Corporate Accounting in Australia - Assignment Example

Running Head: TAX ASSIGNMENT Tax Assignment Name Tutor Date Tax Assignment Part A (i) Payments which have been received for services that are to be rendered in the future do not have to be recognized until earned: Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 3141 (Julie, 2007)2. The taxpayer company provided dancing lessons for payment. Customers paid for dancing lessons in advance, and a discount was given for advance payment. Legally, these payments are non-refundable; though in practice sometimes refunds may be given. The taxpayer company deposited the money in an unearned deposits-Untaught Lessons account, and did not bring them to account until the lessons paid for had been taught. The tax commissioner assessment was based on the fact that advance payment was made, and brought to account. The following issues were raised in the case. The payments had not accrued even though they had been paid to the taxpayer. This was investigated by finding out whether the transaction was sufficient by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income (97/23, 1953)3 In a case like the present the circumstances of the receipt do not prevent the amount received from becoming immediately the beneficial property of the company; for the fact that it has been paid in advance is not enough to affect it with any trust or charge, or to place any legal impediment in the way of the recipient’s dealing with it as he will. Nevertheless, the recipient should treat each amount of fees received but not yet earned as subject to a contingency that the whole or some part of it may have in effect to be paid back, even if only as damages, should the agreed quid pro quo not be rendered in due course (2004/193, 2004)4. However, the possibility of making that payment back depends on the characteristics of the receipt itself. In conclusion, it would be unrealistic, while the possibility remains that the amount received has quality of income derived by the company, as it agrees with the accountancy and commercial principles in the community. Part A (ii) (a). RIP Pty Ltd, derived income generally in Funeral Plan No 1, because the services were prepaid and the payment was both contractual and in practice non-refundable. On the other hand, RIP Pty Ltd, derived income in Funeral Plan No 1, because the income is recognized on an accruals basis is ordinarily derived when the taxpayer has done everything necessary to become entitled to payment, regardless of when payment is due but provided it is non-contingent. (b). Yes. In Funeral Plan No 1, the contractual principles and non-refundable of the payment, is referred in Arthur Murray’s case where the amount of fees received but not yet earned is subject to a contingency that the whole or some part of it may have in effect to be paid back, even if only as damages, should the agreed quid pro quo (2004/193, 2004)5 not be rendered in due course. (c). Yes. For this case the payment had accrued and so the commissioner or the tax payer have to choose the accruals basis of accounting as the appropriate method of accounting for the income in RIP Pty Ltd company business (Stephen, Cameron, John, & Neil, 2010)6. Part A (iii) The next of kin will notify the RIP Pty Ltd by writing to cancel the contract. The amount to be refunded will be determined by a formula that factors in the client’s age, amount paid and period of membership. On average, 85% of the amount paid will be refunded and balance shall be described as administrative fees. Administrative fees amounts to taxable income. Part A (iv) The forfeited amount by clients will be treated as taxable income. Part B (i). The caskets and accessories would be treated as trading stock for tax purposes because, according to (Stephen, Cameron, John, & Neil, 2010)7 in FC of TV Suttons Motors (Chullora) Wholesale Pty Ltd 85 ATC 4398; (1985) 157 CLR 277 case8, ‘anything produced, manufactured, acquired or purchased for purposes of manufacture, sale or exchange and also includes livestock.’ Also, anything which is attributed to RIP Pty Ltd legal and commercial people for accounting and other purposes is regarded as trading stock and is subject to taxation (Stephen, Cameron, John, & Neil, 2010)9. The amount of $ 25, 000 paid in advance does not constitute taxable income or expense. Full High Court: Barwick CJ, Kitto & Taylor JJ: CLR 32010 in (Stephen, Cameron, John, & Neil, 2010)11 states that according to accounting and commercial principles, in the case of business either selling goods or supplying services, amounts received or paid in advance of the goods being delivered or services being supplied are not regarded as income. The discounts for advance purchase were capital in nature and therefore not liable to income tax (Court of Appeal: Lord Green MR, Mackinnon and Dn Parcq LJJ)12. (ii). In (i), cash dividend of $ 21, 000 received from Ripper Finance Pty Ltd forms a taxable income. This is because there is an increase in the company’s net earnings, which are subject to tax. If the dividends are in the form of stock, the dividend is generally taxable. However, stock dividend is taxable when, 1). One elect to either take stock or cash; 2). There are different classes of common stock, one class receiving cash dividends and another class receiving stock: or 3). The dividend is of convertible preferred stock (Lasser, 2007)13. Therefore, this amount of $ 21, 000 will be adjusted by deducting income tax. In (iii), company’s financial accounts amount of $ 9, 500 which was expensed is subject to tax during the year it was paid. However, deductions in capitalized amount should be made in 2013 after the expiry of the rental contract. This is the time when the company is said to have earned taxable income. In (iv), three months long service leave paid in advance, this money is deductible from taxable income. iii). The company should include calculations of any allowable deductions in arriving at taxable income. The initial 250, 000 paid for preliminary architectural design is not taxable, because amount paid for initial research and development is not taxed (Ron, Graeme, & Cecilia, 2007)14. Also, 50, 000 paid for demolition, and 40, 000 for landscaping will not be taxed. These moneys will be deducted from the total income to derive the taxable income. iv). The company’s taxable income are determined by; subtracting non-taxable income, adding taxable income or revenue received in advance, and expenses for accounting purposes (such as doubting debts). Also, subtraction of allowable deductions for tax purposes such as bad debts written off (Ron, Graeme, & Cecilia, 2007)15. Tax Treatment Schedule Credit Debit Building cost 2500000 Land acquired 1250000 Architectural design 250000 Demolition cost 50000 Car park 125000 Landscaping 40000 Leave 22000 Rent 57000 Dividend 21000 Prepaid amount 25000 Total amount 3921000 419000 Therefore, table income is derived by subtracting total debits from total credits; Total Credit 3921000 Total Debit 419000 Taxable Income 3502000 Taxable income is obtained by making standard deductions or itemized deductions, deductions for personal exemptions for dependants which are legally allowed. Current tax liability is calculated by multiplication of taxable income with tax rate. Taxable income 350200 Tax rate (30%) × 30 Tax liability 105060 Tax liability refers to the total amount of the tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event. It depends on the amount of the taxable income and the types of incomes the company is having. In a situation where one has a net capital gain or qualified dividends, tax is normally calculated on the qualified dividends and capital gain. Taxable events include annual income, the sale of an asset, a fiscal year end or an inheritance. It is usually a legal claim (Investopedia News and Articles, 2011)16. References Cases Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 Court of Appeal: Lord Green MR, Mackinnon and Dn Parcq LJJ FC of TV Suttons Motors (Chullora) Wholesale Pty Ltd 85 ATC 4398; (1985) 157 CLR 277 case Full High Court: Barwick CJ, Kitto & Taylor JJ: CLR 320 Texts 2004/193, A. I. (2004). Australian Government, Taxation Legal Database. Retrieved September 01, 2011, from ATO Interpretative Decision: http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2004193/00001 97/23, T. R. (1953). Australian Government Taxation office. Retrieved September 01, 2011, from Australian Legal Database: http://law.ato.gov.au/atolaw/view.htm?locid='FOI/1013884P'&PiT=99991231235958 Julie, C. (2007). Concise Income Tax; 4th Edition. Leichhardt, NSW: The Federation Press. Ron, D., Graeme, W., & Cecilia, L. (2007). Corporate Accounting in Australia. Sydney: University of NSW Press Ltd. Stephen, B., Cameron, R., John, B., & Neil, B. (2010). Autsralian Tax Casebook. Australia: McPherson’s Printing Group. Investopedia News and Articles. (2011). Retrieved September 15, 2011, from Tax Liability: http://www.investopedia.com/terms/t/taxliability.asp#axzz1Y1gj8wax Read More