HI6028 Taxation Law: Examining Tax Issues for RIP Pty Ltd in Australia

This case study provides a detailed analysis of the taxation law implications for RIP Pty Ltd, an Australian funeral services company, focusing on income recognition and treatment of various financial transactions. It examines the application of the Arthur Murray v FCT case principle regarding advance payments for services, specifically concerning RIP Pty Ltd's 'Easy Funeral Plan' and 'Forfeited Payments Account.' The study also addresses the tax treatment of inventory items, fully franked dividends, advance rent expenses, director payments, and building construction expenses, referencing relevant sections of the Income Tax Act 1977. The analysis aims to guide RIP Pty Ltd in ensuring compliance with Australian income tax regulations, offering insights into the appropriate accounting methods and tax liabilities associated with their business operations. Desklib provides access to this and other solved assignments for students.

HI6028 Taxation Law
1

Table of Contents
Introduction:....................................................................................................................................3
Part A...........................................................................................................................................4
Arthur Murray v FCT case..........................................................................................................4
1: Treatment of Income if received generally or from funeral services......................................5
2: Application of Arthur Murray principle on the treatment of Easy Funeral Plan.....................5
3: Choice in the method of accounting for tax............................................................................6
(B) Tax treatment of ‘Forfeited Payments Account’ item...........................................................6
Part B:..........................................................................................................................................7
(a): Treatment of Inventory items................................................................................................7
(b): Treatment of fully franked Dividend....................................................................................7
©: Treatment of Advance rent expense.......................................................................................8
(d) Treatment of amount paid to Director....................................................................................8
(e) Treatment of expenses for Building construction..................................................................8
Conclusion:....................................................................................................................................10
References:....................................................................................................................................11
2

Introduction:
Taxation is a very crucial matter for the taxpayers as well as a government because it is related to
the revenues of both. Present summary is made to explain the Income Tax rules which are
applicable to a business company in Australia. RIP Pty Ltd is a resident company is Australia
and engaged in the business of Funeral services. The Income Tax rules in Australia are
applicable according to the income tax act 1977 and present summary explains some income Tax
rules which are applicable on RIP Pty Limited along with the applicable criteria, rules and
exceptions. Income Tax rules related with Income recognition and determination are also
explained in this summary statement so that the managers of RIP Pty Ltd can make an
appropriate correction in the Tax Calculation statement to ensure the compliance of Income Tax
Act 1977.
3

Part A
Arthur Murray v FCT case
The case is about the dispute between Arthur Murray Vs FCT in which the high court gives a
judgement in the matter of income recognition. The judgement of court explains that is a
prepayment of a service which will be provided in future is included in the income of the
company or not?
Case facts:
The Company gave dancing lessons to Learners and receives fees on an hourly basis. The
organization additionally gave the chance to make a single payment for the dance practice
lessons of 1200 hours which can be taken by the learner at any time in life but learner should pay
the whole amount in advance. The rebate for fast instalment was made for the single amount
portions. The company was having a No refund policy and if learner fails to join the classes, the
company does not make any refund to the customer. The sum of fees received from the
customers as single payment was transferred to the ‘Unearned deposits- Untaught lessons
account’ and when company rendered services to its customers, it was transferred to the “Earned
tuition Fees” account.
Matter:
The case is about the dispute between Arthur Murray v FCT case and the matter of is that the
advance amount which was received by the company from its customers as one-time payment for
1200 dance learning classes, was chargeable to tax in receiving a year or not. In this case
company and income, tax commissioner has a dispute about the assessment of income. As per
the company accounting, fees which were received as a one-time payment from dance learners
will be transferred to the unearned income account because services were to be provided in
future. The company was following an assumption that income is chargeable on the basis of
earning and not on receiving basis so the advance amount does not includable in the income of
current year. As per the view of Income-tax commissioner, fees received by the company from
its customers as advance fees of dance tuition is chargeable to Income tax in the year of
4

receiving without making any difference between receipt and advance receipt (Okello, 2014).
Commissioner also gives a sound reason that the amount received by the company does not
refundable in any case, so it should be included in the income of that year in which it received.
Conclusion:
As per the decision of the court, income tax act1977 gives a defined view of the chargeable
income and the definition of chargeable income does not involve the advance fees as the
assessable income. Court clearly states that income received by the company from its dance
learners as a one-time payment for future tuition services does not include as the part of current
year income and income tax on such income is payable when services will be rendered. In this
way, the treatment of advance amount and tax assessment done by the company is correct and
the company does not have any additional tax liability. RIP Pty Limited is engaged in the
business of funeral services in Australia and dedicated to providing a systematic service. RIP Pty
Limited also gives the option to its clients to pay fees in instalments for a future funeral service.
In the case when a client does not claim the service, the amount of fees is transferred to
‘Forfeited Account’.
1: Treatment of Income if received generally or from funeral services
As per the income tax act 1977 and the decision was given by the Australian Supreme Court, the
advance amount received against any services which have to be provided in future is not
chargeable to income tax and the income will be taxable when service will provide. In the
present case, RIP Pty limited is providing a facility to its customers to pay in instalment for
future funeral services (Gailmard, 2012). If a company receives its income generally, the tax is
payable on the immediate basis under income tax act and company should pay income tax on
income but if the company receives income from funeral services, the tax will be chargeable to
income when services will be rendered.
2: Application of Arthur Murray principle on the treatment of Easy Funeral Plan
RIP Pty Limited has an attractive plan for its customer community that they can pay fees for a
funeral in instalment. A policy of ‘No Repayment’ is also followed by the company and amount
of unclaimed services is transferred to Forfeited Account on 30 June annually. The case of
Arthur Murray v FCT is applied in this situation and company should make an assessment of
5

income as per the court decisions. In the case of Arthur Murray v, FCT court states that income
tax is chargeable on the income on earing basis not on receipt basis. In this way, the amount
which is received by the company from its customers under the scheme of ‘easy funereal’ will be
taxable when services were rendered and the company does not need to pay tax on such receipts
in receiving a year.
3: Choice in the method of accounting for tax
A different option for the treatment of advance amount which is received by the service provider
from customers is also available but subject to some clause. The assessment of such advance
income depends on the situation and subordinate factors. The company can pay its income tax
liability which arises on the advance amount on receipt basis (Okello, 2014). In the case of
Carden (1938), the 63CLR108 court states that income tax should be paid on the received basis
and not after the rendering of service.
(B) Tax treatment of ‘Forfeited Payments Account’ item
RIP Pty limited transfers its unclaimed amount to ‘Forfeited Account’ annually and follows a No
Refund policy. The sum of unclaimed prepayment got by the organization in regard to which the
services were not given by the organization will transfer to the Forfeited Payments Account. If
RIP Pty Limited does not pay its Income Tax liability on the received basis and follows the court
judgement given in the case of Arthur Murray than the income transferred by the company in the
forfeited account will be taxable at the time of transfer. In another situation, if the company does
not follow the Arthur Murray court judgement (1965), it can pay income tax on the income
received from customers for future funeral services. If advance fees are included in the current
year income and company pays income tax on the received basis, no liability will occur in future
(Small and Macleod, 2016).
6

Part B:
RIP Pty Ltd is a company which is working to provide the funeral services to the Australian
community and several plans are offered by the company for its customer so that customer can
manage the funeral without facing any fund crises. The company is facing some trouble in the
assessment of taxable income due to some complex transactions. The transactions and their
treatment according to the Income Tax legislation rules are as follows:
(a): Treatment of Inventory items.
The concerned issue is rated with trading stock and its treatment rules. The items which are held
by an organisation to sell or as a supportive product in the rendering of services will be
considered as the trading stock of the organisation. The Income Tax Act (1977) also gives a
defined view about the trading stock and the transactions related with trading stock. As per the
description is given by the Australian Taxation office, trading stock includes those items which
are purchased or produced by a business to run future business activities like production, trading
or retailing. Australian Tax Office issued a list of some items like some types of spare parts,
Growing crops and basic consumable which are excluded from the income tax assessment. RIP
Pty Ltd has some items in its stock like caskets and other related accessories which are used by
the company as a sub-product to provide the funeral services and the tax treatment of these items
will be same as trading inventory (Taylor and Richardson, 2012).
In the present case, RIP limited paid $ 25000 to purchase some inventory items as an advance
payment and the goods will be received in next month. The company also get a discount from the
supplier because of advance payment. As per the section 8-1 of the Income Tax Act (1977), the
amount paid for the purchase of trading items is an expense for the business and the deduction
for the same is available under the act. In the accordance with above rule, the amount of $25000
which is paid by the company as the advance is deductible from the income of the company
during the income assessment for taxation purpose.
(b): Treatment of fully franked Dividend
The dividend is an income for the receiver and the tax is payable under the head ‘Investment
Income’. In the present case, The RIP Pty Ltd received a dividend income of $ 21000 from the
7

RIP Finance Ltd as fully franked Dividend. The fully franked dividend can be defined as income
which is paid by the paying company to its receiver after paying the tax liability. In this way, the
amount received by the RIP Pty Ltd is received after the payment of Income-tax so the company
does not have any liability to pay the income tax on such amount so no need of change in the
profit and loss account required.
©: Treatment of Advance rent expense
The advance payment of business expenses is allocated to the relevant years and the deduction
of these expenses is available on a periodic basis. RIP Pty Ltd paid its two year’s rent expense on
a 1 March 2016. As per the Taxation rules, the rent related with four months from 1 March 2016
to June 30, 2016, is charged to the current year profits and the remaining amount of advance
payment will be attributed in the relevant period. In this way, the Treatment of advance payment
done by the company is completely according to the Australian taxation rules and there is no
need for any adjustment (Hulse, et. al., 2012).
(d) Treatment of amount paid to Director
In the company, there are several benefits which are provided by it to the employees in addition
to the basic salary which is provided to them. In this, the long service leave which is provided is
also included. For the proper treatment of this, the provisions which are specified in the Income-
tax assessment act 1977 will have to be compiled by. The profit of the company will be affected
by this amount as this is treated as deductible expenses so will be adjusted in the income
statement whole calculating the net amount of the profit. This is because the amount which is
paid by the company in respect of the long service leave will be treated as an expense of the
business and so it will be considered. There is the provision amounting to $22000 which has
been made by the RIP Pty Ltd in respect of the long service leave. The company has made the
advance payment in this and that will not be accounted as only the provision will be identified in
relation to it. In accordance with all of the discussion, it can be said that the company has
followed the appropriate process and the profits of the company are not required to be adjusted in
any manner (Richardson, 2012).
(e) Treatment of expenses for Building construction
In the business, there are various expenses which are incurred and they are to be treated as per
the provisions of the income tax assessment act 1977. According to this all the expenses which
8

are incurred for the business purpose will be treated as a business expense and are deducted from
the profits of the company. But those expenses which are incurred once are considered as capital
expenditures will have to be capitalised. All of the costs which are made by the company will be
classified into these categories and the ones which are used for the construction of the built
facility will be capital. The amount that is paid for the architectural design amounts to $250000
and it is not deductible as this is capital in nature. Similarly, the purchase of land will also be
capitalised by the company and there will be no charge which will be created for this in the
income statement (Taylor and Richardson, 2012). The revenue expenses are to be deducted from
the profits in the same year in which they are incurred and due to this reason although the cost of
demolition is revenue in nature it will not be deducted in 2016 which amounts to $50000 because
this has been made by the RIP Pty Ltd in the year 2014. All the other expense incurred by the
company in this include car parking charges, construction expense, landscaping of site and fitting
and equipment expense and they all will be treated as capital as the company will be receiving
the benefits from all of them for long period of time. Therefore they all will have to be
capitalised by the company in spite of charging them from the profits of the business. By this, it
can be said that company is not required to make any adjustment in the profits as all of the
expenses are capital and the one which is revenue relating to demolition will also not be charged.
9

Conclusion:
Above summary report is made to explain the Income-tax rules and the treatment of various
business items like trading stock, advance payment and dividend in the regarding of RIP Pty Ltd.
the report concludes that the assessment of income tax of the company should be made by
considering all rules which are issued by the Australian tax office along with the respective
judgments given by the court in different matters. It is also concluded that there is some
difference between Australian taxation rules and accounting rules and company should make an
appropriate and required adjustment during the assessment of taxable income to ensure the
complete compliance of Taxation legislation.
10

References:
1. Okello, A., 2014. Managing Income Tax Compliance through Self-Assessment (No. 14-
41). International Monetary Fund.
2. Gailmard, S., 2012. Accountability and principal-agent models. Chapter prepared for the
Oxford Handbook of Public Accountability.
3. Small, D. and Macleod, R., 2016. Murray group holdings Ltd and others v HMRC:
HMRC's new tactics win the day in the Court of Session. British Tax Review, (1), pp.27-
38.
4. Taylor, G. and Richardson, G., 2012. International corporate tax avoidance practices:
evidence from Australian firms. The International Journal of Accounting, 47(4), pp.469-
496.
5. Richardson, D., 2012. The case against cutting the corporate tax rate. Australia Institute.
6. Hulse, K., Burke, T., Ralston, L. and Stone, W., 2012. The Australian private rental
sector: changes and challenges. Australian Journal of Political Science, 35(1), pp.99-110.
11