Pre paying PM fees

With June 30 fast approaching, can any of the accountant / tax savvy types confirm whether prepaid PM fees would be tax deductible in current FY?

I imagine it wouldn't be much different to prepaying interest on loans which many here already do.

Is there anything different I should be writing the invoice to help keep clients compliant?

 

Only under certain circumstances.

Clients cannot just pay in advance but you should invoice them for the amount so that it is incurred now. You would probably need a flat fee model rather than a commission based as this could mean the amount would vary.

 

I think it may be possible if the amount being prepaid is less than $1,000 and covers a period of 12 months or less.

 

The application of section 82KZM of the ITAA 1936 must be considered.

The effect of this section is to evenly spread the deduction for prepaid expenses over the years comprising an 'eligible service period'. The 'eligible service period' is the period to which the services relates to, not the term of the contract, being a period not exceeding 10 years (subsection 82KZL(1) of the ITAA 1936).

Section 82KZM of the ITAA 1936 provides that an immediate deduction is available for prepaid expenses where the following factors exist:

• the expenditure is otherwise deductible under section 8-1 of the ITAA 1997

• the taxpayer is an individual and the the expenditure was not incurred in carrying on a business, and

• the eligible service period is 12 months or less and the period ends no later than the last day of the income year following the year in which the payment was incurred.

 

Sounds like a good idea DT (if it's doable).

What happens if the property is sold 6 months later? I assume you just rebate the advanced payments.

Cheers

Jamie

 

Is the amount varying the only issue here? If it was made available only to properties that are already tenanted, then the amount is pretty predictable?

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Could rebate it - but I guess the ideal candidates for this are people who aren't considering selling (though I know circumstances can change).

 

If it could vary then it is unknown how much it would be so you could not issue an invoice.

 

What if the tenant bolts or stops paying?

 

Get a better property manager?

 

That is at the landlords risk. But if you have insurance that covers the rent arrears then it works out fine.

 

I do this, my accountant said it's ok as long as the pm invoices me each month for the anticipated amount (% of rent). This allows me to capitalise the property management fees in the IP LOC, which is handy since it's the second largest running expense after strata (and of course interest). Otherwise the management fee gets taken out of rent.

 

Yeah, good idea Chylld and DT. borrowing to pay expenses would be a pain in the bum doing it monthly but one year in one hit would be great.

 

Yup, only thinking yearly

 

I do it monthly PM doesn't mind monthly invoices and I simply have a monthly transfer set up from the LOC

 

The PM may see this as a pain in the bum for the $ involved. Remember that in 2017 you would in theory have zero deduction for PM fees if you dont repeat the process in June next year and so on..... Prepayments are of limited value.

 

Not going to offer it on a monthly basis I'm sorry

Yep, I recognise it doesn't appeal to everyone. Same as loan interest prepaying though, sometimes its good to bring forward an expense for one reason or another and I like being flexible.

 

All these small extra deductions add up, especially for those with multiple investment properties.

 

However the PM might not want their income being prepaid

I am a big believer that many small changes add up to a larger change - Often better to take that approach than to try to increase one deduction. That said interest is the big one. Has anyone found banks far harder to deal with for their prepaid interest this year ???

 

So is a better Property Manager going to stop the above?

No it's your risk as the commission is a percentage of rents collected, and if you haven't collected it, surely you could have to reimburse the commission?

You're assuming there is insurance, and even that only lasts so long.

Regarding prepaying, keep in mind the case where a tenant prepaid 6 or 12 months rent, the landlord spent it, the tenant legally broke the lease and wanted his rent refunded...................

 

TR 97/7 paragraph 21 acknowledges that an expense may be incurred when paid in advance.

However, indeterminate expenses anticipated to be incurred may not be sufficient. A reliable estimate or an almost certain amount such as, say, 80% of the previous year's fees, may be more convincing.

The agent might defer recognising the income until the services have been performed, such as by holding the funds in a suspense or trust account.

Hopefully this does not make the landlord's prepayment look merely like a deposit as opposed to a prepayment. It all depends upon the surrounding facts.

Personally, the less of my money held by estate agents, financial planners and travel agents "in trust" the better. They are not renowned for discharging their fiduciary duties adequately.