Law and Practice
Name of the Student:
Name of the University:
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1TAXATION LAW AND PRACTICE
Table of Contents
Part A...............................................................................................................................................2
Answer to Question i.......................................................................................................................2
Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314..........................................................2
a)......................................................................................................................................................4
(i)......................................................................................................................................................4
(ii)....................................................................................................................................................4
(b).....................................................................................................................................................6
(c).....................................................................................................................................................6
Answer to Question ii......................................................................................................................7
Part B...............................................................................................................................................8
Answer to Question i.......................................................................................................................8
Answer to question ii.......................................................................................................................9
Answer to Question iii.....................................................................................................................9
Reference.......................................................................................................................................11

2TAXATION LAW AND PRACTICE
Part A
Answer to Question i
Arthur Murray (NSW) Pty Ltd V FCT (1965) 114 CLR 314
Facts of the case
In the present case, the taxpayer was engaged in the business of providing dancing lessons to
students. If the students provided the company with advance payments then the students became
eligible for discounts. It was clearly agreed between the taxpayer and the students that the
advance tuition fees received by the institution will not be refunded back to them. In respect of
the advance payments received by the entity, it opened up a separate suspense account called
“unearned deposits-untaught lessons account”. After the due lessons were provided to the
students that taxpayer transferred the amount into revenue account from the suspense account.
Thought the agreement expressly stated that the advance fees would not be refunded back to
students, in actual scenario the taxpayer paid back the tuition fees to the students who did not
complete the classes (Burkhauser et al. 2015).
The taxpayer treated the payment received from the students as income only after the lessons
have been provided to them. Due to this reason, the prepaid fees received from the students were
not included in the assessable oncome of the assessee. The fees corresponding to which the due
lessons have been provided was only treated as income for deriving the taxable income for the
year. However, the commissioner made use of the cash basis method of computing taxable
income and thus included the prepaid tuition fees in the ordinary income of the assessee. This
was done under the provisions of the section 25(1) of ITAA 1997.

3TAXATION LAW AND PRACTICE
Issues of the case:
It was found that for finding the assessable or taxable income of the taxpayer the commissioner
and the taxpayer used two different methods to calculate the same. The difference in their
computation arose because of the differential approach towards the prepaid tuition fees. Hence,
the main issue in front of the court was to determine whether the prepaid fees should be included
in the taxable income or not (Lederman 2015).
Conclusion of the case
As per the direction of the High court, it is a general rule that if no product has been delivered or
service has been provided corresponding to an advance fees received by the taxpayer then the
same should not be included in the taxable income of taxpayer for that year. It was observed by
the court that thought the agreement said that the advance will not be paid back to the students in
case they fail to complete the class, in actual practice the same was not followed. Hence, it was
not proper on the part of the taxpayer to include the prepaid amount received in hos total income,
as there existed a possibility of refunding the same if the lessons were not duly delivered to the
students. Hence, High Court concluded that it is to be assumed that the taxpayer received the
income in the year in which he provided the service and not the year in which he received the
advance payments (Saad 2014). It was ascertained that the accounting treatment concluded by
the taxpayer was appropriate.