TAXATION LAW

Introduction

In Australia, tax provision is normally referred to either gross income derived either directly or indirectly from all income sources whether in or out of the Australia. The law states that the tax derivation need not necessarily involve an actual receipt of cash. Terra & Wattèl. (2005). states that in Australia, derived has similar meaning as arising or accruing and does not also means received even though it would means process or mode of derivation. Normally income is derived under the accruals basis accounting when it is earned.

The law provides that a constructed contract allow room for customers to withhold a set percentage from any progress to act as security for the contractor delivering the free of defects or omissions and the same law applies to the contractor and sub-contractor when they engage in the project (Akdogan & Ozturk, 2015).

  1. Fact of the case

In the case of Arthur Murrays (NS) Pty Ltd vs. FCT (1965) 114 CLR 3141the fact arise that the taxpayer sold out for prepaid dancing lessons with some prepaid fees attributable in part to lessons which were to be provided in future dates. As income for the year. From the perspective of the commissioners, they evaluated the tax on the premise that prepaid expenses involves salary which were to be inferred by the citizen when he or she got it. In reacting to the reality of this case, high court presumed that sum got in appreciation of administrations to be given in future years are not ordinarily earned until the future contract or commitment for which they are paid are completely released (Terra & Wattèl, 2005). That is accrual basis of accounting as opposed to cash basis when it comes to future payments.

Accrual basis of accounting is where expenses are being matched with revenue at any given time (Lee, 2014). Cash basis of accounting is where expenses and revenue are not matched in any given period of time.

In reference to Arthur Murray’s case, it is closely related to the situation of the RIP Pty limited as the firm gives out funeral services that is only discharged after the death of client. For this case, the company received payment in advance in order to provide services in the future date. Therefore, this is a perfect decided case in to apply in the case study.

  1. On the advice as to when the income is derived, professional individuals like engineers, accountants, doctors and other small business can access their income in terms of cash basis in circumstances when the turnover is up to $ 2 million per anum (Richardson, Taylor & Lanis, 2013). As per section 6 of the ITAA 97. The provisions for ordinary income and statutory income are normally given in the sub section 6 -5 and also subsection 6-10 in the income tax assessment Act of 19772. According to the act, income is derived in circumstances upon realizing enforceable debt for the taxpayer who is doing the business of supplying goods. On account of expert expenses for administrations, they are determined after emerging of recoverable sums amid course conveying business. However in conditions the sum is fundamentally a prize for individual administrations, then the charges are determined upon its gathering or when it is really receipted (Terra & Wattèl, 2005).

The prepayments for the goods and services are normally assessed in situations at the point when that administrations or merchandise are given. The profit, compensations and wages are generally determined when they are paid and got separately3. In comparable way, intrigue are ordinarily inferred upon it receipt and in circumstances where the citizen is in the matter of loaning business then accumulation premise is the best strategy to be utilized. Furthermore, all exchanging livelihoods is gotten from the purpose of offer. These are very important basic ideas which the company must have at their fingertips before they can start deducting any income derived from the services they offer to people be it funeral services or any other services(Terra & Wattèl, 2005).

In the case of Arthur Murrays (NS) Pty Ltd vs. FCT (1965) 114 CLR 3144, income is derived when the services is provided and this applies to the RIP company with the same principle, RIP company limited will derive their income only when the services is provided to its clients and this will be the basic principle to be applied.

  1. Whether Arthur Murray principle apply in this case, Yes it does to the company accounting principles and treatments of the funeral amounts number 1 and 2. In the case of number 1 funeral services, it is a fixed price contract and in case it is agreed upon the amount is paid, the client is guaranteed deluxe funeral arrangement in this case. In the case of plan 2, the company continuously receive payments in instalments until the death of the client. Nevertheless, the fund is refundable but only 85% upon the cancellation of the contract whereas the money received under the first plan is not refundable (BAHADIR & TOLGA, 2013).

On the two plans, the company ultimately receive money for providing funeral services in the future dates and if this is related with the case of Arthur Murray case, he receive the money first and provide services later and that explain why Arthur Murray principle is very much applicable in the RIP Pty Ltd5.

  1. On Commissioner or any taxpayer have a choice in the method of accounting for tax, yes they have a choice in the method of accounting for the tax (Smith & Richardson, 1999). There are many cases that can be used to help explain this like the case of Carden where the judgment was delivered by Dixon J, with whom a majority of the court cases bases their arguments on. It is very essential to use the tax accounting methods that would help reveal a substantial taxpayers activity and true income. In this case, the court concluded that it was more than appropriate to recognize professional income on the cash basis. This is also seen in Henderson case where it concluded that partnership should account on an accrual basis for income year ended 30th June 1964. Other cases include Fc of T v Firstenberg 76 AT (4141) among others. It is quite unrealistic to impose accrual accounting basis on professionals and this can present unnecessary burden to taxpayer.

  1. On the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv), the company should n tax it as there is actual income which is realized by the company in this case hence it a forfeited payments belonging to the company. That is to say no expense attached to it but income to the company (Blissenden, 2015).

Section 70-10 of the Tax Assessment Act (1997) defines trading stock as anything produced or acquired which is held or acquired that is held for the purpose of manufacturer, sale or exchange in the ordinary course of business6. Using this definition, we can state that an item qualified to be trading stock if and only if it is capable of exchange or sale as part of business or if it is a good, property or services in the process of the production (Terra & Wattèl, 2005). Therefore in the case of RIP Pty limited, caskets and accessories are trading stock since they are held up for the purpose of sale and exchange7. Since the company is using the cash basis of accounting as opposed to the accrual basis, the $25,000 advance payments should be tax in this case as it is an expense that had been incurred by the company and in the process get huge discount back which is an income for the company (Terra & Wattèl, 2005).

There are three simple rules to be followed here:-

  • A deduction is allowed for the cost of purchase trading stock

  • If closing stock exceeds opening stock, the difference is assessable and

  • If opening stock exceeds closing stock, the difference is deductible

Hence in our case of RIP Pty limited, the deduction will be allowed for the cost of purchase trading stock of caskets and accessories (Terra & Wattèl, 2005). And in similar case Norfolk & Western R. Co. v. Liepelt8,

Item (ii) is dividend received from a subsidiary of RIP limited. The total amount of dividend received is $ 21,000. The tax Act allow exemption of up to $ 5000, meaning that anything or dividend above $5,000 will be subjected to tax ($21,000- $5000) = $15,000. This will be subjected to tax deduction (Blissenden, 2015).

Item (iii) involves capital gain in the process of paying advance in March, $57,000 was paid for 2 years and the tax concept used by the company is cash basis, meaning this amount is deductible for tax purposes since it is an expense incurred by the company and only $ 9500 will be assessable in this case. The remaining balance of $47,500 is deductible expense in this case and only $5,000 will be exempted from tax. The tax approach is similar to that of dividend as per the new Act (Terra & Wattèl, 2005). Item (IV) is service expense of $22,000, this is a typical expense which is incurred by the company for leave purposes and it is an expense account9. It means that this amount is not assessable for tax purposes but exempted. This is in the case of Prices vs. equity in international climate policy10

Items here include:-

  • Preliminary architectural design $ 250,000

  • $ 1.25 million land acquired

  • $ 50,000 for demolition

  • $ 2.5 million for construction

  • Car parking construction $ 125,000

  • Landscaping $ 40,000

Among these expenditure deduction include:-

  • Preliminary architectural design $ 250,000

  • $ 1.25 million land acquired

  • $ 2.5 million for construction

  • Car parking construction $ 125,000

These cost are capitalized since they are part of the initial investment used in expanding the business hence form part and parcel of capital expenditure that is why they are deductible expenses11.

Reference

Akdogan, N., & Ozturk, C. (2015). A Country Specific Approach To IFRS Accounting Policy Choice In The European, Australian And Turkish Context. Emerging Markets Journal, 5(1), 60.

BAHADIR, O., & TOLGA, B. (2013). Accounting Policy Options Under IFRS: Evidence from Turkey. Accounting and Management Information Systems, 12(3), 388.

Blissenden, M. (2015). The income tax and CGT consequences of property disposals. Taxation in Australia, 49(7), 385.

Bretschger, L., & Mollet, J. C. (2015). Prices vs. equity in international climate policy: A broad perspective. Equity in International Climate Policy: A Broad Perspective (February 6, 2015).

Lee, Y. T. (2014). Australian taxation issues for Chinese investors investing in Australian real property. Tax Specialist, 17(3), 102.

Richardson, G., Taylor, G., & Lanis, R. (2013). The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), 68-88.

Richardson, G., Taylor, G., & Lanis, R. (2016). Women on the Board of Directors and Corporate Tax Aggressiveness in Australia: An Empirical Analysis. Accounting Research Journal, 29(3).

Smith, D., & Richardson, G. (1999). The readability of Australia’s taxation laws and supplementary materials: an empirical investigation. Fiscal Studies, 20(3), 321-349.

Terra, B. J., & Wattèl, P. J. (2005). European tax law. Kluwer law international. Taylor, G., &

Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.

1
Cotton, A. TABLE OF CASES A. NZLR, 186, 293.

2
Blissenden, M. (2015). The income tax and CGT consequences of property disposals. Taxation in Australia, 49(7), 385.

3
BAHADIR, O., & TOLGA, B. (2013). Accounting Policy Options Under IFRS: Evidence from Turkey. Accounting and Management Information Systems, 12(3), 388.

4
Cotton, A. TABLE OF CASES A. NZLR, 186, 293.

5
Richardson, G., Taylor, G., & Lanis, R. (2016). Women on the Board of Directors and Corporate Tax Aggressiveness in Australia: An Empirical Analysis. Accounting Research Journal, 29(3).

6
Smith, D., & Richardson, G. (1999). The readability of Australia’s taxation laws and supplementary materials: an empirical investigation. Fiscal Studies, 20(3), 321-349.

7
Lee, Y. T. (2014). Australian taxation issues for Chinese investors investing in Australian real property. Tax Specialist, 17(3), 102.

8
Norfolk & Western R. Co. v. Liepelt, 444 U.S. 490, 100 S. Ct. 755, 62 L. Ed. 2d 689 (1980).

9
Akdogan, N., & Ozturk, C. (2015). A Country Specific Approach To IFRS Accounting Policy Choice In The European, Australian And Turkish Context. Emerging Markets Journal, 5(1), 60.

10
Bretschger, L., & Mollet, J. C. (2015). Prices vs. equity in international climate policy: A broad perspective. Equity in International Climate Policy: A Broad Perspective (February 6, 2015).

11
Taylor, G., & Richardson, G. (2013). The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), 12-25.