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Income Tax law and Practice Assignment

Number of Words : 3801

Number of References : 14

Contents

 Introduction 3
 Analysis and discussion of the case Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 3
 Part a, Question (1): When does RIP Pty Limited derive its income? 4
 Part a, Question (2): Does the Arthur Murray principle apply in the taxation of income earned under Funeral Plan No. 1 5
 Part a, Question (2): Does the Arthur Murray principle apply in the taxation of income earned under Funeral Plan No. 2? 6
 Part a, Question (3): Does the Commissioner or any taxpayer have a choice in the method of accounting for tax? 7
 Part a, Question (4): Advice on the treatment of the $16,200 in the Forfeited Payments Accounts 8
 Part a, Question (5). Advice on taxation treatment of contributions when death occurs abroad or client remains are never found 9
 Part B, Question (1); Prepayment rules of trading stock(caskets and other accesecories) 9
 Part b, Question (2): Treatment and taxation of the Fully Franked Cash dividends 10
 Part b, Question (3): Treatment of lease agreement prepayment 11
 Part b, Question (4): Treatment of managing director leave payment 11
 RIP PTY Limited, Income and Tax Liability Schedule 12
 Conclusion 13
 References 14
 Cases used 14
 Legislation used 15

Description

This assignment is based on the following requirement – <br />Part A<br />RIP Pty Ltd is a resident private company carrying on the business of undertaker/funeral director. It operates out of premises comprising office facilities, a chapel and assembly area and professional rooms. Its other assets include a fleet of motor vehicles.<br />For the year ended 30 June 2011 the company reported a net profit of $2.45m. Its income arises from the provision of funeral services financed as follows:<br />i) Fees payable under a ‘net, 30 days’ invoice.<br />ii) Fees payable under several external insurance contracts to which bills are issued under a ‘net, 30 days’ arrangement. [Eg: some funeral costs are paid by the Transport Accidents Commission.; others are paid out of private life assurance plans.]<br />iii) Fees received from Ripper Finance Pty Ltd, a wholly owned finance company providing credit under an instalment repayment plan.<br />iv) Amounts paid under two funeral plans in which clients make periodic contributions to meet future funeral costs. <br />a) Funeral Plan No 1 is a fixed price contract. When the agreed amount is paid, the client is guaranteed a ‘deluxe funeral arrangement’. If the contract price in not fully paid at date of death, the deceased’s estate is billed under (i) or (iii), above. The amount is not refundable or transferable. Receipts are credited to a Deferred Income Liability Account. At 30 June the credit balance in Funeral Plan No 1 is $225,000.<br />b) Funeral Plan No 2 is an insurance type plan under which a client periodically pays an actuarially determined amount until the date of death and no further amounts are payable. Amounts paid are credited to ‘Funeral Plan No 2 Account’ – a Deferred Income Liability Account. In 2010/11 payments of $166,500 were received under Plan No 2. The plan may be cancelled by notice in writing and the amount refunded is determined by a formula that factors in the client’s age, amount paid, and period of membership. On average, 85% is refunded upon cancellation. Refunds paid were $23,375. The balance, described in the company’s accounts as ‘Administrative Fees; FPNo2’ is brought to account as income at the date of cancellation. At 30 June 2011 the credit balance in that account was $4,125.<br />c) From time-to-time amounts paid pursuant to both Plans are not drawn upon. The clients might die abroad or remains not be recovered and no funeral service is provided. No refund issues arise with Funeral Plan No 1. The company is unsure how it should deal with such matter under Funeral Plan No 2.<br />d) At 30 June the company transfers from Funeral Plans Nos 1 and 2 amounts estimated to have arisen in connection with defaulting members (ie, members who have ceased making scheduled payments and who are not expected to make up arrears). These are credited to a ‘Forfeited Payments Account’ that has a balance at 30 June of $16,200.<br />(i) Refer to the decision in Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314.<br />In your own words, briefly describe the facts, issues and conclusion in that case.<br /> (ii) <br />(a) Advise RIP Pty Ltd when income is derived, generally, and when it derives its income from funeral services.<br />(b) Does the Arthur Murray principle apply to the company’s accounting treatment of amounts in Funeral Plans Nos 1 and 2? Explain.<br />(c) Does the Commissioner or any taxpayer have a choice in the method of accounting for tax?<br />(iii) Advise the company of the tax treatment of amounts in item (iv)(c).<br />(iv) Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv)(d).<br />Part B <br />i) RIP Pty Ltd holds a stock of three types of caskets as well as a range of accessories (such as religious and secular icons). In June 2011 the company prepaid $25,000 for material to be delivered in August. The company obtained considerable discounts for the advance purchase. <br />ii) A fully franked cash dividend of $21,000 was received from Ripper Finance Pty Ltd.<br />iii) An amount of $57,000 was paid on 1 March 2011 for two year's rental of storage space. The lease expires on 28 February 2013. In the company’s financial accounts an amount of $9,500 was expensed and $47,500 capitalised.<br />iv) On 1 June 2011 the managing director of RIP commenced three months long service leave and was paid $22,000 in advance. The amount was debited against a Provision for Long Service Leave Account.<br />v) In 2008 the company’s Board of Directors decided existing accommodation was inadequate and it resolved to construct a purpose built facility. In that year $250,000 was paid for preliminary architectural designs. In 2009 land costing $1.25m was acquired and $50,000 paid to demolish an existing structure. Construction of the new premises commenced on 1 September 2009 at a cost of $2.5m. Fitting and equipment was installed on 1 June 2010; operations began on 1 August 2010. On-site car parking costing $125,000 was completed on 30 September and landscaping of the site was completed on 31 January 2011 at a cost of $40,000. <br /> Required [Approx 50%]<br />Advise the company in regard to the following: [You must refer to appropriate sections of the legislation and relevant case law.]<br />i) Advise the company what is trading generally, whether the caskets and accessories would be trading stock for tax purposes and how the amount of $25,000 is treated for tax purposes.<br />ii) What adjustments (if any) should be made to the company’s reported profit for tax purposes in regard to items (ii), (iii) and (iv).<br />iii) Advise the company what tax deductions are available for the costs connected with the new facility [Item (v)] under s8-1, Div 40 or Div 43. [You should include calculations of any allowable deductions.]<br />iv) Prepare a schedule taking $2.45m as your starting point and making appropriate additions and subtractions to calculate the company’s taxable income and tax liability. <br />

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