Instructions:
This assignment is to be submitted by the due date in soft-copy only (Safe assign
– Blackboard).
The assignment is to be submitted in accordance with assessment policy stated in
the Subject Outline and Student Handbook.
It is the responsibility of the student submitting the work to ensure that the work is
in fact his/her own work. Ensure that when incorporating the works of others into
your submission that it is appropriately acknowledged.
It is recommended that you prepare an assignment of 2500 words.
HI6028 Taxation Law Theory and Practice T1 2018
Part A
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.
For the year ended 30 June 2016 the company reported a net profit of $2.45m. Its
income arises from the provision of funeral services financed as follows:
• Fees payable under a ‘net, 30 days’ invoice.
• Fees payable under several external insurance contracts to which bills are
issued under a ‘net, 30 days’ arrangement. For instance, some funeral
costs are paid by the Transport Accident Commission, others are paid out
of private life assurance plans.
• Fees received from RIP Finance Pty Ltd, a company providing credit under
an instalment repayment plan.
• Amounts paid under a funeral plan in which clients make periodic
contributions to meet future funeral costs. ‘Easy Funeral Plan’ 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. At 30 June the credit balance Easy Funeral
Plan is $225,000.
From time-to-time amounts paid pursuant to the Easy Funeral Plan are not drawn
upon. The clients might die abroad or remains not be recovered and no funeral
service is provided. No refund issues arise.
At 30 June, the company transfers from Easy Funeral Plan 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.
Required (60% of the answer)12 marks
[Note: it is necessary to refer to appropriate case law on the issues.]
a) Refer to the decision in Arthur Murray (NSW) Pty Ltd v FCT (1965) 114
CLR 314. In your own words, briefly describe the facts, issues and
conclusion in that case. [Note: Case reports and extracts of Arthur Murray
are widely available or the decision may be accessed via
www.hcourt.gov.au]
o Advise RIP Pty Ltd when income is derived (i) generally, and (ii)
when it derives its income from funeral services and related
activities.
HI6028 Taxation Law Theory and Practice T1 2018
o Does the Arthur Murray principle apply to the company’s accounting
treatment of amounts in Easy Funeral Plan? Explain.
o Does the Commissioner or any taxpayer have a choice in the
method of accounting for tax?
b) Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments
Account’ in item (iv).
Part B
a) 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 2016 the
company prepaid $25,000 for material to be delivered in August 2016. The
company obtained considerable discounts for the advance purchase.
b) A fully franked cash dividend of $21,000 was received from RIP Finance
Pty Ltd.
c) An amount of $57,000 was paid on 1 March 2016 for two year's rental of
storage space. The lease expires on 28 February 2018. In the company’s
financial accounts an amount of $9,500 was expensed and $47,500
capitalised.
d) On 1 June 2016 the managing director of RIP commenced three months
long service leave and was paid $22,000 in advance. In the company’s
accounts the amount was debited against a Provision for Long Service
Leave Account.
e) In 2013 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 2014 land
costing $1.25m was acquired and $50,000 paid to demolish an existing
structure. Construction of the new premises commenced on 1 September
2014 at a cost of $2.5m. Fitting and equipment was installed on 1 June
2015; operations began on 1 August 2015. On-site car parking costing
$125,000 was completed on 30 September and landscaping of the site was
completed on 31 January 2016 at a cost of $40,000.
Required (40% of the answer) 8 marks
Advise the company about the following:
[You must refer to appropriate sections of the legislation and relevant case law.]
? The nature of trading stock, 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.
? What adjustments (if any) should be made to the company’s reported profit
for tax purposes in regard to items (b), (c) and (d).
HI6028 Taxation Law Theory and Practice T1 2018
? What deductions (if any) are available for expenditure set out in item (e).
Explain.
HI6028 Taxation