Taxation laws : Sample Assignment

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Arthur Murray (NSW) Pty Ltd v FCT (1965)............................................................................2
The fact Situation:..................................................................................................................2
Issue:......................................................................................................................................3
Conclusion:............................................................................................................................3
Answer to A...............................................................................................................................4
Answer to (i):.........................................................................................................................4
Answer to question (ii):..........................................................................................................5
Answer to (iii):.......................................................................................................................6
Answer to question B:................................................................................................................7
Answer to Part B:.......................................................................................................................7
Answer to A:..........................................................................................................................7
Answer to B:..........................................................................................................................8
Answer to C:..........................................................................................................................8
Answer to D:..........................................................................................................................9
Answer to E:...........................................................................................................................9
Reference List:.........................................................................................................................11

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Arthur Murray (NSW) Pty Ltd v FCT (1965)
The fact Situation:
Arthur Murry (N.S.W) Pty Ltd who is the taxpayer in the current situation was under
licence from the United States Company, carried out the business of providing lessons in
dancing in Sydney and Melbourne. Contract were signed by the pupils that came to take
lessons generally for five, ten or fifteen hours that was spread over the period of a year.
Payments were made either in the form of full upon the signing of the contract or in the form
of substantial deposits followed by the payment of instalment in the course of lesson (Hora
2014). The contract provision included that the contract was entire and not separable and the
students were held responsible for the entire amount of tuition that was set forth in the
contract. The contract was non-refundable and non-cancellable.
The agreement of the licence contained that any request for refund would be
entertained if the provision of request is justified (Kiprotich 2016). In spite of the terms
contained in the contracts the taxpayer during the year of income made certain refunds on
circumstances when the students failed to take the agreed number of dancing lessons and
provided a satisfactory explanations for discontinuation of the contract.
The taxpayer undertook the method of accounting that was considered as the
“accrual” or the “earnings method” where the entire sum of money that is received in
advance in form of advance payment for dancing lessons provided were not credited
immediately to the general revenue (Jones and Rhoades-Catanach 2013). Rather, these
amounts were credited to the account named as “Unearned deposits”-“Untaught Lessons
Account”. As soon as the each lessons were given the instructor used to enter the amount on
the record sheet that was maintained by him with the name of students.

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Following the end of the every month a corresponding sum of amount that earned
from the lessons were transferred to the account known as “Earned Tuition Account”.
Therefore, the amount of money that was received by the taxpayer were not held as income
by the taxpayer as having been earned till the lesson is provided (Hart et al. 2017). Following
the year of income the consequences of the amount that was standing as the “Unearned
Deposits-Untaught Lesson Account” was to be carried forward to the next year.
The taxation commissioner issued an assessment of the amount in relation to the years
of income along with the taxable income, the sum that was eventually received by the
taxpayer in each of those income year instead of the amount that was presenting the taxpayers
bookkeeping scheme as having been received. The taxpayer raised the objection for
assessment that was not allowed by the commissioner and requested that the matter be
referred to the Board of review (Coleman et al. 2014). From the board review it was found
that the receipt of cash constituted gross proceeds in the business of the taxpayer and was
regarded as the part of the taxable income in the year in which the amount was received and
thus, upholding the assessments. The taxpayer however raised an appeal in the Australian
High Court.
Issue:
Had the taxpayer actually derived the prepaid amount of tuition fees during the year in
which it was the tuition was provided or the year in which the fees were received?
Conclusion:
The court of law relied on the principles of “Federal Commissioner of Taxation v
Flood (1953)” where the court of law declined to follow the accounting and the commercial
practice based on the question of what established an appropriate deduction from the income
(Graetz et al. 2015). In deciding the verdict in Arthur Murray, it was held that the amount that

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was received in advance for dancing lesion were not regarded as derived until the lesson were
actually provided. The court of law found the circumstances of the receipt made is
necessarily in respect of good business sense which the taxpayer must treat the fees received
but yet to be held as earned. The decision states that as a subject of contingency the entire
amount or a portion of the amount may have to be repaid even though it only accounted as
damages given the taxpayer failed to provide the agreed services (Hayek 2014). The court of
law held that no income had been derived by the taxpayer until the taxpayer rendered the
service.
Answer to A
Answer to (i):
As defined under “section 6-5 of the ITAA 1997” majority of the income which is
obtained by an individual taxpayer is held as income (Jones and Rhoades-Catanach 2013).
According to “section 6-5 of the ITAA 1997” income that are derived by the taxpayer in this
section is regarded as taxable based on the ordinary concepts.
There are two methods of calculating the assessable income. This comprises of
earnings and the receipts method. Based on the suitability of the taxpayer it may choose any
of the method. The “taxation ruling of TR 98/1” provides guidelines in ascertaining income
based on two methods which is earnings and the receipts method (Rohatgi 2015). As stated
under “subsection 6-5 (2) of the ITAA 1997” a taxpayers should include the gross earnings in
their taxable income.
As stated under the “Taxation ruling of TR 98/1” one of the best method of keeping
track of income is the receipt method. There is also an exception which explains that earnings
method is held as right method determining business receipts obtained from manufacturing or

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trading (Basu 2016). The common rule states that to record income a taxpayer is required to
follow the earnings method.
Answer to question (ii):
Denoting the circumstances of RIP Pty Ltd the company provided its clients with the
funeral service and earned a net profit of $2.45 million. The funeral service company
provided its clients with the credit facilities of paying their invoices within the span of thirty
days. Denoting the guidelines of “Taxation ruling of TR 98/1” and “subsection 6-5 (2) of the
ITAA 1997” the receipt of income from the funeral service business should be recorded
under the earnings method (Sadiq et al. 2013). A recommendations can be provided in this
respect is that earnings method of recording revenues is the appropriate method of recording
the taxable income derived by the RIP Pty Ltd during the accounting year.
In the later part of the case study RIP Pty Ltd received prepaid fees from its “Easy
Funeral Plan” which was non-refundable. Usually the prepaid amount that was received by
RIP Pty ltd was usually forfeited and moved to the “Forfeited Payment Account”. Likewise,
the fees that was forfeited was regarded as income with no further obligations of giving
funeral service if the services are discontinued under the easy future plan.
The principles of “Arthur Murray” is only applicable if the prepaid payments are kept
in the suspense or the unearned income account by the taxpayer (Freeland, Lind and Stephens
2014). These payments are not treated as income till the amount is earned if not the balance
day adjustment is made to the gross revenue account to exclude the unearned income from
the profit and loss account. An argument can be bought forward by stating that the principles
of the Arthur Murray is only applicable where there are probability that the unearned income
might have to be repaid because of the specific term of contract.

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In the current situation of RIP Pty Ltd receipt of fees made under the “Easy Funeral
Plan” is held as income which is received by the company as the part of the prepaid funeral
service to be rendered in future. According to the “taxation ruling of TR 98/1” there is a need
for placing a sufficient amount of weightage in the taxpayer’s circumstances and appropriate
accounting method should be used to correctly reflect the income made in the year (Woellner
et al. 2013).
The high court of Australia in “Dunn v FCT (1989)” explained that it is obligatory to
understand the business state and methods of record keeping procedure. In the current case,
the receipt of fees by the RIP Pty Ltd is preserved in the company’s accounting books and it
should be treated as income during the year in which the fees is derived. The principles of
“Arthur Murray (NSW) Pty Ltd v FCT (1965)” is applied in the current case of RIP Pty Ltd
for accounting treatment of accounting receipts (Miller and Oats 2016). In addition to this,
RIP Pty Ltd is required to maintain a record books of fees that is received as prepaid into the
company account books. Furthoremore, the company is required to treat the receipt of
prepaid fees in the form of income that is made from the easy funeral plans that is offered by
the company to its clients.
Answer to (iii):
The taxation ruling of “Taxation ruling of TR 98/1” applies for taxation purpose to
the individual taxpayers as well as the business. The taxation ruling of “Taxation ruling of
TR 98/1” requires each of the taxpayers to account for their revenues based on the concepts
of receipts method or the earnings methods so that they can ascertain their taxable income
(Barkoczy 2016). Denoting the explanations made under the “subsection 6-5 (4) of the ITAA
1997” the receipts of accounting income based on the receipts method is either made
constructively or made on real base. The earning method states that a taxpayer derives
income when the amount of earned by them. The taxation ruling of “Taxation ruling of TR

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98/1” provides the taxpayers with the options of selecting from any of the two method in
order to determine their taxable income.
Answer to question B:
As evident in the current case study of RIP Pty Ltd, if it is noticed that a failure on the
part of the customer in paying their advances in instalment then the part of the amount is
forfeited that is received by the company from its customers. Additionally the forfeited
amount is shifted to the account name as “Forfeited Payment Account”. The case study
highlights that the fees that is received by the RIP Pty Ltd is held as non-refundable and the
forfeited amount of $16,200 would be classified as income.
Answer to Part B:
Answer to A:
Denoting the explanation made in “section 70-10 of the ITAA 1997” trading stock
refers to an items that a business produces or it is purchased for selling it in market (Bankman
et al. 2017). Alternatively “section 70-25 of the ITAA 1997” provides that expenses sustained
in purchased of trading stock should be in nature of capital.
Referring to “section 275-105 of the ITAA 1997” trading stock is viewed as CGT
assets since it does not forms the part of the section (McDaniel 2017). Likewise for RIP Pty
Ltd it bought accessories and caskets which is used for ordinary business course. Therefore, it
would be classified as trading stock and not capital assets.
An important declaration of “section 8-1 of the ITAA 1997” is that expenditure
occurred at the time of purchasing the trading stock should be held as permissible deductions
(Murphy and Higgins 2016). Taking into the consideration the circumstances of RIP Pty Ltd
the purchase of caskets and accessories constituted trading stock expenditure which is
allowed as deductions under “section 8-1 of the ITAA 1997”. The company can further claim

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deductions for items purchased in ordinary business course and stocks that are regarded as
closing stock in hand.
Denoting the explanations of “section 8-1 of the ITAA 1997” an individual taxpayer is
permitted to claim deductions for any losses or outgoings sustained in making taxable
income. Denoting the circumstances of RIP Pty Ltd the company reported a prepaid expenses
that forms the part of the purchase of trading stock (Schmalbeck, Zelenak and Lawsky 2015).
With respect to “section 8-1 of the ITAA 1997” the company would be allowed for claiming
deductions from the assessable income since the expenses were incurred in producing the
taxable income of business.
Answer to B:
Referring to the “section 6-5 of the ITAA 1997” majority of the income which is
obtained by the taxpayers from all the sources is regarded as the taxable income on the basis
of ordinary concepts (Burke 2016). As stated by the ATO dividends that are earned by the
company of Australian resident is required to include into the taxable income.
As understood from the state of affairs of RIP Pty Ltd income that is derived through
dividend should take away the franking credits which attached to the dividend. The company
is required to detach the franking credits in order to make the dividend completely franked.
Answer to C:
Signifying the explanations of “section 100-25 of the ITAA 1997” any form of
advance payment received for the rental storage does not constitute a capital assets. With
regard to the “section 100-25 of the ITAA 1997” receipt of rental storage is not believed as
the capital asset (McDaniel 2017). Furthermore, it is worth mentioning that the receipt of
prepaid sum of payment which is obtained by the RIP is regarded as the present income based

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on the period of four months and with respect to “section 100-25 of the ITAA 1997” the rent
obtained would be held in the form of general deductions.
Answer to D:
Payments that are made by the taxpayer for an employee long service leave or
payments that is made by the employer for the termination of employment shall be liable for
PAYG Withholding. According to the ATO an employer is required to contribute into the
employees long service leave entitlement in respect of the services that are rendered by
employee. Denoting the explanations of “section 83-80 of the ITAA 1997” the unused
amount of the long service leave is not considered as the element of the taxable income.
Taking into the consideration of the “subsection 83-85 of the ITAA 1997” an
individual taxpayer is required to claim an allowable deductions for the unused amount of
long service leave (Bankman et al. 2017). However, it is vital that the amount of the long
service leave paid that is paid should not be higher than thirty percent of the assessable
income. Similarly for the RIP Pty Ltd the company paid the long service leave to its
employees for three months and such payment is held as expenses for the year ended 2016.
Answer to E:
As defined under the positive limbs of the “section 8-1 of the ITAA 1997” a taxpayer
can claim an allowable deductions given the outlay and the outgoings that is sustained was in
the direction of deriving the assessable income (Barkoczy 2016). According to the “Section
100-25 of the ITAA 1997” CGT assets generally classified as the land and buildings.
Taking into the consideration the circumstances of the RIP Pty Ltd, expenses reported
by the company relating to the payment of the preliminary architectural designs is regarded as
the capital expenditure. Under “Section 100-25 of the ITAA 1997” such expenditure forms
the part of the cost base which is not allowed as deductions. Additionally the expenses

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reported by the company for the onsite car parking and the expenses on the building and
equipment is classified as the capital expenditure with no allowable deductions is allowable
under “section 8-1 of the ITAA 1997”.

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Reference List:
Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation.
Wolters Kluwer Law & Business.
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.
Burke, K., 2016. Federal income taxation of partners and partnerships in a nutshell. West
Academic.
Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Orbist, W. and
Sadiq, K., 2014. Principles of taxation law.
Freeland, J.J., Lind, S.A. and Stephens, R.B., 2014. Fundamentals of Federal Income
Taxation (pp. 27-30). Foundation Press.
Graetz, M., Schenk, D., Freeland, J., Lethrope, D., Lind, S., Stephens, R., Dickinson, M.B.
and Bittker, B.I., 2015. Federal Income Taxation, Principles and Policies (University
Casebook Series). Foundation Press.
Hart, G., Coleman, C., Jogarajan, S., Sadiq, K., McLaren, J. and Krever, R., 2017. Principles
of taxation law.
Hayek, F.A., 2014. Law, legislation and liberty: a new statement of the liberal principles of
justice and political economy. Routledge.
Hora, B., 2014. Principles of Taxation. Issues in Accounting Education, 19(1), p.150.
Jones, S. and Rhoades-Catanach, S., 2013. Principles of Taxation for Business and
Investment Planning, 2014 edition. McGraw-Hill Higher Education.

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Jones, S. and Rhoades-Catanach, S., 2013. Principles of Taxation for Business and
Investment Planning, 2014 edition. McGraw-Hill Higher Education.
Kiprotich, B.A., 2016. Principles of Taxation. governance.
McDaniel, P., 2017. Federal Income Taxation. Foundation Press.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Murphy, K.E. and Higgins, M., 2016. Concepts in Federal Taxation 2017. Cengage
Learning.
Rohatgi, R., 2015. Basic international taxation. Richmond Law & Tax.
Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., Obst,
W. and Ting, A., 2013. Principles of taxation law 2013. Thomson Reuters.
Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters
Kluwer Law & Business.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2013. Australian taxation
law. CCH Australia.