Accruals basis you sell trading stock cardens case
When is income derived: cash v accruals
• Income is assessable when derived: s 6-5(2) and (3).
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• If it is not mainly from your own personal exertion, it is accruals basis ie
- You sell trading stock (Carden’s case, Rowe & Sons) - The day-to-day expenses of the taxpayer has direct relationship to income earned (Carden’s case, Barrat) - You employ staff or equipment to earn (Barrat)
- You rely on circulating capital (Barrat)
• Long term construction contract – Progress payments assessable when received (Grollo Nominees)
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• Commissioner argued tp should return income on accruals basis so that the amounts earned before his death was assessable to him even though he had not yet received it.
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Firstenberg
• F is a sole practitioner solicitor. Employed 1 secretary.Held:
• Cash basis correct. Factors which were relevant :
– The income was a reward for the professional skill and work of the tp. He was a one man practice.
• Tp is a sole practitioner chartered accountant.
• He had several employees but he was responsible for co-ordinating and organising all professional work.
Commissioner argued accruals basis should be used.
Henderson
• A large accounting firm employed 295 staff.
• The partnership income were not mainly from the partner’s own personal exertion. There were about 150 employed accountants who earned fees for the partnership. This was different to Carden’s case.
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Held:
• Accruals basis is the appropriate method.
Derivation on Cash Basis
• Income is derived when received. Note constructive receipt rule in s6-5(4) & 6-10(3).
• By end of year, she completed the story but only received $10,000. She asked the company to withhold remainder.
• Commissioner argued whole lot is income because it had been “dealt with on her behalf” under constructive receipt rule.
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a) Have the legal right to receive money (Henderson, Barrat); OR
b) Actually receive money (because you don’t usually receive money unless you have legal right to it).
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• Income is derived when fees have matured into a legal debt.
• When the service is so far performed that according to the agmt of the parties (or according to the law) that it has given rise to a legal debt, income is derived.
Held:
• Distinguish between a debt coming into existence and the the recovery of an existing debt.
The parties were still disputing in court whether and what amount of debt is owing to the taxpayer. FCT argue there is derivation either at the time the goods were sent or an invoice created.
Held: No derivation until dispute is resolved.
• In its books, AM record advance payment as ‘unearned’ income. Only when lessons provided, fee is transferred to revenue.
Held:
Note: After this case ATO issued a statement that Arthur Murray can only apply if:
- you do not recognise the payment in your accounts as earned revenue (ie record as unearned revenue); AND
– If changing from accruals to cash, an amount may be taxed twice (eg Carden’s case). Solution: Argue s6-25 prevent double taxation?
– If changing from cash to accruals, an amount may never be subject to tax at all (eg Henderson). Solution: amend prior year return but there is a time limit to amend returns (Henderson).
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