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. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    There would be heaps.
    A quick google shows an unsuccessful one:
    Legal Database
     
    ChrisP73 likes this.
  2. ChrisP73

    ChrisP73 Well-Known Member

    Joined:
    5th Oct, 2018
    Posts:
    1,205
    Location:
    Brisbane
    Thanks.This makes it pretty clear...

    " the of an amount equal to your future business purchases does not mean that you have incurred an expense. The amount is merely an impending, threatened, or expected loss or outgoing."
     
  3. qak

    qak Well-Known Member

    Joined:
    1st Jun, 2017
    Posts:
    1,671
    Location:
    Sydney
    But they didn't even pay the money anywhere - just moved it to another bank account was my understanding?
     
    Terry_w likes this.
  4. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    In the pbrs the important bits are the ATO s justification. They give a quick summary of the law, or their interpretation of it.
     
  5. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,932
    Location:
    Brisbane
    I recall that a few years ago I planned on paying four times the quarterly rates figure before the end of June for the coming year I could claim it as prepaid.

    I also recall learning here that because BCC would not raise an invoice for prepayment of rates that I couldn’t prepay the rates the way I’d planned to and claim it.

    So is there a clear answer to this? It’s late and my brain hurts but the answers here aren’t helping me (and trying to understand the ATO link makes my brain hurt even more).

    I don’t need to prepay anything this year but I’m just confused now and others may also be confused. I need things explained to me like I’m a toddler. ;)
     
  6. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Basically there is not incurring of an expense unless there is a legal obligation to pay it. A few weeks ago I set up a direct debit for council rates, i did a daily payment instead of quarterly and it went on for more than 27 days before the credit card limit was exceeded and I found out.
    The council just treated this as paying in advance, and not a prepayment of expense because I had not incurred it. (they gave me a choice, to get it refunded or leave it for the next 5 years or so and each month they would have debited the expense from the credit.

    So you cannot prepay rates, interest, or insurance etc until you have been invoiced. Some invoices give an option of paying now, or in installments, that is ok to pay upfront and claim it all. But not if you haven't been invoiced.
     
    craigc, Marg4000 and wylie like this.
  7. Hosko

    Hosko Well-Known Member

    Joined:
    21st Jun, 2015
    Posts:
    293
    Location:
    Victoria
    Has your accountant got a view on this? Pay for their advice, there's a deduction straight up.
     
  8. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,917
    Location:
    Melbourne
    I wanted background advice before asking my tax advisor, who only does tax and has qualifications in this area. Your advice above was most helpful. The tax advisor
    said:
    "I will accept prepayments for rates with or without invoices and there is a reasonably arguable position that you will incur costs. With water there is a consumption amount and that makes things a little different, an invoice would be nice. Do not go over the previous year amount. The property only needs to be available for rent."

    In the past I have pre-paid council rates, OC, water and other items. All were accepted by my tax advisor. All were later found to be slightly under the actual amount due for the next FY. All entities kept my payments.

    I will be pre-paying more on Friday, and if there's a problem I will advise here. This will be in early 2020 as significant CGT will be due and I'm lodging as late as possible.
     
  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
    It doesn't matter what the accountant accepts though, the real deciding factor is what will the ATO accept.
     
    craigc, meni, qak and 1 other person like this.
  10. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,932
    Location:
    Brisbane
    The accountant we had been using didn't tell me I couldn't prepay rates, utilities infrastructure charges... and then I asked here on the forum and got a surprise that perhaps my accountant was wrong.

    Perhaps my accountant back then didn't know the answer and was happy for me to take the risk.

    If you are audited, will the accountant giving your the "all clear" pay your fine? ;)
     
  11. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    13,932
    Location:
    Brisbane
    Thanks @Terry_w this is pretty clear. It doesn't mean people won't do it, but I'd not like to be explaining myself if I was audited. And my old accountant either didn't know or didn't care. He certainly didn't tell I couldn't do it when I was planning to prepay rates and utilities.
     
  12. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,917
    Location:
    Melbourne
    I rely on advice from the professionals I engage, people familiar with my circumstances. I normally do not submit invoices to my tax advisor, just a spreadsheet, but for FY19 I will submit the last invoices for all the prepaid items. I will also describe how I got to the figures. For example, the last water invoice was $200 for a quarter, but I will not be claiming $800. I have looked at the average cost and use over several years and calculated my projected water costs for FY20. I will be paying a little under this.

    Responsibility for the accuracy of a tax return lies with the taxpayer, which is why I carefully check every line in the return that is sent to me. Now and again there's a typo, and this is fixed. If the ATO audits me and finds an error in the prepayments I will be able to show that I did everything that a reasonable and prudent person would do. If I am fined then this can be recovered from my tax advisor.
     
    Terry_w likes this.
  13. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    The trouble is you already know what the tax advisor is saying is wrong, so this could be used by the advisor and their insurer to avoid payment to you. However it is going to be a relatively small amount so it won't amount to much at all of a loss, but I hope Burramys is not your real name just in case.
     
    wylie likes this.
  14. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,917
    Location:
    Melbourne
    I have relied on my tax advisor for about 10 years and see no need to dispute the advice now. When I submit my tax information in about six weeks I will detail the concerns in the above posts. I will then know if I can or cannot claim the prepayments. Worst case is that I cannot, no big deal, and no payments for a few things for a year.

    My tax advisor knows my circumstances and tax law. What is legal for one person may not be legal for another. The tax advisor has no idea that I am posting here, so I cannot see how there can be a link to me. In any case I do not know that the tax advisor is wrong. Differing views have been posted here, and these will be tested.

    It's been very interesting seeing these differing views and reading the links, most helpful. It would have been easier if the ATO had more information online. Burramys is not my name. The picture at the left is Burramys, a pygmy possum.
     
    qak likes this.
  15. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,667
    Location:
    Australia wide
    Have a read of this one.
     
  16. craigc

    craigc Well-Known Member

    Joined:
    25th Jun, 2016
    Posts:
    1,575
    Location:
    Melbourne
    ‘Used to know a girl’ hmm - it could potentially be a deduction depending on her ‘profession’ ;)
     
    Terry_w likes this.
  17. craigc

    craigc Well-Known Member

    Joined:
    25th Jun, 2016
    Posts:
    1,575
    Location:
    Melbourne
    You are both likely correct, some expenses would appear to be claimable based on facts given.
    But the fact that there are expenses claimed related to rental costs but no rental income declared in the return for the year will raise a flag with ATO analytics software.
    You should likely expect a please explain sent to your accountant to justify this.
     
  18. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    6,377
    Location:
    Qld
    At one time, Air hostesses and models could legitimately claim deductions for stockings and makeup (clearly the “professions” you were thinking of ??).
    Not sure if this still applies.
    Marg
     
    craigc likes this.
  19. Burramys

    Burramys Well-Known Member

    Joined:
    26th Jun, 2015
    Posts:
    1,917
    Location:
    Melbourne
    An update. I submitted the spreadsheet with notes and my tax adviser has accepted all the expenses. This includes but is not limited to prepaying council rates, water, and owners corporation, paid in late June after the IP was on the rental market and before rent was received. I summarised the advice above that these items were questionable. In May 2020 when the tax return is submitted the ATO may query the expenses. Around July 2027 I think it will be safe to conclude that the expenses will not be queried.
     
    Terry_w likes this.
  20. TSK

    TSK Well-Known Member

    Joined:
    14th Apr, 2018
    Posts:
    625
    Location:
    VIC
    All depends on the type of stocking. Nurses can claim them afaik, suspect that flight attendants or cabin crew could claim them too with reference to reducing deep vein thrombosis i.e. protective. Fish nets...probably not some much.