Arthur murray nsw pty ltd v fct 1965 114 clr 314 the

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Arthur Murray (NSW) Pty Ltdv FCT(1965) 114 CLR 314The taxpayer was a dance school. Dancing lesson fees were paid in advance and wereplaced in a suspense account until the lessons were rendered and were then transferred to arevenue account. A pupil had no right to a refund but in practice refunds were often given.Issue- had the taxpayer derived the prepaid tuition fees in the year in which the tuition wasprovided or the year in which the fees were received?Held- no income had been derived until the services were rendered.Court stated-the object is to discover what gains have come home to the taxpayerwhich have not only been received but have 'come home' to the taxpayer. The court askedwhether the situation had been reached in which the sum may be properly counted as a gaincompletely made so that there is neither legal nor business unsoundness in regarding itwithout qualification as income derived? Although the fact that it was paid in advance didnot place any legal impediment in the way of the recipient dealing with it as it chose, it wasa matter of business good sense that the recipient should treat the pre-paid sums as subjectto the contingency that some part of it may have to be paid back, even if only in damages.That possibility was an inherent characteristic of the receipt. While that possibility remained,the amount received could not be seen as having the quality of income.The court added that according to established accountancy and commercial practices,amounts received in advance of goods being sold or of services being provided are notentered to the credit of any revenue account until the sale takes place or the servicesrendered. In the meantime amounts received in advance are credited to a suspense account,and their transfer to a income account takes place only when the discharge of theobligations for which they are a prepayment justifies their being treated as finally havingacquired the character of income.The Commissioner takes the view(MTG 9-090) that the Arthur Murray principleonly applies if advance payments are kept in a suspenseor unearned income account bythe taxpayer and arenot treated as income until earned or if not, a balance day adjustmentis made to gross revenue account to exclude unearned income from the profit and lossaccount.On the other hand,it can be argued that the Arthur Murray principle should applywhenever there is some likelihood thatsome part, of the unearned income may have to berepaid due to:(a) a specific termof the contract, or(b) where the recipient adoptsa practice of making refundsirrespective of the contract asfor example, as a matter of good will , or(c) where it it is likely that the recipient may have to paydamages forfailure to performthe contractif the goods orservices are not provided.4.8Interest, Rent, Dividends, Work in Progress6.
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commissioner, Professional Practices, accruals basis

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