PPOR to IP - apportioning expenses

Hi all,

Long time reader, first time poster.

My scenario: I purchased a unit in Melbourne (settled January 2019). It was my PPOR from Jan 2019 to Mar 2020. A tenant moved in Mar 2020 and was there for the rest of the financial year. The split would be 247 days as PPOR and 119 days as IP.

I am a little confused in how to correctly apportion my expenses on the property as it moved from being my PPOR to an IP within the financial year.

Let's take the Owners Corp fees for example. I paid four quarterly payments of $500.00 for the levies within the FY. Would I get the total amount paid in the FY ($2,000.00) and divide by 366 days of the year and multiply by the 119 days it was an IP (equates to $650.28)?
I paid only the final quarterly levy invoices ($500.00) in the period whilst the property was an IP, could I only then claim that $500.00 payment as a deduction? Or could I use the first method and claim $650.28? Same thing for the council rates and water rates, which I paid quarterly?

Would this be the same for interest paid on any loans pertaining to the property? Would I pro rata on a daily basis then multiply by 119 days? Or can I only claim the interest payments I physically made from the time the property became an IP?

Thanks in advance for any help!

 

Work out on a daily basis

 

Thanks Terry!

A hypothetical here so I know for next time....I received the levy invoice for 01/07/20 - 30/09/20 quarter in June. If I had of paid that prior to 30/06/20, that would be a deductible expense for FY20 right? It isn't like it an expense for FY21 because the 'supply period' is in the following financial year?

Also, my mortgage package charges me $395.00 a year in an annual fee. Is this something I can claim as an immediate deduction in the one FY? Or do I have to spread over five years (as per example #22 in the PDF doc here https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Rental-properties-2019.pdf)?
I am assuming the former as it is more loan establishment fees which would need to be spread over five years, regular annual fee I can just claim as an immediate deduction?

Thanks

 

Each cost needs to consider that period of service initially/ Once the first is apportioned based on the date/s then it should them maintain deductibility at 100%. eg The interest will be apportioned in the month of April and then would be 100% thereafter. For the levy its deductible when paid (2021) but would need to apportion between the pre-rental period and post rental. As its post rental ist likley deductible BUT check our video about levies. The nature of SPECIAL levies may mean these are non-deductible it it relates to a capital works purpose. The ATO 2020 Rental Property Guide has been upgraded this year about that topic and I found their explanation very clear.

The bank loan fee is NOT a borrowing expense and is apportioned reasonably based on the use of that apckage. eg If you have only deductible laons with that lenders its 100% (based on the period of the service of course). But if you had two loans apportion based on the periods and also the % of each loan purpose. A monthly lender fee is also deductible for the rental period. Borrowing fees may include past establishment, valuation, LMI and legal charges imposed by a lender but NOT duty

Our PAS TV series covers these issues and our new (client only) 2020 update delves deeper into this specific topic about apportioning as we have noted many enquiries for new or ceased rentals.

 

Hi Paul, is the % you speak of based on the interest charged or the outstanding amount?

Eg. If I had an IP loan of $150k and a non deductible equity release loan of $50k which was fully offset, so no interest charged.
Would the annual bank fee be 100% deductible or 75%?

EDIT: are you able to explain a bit more about the period of service? - are you saying here if in above example the IP loan was taken out 5 yrs ago, but the equity release was taken out 3 yrs ago, that makes a difference in the calculation?

 

For a package fee likely based on time (eg pre-post IP rental) AND a reasonable average basis for the two different purposes of the loan (eg Ip / private). Given the low value for the fee just pick the % at a point in time for the two loan balances.

Period of service refers to the charges for costs. Eg Property insurance may be $1350. Covers the period 1 July 19 to 30 June 20. We arent concerned with when it was paid provided its apid after 1 July 2019. rental commences 1 Feb 2020.

$1530 / 366 x 151 (day between 1 Feb and 30 June) = $631

For borrowing exenses the borrowing costs would have been deductible over 60months (dont think of 5 years). Start date ? Then there will be X months in year one, 12 y2 etc until year 6. whne the final is potentially applicable. So apportion 2020 for the time property was rented AND for the different loan uses if applicable to that fee. If the fee relates to 5 years ago it wont have anything to do with release 3 yaers ago and may be non-deductible IDK.

 

The OC levy was just the regular maintenance levy, no special levies paid.

For the loan interest, the loan is 100% just for this property (no personal portion etc). The loan gets drawn on the 9th of each month. The tenant moved in 06/03/20. In terms of apportioning the interest, would it look something like this:
- Interest payment 09/03/20 = apportion for period 06/03/20 to 08/03/20 as deductible, rest is not.
- Interest payment 09/04/20 = 100% deductible
- Interest payment 09/05/20 = 100% deductible
- Interest payment 09/06/20 = 100% deductible

Or could I just take the whole amount of interest paid in the financial year and get a daily rate then multiply by number of days the property was a rental in that FY? Is that not technically the correct way? I feel that method would yield better for me, would either method be ok?

So to clarify, the $395.00 annual loan package fee is fully deductible in that FY? I just need to apportion by how many days in that FY the property was a rental?

Whereas loan establishment fees are something which has to be spread over five years?

Apologies for all the questions. Thank you so much for your time and expertise, it is much appreciated!

 

Just wanted to point out that "Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent – that is:

• the property is advertised in ways which give it broad exposure to potential tenants, and
• having regard to all the circumstances, tenants are reasonably likely to rent it."

Rental properties 2020 publication from ATO website

 

Yes good point, I will have to check what date the ad went up online. I was living in the property right up until the new tenant moved in though, so would the say two weeks prior to that date when the ad went up still be 'rented out' period for tax purposes?

 

If you were living in it the relevant date is when U moved out, not when first advertised it

 

No. The earliest possible date is the date after you move out. The property cannot be available if you are living in it.