This strategy deals with how a taxpayer receiving an up-front pre-paid income from a contract that straddles several tax years is taxed on the income.

Examples of this prepaid income includes pre-paid advertising, prepaid web service fees, prepaid gym memberships, and construction contracts that are paid up-front with the services to be provided over the following 12 month period.

Where the Arthur Murray case principles apply the business receiving the income can allocate the income to the financial years in which the services are provided to the customers (i.e. over several financial years), and not just the financial year when the up-front payment was received.

Arthur Murray involved a taxpayer who carried on a business of giving dancing lessons. The taxpayer often received payments for tuition courses in advance. The taxpayer lodged their income tax returns on the basis that payments received in advance of lessons taught did not form part of its assessable income immediately upon receipt. The payments were only assessable once earned by the giving of the lessons.

In deciding Arthur Murray, the Court found that amounts received in advance for dancing lessons were not derived until the lessons were actually given. Additionally the circumstances of the receipt made it necessary as a matter of good business sense that the taxpayer should treat ‘fees received but not yet earned’ as subject to the contingency that the whole or part may have to be repaid, even if only as damages, if the taxpayer failed to render the agreed services.


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