Taxation Law Assignment: Income Tax and Accounting Principles

This document provides a comprehensive solution to a taxation law assignment, focusing on income tax principles and case studies. The assignment analyzes the Arthur Murray (NSW) Pty Ltd v FCT (1965) case, examining the concept of assessable income and the distinction between the earnings and receipt methods of accounting. It applies these principles to the scenario of RIP Pty Ltd, a funeral service provider, addressing issues such as the treatment of prepaid fees, forfeited payments, trading stock, and dividend income. The solution also references relevant sections of the ITAA 1997 and taxation rulings, offering a detailed understanding of tax implications for businesses and individuals. The document explores the tax treatment of various financial transactions, including prepaid expenses, trading stock purchases, and franked dividends, providing a clear and concise analysis of complex tax concepts.

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

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Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314
Facts of the Case:
The facts surrounding the case is relevant to the question that are few and simple.
During the relevant years the company executed the business of providing course of tuition in
dancing and derived fees of variable amount each hour1. The case describes that the basic
tuition courses that was available comprised of 5, 15 or 30 hours of the private tuition to be
taken following the appointment inside the span of one year. The payments related to the
course fees was generally made in advance either as the lump sum or in the form of
instalment with a variable amount of discount is allowed for making an immediate payment.
In the books of the company the fees that were received were immediately credited
following their receipt under the account named as the “Unearned Deposits- Untaught Lesson
Account”. The amount from that account was corresponding to the lessons taught and was on
periodical basis transferred to the credit of the account named as the “Earned Tuition
Account”. The income tax returns were made by the company based on the footings that the
fees that was received in advance of the tuition does not formed the part of the taxable
income during the time of receipt2. The commission following the relevant assessment on
viewing the fees that was received in advance of the tuition had the nature of income in the
hands of the recipient from the moment when it was received in the income year.
1 Mumford, Ann. Taxing culture: towards a theory of tax collection law. Routledge, 2017.
2 Basu, Subhajit. "International Direct Taxation and E-Commerce: A Catalyst for
Reform." NUJS L. Rev. 10 (2017): 19.

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The taxpayer treated prepaid the tuition fees in the form of income that is obtained
and the same was recorded in the books of accounts following the completion of the dancing
lesson that was provided to the students3. Furthermore, there was no such inclusion of the
prepaid sum of tuition fees in the taxable income of the taxpayer. However, during the
calculation of the taxable income, it was found that the fees which was involved in the
computable proceeds during the year in which it was received. Hence, the taxation
commissioner held that the taxpayer obtained the assessable income in the form of prepaid
dancing lessons charges during the year in which the course lesson was delivered or when the
fees that were obtained. The receipt of prepaid tuition fees constituted an ordinary income
based on “section 25 (1) of the ITAA 1997”4.
Issue:
The issue surrounding the case is that had the taxpayer obtained the advance amount
of dues during the income year in which it was received? The issue surrounding the case
required the vital assessment of the fact whether the taxable income of the taxpayer
constituted a prepaid tuition fees?
Conclusion:
The objective of the case was to understand whether the income that comes home to
the taxpayer in the form of prepaid was held as taxable. The court of law in its decision held
3 Savage, Michael, and Tim Callan. "Modelling the impact of direct and indirect taxes using
complementary datasets." (2015).
4 Asatryan, Zareh, Thushyanthan Baskaran, and Friedrich Heinemann. "The effect of direct
democracy on the level and structure of local taxes." Regional Science and Urban
Economics 65 (2017): 38-55.

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that the given the fees that is received in advance for the services but yet to be provided then
such receipt of fees does not form the part of the taxable income5. The court of law held that
there would be an agreement among the student and the taxpayer, to clearly mention that the
no refund is possible against the prepaid fees. However, in the real situations of this case the
fees were refunded by the taxpayer if no tuitions or lesson is provided to the student. The
court of law passed its verdict that the taxpayer did not included the tuition fees as the income
during the year of receipt since there was the probability of refunding the same if no tuition is
provided to the students by the taxpayer6. The taxation commissioner held that the tuition fees
that was obtained by the taxpayer does not carries the character of income until the services
are rendered.
Answer to A (i):
Meaning “section 6-5 of the ITAA 1997” any sum that is reived by a person or on
behalf of the taxpayer, conversely the sum that is received must he regarded as income7.
Furthermore, derivation of such income is required to be counted in the chargeable earnings
of an individual in respect of “section 6-5 of the ITA Act 1997”.
5 Becker, Johannes, E. Reimer, and A. Rust. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International, 2015.
6 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
7 Lang, Michael. Introduction to the law of double taxation conventions. Linde Verlag
GmbH, 2014.

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There are two methods of computing the income for assessment purpose and this
comprises of earnings methods and receipt method. The taxpayer based on the suitability is
required to decide upon the selection of the method8. The taxation ruling of 98/1 is associated
with the ascertainment of income based on receipts or earnings method. Subsection 6-5(2) of
the ITAA 1997 requires a taxpayer to include the gross amount in their taxable income for the
gross amount derived.
The “taxation ruling of 98/1” states that the receipt methods is held as the suitable
way of ascertaining the earnings obtained from the investments. However, there are
exceptions to this rule9. This includes that the earnings methods are usually considered the
suitable method of determining the business income generated from the trading or
manufacturing business. As the general rule the earnings scheme is regarded as the best
technique of treating the returns for levy purpose.
Answer to (ii):
The circumstance of RIP provides that the business has been engaged in providing the
services related to the funeral. As evident during the year ended 2016 the firm recorded a net
income of $2.45 million10. The company also derives income through other means by
providing its customers the facilities of credit to pay the invoices within the span of 30 days.
8 Austin, Chelsea, and Ryan Wilson. "Are Reputational Costs a Determinant of Tax
Avoidance?." (2015).
9 Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
10 Jones, Sally, and Shelley Rhoades-Catanach. Principles of Taxation for Business and
Investment Planning. McGraw-Hill Higher Education, 2015.

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To treat the income of the RIP for assessment it is vital to consider the earnings method with
reference to subsection 6-5(2) of the ITAA 1997. The earning method of accounting is
regarded as the correct method for RIP Pty Ltd to substantially provide the appropriate reflex
of income.
In the later instances it is noticed that the company usually receives fees in advance
however the advance fees that is received under the easy future plan is generally held as non-
refundable11. Usually fees that are paid in advance are forfeited and transferred to the
Forfeited Payment Account given that any person that fails to pay all the instalment under the
easy future plan. Consequently, RIP Pty ltd is required to consider the receipt of forfeited fees
as the income since no further liability originates to offer the services related to funeral for
the discontinued operations under the easy future scheme.
Answer to (b):
Meaning the explanation that is provided in Arthur Murray any type of advance
payment is income when the services are provided12. As per the situations that is highlighted
in the case study of RIP the company usually obtained the income from the Easy Funeral
Plans where the company would be providing the funeral service to its clients in future. The
case law approach states that the instead of setting down the hard and fast rules appropriate
weightage is required to be provided in the situations of the taxpayer and the income should
be determined in accordance with the accounting method to provide the right reflection of the
income during the year.
11 Christie, Michael. "Principles of Taxation Law 2015." (2015): 814-816.
12 Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).

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The Federal Court in “Federal Commissioner of Taxation v Dunn (1989)” held that
the circumstances of the occupation and how the business is carried on along with how the
books of account were kept should be determined13. Denoting the situation of the RIP in the
books of the accounts of the company the fees were recorded when it is received. Signifying
the situation of the Arthur Murray it can be stated that evidences obtained is identical in RIP.
Therefore, the principles of the Arthurs Case is applicable to understand the accounting
record keeping for RIP Pty Ltd. Nevertheless, the company is not required to include the
fees received in advance and treat the same as income during the year of receipt. Importantly,
RIP is required to record in the books of accounts the fees that is received in advance and
consider the same as income in respect of the funeral services provided.
Answer to question (c ):
The taxation ruling of TR 98/1 explains that the ruling is only applied to the
individuals and entities for the assessment and should use the receipts or the earnings system
of tax bookkeeping to ascertain the taxable earnings14. Quoting the meaning of “Subsection
6-5 (4) of the ITAA 1997” it lay down that amounts are usually obtained by the taxpayer as
constructive receipts or derived actually. The impact of the subsection represents that the
earnings is considered as made by the individual even though the sum is not originally paid
but it dispensed based on an individual direction.
13 Buchanan, Richard, and Edward Consett. "Section 974-80 ITAA97: The current state of
play." Tax Specialist 19.5 (2016): 217.
14 Burton, Mark. "A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes
of the Australian Income Tax." J. Austl. Tax'n 19 (2017): 50.

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The method of earnings is regarded as the accrual technique or the credit system. In
this method the income is acquired by the taxpayer when it is earned. The taxpayer might
have the recoverable amount of debt even though when they cannot be legally enforced for
the recovery of the debt. An important assertion in this respect is that the commissioner and
the taxpayer will be able to select the earnings method or the receipt method for computing
the income relating to the assessment purpose.
Answer to question B:
The case study highlights that the given the circumstances that the customers have
failed to pay the advances then a portion of the fees is forfeited. These amounts of the
forfeited fees are relocated under an account named as Forfeited Payment Account. It is
learned from the case study that RIP has obtained non-refundable forfeited sum of $16,200.
RIP is required to treat this as earnings.
Answer to Part B:
Answer to question i:
According to “section 70-10 of the ITAA 1997” trading refers to everything that a
business produces, manufactures and acquires for the purpose of selling or exchange. Section
70-25 of the ITAA 1997 states that any sum that is occurred in the trading stock must not be
in capital nature15. The trading stock does not include the CGT assets that are not covered
under “section 275-105” that is owned by the obeying retirement fund or conforming with the
agreed deposit funds. RIP has purchased caskets and has also purchased accessories.
15 Jones, Daryl. "Tax and accounting income-Worlds apart?." Taxation in Australia 52.1
(2017): 14.

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However, the caskets and accessories is a trading stock and should be prohibited from being
held as held as capital assets.
According to section 8-1 of the ITAA 1997 any sum that is occurred in the purchase
of the trading stock will be required for deductions. Similarly, in the case of RIP Pty Ltd, the
purchase of trading stock will be held as allowable deductions. Furthermore, RIP Pty Ltd will
be able to claim allowable deductions relating to the trading stock throughout the year in
which the trading stock was purchased or where the trading stock forms the part of stock in
hand. In the same way, “section 8-1 of the ITAA 1997” provides an explanation where
deductions is allowable from chargeable income. similarly, for the RIP Pty Ltd a prepaid
expenditure of $25,000 was paid for the purchase of trading stock therefore, the prepayment
sum must be held as advance for the income year ended June 2016.
Answer to question B:
“Section 6-5 of the ITAA 1997” defines that income derived by the residents through
the ordinary sources will be held as income from ordinary concepts16. Furthermore, a
company deriving income from dividends is required to include the same in their taxable
return. As evident in the situation of RIP Pty Ltd the company derived a dividend income and
in return franking was attached with the dividend. Therefore, in case of RIP the dividend
income that they receive from the company that is paying the franked dividend should take
away the franking credit since the dividends are fully franked17.
16 Samarkovski, Lisa, et al. "The impact of tax on the prospects of achieving target retirement
wealth in Australian default superannuation plans." (2017).
17 Black, Celeste. "The Attribution of Profits to Permanent Establishments: Testing the
Interaction of Domestic Taxation Laws and Tax Treaties in Practice." (2017).

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Answer to question C:
Accordingly, the taxpayers are prohibited from taking into the consideration the
prepaid rental payment as capital asset. It must be noted that the provision of “section 100-25
of the ITAA 1997” should be applied in the situation of RIP Pty Ltd to exclude the rental
storage as capital asset. Meaning the “section 8-1 of the ITAA 1997” prepaid rent is an
expense to derive income and the amount should be allowed as deductions.
Answer to question D:
A PAYG withholding is applicable for the long service leave. According to the
Australian taxation office an employee is usually held entitled to long service leave till the
end of the period of service. Furthermore, the long service leave can then accrue based on the
tem of the employment. The unused amount of long service leave is not a taxable income in
respect of the “provision 83-80 of the ITAA 1997” 18. Tax offset is allowed the unused sum
of long service leave. As explained in “subsection (2) of the 83-85 of the ITAA 1997” the
taxpayer should ensure that the unused long service leave should not be greater than 30% of
the taxable income. During the income year of June 2016 the three-month long service that is
paid in advance is held as allowable deductions.
Answer to question E:
There is certain list of CGT assets that are stated in the “section 100-25 of the ITAA
1997” and takes into the consideration the land and building19. Concerning the state of affairs
18 Van Niekerk, Doreen Patricia Elizabeth. The taxation of illegal income: an international
comparison. Diss. University of Johannesburg, 2016.
19 Richards, Robert. "Taxation: Employee share schemes." Law Society Journal: the official
journal of the Law Society of New South Wales 52.3 (2014): 40.

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of RIP Pty Ltd an expenditure relating to the land and building was incurred by the taxpayer
and this forms the part of the capital asset which is not allowed as general deductions.
Correspondingly, the disbursement expenses for onsite car parking that was sustained by the
RIP Pty Ltd along with the payments on the landscaping and equipment is a capital expense
that is not acceptable as allowable deduction under “section 8-1 of the ITAA 1997”20. The
expenditure incurred will be held as capital expenditure and no allowable deductions is
allowed in this case.
20 Scholes, Myron S. Taxes and business strategy. Prentice Hall, 2015.

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Reference List:
Asatryan, Zareh, Thushyanthan Baskaran, and Friedrich Heinemann. "The effect of direct
democracy on the level and structure of local taxes." Regional Science and Urban
Economics 65 (2017): 38-55.
Austin, Chelsea, and Ryan Wilson. "Are Reputational Costs a Determinant of Tax
Avoidance?." (2015).
Basu, Subhajit. "International Direct Taxation and E-Commerce: A Catalyst for
Reform." NUJS L. Rev. 10 (2017): 19.
Basu, Subhajit. Global perspectives on e-commerce taxation law. Routledge, 2016.
Becker, Johannes, E. Reimer, and A. Rust. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International, 2015.
Black, Celeste. "The Attribution of Profits to Permanent Establishments: Testing the
Interaction of Domestic Taxation Laws and Tax Treaties in Practice." (2017).
Buchanan, Richard, and Edward Consett. "Section 974-80 ITAA97: The current state of
play." Tax Specialist 19.5 (2016): 217.
Burton, Mark. "A Review of Judicial References to the Dictum of Jordan CJ, Expressed in
Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes
of the Australian Income Tax." J. Austl. Tax'n 19 (2017): 50.
Christie, Michael. "Principles of Taxation Law 2015." (2015): 814-816.
Jones, Daryl. "Tax and accounting income-Worlds apart?." Taxation in Australia 52.1 (2017):
14.

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Jones, Sally, and Shelley Rhoades-Catanach. Principles of Taxation for Business and
Investment Planning. McGraw-Hill Higher Education, 2015.
Lang, Michael. Introduction to the law of double taxation conventions. Linde Verlag GmbH,
2014.
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
Mumford, Ann. Taxing culture: towards a theory of tax collection law. Routledge, 2017.
Richards, Robert. "Taxation: Employee share schemes." Law Society Journal: the official
journal of the Law Society of New South Wales 52.3 (2014): 40.
Samarkovski, Lisa, et al. "The impact of tax on the prospects of achieving target retirement
wealth in Australian default superannuation plans." (2017).
Savage, Michael, and Tim Callan. "Modelling the impact of direct and indirect taxes using
complementary datasets." (2015).
Scholes, Myron S. Taxes and business strategy. Prentice Hall, 2015.
Van Niekerk, Doreen Patricia Elizabeth. The taxation of illegal income: an international
comparison. Diss. University of Johannesburg, 2016.
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).

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