HI6028 Taxation Law: Evaluating Tax Issues for RIP Pty Ltd

This report provides a detailed analysis of various tax-related issues faced by RIP Pty Ltd, referencing the Income Tax Assessment Act 1977 and relevant case laws such as Arthur Murray (NSW) Pty Ltd v FCT. It examines the treatment of advance payments, forfeited amounts, and the definition of trading stock in the context of Australian taxation law. The report also addresses the tax implications of dividend income, prepaid expenses, and employee benefits. Furthermore, it offers advice to the company on how to correctly treat these items for tax purposes, ensuring compliance with legal requirements and optimizing tax outcomes. This document is a student contribution and available on Desklib, a platform offering a variety of study resources including past papers and solved assignments.

HI6028 Taxation Law
1

Table of Contents
Introduction......................................................................................................................................3
PART A...........................................................................................................................................4
PART B...........................................................................................................................................7
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
2

Introduction
Tax is the amount which is required to be paid by the business on the income that is made by it
and for that, all the laws and regulations which are there in a relevant manner are to be complied
with. There is the need to file the return and for that correct calculation of the tax, an amount is
required to be made. In this report, various aspects in relation to it will be discussed for the RIP
Pty Ltd. In that, the income tax assessment act 1977 will be taken into consideration. All the
areas of the deductions and allowability will be explained below in the report.
3

PART A
a) Description of Arthur Murray (NSW) Pty Ltd v FCT (1965) case.
In the Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 the aspects in relation to the
prepayments which are made by the entity will be taken into consideration. It will be identified
that whether it shall be included in the assessable income of the organization so that correct
taxable amount is determined.
Facts of the case:
In this case, the company is involved in the provision of the dancing facilities to the client and
they are provided on the hourly basis. In this, the students will be required to make the payment
to the company on the per hour basis. Then a new lump-sum facility was provided in which they
were to make the payment for the total 1200 hours and that will have to be paid in advance. They
can use those hours for the lifetime and for this they were also offered the discount by the
company they make the immediate payment (Hemmings and Tuske, 2015). There is no provision
in relation to the refund and in any case, there will be no repayment and the amount which is
collected is deposited in the unearned deposits-Untaught lessons account. This will be transferred
to another account of earned tuitions when the company will be providing the lessons for the
same.
Issue related to the case:
The issue which is faced here is in relation to the identification of the fact that whether the
advance payment made by the customers will form part of the assessable income or not. The
company is of the view that the amount will be included in the income only when the income is
actually earned that means when the lessons will be provided and due to this, it as not included
the same in the tax return which is prepared by the company. But in the contention of the
commissioner the amounts which are received whether they are in advance or after the provision
of the service both will be included in the calculation of the taxable income and will be recorded
in the company as and when it is received.
4

The conclusion is drawn from the case:
It has been identified by the account that as per the definition which is provided in the act in
relation to the assessable income, there will be no inclusion of the advance income as the
services will be provided in the future period. This will be considered as the contract which is
made by the company for the future services and will not form part of the assessable income.
Due to this, it can be said that the treatment made by the company is correct and without
providing the lessons of dance the advance payments will not be added to the assessable income.
The RIP Pty Ltd is involved in the provision of the funeral services and in that there are various
plans which are offered by it to the client. The charges in all vary and are made on the variable
contract basis. In this also a ‘forfeited account’ has been created in which the entire amount that
has not been claimed in the easy funeral plan is transferred to it (Austlii, 2018). The following
devices are provided to the company on the basis of the understanding that is gained from the
above case.
 As per the decision provided in Arthur Murray v CT case law, the company derives its
income from the services which are provided by it and that are received only after the
provision of the service. Any amount which is received as advance will not be included in
the assessable income of the company and there will be no amount of tax which will be
charged on it. In the given case the company is receiving the payment after it provides the
services of the funeral to its clients. So it can be said that inclusion of the income will be
made only after both the conditions will be satisfied which are that service will be
provided and payment will also be received. The fees are charged by considering the
invoice for the 30 days and then when the payment will be finally received it will be
included in the assessable income.
 In case of the deluxe arrangement which is made for the funeral, there will be advance
payment which will be charged for the periodic contribution and this is provided in the
easy funeral plan. There will be no refund which will be made in respect of the amount
that is not drawn by the customers. All of the amounts which remains unchained at the
end of 30th June will be transferred to the forfeited account. So that results of the case
which is understood above will also be applying to the current situation as in this also
5

there is the advance payment which has been received by the company and the services
will be provided in the future period. Therefore in accordance with the same, all the
payments which will be received by the company in this respect will be included in the
income only after the provision of the service to the specified customers and by that the
correct treatment will be made possible.
 According to the Carden’s case (1938) 63CLR108 the medical practitioner who is
involved in the case can charge the income to tax as and when it is received and the
service can be provided afterward. In case of the easy funeral plan the company can
choose another option for the providing of correct treatment and in accordance with that
it will be required that the facts and the circumstances of the case shall be properly
evaluated and then the decision shall be made by the assessor. According to that, the
income tax will be charged by the company on the amount when it is received and not
after the service will be provided.
b) In the company, there is the balance amounting to $16200 which has not been claimed by
the customers and no services in respect of which have been providing in the easy funeral
plan and due to that it has been transferred to the forfeited payments account at the end of the
year. In this case, company has the option to make the treatment as per the case of Arthur
Murray and of this is done then the amount will not have been included in the assessable
income when it was received and due to this, it will become table at the time of the transfer
(ATO, 2018). This is because the tax has not been paid on this amount in the earlier times.
Another option may also be used by the company and in that case, it will not have to be
included in the assessable income as it has been already included and the company has paid
the tax on it. According to the law, the tax will be paid once only and will not be charged
again. The treatment of the amount which is forfeited will be made in accordance with the
one that is provided for the prepayments for the future service contract.
6

PART B
In the company, there are various issues which are faced in respect of the tax and due to that, the
advice is required to be provided to the company for the same in which the case laws and the
legislation will be taken into consideration. The following are the issues which are taken into
account:
a) in accordance with the Australian taxation the stock of the company is defined as the resources
whether in the physical or in an intangible manner and they will be used in the business so that
further activities can be conducted in the business by which it will be possible to generate the
earnings. The activities which will be undertaken with the help of this will be including selling,
manufacturing, trading, and exchange. There are some of the items which are not included in the
trading stock according to the taxation and they include consumables, spare parts of the fixed
assets and growing crops. In the company funeral services are provided and the various
accessories and caskets are used by it in relation to its which make the process possible and
company can carry out the further services for the completion of the whole process and by that it
will be receiving the consideration in monetary manner (Burkhauser, et. al., 2015). As the
company is using the caskets and other material for the services, by which earnings will be made
so they will be considered as the stock in both the accounting as well as taxation laws.
The amount which is spend by the company in respect of the payments which are made for the
acquisition of the stock will be considered as the business expense and this is provided in the
income tax assessment act 1977. Due to this reason it will be deductible and on this discount has
been availed so it will be deducted from the revenue while the taxable income will be calculated
for the calculation of the tax expense.
b) In accordance with the Australian law the amount which is received by the company from the
other company in which investment has been made in form of the dividend is considered as the
investment income. This will be taxable in the company and in the given case an amount of
$21000 has been received by the company for the dividend from the RIP Finance Pty Ltd. The
dividend which is received is fully franked and this means that the tax has already been paid on
the same by the company distributing it and due to this there will be no payment of tax which
7

will have to be made on it. Therefore the company will not be making any adjustment in relation
to it in the profit and so it will not have to be included in the assessable income of the company
for that period.
c) The expenses which are incurred by the company in advance are to be treated in the periodic
manner whole making the treatment of the tax. For this the law specifies that proportionate
consideration of the prepaid expenses shall be made. In the given case a rent has been paid
amounting to $57000 on 1st March 2016 and this is related to the coming two years but in the
current period, only the rent which is related to the four months will be treated (O’Rourke and
Antioch, 2016). The company has charged $9500 and this is still the 30th June so it can be said
that the treatment provided by the company is appropriate and no adjustment will have to be
made by the company in the profits. The remaining amount will be charged by the company in
the proportionate manner as and when it will become due.
d) As per the Income tax assessment act 1977 there are various employee benefits which are
provided by the company in addition to the basic pay to its employees and one of them is the
long service leave. Any provision which is made by the company in respect of such expenses
will have to be deducted from the earnings of the company so that correct amount of the profit is
determined. The company has provided an amount of $22000 to an employee in respect of long
service leave and this has been paid in advance by the company. The amount which is paid is the
business expense and shall be deducted from the revenue but as the same is advanced in relation
to the future period so it will not be deducted and only the provision can be recognized in
relation to it. So the company has made the appropriate tax treatment by creating the provision
and due to this there will no adjustment made in the profits of the company which are earned for
the current period.
e) business expense are the payments which are made by the company in the process of earning
the revenue and conducting all the activities of the business and this has been provided in the
income tax assessment act 1977 under the section 8-1. For the purpose of the calculation of the
taxable profit this amount will have to be deducted from the profits so that final taxable income
is ascertained but if there is any capital expenditure then that will have to be capitalised instead
of charging it from the profit. In the RIP Pty Ltd also there are various expenses which have been
8

made in context of the built facility which has been constructed in the business (EDD, 2012).
This is the asset for the company and there will be long-term returns which will be received from
this and due to this reason all the expenses which are related to it and will be giving long-term
returns will have to be capitalized. If there are any other expenses then they will be charged as
the business expense. The company has made the payment for the architectural designs which
amounts to $250000 and this is not deductible as it is capital expense in nature. In addition to this
purchase of land is also capital expense and will be capitalised. The other expenses which are
incurred such as demolition expense of $50000 in revenue and will be charged when incurred
that is 2014 and not in the current period ending 30th June 2016. All the other expenses such as
car parking, construction, and fitting expense will also not be charged by the company in profit
as they will also be giving the long-term returns (Bentley, 2016). So all the expenses will be
capitalised and only the demolition will be excluded as it is not related to the current period.
9

Conclusion
From the report that is provided above all the understanding in respect of the taxation has been
obtained in relation to the treatment that is made for the various expense. The manner in which
the assessable income will be calculated and all of the deductions which can be made from it are
identified in the context of RIP Pty Ltd. The adjustments which are to be made by the company
from the profits in respect of various expenditures which are made are also taken into
consideration and all of this is done in accordance with the income tax assessment act 1977.
10

References
 ATO 2018, Deductions for prepaid expenses 2010-11. [online] Available at:
https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2010-11/?page=3
[Accessed 17 May 2018].
 Austlii, 2018. INCOME TAX ASSESSMENT ACT 1997. [online] Available at:
http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/itaa1997240/
[Accessed 17 May 2018].
 Bentley, D., 2016. Taxpayer rights in Australia twenty years after the introduction of the
Taxpayers' Charter. eJournal of Tax Research, 14(2), p.291.
 Burkhauser, R.V., Hahn, M.H., and Wilkins, R., 2015. Measuring top incomes using tax
record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2),
pp.181-205.
 EDD, 2012. Information Sheet, Employment Development Department, State of
California, pp 6-12. Available at: http://www.edd.ca.gov/pdf_pub_ctr/de231eb.pdf
[Accessed 17 May 2018]
 Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.
 O’Rourke, A. and Antioch, S.K., 2016. Workplace bullying laws in Australia: Placebo or
panacea?. Common Law World Review, 45(1), pp.3-26.
11