Assessment of Lump Sum Prepaid Rent for Tax Purposes

As stated under the “Section 6-5 and 6-10 (3) of the ITAA 1997” a person is deemed to have received the amount when is understood or distributed in a manner on behalf of them or as per their direction. According to “Subsection 6-2 (2) of the ITAA 1997” a person is held for assessment relating to the income generated by them from all the sources either directly or through indirectly in the income year. According to the “taxation ruling of TR 2002/14” there are certain situations where the receipt of lump sum amount of prepaid rent are held for assessment.

As defined under the “taxation ruling of TR 2002/14” the receipt of lump sum amount of prepaid is considered for assessment on noticing that the intention of the parties states that the payment of lump sum in advance represents the use of the property for a certain fixed time period. The present question is about the taxpayer that owned a flat and leased it to the new tenant to receive a lump sum amount of $15,000 as prepaid for lease management. The court of law in “Frezier v Commissioner of Stamp Duties (NSW)” explained that the lump sum amount of prepaid rent is held assessable. According to the taxation law commissioner the prepaid amount of lump sum possess the nature of home coming for the taxpayer and receipt of such prepaid lump sum constituted entirely taxable in the year such income is received. Considering the case of Arthurs in the present question, the receipt of lump sum amount of prepaid rent by the land lord is held as the taxable income under section 6-5 as ordinary concept.

According to the Australian taxation office insurance pay-out are held as the personal element which is not necessarily required to be included in the taxable return. But the Australian taxation office also defined that receiving insurance pay outs for items which is used in generating income should be included in the taxable return. If it is found that the person receiving an insurance payment as lump sum for covering the assets then an individual should distribute the amount of such payment among the assets for the purpose of assessment. The present question evidently provides that Cheryl had a warehouse which was destroyed in fire and as a result she received an insurance payment of $500,000 in the form of compensation for loss.

Taxable Nature of Prepaid Lump Sums

Referring to the event of “Allied Mills Industries Pty Ltd v FCT (1989)” the taxation commissioner held that the nature of compensation that is received by a person is dependent on the sum received. According to the commissioner the compensations is regarded as capital element except in circumstances where principles of substitution is applied for things that is lost. Additionally, compensation that is paid for the employment loss is held as income since it is a substitute for things that is lost. As evident in case of Cheryl, receipt of compensation payment from the insurance company is held as capital receipt since the loss warehouse constitute a capita item. Referring to the taxation commissioner judgement the receipt of compensation payment is held as capital and does not forms the part taxable income.

As per Australian Taxation Office a person is allowed to claim allowable deduction for expenses occurred in administering tax affairs. The ATO provides that a person is allowed for claiming permissible deductions for the cost of preparing and lodging tax return. In the present circumstance of Boris it is noticed an expenses of $500 was incurred for lodging tax return in 2015-16. With respect of section 8-1 of the ITAA 1997 an individual taxpayer can claim allowable specific deductions for expenses incurred deriving taxable income. With regard to the guidelines of the ATO can claim an allowable deductions for expenses occurred in the preparation and lodgement of tax return.

Additionally, an individual taxpayer can bring forward the objection relating to the decisions regarding the tax matters. Occurrence of cost in bringing an objection is held as a permissible deductions. As evident in the circumstances of Boris, the expenditure incurred by Boris in raising objection shall be allowed for specific deductions under “section 8-1 of the ITAA 1997”.

As defined under the “section 8-1 (2) (b) of the ITAA 1997” a person is barred from claiming deductions relating to expenses that is solely incurred for private purpose or for domestic purpose. Such expenditure neither meets the eligibility of positive limbs nor is such private or domestic expenditure considered for deductions under the second limb. In the present situation of James it is found that he worked in the hospital and often purchase food from hospital café that resulted in an expense of $2000.

Referring to the judgement in “Lunney v Federal Commissioner of Taxation” the commissioner held that it is vital to consider the essential nature of the expenses and outgoings which is inadequate for such expenses to form a vital prerequisite in the generation of assessable income. In an alternative example the taxation commissioner has barred the taxpayer from claiming an allowable deductions relating to relocation cost occurred from one city to another as they constituted private in nature. Referring to the situation of James the expenses occurred constitutes a private expense and the same shall not be allowable for deductions.

Treatment of Insurance Payouts

As defined by the Australian Taxation Office, to determine whether the food or drink provided for business purpose constituted entertainment. According to “section 32-10 of the ITAA 1997” it evidently lay down the intention of considering the food and drink consumed in the circumstances of entertainment notwithstanding whether the business transaction of business discussion happened during such event. The present circumstances of Frances defines that that he started a new business and summoned guest at the restaurant to serve food and drink for a cost of $5000. The expense that ware incurred in James is within the meaning of the expression of defined in “paragraph 32-10 (1) of the ITAA 1997” for food and entertainment. Hence, James is allowed to claim a permissible deductions for such business expenses.

The issue getting highlighted is related to the fact that Usman will be considered as Australian resident or non- resident for tax year 2016-2017. According to the “taxation ruling of 98/17” this is related to the interpretation of ordinary concept related to word resident that held a place under “subsection 6 (1) of the ITAA 1936”. This ruling is applicable on those people who enter within the country as migrants or for the purpose of academics teachings or studying. Apart from this visitor entering in holidays and workers based on the contractors. According to “Miller v Federal Commissioner of Taxation (1946)” the individual residential status is a question of fact that is known as main domain which finds the liability of taxation. The declaration further helps in providing an individual the reason for staying in Australia.

According to recent evidence in Usman, an individual held the French passport at the different situations, as a result of these usages the he entered in Australia for work and residence purpose. The “taxation ruling of TR 98/17” states the behaviour for individual physical presence that reflects their behaviour and habits and also highlights the impact of the country on their routine and behaviours. According to the commissioner’s view in “Joachim v FCT (2002)” six month is considered as the period for deciding the behaviour for an individual for staying in Australia.

The commissioner stated that the physical presence intention of managing situations may increase the clashes of thought sometimes. If any individual establishes home at some particular place and but he is no present their, this will not affect his residential status for that country. The verdict will provide if the individual has grabbed the continuation of association with the place about his feelings while taking it as his home. Likewise, according to the current situation of Usman, he was present in Australia from 2012 until the end of 2016-17.  His presence reflects that he has grabbed some considerable behaviour changes according to his place.

Claiming Specific Deductions for Expenses Incurred Deriving Taxable Income

Respectively, the individual who is staying in Australia for the period of six months or more than the time of period of six months will be considered as the Australian resident and this will be considered from the time they entered into the country. Likewise, Usman is also considered as the responsible resident of Australia as he has stayed within the country during that entire considerable period. Therefore, for the taxation period of 2016-17 with respect to “subsection 6 (1) of the ITAA 1936” he will be liable for paying the taxes according to the Australian taxations laws.

Therefore, this can be concluded that Usman will be regarded as the Australian resident for the year ended 2016-17 in accordance with the income tax purpose. All the taxation laws and rights will be applicable on Usman for being an Australian resident.

The current scenario is describing the capital gains tax consequences for Norman. Norman is acquiring a major residence and this case scenario is elaborated to determine if Norman would be subjected to major residence exemption or not.

According to “Section 118-192 of the ITAA 1997” states the special rule for working out the capital gains or loss for dwelling which is considered as major residence as a source of income. Whereas, “Subdivision 118 B” allow all individuals to gain partial major residence exemption. Here condition is the residence is used partially for generating revenue while ownership of the taxpayer.

The individual is allowed to take exemption that helps for reducing the capital gains tax or losses. Usually capital gains and losses are calculated from the pre-CGT assets. These are acquired only before 20 September those will be subjected to exemption from capital gains tax.

Conversely, there are different capital gains tax assets that are not subjected to capital gains tax. These are mentioned as follows-

Most of the motor vehicles,

Breakables those are acquired for 500 or less,

A capital gains tax asset that bought entirely for generating the exempted income or non- taxable and non- exempted income or,

For a single taxpayer to qualify the residence for exemption this is necessary that taxpayers have occupied the major residence. Though, if this is noticed that the taxpayer is having another two residences along the known major residence, then he needs to specify which the major residence is for him along with the eligibility for the exemption from the residence.  Whether a residence quantifies as a major residence for the tax payer is now a matter fact to be discussed here. As evident in the current situation of Norman who is a hairdresser purchased his major residence for $700,000 and acquires associated costs such as stamp duty of $70,000. The taxpayers made additional improvement upon the asset as they spent further $100,000 for improving the property.

Expenses Not Allowable for Deductions

This can be understood from the above scenario, it is important to establish a standard of occupancy for qualifying as a major residence exemption so as to reduce the capital gains tax. According to the view of commissioner, there is no proper direction for providing the rules for exemption issue. However, according to “section 118-150” highlights that a property qualifies for major residence exemption, if the property is acquired and then repaired prior to get occupied to the owner it needs to be indicated to the owner.

Consequently in the current situation of Norman this is understood that he incurred an expense of expenditure of $100,000 to make his major residence for satisfying his business of hairdressing.

Citing the view Australian taxation office a taxpayer should be subjected to gain exemptions from the capital gains tax. Conversely, the person does not get the full amount of exemption if the part of the residence is used for generating income. Likewise, in case of Norman, out of six rooms he utilized two rooms for his hairdressing business. Therefore, under “Subdivision 118 B” he will be entitled for partial exemption from the property.

Now this can be concluded that with respect to “Subdivision 118 B” Norman will not get the full exemption from the major residence as he has used two rooms for generating income.

Here the scenario is based on the determination of taxpayer Avon who will be able to claim allowable deductions for expenditure involved within scientific research and development for taxpayers or not. The “taxation ruling of 92/2” states that expenditures involved due to the research and development will be considered as the allowable deductions under “subsection 73 (A) of the ITAA 1997”. These research and development activities ensure the business process to achieve excellence within the business process. According to the evident from the situation of Avon this is identified that the Avon Pvt Ltd started the business with agreement of $500,000 for a one year contract with registered service provider for undertaking the activates of research and development.

Considering the current scenario elaborated above for Avon, this can be advised in accordance with section 73A of Income Tax Assessment Act, 1936 that allows an organization to apply for a claim as per the deductions for the research and development and this will not be allowed under any other act or provisions. An important consideration can be elaborated under section 73A of Income Tax Assessment Act, 1936 that any organization is allowed to make a claim for any deductions for their research and development but only if these expenses are incurred for generating the assessable income. Furthermore subsection 1 of the section 73A of the ITAA 1936 provides these claims will only be accepted if the expenses are incurred for any approved research institutes.

As understood from the scenario analysis above the Aon Pvt Ltd will be able to take the allowable deductions from the government as they are approved provider of research and development to the Central Queensland University. So they will get the expenditure incurred into their research and development.

Under section 73A of ITAA, 1936 of the “taxation ruling of TR 92/2” an organization is also bound to get the tax incentives for the expenditure they are making for the research and development from the approved institutes. Whereas, Section 73A of the ITAA 1997” states that to claim these incentives the organizations need to meet the obligatory requirements for the deductions.

Under “Section 73A of the ITAA 1997”  Avon Pvt Ltd will get the claim as they are working for a approved university for their research and development planning. Apart from this, this company will also be able to get the incentives from the assessable income as the expenditure of $500,000 is directly used for increasing the operational efficiency of the organization.

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