Arthur Murray(Ns) Pty Ltd V Fct (1965) 114 Clr 314 Essays

Arthur Murray(Ns) Pty Ltd V Fct (1965) 114 Clr 314 Essays Arthur Murray(Ns) Pty Ltd V Fct (1965) 114 Clr 314 Essay Arthur Murray(Ns) Pty Ltd V Fct (1965) 114 Clr 314 Essay Part A (i) the fact arises on Arthur Murray(NS) Pty Ltd V FCT (1965) 114 CLR 314 is that the taxpayer sold prepaid dancing lessons with prepaid fees attributable in part to lessons to be provided in future income years. The commissioner assessed the tax payer on the basis that prepaid fees constituted income derived by the taxpayer when received. The high court concluded that amount received in respect of service to be provided in future years are not earned until the future obligations for which they are paid are discharged. Arthur Murray’s case can be co-related with the given condition of RIP Pty Ltd as the company is providing funeral services which is provided only after the death of client. For this they are receiving money in advance in order to provide future service . that’s why the case is related to Arthur Murray case ii a) The professional people like Doctor, engineer and small business they can access their income in cash basis if their income turnover is up to $ 2 million a year. Section 6 of ITAA 97, Provisions for ordinary income and statutory income are given in s6-5 and s 6-10 in income tax assessment act 1997. Income is derived upon the arising of enforceable debt for taxpayer who carries business of supplying goods. Professional fees for services are derived upon the arising of recoverable amounts during course of carrying business however if the amounts are basically reward for the personal service then the fees are derived upon its reception. The prepayments for goods and services are assessable only when that services or goods are provided. Dividends, wages and salaries are derived when paid and received respectively. Likewise, interest is also derived upon it receipt but if the taxpayer is in the course of lending    business then accrual basis is appropriate. And, all the trading income is derived at the point of sales. (Gilders et. al. 2009). According to Arthur Murray case, income is derived when the service is provided . Relating to RIP Company with Arthur Murray principle, we can say that RIP Company will derive their income only when the service is provided to its client. b) Yes the Arthur Murray principle apply to the company‘s accounting treatment of amounts in funeral plan No 1 and 2. Funeral plan 1 is a fixed price contract and when the agreed amount is paid, the client is guaranteed deluxe funeral arrangement. Under funeral plan 2 company continuously receive installment until the death of the client . however the fund is refundable but only 85% upon the cancellation where as money received is not refundable in funeral plan 1 . On the both plan, the company ultimately receive providing funeral services in the future . if we co-relate their services with the situation of Arthur Murray, we can see that they first receive the money first but provide service later in the future to its client. That’s why Arthur Murray principle is applicable to RIP Pty Ltd. c) Yes the commissioner or any tax payer have a choice in the method of accounting for tax. There are some cases that can be introduced to answer this question briefly. Carden’s case , the judgment of Dixon J , with whom a majority of the court agreed ,stated it was necessary to use the tax accounting methods that would reveal a â€Å"substantially correct reflex of the taxpayer’s true income â€Å". The court concluded it was appropriate to recognize professional income on a cash basis. Similarly Henderson case concluded that partnership should account on an accrual basis for income years after 30 June 1964. Similarly in Fc of T v Firstenberg 76 AT (4141) case, the court stated that where the taxpayer is a professional Sole practitioner, it is appropriate his income to be consider as being cash basis . Imposing the use of accrual basis on a professional sole practitioner would represent unrealistic and un reasonably burden. We can say that if the company is a Pty Ltd or Partnership , the tax payer derives income on accrual basis and if the tax payer is a sole trader then the income should be derived on cash basis (iii) According to sec 6-5(1)(2) Assessable income include according to ordinary concept and if a person is an Australian resident then taxpayer income includes the ordinary income derived directly or indirectly from all sources whether in or out of Australia during the income year . In funeral Plan 1 as there is no policy of refunding, the amount $ 225,000 will be assessable income if the client dies abroad. Where as in Funeral plan 2, the amount $ 4125 will be assessable for tax purpose as there is no one to claim the refund (iv) According to sec 104-150 ITAA 1997 if a person make a capital gain and deposit is more than the expenditure occurred in connection with the prospective sale or other transaction . People make a capital loss if the deposit is less. According to taxation ruling 97/19 Para 7, we can consider that other CGT provision apply with the effect that a forfeited, deposit is assessable as a capital gain in certain circumstances. The amount $16200 paid by defaulting member is consider as capital gain and should be assessable income under sec 104 -150 of ITAA 1997and TR 97/19 . RIP is not incurring any expenses against the forfeited amount paid by default member. Part B I) in simple language , trading is a buying and selling securities or commodities on a short term basis , hoping to make quick profit The term trading stock is defined in section 70-10 of the 1997 Act to include anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business. Trading stock of a mining business comprises those tangible assets that are held for sale in the ordinary course of that business. Caskets and other accessories are acquired by a company to provide their funeral services . these accessories are trading stock for that company without which they cannot provide their services . the amount of $25000 spend by a company for trading stock which is spend to gain accessible income can be claimed for general deductable under sec8 (1) ITAA 1997 . II) according to sec 44(1) ITAA 1936 , shareholder in a company whether the company is resident or nonresident states that the dividend other than that are paid to the shareholder by a company out of profit derived by it from any source is assessable income . Under sec 207 -5 ITAA 1997 , if a corporate tax entity makes a franked distribution to one of its member then as a general rule –amount equals to the franking credit on the distribution is included in the member’s assessable income and the member is entitled to a tax offset that is equal to the same amount of money . Here the cash dividend paid is $ 21000 which is fully franked which means amount is paid after deducting the tax. Total amount before tax can be calculated by multiplying by 30 and dividing by 70. Mathematically 21000*30/70 =30000. Therefore $ 30000 is the company’s assessable dividend. Sec 82 K2MD, ITAA 1936 (Expenses * no. f days of eligible service period) / total no. of days of eligible service period 57000*122/731 =9513 is deductable amount Sec 26-10 ITAA 1997 , you cannot deduct loss or outgoing for long service leave ,annual leave , sick leave or other leave except accrual leave transfer payment that is made in the income year According to thi s case the tax payer had not incurred a loss or outgoing under sc 51(1) in the income year in respect of its employees accrued long service leave and annual leave entitlement unless it is paid in that income year ( Nilsen Development laboratories Pty Ltd ORS V FC of T 81 ACT 4031; (1981)144 CLR 616 . III) Sec 8-1 1997 Act This section provides that â€Å"You can deduct from your assessable income any loss or outgoing to the extent that (a) It is incurred in gaining or producing assessable income or (b) It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. however you cannot deduct a loss or outgoing to the extent that : (a) It is a loss or outgoing of a capital nature b) It is a loss or outgoing of a private or domestic nature of (c) It is incurred in gaining or producing your exempt income or (d) A provision of this act prevents you from deducting it† A deduction for the capital works under division 43 is based on the amount of construction expenditure, that is, capital expenditure incurred in respect of the construction of those capital works . There are three different types of capital works under sec 43-20 A building or an extension, alteration or improvement to a building Structural improvement or extensio n, alterations or improvement to structural improvement. Capital works being earthworks or extension, alteration or improvement to earthworks if they are constructed as a result of environmental protection activities, can be economically maintained in reasonably good order and condition. AS per above terms and condition, the payment of $250000 of architectural design is a capital work under division 43 so the construction expenditure is deductable under TR 97/25. The taxpayer‘s demolition expenditure is not a capital in nature and therefore is not deductable ie . ec 51(1) of the Act. (Mount Isa Mines Ltd V FC of T 92 ATC 4755;( 1992) 176 CLR 141) Similarly the cost of acquisition of land costing $ 1. 2 m and demolishing expenditure of previous structure amounting $50000 and landscaping costing $ 40000 are not deductable. Sec 40-70(2) ITAA 1997 Calculation of deduction amount of capital expenditure Period of your C E* days used *4%/ 365 sec 43-210 ITAA 1997 The amount $2. 5 m is deductable under the rule. As per the above formula, 2. 5m * 330*4%/ 365 = $90411 is deductable Capital work deduction applies for sealed roads, sealed driveways, sealed car park, bridge, pipelines, retaining walls, fences, concrete or rock dams and sports field. Section 43-20(3)(a) Thus the on-site car park with the amount of $125000 is deductable iv Details | Amount | total| | Assessable income| | | | Profit from last year | | 2450000| | Cash dividend | 21000| | Sec 44 –(1)| imputation| 9000| 30000| Div 207| Total assessable income| | 2480000| | Deduction | | | | Material purchased | 25000| | Sec 70-10| Long service leave | 22000| | Sec 26-10| Rental storage space| 9513| | Sec82 KZMD| Architectural design | 250000| | TR97/25 Para 78| Construction of new premises | 90411| | Sec 43-15| Onsite car parking | 125000| | Sec43-20(3)| Total deduction | | 521924| | Taxable income | | 1958076| | Tax payable 1958076 *30% = 587422 Less tax off set 9000 Total tax payable 578422. 8