In context to this report, the Income Tax Assessment Act (ITAA) 1997 of Australia has been referred for understanding the various cases. The current case has been indicating the measures that need to be taken while assessing the income of a taxpayer and relevant sections and case laws are also been stated for an in-depth indulgence of the facts.
Though there are varied references provided in context to income but there is no specific definition pertaining to it. Section 6-5(1) of ITAA 1997 has thrown some light on assessable income; it states that the assessable income includes ordinary income, which is procured by ordinary concepts (Barkoczy, 2016).
As per section 6-5(2) of ITAA, if one is an Australian resident then the assessable income shall include ordinary income, which is directly or indirectly derived from all sources.
If the income is not yet derived then one is not liable to pay any form of taxes on it. As per the case of Scott v Commissioner of Taxation (1953), the word income is not a term of art and it must be determined on the basis of the ordinary concepts as well as usage of mankind (Charlesworth and Marshall, 2011).
Also, the famous case of Brent V FC provided explicit provisions regarding determination of derived income. According to this case verdict, applying the ordinary and commercial principal of driving income derives income.
The RIP Pty Ltd being a resident private company conducting the business of undertaker/funeral functions and the company earnings are determined by way of fees availed from RIP Finance Pty Ltd. The RIP finance Pty Ltd offers credit to its clients under a scheme of instalment repayment plan. Deluxe funeral arrangements are made only when the client pays an agreed amount. Wherein any amount is unpaid or remains in arrear then the same shall be charged as fees payable under a 30 days invoice or under the instalment repayment plan of RIP Finance Pty Ltd.
Arthur Murray (NSW) Pty Ltd V FCT (1965), (Full High Court of Australia), Authority had given proposition in this case that in order to be an income, a receipt is required to be earned. If an amount is received by way of something in reference to service provided or if it subject to some qualification- the same is not said to be earned until the required event has passed (Lang, 2014).
The principals of Case Arthur Murray if applied to the current company wherein the income is earned through funeral services and not by means of any additional incomes earned during the current year. The case shows that the taxpayer is availing fees on the basis of prepaid payments and no future refunds are made in case if the client does not avail such services in future. The same shall be applicable to clients who are considered as bad debts (Donald, 2011).
There have been two methods specified under the Taxation Ruling of Rule 8 and Rule 9, which are as follows:
Example: In case whereMr X receives two months advance salary; it will be deemed received even if the services are not rendered in regard to such salary.
Example: Mr Z has a business of retailing Mobile handsets. He launches a scheme wherein customers are attracted by his offer to make an advance payment before the launch of a new phone to avail the benefit of 20% discount. Herein as per accrual method though the payment is received before the product launch, still the amount received shall be accounted in the current year for assessing the income of Mr Z.
As per the Section 104-150 of ITAA 1997, referred to forfeiture of deposit CGT event H1. This provision is applicable to that individual or entity who have received any sum of deposit and the same has been forfeited because any future prospective sale or transaction is not made (Saad, 2014).
Mr Y has been willing to sell his property. Before entering into a legal contract of sale, the prospective buyer pays $1000 as a deposit for 1 month. In any unforeseen circumstances if the negotiation cease to occur then in such case deposit of Mr X can be forfeited.
As per section 1A the amount forfeited shall be deducted by following amounts:
Proceeds availed may be also in the form of some property.
The amount is received by RIP Pty Ltd from their client under the funeral plan for any future costs that may occur in context to the funeral. Wherein the client is unable to complete is obligation then the amount deposited is liable to be forfeited by the company. The amount that rests in Easy Plan Funeral is $225000.
According to section 104.150, the company has rights to forfeit such amount, as the obligation is not fulfilled and $225000 shall come under the head of capital gain of RIP Pty Ltd books.
Section 70.10 of 1997 Income Tax Assessment Act defines the trading stock. This section includes anything that is made, produced or bought which is held for manufacture, sale or exchange of the ordinary course of business. In the case of livestock and shares, special issues are considered (Mete, Dick and Moerman, 2010).
Only if livestock is a beast of burden in the primary production business, it is treated as stock. In the case of shares, only when transactions are frequent in number and significant resources are developed, they are included in trading stock.
The range of accessories is held by RIP Pty Ltd. as closing stock, along with 3 types of caskets as religious and secular coins. The company on advanced purchases obtains a considerable amount of discount.
For achieving the business obligation, caskets and accessories are bought and not for selling or exchanging in ordinary business as this will not be included in trading stock. “Ballarat Brewing Co. Ltd v FCT” case law’s conclusion will be applied for proper reflection of how much is spent in buying caskets and accessories (Reynold and Smolenky 2013). Therefore, the amount that is in the accounts book will be after the discount is applied, this will be the net amount for proper reflection.
The amount of $25000 will be shown under the head assets, only if the casket and accessories are shown under the head asset and for the same amount, debtors will also be created for the same amount of an advance against a capital asset (Standard Charts of Accounts 2014).
If they are noted down as expenditure, then the same will be accounted as prepaid expenses.
When paid, ITAA36 dividends are evaluated according to section 44 and the word “paid” which includes credited or distributed according to section 6. If once declared by the company, the dividend payment is not revocable according to section 44. As part of the assessable income, the dividend should be included as part of it, if they received and can’t be cancelled by the company (Jacob and Jacob, 2013). $21000 will be included as a cash dividend, received from RIP Finance Pty Ltd. in assessed income of the company.
Businesses and individuals can claim rental expense as revenue, according to the provisions of Australian taxation law. Although downfall in the value of capital work, in regards to capital expense, can be claimed as a deduction.
On 1st march 2016, $57000 was paid for 2-year rental for storage space and on 28th February 2018, the lease will expire. The amount of $9500 was expensed and in financial accounts, $47500 was capitalised.
$9500 will be allowed as a deduction in the same year by the provisions of the act. As per the downfall of capital expenditure, $47500 cannot be claimed immediately in 2 years.
The Section 83-70 of Income Tax Assessment Act states the provision regarding Long Service leave Account. Here in this section specifies the following:
This section is referred to cases wherein there is involvement of any long service leave payment remaining unused. This section directs payment that is attributed to post 14th August 1993 shall be 100% included in the assessable income of the employee.
RIP Pty Ltd MD had been paid an advance of 3 months i.e, $22000 for Long service leave.
In compliance with the above section, it can be articulated that the amount pertaining to the employee is the payment made in relation to long service leave payment. The entire $22000 shall be a part of the assessable income of the employee. Thus, the treatment done is correct.
Reductions shall be declared under the head of capital work in a reference to the construction cost of the building. It comprises of:
Different deduction rates are specified for the same 2.5% or 4% on the basis of date when work has begun. Division 43 of ITAA has been applicable to this provision.
The board of directors decided to undertake and construct built facility.
In the given situation, a business can attain 4% of allowance in reference to the division 43 ITAA 1997.
It has been seen imperative for organisations to comply with all the norms of ITAA 1997. Non-compliance if any of law can lead to severe penalties and punishments for the company and those responsible for the actions (Mete, Dick and Moerman, 2010). The current study has stipulated all the standard norms and provisions that are in tune with the taxation laws of Australia. An elaborative manner of explanation has been chosen to understand the facts and ascertain the treatment in a well-justified manner. Relevant case laws have cited to broadcast the judgement announced in various situations embedding upon the organization to abide by the laws of taxations.
Books and Journals
Barkoczy, S. (2016). Core tax legislation and study guide. OUP Catalogue.
Barkoczy, S. (2016). Foundations of Taxation Law 2016. OUP Catalogue.
Oats, L.and et.al., (2010). Critical perspectives on taxation. Critical Perspectives on Accounting, 21(7). pp.541-544.
Charlesworth, S. and Marshall, H. (2011). Sacrificing workers? The curious case of salary sacrificing in non-profit community services in Australia.International Journal of Public Sector Management, 24(7). pp.673-683.
Donald, M.S. (2011). What contribution does trust law make to the regulatory scheme shaping superannuation in Australia. Australian Prudential Regulation Authority.
Lang, M., (2014). Introduction to the law of double taxation conventions.LindeVerlag GmbH.
Mete, P., Dick, C. and Moerman, L. (2010). Creating institutional meaning: Accounting and taxation law perspectives of carbon permits. Critical Perspectives on Accounting, 21(7).pp.619-630.
Pinto, D.and et.al., (2011). Australian Taxation Law Select: legislation and commentary. CCH Australia.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109.pp.1069-1075.
Van der Laan, S. and Dean, G. (2010). Corporate groups in Australia: State of play. Australian Accounting Review, 20(2).pp.121-133.
Subdivision 104-H — Special capital receipts. (2016).[Online] Available through. <http://www.iknow.cch.com.au/document/atagUio695860sl24365276/income-tax-assessment-act-1997-section-104-150-forfeiture-of-deposit-cgt-event-h1 >. [Accessed on 14th September 2016].
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