Assessment of Lump Sum Prepaid Rent

Discuss About The Global Perspectives E Commerce Taxation Law.

An individual is considered for taxation purpose based on the income that is generated from all the sources directly or indirectly during the year of income. As explained under “taxation ruling of TR 2002/14” the receipt of lump sum as the prepaid rent is considered for taxation purpose[1]. Referring to “Section 6-5 and 6-10 (3) of the ITAA 1997” an individual is assumed to have received the income when the same is either distributed based on their behalf in accordance with their direction.

The existing question is concerned with the taxpayer that held the flat and leases the same to the new tenant. The taxpayer received a prepaid lease agreement for a sum of $15,000. An explanation is provided under the “taxation ruling of TR 2002/14” where a taxpayer getting the large amount in consideration of the lump sum prepaid agreement in advance is held liable for taxation purpose[2]. The judgement made in “Frezier v Commissioner of Stamp Duties (NSW)” the commissioner of taxation stated its by judgement by stating that prepaid rent received in the form of lump sum is held for assessment purpose. The commissioner explained that prepaid lump sum is considered as the nature of home coming for the person receiving such amount. Therefore, the taxpayer in such situation is held liable for assessment. In accordance with the “section 6-5 of the ITAA 1997” the prepaid rent in the form of lump sum for lease agreement will be included for assessment as income in respect of ordinary concept[3].

The Australian Taxation Office provides that an individual receiving insurance payment will account as the personal item and the same does forms the part of tax return. An exception to this rule is that in an individual receiving insurance pay for the purpose of deriving taxable income then such payment is held for assessment[4]. Alternatively, on noticing that a person receives an insurance payment in the form of lump sum for covering the assets then such amount should be assigned to the assets for taxable purpose. The current situation of Cheryl explains that warehouse of the taxpayer was destroyed by fire and as a consequence received an insurance pay of $500,000 as the compensatory loss.

The judgement made in “Allied Mills Industries Pty Ltd v FCT (1989)” explained that the taxation commissioner held the compensation receipt as based on the nature of the amount[5]. The federal court states that compensation payment is viewed as capital element only in circumstances where the substitution principle is implemented for a lost item. Alternatively, receiving a compensation payment for the loss of service is accounted as income because it constitutes a substitute of the lost element. Consequently, in the situation of Cheryl, receiving a compensation payment relating to insurance is considered as capital receipt because the lost warehouse is the capital item. Considering the verdict of federal court, Cheryl on receiving the compensation payment from insurance pay-out constitutes a capital receipt and excluded from the taxable income.

Compensation Payment and Taxable Income

A claim for allowable deduction can be bought forward by the taxpayer for expenses that are incurred in managing their tax matters. The Australian Taxation Office explains that an individual is allowed to claim deductions for the cost that are incurred in preparing and lodging the tax return[6]. The question introduces that Boris has occurred expenses of $500 on lodging a tax return. Referring to section 8-1 of the ITAA 1997 a person is allowed to claim specific allowable deduction for expenses occurred in generating assessable proceeds. Adhering with the rules of Australian Taxation Office Boris can bring the claim of permissible deductions relating to expenses incurred in lodging tax return.

The Australian Taxation Office provides that a person can object to the ATO decision. An individual taxpayer can disagree with the manner based on which the ATO interprets the law. As evident Boris disagreed with the amended assessment[7]. Furthermore, Boris incurs cost on raising those objections. Therefore, with reference to section 8-5 of the ITAA 1997 Boris can claim the deductions for those expenses as specific deductions.

There are two positive limbs of section 8-1 of the ITAA 1997. A person is allowed to claim deductions for general deduction under section 8-1 from their taxable income for any form of outgoing or the extent that it is occurred in generating taxable income[8]. The expenditure under general deduction is required to meet the test of eligibility under the positive limbs. However, where an expenses or losses under this section is to the extent of private or capital in nature then deduction is not allowed[9]. The federal commissioner referred to “Lunney v Federal Commissioner of Taxation” considered that it is vital to consider the required characteristics of the loss or outgoing that is necessary prerequisite in the derivation of taxable income. The expenditure incurred by James for having meal at hospital café is held as private expenses. With the respect to the decision of court James will not be allowed to claim deduction for meal expenses as this expenses do not meet the eligibility test of positive limbs.

To ascertain whether the food or drink provided an individual is required to look into the factors such as whether the food or drink forms the part of refreshment for employee to complete the day’s work which is generally not an entertainment. Another factor includes whether the food or drink provided in the social situation for business purpose. As evident in the current situation of Frances, he incurred an expenses of $5000 for food and drink on guest that he has invited as the mark of commencement of new business[10]. With reference to “paragraph 32-10 (1) of the ITAA 1997” the expenses incurred by James on food and drink is a business entertainment expense and the same will be allowed as allowable deduction for James.

Allowable Deductions and Tax Returns

The question introduces the issue whether Usman for the assessment year of 2016-17 will be considered as the Australian resident for taxation purpose. The “taxation ruling of 98/17” is associated to the understanding of the ordinary concept of the term “Resident”[11]. The taxation ruling of “taxation ruling of 98/17” is generally made applicable on individuals that comes to Australia in the form of migrants. This includes students for study purpose, visitors on holiday and workers under overseas work contracts. The judgement made in “Miller v Federal Commissioner of Taxation (1946)” where a person is residential matter is based on the question of fact for the taxation purpose. The judgement made by the court in the above stated case is based on assessing the reason for a person stay in Australia.

Referring to the case of Usman he holds a French passport during his stay from the period of 2012-2016. The passport allowed Usman to stay and work in Australia. According to the “taxation ruling of 98/17” the period of physically being in Australia helps in explaining the behaviour relating to endurance or a matter of habit[12]. The federal commissioner elaborated his view in “Joachim v FCT (2002)” where a duration of six months is viewed as a matter of significant time while concluding the that the behaviour presented a span of continuity stay in Australia.

The viewpoint of the commissioner states that the period of physical existence accompanied by the intention of staying in Australia coincide on several occasion. Once it is understood that the person has established a residence even though willingly this would be mean that an individual would cease to be an Australian resident simply for the reason that the person was non-existent in Australia[13]. As per the “taxation ruling of 98/17” whether the person has preserved the continuity with the place where he or she resides with the purpose of returning and the expression that place of residence continuously his or her home. Evidently, in the Situation of Usman a period of continuousness was noticed which demonstrates that significant amount of time has elapsed here in Australia.

Evidently an individual visit to Australia accompanied with the object of living in Australia for the period of six months and then extending the stay to greater than six months then the person would be held as the Australian resident from the time they come to Australia. consequently, denoting the circumstances of Usman provides that his stay in Australia reflected the period of continuity until the year 2016-17[14]. Therefore, Usman is considered as the Australian resident under “subsection 6 (1) of the ITAA 1936” and is held as liable for taxation.

Determining an Individual’s Residency Status for Taxation Purposes

Adhering with the “Section 118-192 of the ITAA 1997” there are certain special rules that are helpful in determining the consequences of capital gains and loss associated to the main residence employed to generate taxable income[15]. Furthermore, the “Subdivision 118 B” enables a person to claim a partial exemption for the dwelling where a portion of that main residence is employed in producing income. Denoting the circumstances of Norman, he is surrounded with the consequences of capital gains tax for his main residence and also based on ascertaining whether Norman would be able to claim partial or complete main residence exemption.

A person is permitted to claim the partial main residence exemption for the reason that it helps reducing the burden of capital gains tax or loss. Usually, a pre-CGT asset obtained prior to 20^th September is held for main residential exemption from the capital gains tax. Nevertheless, there are some of the capital gains tax that are not regarded for capital gains tax is stated below;

1. Motor Vehicle
2. Collectibles bought for $500 or more than $500.  
3. A CGT asset that is bought entirely to generate the exempted income or the non-taxable income or non-exempted income.
4. A person that receives valour awards.

For a taxpayer to be considered as eligible for exemption of main residence it is necessary to possess a dwelling as main residence. Nevertheless, on perceiving that a person has two residences simultaneously it vital to ascertain whether the main residence is employed for residence purpose or for gaining producing taxable income[16]. To be considered for main residence exemption it is necessary for the taxpayer to determine whether there is a subject of fact and question. As evident in the current situation of Norman by profession who is a hair dresser has bought the main residence at a cost of $700,000. The main residence incurred the expenses on stamp for a cost of $70,000. An additional improvement that was made by the taxpayer to the residence was $100,000 so that the property is held suitable for the business of hairdressing.

As understood from the question an important element is to establish as to what extent the residence question for the main residence exemption with reduced instances of capital gains tax. The taxation commissioner in its judgement held that no form of direct course in determining whether the residence qualifies for the main residence. According to the “section 118-150” a dwelling is considered eligible for main residence exemption provided that the residence purchases and later the residence is renovated before acquiring the property provides some indication.  

Taking into the account the situation of Norman an expense of $100,000 was reported before making the property suitable for hair dressing business. considering the declaration of the Australian Taxation Office a taxpayer would be able to gain main residence exemption from their capital gains tax[17]. Alternatively, a person is allowed to claim partial main residence exemption if any part of the dwelling or main residence is employed for generating taxable income. Referring to the situation of Norman he has six rooms at his main residence and used two of the rooms for the business purpose[18]. Adhering to “Subdivision 118 B” Norman will be able to allowed for partial main residence from the capital gains for the reason that a part of his residence was used for business purpose to produce income.

As defined under the “taxation ruling of 92/2” expenses that are occurred in the process of research and development for the scientific purpose[19]. The taxation ruling of TR 92/2 provides that expenses on scientific research are allowed for deductions under section 73A (1) if the expenses is not considered allowable under any other section. The current situation of Avon provides that the expenses that are incurred in the course of scientific research and development is considered for allowable deductions[20]. Evidences obtained from the case study suggest that the taxpayer occurred expenditure relating to the research and development stood $500,000. However, the expenditure that was occurred was in the course of business enhancement and was from the approved research and development institutes.

With reference to section 73 A of the ITAA 1936 an organization is eligible for claiming permissible deductions for the expenditure that is occurred for undertaking the scientific research and development[21]. An important consideration for the section 73 A of the ITAA 1936 is to qualify for the allowable deductions the expenses that are occurred is for the cause of assessable income.

As an alternative if an organization occurs an expenses on research and development for gaining or producing the taxable income then in such situation the expenses is not allowed for allowable deductions. Furthermore, subsection 1 of the section 73A of the ITAA 1936 provides an explanation that the eligibility criteria for getting the allowable deductions is to occur expenses from the scientifically approved research institute[22]. As held in the situation of the Avon Pty Ltd, the company occurred a research and development expenditure as the payment to Queensland University which is scientifically approved research institute with the business improvement activities. Therefore, Avon in this situation would be eligible for claiming allowable deductions based on the research and development activities.

An important consideration of the “section 73A of ITAA, 1936” and “taxation ruling of TR 92/2” provides that a business would be able to gain income tax incentive on the circumstanecs when the expenses occurred is with authorized research centre[23]. However, section 73A of ITAA, 1936 of the “taxation ruling of TR 92/2” explains that to claim a tax incentive the business should satisfy the deduction criteria. Evident in the circumstances of Avon Pty the expenditure on the research and development is from the scientifically approved institute which meets the eligibility norms of section 73A of ITAA, 1936[24]. In addition to this, the company would be able to gain the advantage of income tax incentive from the taxable earnings for the expenses on scientific research and development.

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