The success of tax professional strategy deals with, how the taxpayers are receiving an upfront prepaid income from any kind of contracts that straddles various tax years based on the generated income. In this paper, a brief discussion on the RIP Pty Ltd's taxation planning has been described. RIP Pty Finance Ltd is a private company which mainly deals with carrying business of funeral director and undertaker. Other assets of RIP Pty Ltd include a fleet of motor vehicles. The company is facing trouble with tax adjustments. While comparing with the case study of Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314, necessary advice has been drawn on tax consulting laws. Based on the current issues in RIP Pty Ltd's, necessary recommendations have been given.
A. Advising RIP Pty Ltd based on case study of Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314
Facts of case study:
The Arthur Murray (NSW) Pty Ltd case is about to find out the tax position from the received income which is not yet earned. The same case is also included in the Gardens case.
Issues in the case study:
Arthur Murray Pty Ltd was offering the dance related tuition services where the interested students are needed to pay in advance manner. The commissioner of income taxation departments needed the taxable income computation on the received income from the tuition and not based on the earned income. It has been complained by the students that the dance lessons are not yet taken; however, the money is received in advance. The commissioner has advised refunding the taken money to all the students who have been paid to Arthur Murray (NSW) Pty Ltd. This, in turn, makes failure to generate income for the company.
Inferences from the case study:
As per the comment of Jacob and Michael (2017, p.3200), in order to make the income assessable, the income needs to be earned and it must not be only received. The Arthur Murray (NSW) Pty Ltd has only received the fees from the students and not at all earning it. The amount paid by the students will only be assessable when the students will take the lessons from the institute.
I. Income generated generally and income generated from funeral services
Holzmann (2016, p.130) has opined that the income derived from generally is equivalent to the income acquired or earned from the active conduct of the business activities and transactions. In case of RIP Pty Ltd, the income derived from the relative activities of funeral services are termed as an ordinary income. It can be stated from the given case study that the income generated through the funeral service are different from the income derived from generally. As per Fry (2017, p.50), the fee received from the funeral services are known as an assessable income. As per Australia Taxation Laws and regulation of the income gained from the funeral services are taxed as per the Income tax Assessment Act 1997 of provisions in section [6-5] contractual basis. RIP Pty Ltd mainly deals as per the provision of the funeral services. This company also earns income from various contractual obligations. The ordinary income of the RIP Pty Ltd mainly comprises of the periodical payments which are used to compensate the basic and ordinary expenses as per the case study of Gardens (Fisher, 2015, p.353).
The generally derived income is that income which is received after delivering the services to its customers or stakeholders in regard to the fulfillment of the requirements (Income Tax Assessment Act 1936 Cth). Based on this act the income derived from the funeral services of various clients’ will be identified as the regular income earned from the business firm (Daniel et al. 2016, p.132). The income is derived generally, than it won't be comparable with the income derived from any kind of funeral services.
II. Arthur Murray principle applies to the treatment of company's accounting amounts in Easy Funeral Plan
The principle can be applied and similar treatment could be given in the Rip limited case. From the case study analysis of Arthur Murray, the drawn principles are applicable for the accounting treatment of companies in the easy funeral plan. The service offered by the company is much efficient in nature and it also requires the pay from the customers before provision of its services. As per the Arthur Murray principle if the company receives some kind of payments in regard to the fulfilment of the purpose related to the service delivery case the earning from the customers is subject to some qualification, then the payment must not get earned unless the event has occurred and accomplished. In order to convert the payments into income, it is utmost important to showcase the earning receipts from the involved activities (Comans et al. 2017, p.324).
It has been observed from the case study of RIP Pty that the company has not received the full payments; henceforth these half delivered payments cannot be included in the company’s income statement. This mechanism, in turn, proves the Authors principles of receipt generation.
In case it can be considered that the RIP Pty Ltd has not received the payments at the time of delivering the funeral services, then the customers can pay it in instalment basis. For instance, it can be stated that there is a facility available while offering services to the customers is mainly dealt with the ‘net 30 days invoice fee payable' and the fee payable from various external insurance contracts under 30 days.
The fee received from the RIP Ltd mainly deals with the credited offers through repayment instalment plan. It is highly recommended to the RIP Pty Ltd not to consider the bill payments as company's income. This is due to the payments are not yet converted into the receipts.
In this case study analysis it can be recommended as not to consider the payments as an income earned by the organization unless and until they are fully paid by the clients. The money needs to be received regularly by the funeral activities. The money required for funeral activities needs to be paid by the clients in a regular manner in instalments. The future funeral plans need to be planned by the person in earlier manner. By the time a person dies, he or she needs to be paid all of the agreed amounts to the RIP Pty Ltd. It can also be stated that none of the received payments will be reported as the assessable income, though the company has already received the money. The taken money will only be accessible when the organization has accomplished the tasks as per the taken money. The company needs to record the received money until they are converted as earned one for the taxation purpose (Chardon et al. 2016, p.321).
B. Forfeited Payments Accounts
As per the taxing ruling act of 1999/91, the forfeited payments are considered as a capital receipt. This ruling act is mainly relevant to those business firms which takes the money at present and provides the services in future. In case the company has a failure to deliver the service at the time of need instead of refunding the amount to the client, the payments are forfeited. These amounts have been recorded in the companies forfeited payments accounts. Many organizations in Australia are makers of future service contracts. This, in turn, helps the organization to demand the payment in advance. This kind of activities is not included in the clauses of the forfeiture. Anaf et al. (2018, p.135) stated that in case the service is not delivered to the targeted client, then the receipts generated from such payments are considered as the capital receipts.
As per the case study of the RIP Pty Ltd, it has been observed that the customers who have not availed the funeral services and this have been transferred to the forfeiture accounts. The balance of $16200 has been reflected at the end of the 30th June on behalf of the forfeiture amount. RIP Pty Ltd received the payments in two major ways. In a first way, it has directly received the payments for making the funeral activities whereas in another way it introduced the plan named as ‘Easy funeral plan'. As per the Easy funeral plan, the clients are needed to pay the amount in advance manner and it may be in instalments or any kind of investments.
The generated amount of $16200 is considered as the forfeited amount and in taxation; terminology can be stated as the capital receipts. Ali et al. (2017, p.20) have stated that the capital receipts are different from the revenue receipts. The receipts generated after forfeiting is termed as the capital receipts and it also is noted that these amounts cannot be considered as the revenue receipts.
It has been observed from the case study of RIP Pty Ltd that the company has paid off amount $25000 in the year of 2016, June. This amount is mainly paid for procuring the other accessories in advances as well trading stocks of cassettes. The paid amount is mainly considered as advanced payment for the rest of the vendors. The amount of $25000 accounted for current assets under the prepaid expenses. The amount paid to the vendors is considered as the current assets. This amount has been deducted from the consumable accounts in case the goods are received in physical form. Until the goods are received from the vendors, the company’s assets will be kept aside for tax computation purpose. The delivered consumable amounts are treated as the accounted profit and loss component.
B. The fully franked cash dividend
It has been observed from the case study of RIP Pty Ltd that the derived cash dividend is of $21000 which is received from the finance department. This dividend income is mainly considered for tax purpose. The dividend amount already had been paid as a franked dividend. It states that the dividend amount has been paid after the net tax on the profit. Jacob and Michael (2017, p.210) stated that in order to avoid the double taxation it is not mandatorily required to levy on the company's revenue. The received dividend of $21000 is termed as a net profit of the company and also assessable income.
Double taxation from the business end can also be avoided while following the Australian taxation system. ‘Imputation system’ is the phenomenon which runs under the Australian Taxation system. This system allows the shareholders to take back the paid tax to the government. As per the comment of Kreiser et al. (2015, p.125), the imputation tax system will allow distributing the dividends with the generated amount of franked credits as part of the paid tax on the earnings.
C. Rental storage space
In March 1st, 2016, the company has paid an amount of $57000 for two years rental purpose. It also expected that the lease is going to expire on 28 February 2018. In this scenario, the capitalized amount is of $47500 and expenses incurred are of $9500. This amount needs to be considered for display in the profit and loss statements. This will help the organization to show the amount of the tax purpose. The expenses incurred while paying for the rental and inventory storage are also considered as a prepaid expense (Moisescu, 2018, p.290). These prepared expenses are featured in the balance sheets as well in the current assets. The amount incurred will not be displayed in the financial statements of the financial year of 2016-2017 as it will reflect on the financial year of 2017-2018 financial statements.
D. A paid amount of long service leaves
As per the Income Tax payment rules of Australia, long service leaves are needed to be paid to the employees after they had served the service tenure of 15 years (Long et al. 2016, p.94). This regulation is mainly based on the Income-tax assessment act, 1997 (ITAA-1997). From the case study of the RIP Pty Ltd, it can be stated that the company has paid the amount of $22000 on 1st June of 2016 in advance. The company has paid the payment based on the provision of long service leave account. As the company has paid based on following the legislation, it also involved in the subsequent month's tax creation purpose.
E. Spending on the accommodation
From the case study, the company has spent the amount in existing accommodation facilities. The company has decided to construct the new buildings over the existing building structure. In the year of 2013, the company has started architectural designs over the brought land. In the period of 2013-2016, the company has undergone following expenditure which has been listed in a tabular manner.
As per the Australian income Tax law, based on the capital expenses allowances of deduction will be provided. The incurred expenditure can be ratified as the section of 43-20 of IT act and also known as ITAA36. Based on the different expenditures incurred from the construction activities, the deduction amount has been allowed and ratified. In the table list of ideas can be drawn based on the deduction act. The RIP Pty Ltd can be able to claim the deduction amount based on the act of 1979. This construction act allows the ratified tax payment after the construction of the buildings since 1979. As per the comment of Latimer (2017, p.10), deduction expenses from the capital works are mainly based on the expense amount incurred during the construction process. In contrast to this another law also applicable during the construction works and no refund amount can be claimed by the end of the company in the following scenario.
If the company conducts any kind of earthworks, structural improvement or any kind of capital expenditure has been invested on the land for landscaping activities than clearance of such expenses are not allowed from eth end of the acts. The act applicable in this scenario is Taxation ruling 97/25 of ITAA 97.
Only below mentioned activities, related expenditures are needed to be borne by the company to avail deductions in the Australian taxation system.
In this brief study of taxation law, various kinds of tax adjustments have been learned. The RIP Pty Ltd needs to be following the tax deduction acts and its policies to avail the benefit. The given situation is compared with the Arthurs Murray's case study, which provided supportive information in relation to the taxation issues of the RIP Ltd. This study also distinguished between the income earned from generally activities and from the basic activities involved in the organisation.
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