6 months rent payment up front - in which tax year is it deemed as income?

So the question remains, can I rely on the precedent set by the Arthur Murray case? I feel like I can, but I'd love to get a straight out and clear resounding yes from a tax law specialist so I don't end up having to pay much more tax than required!

I am unaware of any judicial precedent for passive rental income.

1) Arthur Murray involved a business that was required to recognise income for services on an accruals basis,

2) The money was held in a suspense account until the services were performed; and

3) There was a history of the taxpayer actually refunding fees where the full services could not be performed.

In the decision, the High Court considered normal commercial and accounting principles when selling goods or supplying services.



So, where there is an explicit term to the agreement that any amount is refundable should the tenant vacate before the end of the year then it *may* be deferred until that time has passed. The Commissioner may apply this principle to passive residential rent, see ATO ID 2003/526.

This still requires evidence that you would be prepared to refund the amount and you account for it as a contingent liability until the time has passed.

It is not well settled and advice for your specific circumstances is recommended.
 
You could ask the tax office, probably in writing if you want to be sure.

Otherwise, why complicate things, get paid to end of tax year in one sum, then other agreed amount/s in next year/s.
 
Read paragraphs 129 and 130 of TR2002/14
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR200214/NAT/ATO'&PiT=99991231235958

130. The rent should be brought to account over the period for which the payment is made, in accordance with the Arthur Murray principle.F31 This was the approach adopted by the Taxation Board of Review in Case B47, 70 ATC 236.

This TR concerns a retirement village operator receiving lump sum payments for rent upfront.

Here is a link to the case mention in the above quote, Case B47, 70 ATC 236.
http://www.iknow.cch.com.au/#!/document/atagUio554854sl16891300/case-b47

It is from 1970, but involved a tenant paying up to 10 years rent in advance.
However, the taxpayer should be deemed to have derived assessable income week by week at the rate of ?25 per week in the form of rent which accrued to him from 1 March 1965 to 30 June 1965 under the terms of the lease agreement of 31 March 1965. `
 
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Excellent stuff! :)

Aside from the tax stuff, I'd be concerned the tenant is trying to hide something in their applications by sweetening it so much. Are you sure you checked everything? What's their reason for wanting to pay that?
 
This TR concerns a retirement village operator receiving lump sum payments for rent upfront.

Yes, but ATO ID 2003/526 concerns a private individual letting their investment property to a relative.

It applies the same reasoning.

On this basis, the Commissioner appears to be changing his stance to now applying the Arthur Murray principle to passive investors.
 
Aside from the tax stuff, I'd be concerned the tenant is trying to hide something in their applications by sweetening it so much. Are you sure you checked everything? What's their reason for wanting to pay that?

His former landlord is a very trustworthy Somersofter.... that somersofter was happy to recommend him. His brother is a lawyer and he was happy to have him as a referree.
I think it's fine plus he put in an extremely detailed application and sent photos of his passport and licence.
 
In the absence of a private ruling then general principle of receipts based accounting applies to a individual taxpayer. I would also fail to see how a resi lease addresses a prop-rata entitlement for income being bought to account over the period to which it applies.

Take care with considering TR ID and cases which don't relate to a individual taxpayer. ATO ID 2003/526 relates to a life tenancy which is very different to a upfront rental payment representing 6 months. Ditto the retirement village operator is a business and accrual principles may prevail. Even a small business rental operator may have to adopt the receipts basis.
 
I spoke with tax accountants today and they said if I was a real estate agent I could prorate the payment. But as this is not my main source of income, I'd have to declare it when I receive it. So I've arranged for the tenant to pay me the first 6 weeks of rent now, the remainder at the beginning of July.
 
I spoke with tax accountants today and they said if I was a real estate agent I could prorate the payment. But as this is not my main source of income, I'd have to declare it when I receive it. So I've arranged for the tenant to pay me the first 6 weeks of rent now, the remainder at the beginning of July.

a simple solution.
 
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