Income tax and prepaid rent
Discuss About The Statutory Priorities In Corporate Insolvency.
In compliance with the “Section 6-5 and 6-10 (3) of the ITAA 1997” an individual taxpayer is believed to have obtained an amount that is dealt based on their behalf or upon their direction. Evidently “Subsection 6-2 (2) of the ITAA 1997” provides an explanation that a person will is held accountable for taxation for their income based on their derivation either from the direct sources or through indirect sources in an income year[1]. An explanation has been provided under “taxation ruling of TR 2002/14” that there are circumstances where receipt of lump sum is treated as the prepaid rent.
As explained under “taxation ruling of TR 2002/14” an individual receiving lump sum amount of prepaid rent in advance such amount is considered for taxation given the objective of the parties signifies that the lump sum payment in advance is for the use of the property for the fixed time period[2]. Taking into the account the current situation a lump sum amount of $15,000 was received by the landlord from a new tenant.
The federal court held in “Frezier v Commissioner of Stamp Duties (NSW)” that prepaid lump sum received by a person is treated as rent[3]. According to the commissioner prepaid lump sum has the character of come home for the taxpayer therefore, such amount is considered for assessment purpose in the year when such income is received. In the present circumstances the receipt of lump sum is held as taxable income and the income would be considered for assessment under the ordinary concept of the section 6-5 of the ITAA 1997.
The Australian taxation office provides that insurance payment is completely considered as the private item which should be excluded from tax return. But the Australian taxation office describes that insurance payment received for things that are used to generate income should be included in the taxable income[4]. For example, a person received a lump sum amount as the cover for assets then the taxpayer would be obligatorily required to assign such amount among the assets for taxation purpose. In the present situation of Cheryl, she owned a warehouse which was lost on account of fire and the insurance company paid Cheryl a sum of $500,000 as the recompense for loss.
Citing the verdict of federal court in “Allied Mills Industries Pty Ltd v FCT (1989)” the federal commissioner held that nature of compensation receipts is dependent based on the amount received[5]. Compensation is usually referred as the capital item unless in circumstances where the substitution principles replaces for what is lost. More importantly compensation received for lost employment is held as income because it constitute a substitute for what is lost. In the present situation of Cheryl compensation payment obtained from the insurance payment represent a capital receipt because the warehouse that is lost by fire is held as capital item. Citing the judgement of commissioner views the compensation receipt constitute capital receipt and is excluded from the taxable income.
Insurance compensation and taxability
As stated by Australian Taxation Office deduction is allowed to individuals for administering their tax returns. It also explains that an individual can claim specific deductions relating to cost occurred in preparing and lodging tax return. Section 8-1 of the ITAA explains that a person can claim expenses that are occurred in generating assessable income. Taking into the account the present situation of Boris he incurred expenses on preparing and lodging tax return[6]. With reference to the ATO guiding principle, Boris is allowed to claim a specific deduction for preparing and lodging tax return.
Specifically, the ATO explains that a taxpayer may raise an objection relating to deductions about tax affairs. Cost incurred in raising such objection is allowable under specific deductions. For Boris cost occurred in bringing an objection shall be allowable for specific deductions under section 8-1 of the ITAA 1997.
Expenses that are occurred by the taxpayer for their private or person purpose is not allowed for deductions under “section 8-1 (2) (b) of the ITAA 1997” as these expenses are not incurred in the course of generating assessable income[7]. Such private expenses neither satisfies the positive limbs nor is it deductible under the negative limbs. As evident James occurred expenses of $2,000 for lunch in café hospital.
Citing the judgement of the federal court decision in “Lunney v FCT” it is vital to consider the character of expenses which is inadequate for expenses as the necessary prerequisite in generating the taxable income[8]. The commissioner in “Fullerton v FCT” did not allowed the taxpayer from claiming allowable deductions relating to expenses incurred moving from one city to another as the expenses entirely held for private purpose. The current situation of James signifies that the cost of lunch is entirely a private expenditure and same will not allowed for deductions under the positive limbs of “section 8-1 of the ITAA 1997”.
According to “section 32-10 of the ITAA 1997” the purpose of considering food and drinks consumed is considered as the entertainment expenditure irrespective of whether such expenses is in the course of business discussion or business transactions that happens at that time[9]. In the present situation of Frances he started a new business and invited guest at the restaurant in order to provide food and drink for an expense of $5000. As evident the outgoings of food and drinks is well within the meaning of the “paragraph 32-10 (1) of the ITAA 1997”. Hence, Frances in such circumstances would be allowed to claim an allowable deduction as these expenses satisfies the meaning of business expenses.
Allowable deductions relating to tax returns
The present situation of Usman is associated with the determination of the whether he would be held as the Australian resident for income tax purpose in 2016-17. As laid down in “taxation ruling of 98/17” the explanation of the ordinary concept of the term resident within the meaning of the resident in “subsection 6 (1) of the ITAA 1936”[10]. The “taxation ruling of 98/17” is generally applied on large number of persons that comes to Australia namely the academics students, migrants, visitors on holidays or workers coming to Australia based on planned work agreements[11]. The federal court in “Miller v Federal Commissioner of Taxation (1946)” explained that status of residency for a person constitutes the matter of fact and held as the primary eligibility in ascertaining the tax liability. The “taxation ruling of 98/17” further explains an individual objective or intention of coming to Australia.
Denoting from the circumstance of Usman he had the French passport through his stay in Australia from 2012 to 2016 which allowed to work and stay in Australia. As per the “taxation ruling of 98/17” a person span of physical existence illustrates the behaviour of endurance, repetitive or custom as the matter of fact[12]. The court of law stated its viewpoint in “Joachim v FCT (2002)” that the span of six months is held as a significant time at the time of concluding whether the behaviour of a person demonstrates a period of continuity of living in Australia.
The commissioner states its judgement that physical existence together with the intent of living in Australian overlap on numerous occasions. Once a person has created a dwelling a specific place although voluntarily this does not signify that the person ceases to be a resident of Australia merely due to the absence of that person physically. According to “taxation ruling of 98/17” whether an individual has maintained a continuousness with the place together with the objective coming back to that place and concept that the place continuous to remain home[13]. Ideally in case of Usman he has been residing in Australia beginning from 2012 till 2016-17. The existence of Usman demonstrates the period of continuity as his behaviour reflects a considerable amount of time has elapsed in Australia.
Similarly, a person’s visits Australia with the intention of residing here for a period of six months and later prolongs the stay for greater than six months’ period would be regarded as the resident of Australia from the period they entered Australia. Evidently, in the situation of Usman his presence in Australia demonstrated an existence of habit and characteristics of routine from the time he arrived in Australia until 2016-17. Usman for the assessment year 2016-17 shall be held as an Australian resident in agreement with “subsection 6 (1) of the ITAA 1936” and would be liable for taxation.
Disallowable private expenses
The present situation of Norman is surrounded with the depiction of the consequences of capital gains tax relating to the acquisition of main residence together with the depiction whether Norman would be allowed for main residence exemption.
According to “Section 118-192 of the ITAA 1997” there is a special rule that helps in working out the consequences of capital gains and losses relating to the house that is used for main residence to derive income[14]. Whereas “Subdivision 118 B” permits a person to obtain a partial exemption for their main residence given any part of the dwelling is used for generating assessable income during their course of ownership.
An individual taxpayer is allowed to claim for the main residence exemption as this enables in lowering the burden of capital gains tax or losses[15]. Generally, a pre-CGT asset that is acquired before 20th September would be subjected to main residential exemption from the capital gains tax. Nevertheless, there are certain other capital gains which is not subjected to capital gains tax is enumerated below;
- Motor vehicles
- Main residence
- Collectibles purchased for less than 500
- A CGT asset purchased completely to produce exempted income or non-assessable income or non-exempted income.
- An individual receiving valour awards
For a taxpayer to be eligible for main residence exemption it is obligatory to have a main residence. Nevertheless, on discovering that the taxpayer has more than two residences then it becomes necessary to determine the main house that is used for dwelling together with the exemption eligibility[16]. To meet the eligibility of claiming a main residence exemption for the taxpayer it is held as the subject of fact and question. As understood in the present situation of Norman who is by profession a hair dresser bought a main residence worth $700,000 and incurs costs of $70,000 on stamp duty. The taxpayer made further improvement to the dwelling of $100,000 to make property appropriate.
Denoting from the above defined fact it is vital to establish that the extent of occupancy whether the dwelling qualifies for the exemption and lowered instances of capital gains tax. The commissioner of taxation stated that there is no such direct course given in the legislation relating to the main residence exemption. Nevertheless, as per “section 118-150” a dwelling is held eligible for main residence exemption given the property is purchased and then refurbished or reconditioned before occupying the property to give few indications[17].
Considering the present circumstances of Norman, he evidently occurs an expense of $100,000 prior to making the house appropriate for business of hairdressing. Referring to the view of Australian Taxation Office a taxpayer shall be subjected to main residence exemption from the capital gains tax. As an alternative an individual taxpayer would be allowed to claim a partial main residence exemption if any portion of the property is used for producing income. Denoting from the situation of Norman from the available six rooms he employed two rooms for the business of hairdressing. Hence, in compliance with “Subdivision 118 B” Norman shall be entitled to claim a partial main residence exemption from capital gains tax as Normal used a portion of his main residence to generating income from the business of hairdressing.
Residency for income tax purpose
According to the taxation ruling of “taxation ruling of 92/2” that expenses that are occurred in carrying out the research and development is held as permissible deductions with respect to“subsection 73 (A) of the ITAA 1997”. The business and taxpayer are able to attain excellence from their research and development activities[18]. The present situation of Avon is related to the determination of whether the company would be entitled to claiming an allowable deduction for Research and Development for the year 2016-17. Evidently the taxpayer Avon Pty Ltd in the present circumstances formed an agreement of one year that worth $500,000 with the approved research and development institute to carrying out the scientific research and development.
With regard to the state of Avon advice can be provided by complying with section 73A of Income Tax Assessment Act, 1936 that the company is eligible to claim an allowable deduction from the assessable income relating to the expenses of undertaking scientific research and development[19]. It is worth mentioning that section 73A of Income Tax Assessment Act, 1936 allows an organization to be eligible for bringing the claim of research and development expenses given the expenses is occurred in causing the taxable income. Alternatively, if an organization is noticed to be incurring expenditure on scientific research and development that is in the course of generating taxable the organization in such case is barred from claiming deductions. Additionally, subsection 1 of the section 73A of the ITAA 1936 explains the eligibility criteria of claiming for the scientific research and development expenses given the expenses are incurred from the scientifically approved research institutes[20].
Preceding from the above explanation an understanding can be gained that expenses incurred by Avon Pty Ltd as the payment to Central Queensland University an approved scientific research institute is presumed to associated with the business enhancement activities. Hence, Avon Pty Ltd shall be entitled to claiming allowable deductions from the taxable income relating to research and development expenses occurred.
Moreover, “section 73A of ITAA, 1936 of the “taxation ruling of TR 92/2” a business is given an additional tax incentive when the expenses that are occurred for scientific research from the authorized institute. However, section 73A of ITAA, 1936 of the “taxation ruling of TR 92/2” lay down to claim tax incentive the business should meet the obligatory deductions criteria.
Evidently in the circumstances of Avon Pty Ltd, the expenses on research and development is occurred from the scientifically approved research institute that is meets the criteria for section 73A of ITAA, 1936 of the “taxation ruling of TR 92/2”[21]. Moreover, Avon Pty Ltd would also avail the benefits of tax incentive from the taxable earnings as the expense of $500,000 is associated to operating efficiency and are related with scientific research and development.
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