Posted: August 16th, 2016

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

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:

1. Fees payable under a ‘net, 30 days’ invoice.
2. 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.

1. 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 (70% of the answer)

[Note: it is necessary to refer to appropriate case law on the issues.]

314. 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 hcourt.gov.au]
     1. Advise RIP Pty Ltd when income is derived (i) generally, and (ii) when it derives its income from funeral services and related activities.
     2. Does the Arthur Murray principle apply to the company’s accounting treatment of amounts in Easy Funeral Plan? Explain.
     3. Does the Commissioner or any taxpayer have a choice in the method of accounting for tax?
315. Advise the company of the tax treatment of $16,200 in ‘Forfeited Payments Account’ in item (iv).