Torana Ltd applies the principles of tax‐effect accounting as per AASB 112/IAS 12 in accounting for income tax. Torana Ltd calculates depreciation expense on its plant using the straight‐line method, but applies an accelerated method for tax purposes. As a result, tax depreciation in the year ended 30 June 2024 is larger than the related accounting depreciation expense.

Torana Ltd has also recognised rent received in advance from buildings that it owns.
These receipts are included in the current year’s taxable profit but shown in the financial statements as a liability.

Required 

1. Explain the principles underlying tax‐effect accounting.

2. Determine how Torana Ltd should account for the noted differences in treatment for accounting and tax of depreciation and rent received in advance.

3. Analyse under what circumstances Torana Ltd should raise deferred tax accounts and how they should be classified in the statement of financial position.