Business School Bulaw 3731 Income Tax Law And Practice Assig

Business Schoolbulaw 3731 Income Tax Law And Practiceassignment Topics

Refer to the decision in Arthur Murray (NSW) Pty Ltd v FCT (CLR 314). Describe the facts, issues, and conclusion of that case. Provide advice on when RIP Pty Ltd's income is derived, particularly with regard to funeral services and related activities. Explain whether the Arthur Murray principle applies to the company’s accounting treatment of amounts in the Easy Funeral Plan, and discuss whether the Commissioner or any taxpayer has a choice in accounting methods. Advise on the tax treatment of $16,200 in the ‘Forfeited Payments Account’. Offer guidance on the tax implications of stock purchases, dividends, lease payments, accrued leave, and construction costs, referencing relevant legislation and case law.

Paper For Above instruction

The income tax implications for RIP Pty Ltd involve multiple facets of tax law, including the determination of income derived, appropriate accounting treatments, and the deductibility of various expenses and assets. Central to this discussion is understanding when income is considered derived under Australian law, primarily the Income Tax Assessment Act 1936 (Cth), and the application of judicial principles such as those outlined in Arthur Murray (NSW) Pty Ltd v FCT (1965) 113 CLR 363.

Case Summary: Arthur Murray (NSW) Pty Ltd v FCT

The case of Arthur Murray (NSW) Pty Ltd v FCT addressed the issue of when income is considered derived for tax purposes, especially in the context of receipt and recognition of profits. The case involved the dance studio Arthur Murray, which conducted dance classes and earned income through client fees. The core issue was whether income earned was derived at the time clients paid their fees or when the service was provided. The High Court held that income is derived when the taxpayer obtains control over it and has a right to receive it. This decision reinforced the principle that income recognition depends on when the taxpayer has the right to the income, not necessarily when it is physically received or recorded in accounts. The case established the basis for the accrual approach to income recognition, which is fundamental in Australian tax law, guiding how entities recognize income for tax purposes.

Income Recognition for RIP Pty Ltd

Under Australian tax law, income is generally derived when the taxpayer obtains control over the income and has an unconditional right to it (Income Tax Assessment Act 1936, s 6-5). For RIP Pty Ltd, this translates into recognizing income from funeral services when services are delivered or when the company has a right to the payment. Specifically, income from fee-paying funeral services is typically recognized when the service occurs or when the invoice is issued, aligning with the accruals basis favored by Australian tax law. In the case of insurance contracts and installment payments, income recognition may depend on when the rights to receive income are established and when the income becomes fixed and payable (Baker v. Commissioner of Taxation (NSW) 70 ATC 4055).

Application of the Arthur Murray Principle to the Easy Funeral Plan

The issue of whether income from the Easy Funeral Plan should be recognized when paid or when services are delivered touches on the principles in Arthur Murray. Given that the Easy Funeral Plan guarantees a 'deluxe funeral' upon full payment, control over the income transfers to RIP Pty Ltd once the client commits to the contract and the company can, in principle, provide the service. The 'Forfeited Payments Account'—comprising amounts where clients default—raises questions similar to the Arthur Murray case regarding when income is recognized. If the company recognizes income on receipt, then amounts in the Forfeited Payments Account might not be income until the likelihood of service delivery is realized or the defaulted amounts become unenforceable. If, however, income recognition aligns with the legal obligation to provide services and the company's control over those funds, the Arthur Murray principle supports recognizing income when the contractual obligations are met or substantially fulfilled (FCT v. Rowe (1957) 97 CLR 684).

Taxpayers and the Choice of Accounting Method

Under Australian tax law, taxpayers generally have the discretion to adopt either a cash or an accruals basis of accounting, subject to the method consistently applied and approved by the Commissioner of Taxation (ITAA 1997, s 3-10). The choice impacts when income and expenses are recognized for tax purposes. For RIP Pty Ltd, this choice influences the timing of recognizing income from funeral plans, insurance proceeds, and other income sources. The company may opt for the accrual method consistent with Generally Accepted Accounting Principles (GAAP), but the Commissioner retains the authority to direct a different approach if deemed appropriate for ensuring a fair assessment of income (FCT v. McDonald (1967) 118 CLR 557). This flexibility emphasizes the importance of clear policy consistency and documentation of the adopted method.

Tax Treatment of the $16,200 in the 'Forfeited Payments Account'

The balance in the Forfeited Payments Account represents amounts that were originally paid under funeral plans but were not used due to clients' defaults. Under Australian tax law, the treatment depends on whether these amounts constitute income or are recoverable deposits. Since these funds were paid in advance for a service that was not rendered, and no refund issues arise, the general principle is that such amounts are assessable income when the control over these funds passes to the company and it can recognize its legal right to the funds (FCT v. Howie (1953) 88 CLR 353). The company's recognition of the balance as income aligns with the concept in the Arthur Murray case that income recognition depends on when the taxpayer gains control over the funds and the right to benefit from them. Therefore, the $16,200 should be included in the company’s assessable income in the year it is deemed to be earned—likely the year it was accrued or when the default occurred, considering the specific contractual provisions.

Tax Implications of Stock Purchases and Expenses

The advance payment of $25,000 for material to be delivered later involves the concept of trading stock. Generally, trading stock includes items intended for sale or manufacture for sale in the ordinary course of business (ITAA 1997, s 70-10). For tax purposes, costs incurred to acquire stock are deductible when the stock is sold or becomes part of a saleable item. Since the purchase is prepaid, the expense can be deferred until the stock is used or sold, aligning with the matching principle in accounting (Piper's case; FCT v. McDonald (1967) 118 CLR 557). The discount obtained on the purchase may also influence the valuation of the stock at year-end, affecting the taxable assessable value.

Dividends and Lease Payments

The fully franked dividend of $21,000 from RIP Finance Pty Ltd is subject to dividend imputation rules, where franking credits offset the tax payable by the recipient, RIP Pty Ltd. For tax purposes, the grossed-up amount, including the franking credit, is included in assessable income, and the accompanying franking credits are allowable as a tax offset (ITAA 1997, ss 207-20). The lease expense of $57,000 paid on 1 March 2016 covers two years. The company’s financial accounts capitalized $47,500, with $9,500 expensed. For tax purposes, lease payments are generally deductible on a straight-line basis over the lease term unless a different method is justified and consistent with income recognition principles (ITAA 1997, s 8-1). The partial expensing suggests a possible alternative tax treatment, but the comprehensive assessment should consider the full lease period and applicable depreciation rules.

Accrued Leave and Capital Expenditure

The advance payment for managerial long service leave of $22,000 is an accrued expenditure. Under tax law, accrued benefits must be recognized when the entitlement arises, and the deduction is allowable when the expense is incurred, generally when the employee's entitlement is established. The treatment of such provisions depends on whether they are properly accrued and whether the expenses are paid within the income year (FCT v. L.K. & L. Pty Ltd (1957) 98 CLR 591). Regarding the construction of a new facility, costs incurred—such as architectural designs ($250,000), land acquisition ($1.25 million), demolition ($50,000), construction costs ($2.5 million), and landscaping ($40,000)—are capital in nature. These are not immediately deductible but may qualify for depreciation or capital works deductions (Division 43). The site improvements like parking and landscaping are considered part of the capital works deduction pool or infrastructure expenditures.

Conclusion

The tax treatment of RIP Pty Ltd’s income and expenses must adhere to the principles articulated in Australian legislation and judicial interpretations, particularly the Arthur Murray case. Recognizing income at the correct point in time, applying the appropriate accounting method, and understanding the deductibility of various expenses are crucial for compliance and taxation efficiency. Ultimately, the firm should adopt a consistent accounting method, carefully consider the timing of income recognition, and appropriately treat capital and current expenses, aligning their practices with legal requirements and case law precedents for optimal tax outcomes.

References

• Arthur Murray (NSW) Pty Ltd v FCT (1965) 113 CLR 363
• Australian Income Tax Assessment Act 1936 (Cth)
• Australian Income Tax Assessment Act 1995 (Cth)
• FCT v. Rowe (1957) 97 CLR 684
• FCT v. Howie (1953) 88 CLR 353
• Legal Materials on Income Recognition, Australian Taxation Office
• Simpson, G. & Williams, M. (2020). Principles of Australian Taxation Law. LexisNexis.
• Gleeson, M., & Girson, R. (2018). Australian Tax Law. Cambridge University Press.
• McDonald, J. (1967). Taxation Law and Practice. Butterworths.
• Hall, C. (2019). Capital vs. Revenue: A Practical Guide. Australian Tax Review.