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This is a solution of taxation law assignment help in which we discuss the case of Paladin Pty Ltd, Treatment of the points for the tax purposes, Tax deductions and Calculation of the Paladin’s tax liability.
Question1: Description of the facts, issues and conclusions in the Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314 case.
The High Court of the Australia has explained the meaning of the “Derived income” in the famous case law of Arthur Murray. The term “derived income” includes the total income of the Assessed person derived from the various sources whether direct or indirect. The resident of the Australia is liable to pay tax on the total assessed income of the assessee as per the rules of the Income Tax Assessment Act 1936 – 1965.
Facts of the case: The Arthur Murray (NSW) Pty Ltd is a private company which is engaged in the business of the providing dancing classes in Sydney and Melbourne. The company provides lessons for 5, 10, or 15 hours which can be spreaded over a period of 1 year. The total number of lessons to be provided is 1200. The fees for the dancing lessons can be taken from the students either in lump-sum amount or in the instalments, which can be deposited over the period of providing lessons to them (Application by Jemena Gas Networks ltd, 2011 ). Arthur Murray (NSW) Pty Ltd has followed the policy of recording the transactions on accrual basis. The assesseeor the tax payer has recorded his income on accrual basis, but the advance payments for the services to be provided in future are recorded in a separate account known as “Unearned Deposits for the untaught dancing lessons account”. This way, at the end of every another year, the Arthur Murray (NSW) Pty Ltd has collected a huge amount in the Unearned Deposits for the untaught dancing lessons account (Commissioner of Taxation v Ashwick, 2011). The Commissioner of Tax has issued the assessments claiming that the above mentioned amount should be included in the assessable income of the taxpayer. Then the matter was referred to the Board for reviewing the facts.It also gave the same opinion as of the Commissioner of Tax. Then the tax payer filed an appeal to the High Court. The High Court gave its conclusion that the amount of fees which is received in advance for the provision of the dancing tuitions in the near future over a period of time will be consideredas thedeferred income for thatperiod of the tax payer until that income is recognised. The income is derived when the lessons are delivered.
Issues in the case: The discussion is about the inclusion of the unearned income which is received in advance for the delivery of the dancing tuitions over a period of one year in the Assessable income or not.As per the taxtation law of the Australia, the total “taxable income” of the resident tax payer is determined after including all the direct or the indirect incomes of the tax payer after allowance of the deductions available to the tax payer. The High Court gives its conclusions on the cases presented before it on the basis of the Australian Tax Act or the previously decided rulings (Confidential and commissioner of Taxation, 2013). In the present case law Arthur Murray (NSW) Pty Ltd, the tax payer is claiming not to include the unearned tuition fees in the assessable income of the current financial year for the purpose of the payment of the tax. The High Court has issued its rulings on the basis of the decision taken in another case Cardin v Executor, Trustee and Agency Co. of South Australia ltd. The High Court revealed that the income derived is a complex subject matter which includes the variety of the acts. There is no particular formula for the calculation of the total derived income. However, as per the basic adaptability of the general laws and regulations, the assessable income includes the accrued income should be considered in the assessable income of the tax payer for the purpose of the calculation of the tax liability, until any contrary provisions come forthwith. The decision of the Federal Commission of Taxation v Flood was relied to conclude the present case law.
Conclusion of the case: The Arthur Murray (NSW) Pty Ltd case law was a matter of complexity in the application of the appropriate tax laws for the derivation of the assessed income. The Carden’s case was taken as the base for giving decision on this case. The question is whether the receipt of any income is to be taken as the derived income of any business (Grant- Taylor v Babcock & Brown Limited , 2015). The conclusion of the present case law is the income is considered to be derived at the time when the lessons are delivered to the learners. The received income will be included in the assessable income of the tax payer for the current financial year, if there are no limitations of the refund of the receipts in case study of the failure by the students to receive the dancing lessons in the future. This case decision will be applied in themajority of the cases in the coming times.
Whether the principle in Arthur Murray applies in the case of Paladin Pty Ltd in the respect of the certain points.
- Deferred income on term sales: The principle of the Arthur Murray (NSW) Pty Ltd which is ruled by the Federal Commission disclosed that the unearned income is included in the assessable income of the taxpayer with respect to any contrary provision related to the subject matter. Yes, the principles of the Arthur Murray apply to the deferred income on the term sales of the tax payer. The income is derived when the sale is made.
- Deferred income on maintenance agreements: The Arthur Murray (NSW) Pty Ltd case describes the term “derived income” by giving various arguments. The present case shows the treatment of the unearned income in the assessment of the total tax liability. Therefore the principle of the Arthur Murray applies to the deferred income on maintenance agreements also in the Paladin Pty Ltd. The income is derived when the maintenance activities are provided. The revenue can’t be recognised until income has been earned, hence deferred income is shown in the books.
- Treatment of the amount of interest for the tax purpose for the year ended 30th June, 2013: The interest amount of $82,500 is included in the deferred income at 30 June, 2013 (Grant- Taylor v Babcock & Brown Limited , 2015). If the amount of deferred income is to be included in the current year’s assessable income, then the interest income will also be included in the current year’s income.
- Treatment of warranty services amount of $30,000 for the tax purpose for the year ended 30th June, 2013:
- The provision for the warranty services is created by the company and no amount has been charged against these provisions in the current year. It is not appropriate as per the tax laws. The provision can be created for a limited time and proper charges should be made every year against the created provision amount.
Question2: Treatment of the points for the tax purposes
The amount of the Discount received from the advance purchase of the trading stock to be delivered in August can be transferred immediately to the Profit And Loss A/c of the Paladin Pty Ltd for the tax purposes. However, if the stock is not sold then it will be against the earlier treatment. Hence, the discount received can be treated as deferred income until it is earned.
For the tax purpose of the Paladin Pty Ltd, the trading stock should be valued at the cost or the net realisable value, whichever is lower. In this case, the trading stock is valued at cost which includes the amount of obsolete stock which can realise only $2000 at auction (Messenger Press Proprietary Ltd v Commissioner of Taxation, 2012). The amount of $15000 should be deducted from the closing stock and the realisable value of $ 2000 should be credited to the P&L a/c. The cost of goods sold of obsolete stock will be transferred to P&L a/c.
The fully franked dividend income of $10,500 is earned from a resident Australian public company. The franked dividends are subject to Australian tax @ 30%. The tax payer will receive a rebate for it from the total tax liability.
Dividend income before tax deduction = $10500/ 0.70 * 1 = $15000
Total $15000 – 10500 = $4500 is to be treated as the offset against the tax liability.
The warranty provision of $20000 and the stock obsolescence provision of $15000 are created by the Paladin Pty Ltd. However, the company hasn’t charged any amount against these provisions during the current year. It can be treated as the increased liabilities of the company for reducing the tax liability. However, The obsolete stock provision will be nil after writing down the obsolete stock in appropriate time interval. The warranty provision is absolutely correct. No adjustment is required for it. It will be written off when the warranty obligations are imposed.
The company paid an amount of the $57000 as a rent for the two years period on 1.3.13. So, the amount of 4months from 1.3.13 to 30.6.13 [57000/24 *4 = 9500] will be treated as the expense of the current year.And the remaining $47,500 will be treated as the prepaid expenses and shown in the Assets side of the balance sheet.
On 1.6.13 the managing director of the company was provided a three months long service leave and he was paid an amount of $22000 in advance.This amount is to be treated as the prepaid expense and to be taken into the asset side of the balance sheet for the year ended 30 June, 2013. The advance payment is deductible for tax purpose. The amount of $2.1m net profit should be increased.
Question3: Tax deductions
Tax deductions are available for the costs connected with the new factory under s8-1, div 40 and Div 43. As per the regulations of the Australian Tax laws, under s8-1, any loss or expense which is incurred for the purpose of producing any assessable incomecan be deducted from the amount of the assessable income for the calculation of the tax liability. The Division 40 of the Australian tax can be used as the basis for the promotion of the scientific research for the development of the knowledge and the techniques in the study of the relationship between the brain and the behaviour (Sent v Commissioner of Tax, 2012). And the Division 43 of the Australia tax act provides the capital deductions for the expenses incurred on the construction of the building and related capital assets which can product the assessable income for the tax payer. Hence, all the capital expenses will be deducted under div43 i.e. ($2, 50,000 + 50000+40000) = $340000
Calculation of the Paladin’s tax liability for the year ended 30th June, 2013:
(-) cost of obsolete stock (15000-2000)as It is already in the accounting profit
(-) Interest amount included in deferred term sales
(-) Deductible long service leave advance payment
(-) deduction under Div 43 (calculated above)
Net assessable income
Tax @ 30%
(-) Franked dividend credit
Net tax payable
- The deferred income of $ 2, 25,000 included the interest amount of $82,500. An instalment method is used for the recording of the term sales. The amount of $2,25,000 which is deferred is taken for tax treatment when the sale is made. However, the interest of $ 82,500 is to be taken into account when it is accrued or received. The taxable income of the Paladin is shown as $2,25,000 less interest of $ 82,500, which is equal to $ 1,42,500.
- Thewarranty cost of $ 30,000 requires no adjustment because Paladin is still engaged with the warranty provision services to be provided if any chance occurs in the future. When the contract will expire, then this will be counted in the derived income.
- The advance payment of $22,000 for long service leave is deductible for tax purpose.
Application by Jemena Gas Networks ltd, 6 (Australian Competition Tribunal Feb 24, 2011 ).
Commissioner of Taxation v Ashwick, 49 (Federal court of Australia April 7, 2011).
Confidential and commissioner of Taxation, 112 (Administrative Appeals Tribunal of Australia Feb 28, 2013).
Grant- Taylor v Babcock & Brown Limited , 149 (Federal Court of Australia March 03, 2015).
Messenger Press Proprietary Ltd v Commissioner of Taxation, 756 (Federal court of Australia July 16, 2012).
Sent v Commissioner of Tax, 756 (Federal court of Australia April 15, 2012).