Pre-pay unrented IP costs

Discussion in 'Accounting & Tax' started by Burramys, 24th Jun, 2019.

Join Australia's most dynamic and respected property investment community
  1. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,920
    Location:
    Melbourne
    This matter has most probably been discussed but I cannot find anything.

    A week ago I finished the reno that turned my PPOR into an IP. As of late last week it is on the rental market. In FY19 I sold an IP and have a lot of CGT, a nice problem but I'd like to reduce FY19 tax. I have paid LL insurance and OC for a year. In a few days I will pay a year of council rates and water. I have asked the PM to send me invoices for the advertising and photography, and I'll pay those.

    Is there anything else I can pre-pay?

    TIA.
     
  2. Propertunity

    Propertunity Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    3,476
    Location:
    NSW
    Mortgage interest?
     
  3. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,932
    Location:
    Brisbane
    I learned here on the forum that prepaying BCC rates is not able to be claimed. Maybe run this past your accountant before doing so.
     
    ChrisP73 likes this.
  4. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,920
    Location:
    Melbourne
    Thanks. There's no mortgage. I have claimed pre-payment of council rates before. The law may have changed, and I will check. My understanding is that any expense that can be legally claimed can be pre-paid or an immediate deduction. See this
    Rent
     
  5. ChrisP73

    ChrisP73 Well-Known Member

    Joined:
    5th Oct, 2018
    Posts:
    1,205
    Location:
    Brisbane
    But is it an expense if you haven't been invoiced yet?
     
  6. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,920
    Location:
    Melbourne
    The ATO says that expenses can be pre-paid and claimed. This seems to me to be saying that the pre-payment relates to items which are not due now and thus, by definition, have no invoices. As it happens I received a water invoice today and will pay about four times the amount invoiced. (An allowance must be made for the one park fee paid each year, and an average use over 12 months.) I've done this before, was accepted by my accountant.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    You can only claim expenses you have incurred. If you pay rates for example before you have been invoiced you are not able to claim these, you are just in credit with the council. You need an invoice.
     
    Archaon and craigc like this.
  8. Fargo

    Fargo Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,304
    Location:
    Vic
    Just because you can doesn't make it legal. 2 wrongs don't make it right. You cant make a legitimate claim unless you have been invoiced. The tax department are focussing on dodgey claims this year. Are you Feeling lucky?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    I used to know a girl that claimed stockings. But that doesn't mean stockings are an allowable deduction
     
  10. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,377
    Location:
    Qld
    The complicating factor for you is that you aren’t declaring rental income, yet claiming rental deductions. This will most likely raise a red flag with the ATO.

    Make sure your accountant is very accurate with what you can legally claim.
    Marg
     
    Rugrat and Terry_w like this.
  11. Ross Forrester

    Ross Forrester Well-Known Member

    Joined:
    30th Oct, 2016
    Posts:
    2,085
    Location:
    Perth, Western Australia
    You can prepay accounting fees.

    Sadly not many of my clients like that idea.
     
    Toby likes this.
  12. ChrisP73

    ChrisP73 Well-Known Member

    Joined:
    5th Oct, 2018
    Posts:
    1,205
    Location:
    Brisbane
    Have you maxed out your concessionally taxed super contributions? If not that will get you a deduction. Better than paying a bill cause you get to keep the money - or at least the trustee does on you behalf :) - might just be an exercise in patience before you benifit though depending on how old you are.
     
  13. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,920
    Location:
    Melbourne
    I have claimed expenses that have been incurred. The whole idea of pre-payment is to pay now for expenses that will be incurred. I have invoices for everything. but not for the next 12 months. The ATO links are not working. Amazingly, one link refers to getting a booklet.

    A non-attributed quote from June 2018 says:
    "Prepaid expenses. If you prepaid a rental property expense, such as insurance or interest on money borrowed, that covers a period of 12 months or less and the period ends on or before 30 June 2019, you can claim an immediate deduction."

    Can anyone direct me to an ATO page that clarifies this matter?

    No. I rely on compliance. Luck is not a factor.

    See this
    Rent
    "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."
    The property is available for rent, advertised, and OFIs.

    Yes.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Yes this sounds correct. But it is a bit imprecise

    INCOME TAX ASSESSMENT ACT 1936 - SECT 82KZM Expenditure by small business entities and individuals incurring non-business expenditure
     
  15. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,932
    Location:
    Brisbane
    Agree.

    It was an accountant from this forum who flagged that rates can’t be prepaid, confirmed by a second accountant.

    The accountant we were with at the time we were looking to prepay rates and utilities seemed to think it was ok (or didn’t know). He wouldn’t be paying the fine though - we would have.

    Thankfully we learned that from the forum and didn’t have to learn the hard way.
     
  16. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,920
    Location:
    Melbourne
    Agreed, and it's unattributed.

    The end of section 82KZM says
    "then, for the purposes of this Act, instead of the deduction being allowable as mentioned in paragraph (c), a proportion of the deduction is allowable from the assessable income of the taxpayer of each year of income during which the whole or part of the eligible service period in relation to the expenditure occurs, being a proportion ascertained in accordance with the formula:
    period in year/eligible service period"

    This seems to be saying that prepaid expenses are applied pro rata for the FY in which they are paid. For example, if there's an expense of $365 for one year and it's paid 30 days from the end of the FY then $30 can be claimed in the current FY. Is this example correct?

    As far as I can determine I'm viewed by the ATO as an investor, and tax returns are filed as an individual. Except for the recent reno, property matters do not take much time.

    Deductions for prepaid expenses 2017
    "A prepaid expense is expenditure you incur under an agreement for something to be done (in whole or in part) in a later income year ...

    "However, a prepaid expense may be immediately deductible if:
    * it is ‘excluded expenditure’
    * ‘the 12-month rule’ applies, or
    * it relates to a ‘pre-RBT (Review of Business Taxation) obligation’."

    By paying rates or whatever now that are due later it's prepaying. The dollar amounts are less than 12 months. The preceding sees to disagree with s. 82KZM in that s.82KZM says pro rata and the preceding says that all of the amount for later FY may be a deduction. I can find no definitive example that fits my situation.

    It's confusing.
     
  17. ChrisP73

    ChrisP73 Well-Known Member

    Joined:
    5th Oct, 2018
    Posts:
    1,205
    Location:
    Brisbane
    To the tax professionals - are there any private rulings either way on this type of thing?
     
  18. qak

    qak Well-Known Member

    Joined:
    1st Jun, 2017
    Posts:
    1,671
    Location:
    Sydney
    Terry_w likes this.
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    see also
    Taxation Ruling TR 94/25 Income tax: implications of the decision in Coles Myer Finance Ltd v. FC of T for the timing of deductions for prepaid expenses

    Legal Database