HI6028 -TAXATION LAW
[A CRITICAL APPRAISAL ON THE RIP PTY LTD’S INCOME STATEMENT]
This assignment examines the income segregation of an organization to recognize the revenue as taxable or nontaxable. Taxation law is a charge by the government on the income of an individual or an organisation. A tax is not a voluntary payment but an endorsed amount by the government authority on the individual or company bases of statutory law.
In Australia the federal government of the taxable income of an individual or company levies the income tax. The income tax commissioner decides on the source of revenue generated and accordingly maps the taxable and non-taxable income based on the statutory mandates.
Income tax assessment act 1936 and income tax assessment act 1997 are the two legislative mandates based on which the income is assessed as taxable or non-taxable (Warner, 2016). However, there are certain exemptions on the different types of income.
Few income sources are exempted as non-taxable. The assignment provides a case study of two organizations, which had to face discrepancies while determining their income sources. Arthur Murray dance school and RIP pvt ltd are the organizations whose cases are equivalent to each other and the conclusions drawn are based on the judgment of the first case.
This assignment highlight on two case studies juxtaposed together to have a comprehended understanding of the taxation determination. RIP pvt ltd is a resident private company that provides services of a funeral director. It has facilities of an assembly, a chapel and professional rooms and a fleet of motor vehicles.
They even have facilities to provide to the clients who die abroad. They earn their income by providing funeral services within the country as well as abroad. However, some of the funeral costs are paid to them by Travel Accident Commission and other for general life insurance plans. There is a facility of services being provided on a 30 days credit period limit.
There Easy funeral plan ensures deluxe funeral arrangement and the money is paid in advance. The money taken is kept in the suspense account till the service is provided. However this amount is non-refundable. Therefore, it obvious that RIP ltd has several sources on income some are paid in advance while others are paid after the services are offered. The discrepancy arises on determining the taxable part of the income.
The company needs to get a power governance regarding the income tax law determination on the aggregate earning of the company. This tax determination will be conducted based on the Australian income tax acts. In this regard the Arthur Murray dance school case has been referred to arrive at a clear picture. The reference of Arthur Murray case is mentioned below.
Facts: Arthur Murray is a renowned dance studio in Australia with a huge number of students. Once a student enrolls for a dancing session the fees needs to be paid in advance. Thus, advance payment is kept in the suspense account until the actual session starts and the money is shifted from the suspense account to the revenue account.
There is no official system of refunding money in case of any misses. However, refunds are given to the students unofficially. In case any student who had paid money in advance but did not attend the dancing sessions got their deposited money back.
This Was done secretly and without any legal or official allowance. At the time of fixing up of the yearly fiscal plan the income tax authorities had difficulty in determining the taxable and nontaxable income part. This was creating confusion and problems arise while calculating the income tax on their aggregate income and net profit of the company (Hutchinson, 2014).
Issue: the issues were with the taxpayer whether they had received the money in the year in which the fees were paid in the year in which the tuition was offered. The income tax department was unable to determine this prepaid income part, whether to charge tax on it or not.
The issue raised on recognizing the prepaid tuition fees whether it should be calculated on fiscal plan of the year when the tuition was offered or in the fiscal year when the prepaid amount was received.
Observation: it was observed that no income had been derived until the services were offered. After perusing the books of accounts and standardized accounting agendas, the amount received as prepaid shall be treated as advance payment until the services have been offered to the students.
The prepaid amount had been finally construed as advance payment however; the court needs to determine the nature of the advance payment in context of the total revenue generated for the company.
Court jurisdiction: the major objective of the court is to determine the gains have come home to the taxpayer that is Arthur Murray dance studio who is the taxpayer here. The advance amount has not only been received by the taxpayer but has come home to the taxpayer.
According to the court verdict jurisdiction although the money was received in advance but it did not detriment the recipient while dealing with it. It was rather a matter of good business sense that the money received in advance shall be preserved for any kind of insurgency (Warner, 2016).
It was also witnessed that some if the amount needed to be paid back in case of damages. The possibility was the intrinsic characteristic of the receipts. While the possibility of the receipt remained, however the amount received could not have been seen as having equality of income.
Further, the court stated that in accordance with the accountancy and commercial practices, the amount received in advance of any goods being sold or nay services rendered shall not be added into the credit revenue of the company until the service takes places or the goods sold. This amount shall be submitted in the suspense account and only white services are offered it will be transferred to the revenue account.
The commissioner takes the view (MTG 9-090) that the Arthur Murray directive will only apply in case of any advance payments, which should be transferred to the suspense account until the time comes when the services are rendered. This amount can be preserved for future contingency purpose.
Theatre this reserved amount should be considered as unearned income of the taxpayer and should not be treated as communal income until the amount is received and the services are offered. A balance day adjustment should be made on the gross revenue account of the company with the aim of removing the gross revenue from unearned income to infer the actual profit and loss of the company.
As per the contract specifications, the receiver of the advance payment can exercise the process of refund in mentioned in the contract and not on any company goodwill sale.
The recipient of the advance payment is liable to pay damages in case if he fails to perform the contract if the services and goods are not delivered.
This case history illustrates that the income received in advance prior to the services rendered shall be considered unearned and should be kept in the ensure account of the company. However, this amount can be transferred to the income account once the services are rendered (Barkoczy, 2016). The income received in advance by the taxpayer is preserved in the suspense account for any kind of emergency purpose and that it should not be included in the taxable part.
A further analysis is made on the similarity between the Arthur Murray case and the RIP company case. Both companies have the facility of advance payments therefore the determination of the nature advance payment is confusing decision for income tax professionals. The income tax commissioner decides on the RIP case based on the legal jurisdiction of the Arthur Murray case.
Since RIP private ltd is mortician organization, therefore majority of their income comes from providing mortuary services prior to cremation and burial of the corpses. Their income is received from insurance companies mainly Transport Accident company and general life insurance companies.
These insurance companies provide services to the demised on funeral on a 30 days credit system. The major portion of the income comes from these recoveries and 30 days credit system payments. He ancillary part of the income is received from RIP finance pvt ltd as the fees are received in an installment repayment plan basis.
They have a special program known as the easy funeral plan, which provides deluxe funeral arrangements, and the money is paid in advance. Here they significant of the Arthur Murray case are drawn. Arthur Murray also received money in advance prior to the services rendered so does RIP ltd though their easy funeral plan.
Thus, it is difficult to determine the nature of this advance payment. Therefore, of the case goes by the Arthur Murray principle then the advance payment should be considered as unearned income and should be submitted in the suspense account till the services are rendered. RIP ltd is receiving money in anticipation of the services to be rendered in future therefore; it has a huge similarity with Arthur Murray dance studio.
Hence, the amount in both cases should be construed as unearned and not incorporated in the revenue account till the services are rendered. The amount should be treated as taxable in the fiscal year when the services are factually offered (Edge, 2017). The amount should be included in the fiscal year calculation when the actual execution of the services takes place.
Therefore, the amount received by any organization for any kind of services to be offered in future, the consideration of such income in respect of the receipts should be treated as unearned. The income tax commissioner will have to accept such advance payment receipts as unearned and should include them as liability on the balance sheet of the company.
The taxpayer also needs to include the amount in the liability part of the balance sheet of the company. Therefore the RIP lts case draws utter similarity with the Arthur Murray dance school case where the advance money is to be considered unearned and a liability in the balance sheet of the company.
As per the calculations of 30thh June RIP has found that, they have a number of defaulting members who have stopped paying their scheduled payments and even failed to pay the arrears. The amount of $16,200 is gathered from unpaid services who subscribed or the easy funeral plan and failed to make payments in a regular basis.
This amount is being deposited in the Forfeited payments account. This amount should be treated as an outstanding amount and reserved in the asset part of the balance sheet of the company. Therefore, this should not be considered as taxable income and no tax shall be levied on it. This amount is further saved as contingency fund.
An amount of $25,000 was paid by RIP ltd in June 2016 for attaining trade stocks and other accessories in advance to get materials in august 2016. This amount should be treated as current assets under the account head of prepaid expenses.
Since the amount has been paid in advance for procuring trading stocks, therefore initially it will fall under the current assets and once the goods are delivered the amount will transfer into the consumable account.
For the tax composition, this amount shall be considered in current assets prior to august 2016. Once the goods are delivered, the amount will be transformed into the consumable account and after the acquisition of the stocks (Basu, 2016).
The amount of $21,000 was received by RIP finance limited as franked cash dividend. This amount is considered in the taxable income part of the company’s aggregate income.
Since the dividend has been paid from RIP it is anticipated that the dividend has been paid after tax being imposed on profit therefore this amount will stand non taxable to avoid double taxation.
An amount of $57,000 was paid by RIP ltd on 1st March for a two years rental lease. This amount is considered for the fiscal years 2016-17 and 2017-18. Out of the total amount $9,500 was paid as the rent and this amount is incorporated in the fiscal sheet of 2016-17.
This amount is as expenditure in the profit and loss statement of 2016-17. The rest $47,000 is paid in advance so it will not show up in the fiscal balance sheet for the year 2016-17 nad will be included in the prepaid expenses account.
According to the income tax act of 1997 long service leave payment is made to an employee for a bonafide service of more than 15 years. RIP paid their managing director an amount of $22,000 in advance as a long service leave.
The amount was debited in the provision of long service leave account. Since the money is paid as per the company scheme therefore is labeled as a expense of the company and shall be treated as an expense for the tax purpose.
RIP took the decision of building a fresh new facility by destroying the existing structure, the decision had been taken by the company in the year 2013. Once the decision was taken instantly, the company had allocated the architect for crafting the architectural design of the new structure.
Later on decision was taken in acquisition of land. According to s 43-20 of income tax act of Australia, ITAA36 there is an allowance in the deduction of capital expenses for construction. The subtraction is calculated in terms of different norms. A table is shown below that displays the deduction in the construction expenses after 1979.
|Year of Action||Project||Cost||Deduction % age||Duration|
|2013||Designing – Architectural||$2,50,000.00||nil|
|2014||Cost of Land||1.25 million||nil|
|2014||Demolition of existing structure||$50,000.00||4%||25 years|
|2014||construction of new premises||2.5 million||4%||25 years|
|2015||Car Parking construction||$1,25,000.00||4%||25 years|
Deduction in construction costs
This assignment provides an insight into the understanding of taxation law and its several aspects in context to situations. It clarifies the different parts of taxable and nontaxable income with help of two case studies.
The Arthur Murray case and the RIP case have been studied simultaneously with end-to-end details on the taxation part. A table is attached in the assignment to give a clearer picture of deductions levied on construction costs as per the Australian income tax rule.
Basu, S. (2016). Global perspectives on e-commerce taxation law. Routledge.
Edge, P. W. (2017). Religion and law: An introduction. Routled
Barkoczy, S. (2016). Core tax legislation and study guide. OUP Catalogue.
Warner, D. M. (2016). Dancing Around Contracts and Business Ethics: Lessons from Arthur
Murray. Jeffrey S. Moorad Sports LJ, 23, 109.
Hutchinson, S. (2014). Dancing in place: An introduction. Salsa World: A Global Dance in
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Warner, D. M. (2016). Dancing Around Contracts and Business Ethics: Lessons from Arthur
Murray. Jeffrey S. Moorad Sports LJ, 23, 109.