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What expenses can you prepay?

Discussion in 'Accounting & Tax' started by Kirsti327, 3rd Jun, 2016.

  1. Kirsti327

    Kirsti327 Active Member

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    Hi all,

    I have higher than normal income this year pushing me into the next tax bracket. I'm trying to work out how I can bring forward about $10k-$12k worth of expenses.

    I've checked with my banks and the break cost on my current fixed rate loan would outweigh any tax savings from switching to interest in advance.

    I always pay insurance before 30 June so no benefits there. I'm also far too young to look forward to my super so not interested in making concessional contributions if there are other options that would benefit me more quickly.

    I was planning to contact Brisbane council and the strata managers about prepaying next years rates & fees on my two properties. That could get me about $7k between them.
    Bris Council invoices don't normally give me the option of paying the full year upfront even though Newcastle Council does. Does anyone know if there's any problem getting an invoice/receipt for the full year from BCC?

    Are there any other suggestions for what can be prepaid? I've seen the thread about PM fees and thinking maybe I offer to prepay a few months to each of my PMs, but that wouldn't really add up to much unless I do at least 6 months.

    FYI I'm also in the process of buying a third IP - an OTP apartment that won't settle til maybe late July. I might be able to prepay a depreciation schedule and handover inspection with the work to be done after year end. Conveyancing fees would be a capital cost so no benefit to paying them early.
    Is there anything else I haven't thought of?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You can't pay an invoice and claim it until the expense is incurred. This is usually when you are obligated to pay legally - such as a tax invoice being issued.
     
  3. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Kristi the breakcost may be the deduction you are seeking Just depends how much that breakcost is. I have seen a few banks do a switch if the fixed rate loan is longer term....

    EG lets say you have a 3 year fixed loan. The bank does a break on the three year and rewrites it to 2 years at the old rate. The effective cost in that case may be far lower than the three year rate. Its often far cheaper.
     
  4. wylie

    wylie Moderator Staff Member

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    Last edited: 6th Jun, 2016
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Last edited by a moderator: 6th Jun, 2016
  6. wylie

    wylie Moderator Staff Member

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    Last edited: 6th Jun, 2016
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  7. kierank

    kierank Well-Known Member

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    Are you sure you can't do this. I had a 3 year fixed rate loan and each year I paid the interest in advance. No break costs.

    This fixed rate expires tomorrow. I have taken up another 3 year fixed rate (at a lower rate :) :)) and I am paying the next year's interest on it this week. I will be doing that for the next 2 years at least. No break fees. This is with St George.

    You might have to think about changing banks. Who are you with?
     
  8. wylie

    wylie Moderator Staff Member

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    I also prepay loans each year on a fixed rate. I usually fix for one, two or three years and each year through that period I can choose to prepay or not.
     
  9. wylie

    wylie Moderator Staff Member

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    Last edited: 6th Jun, 2016
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I concur....If it cant be billed its a tough sale.
    Its like paying extra on a loan isnt interest that is deductible.

    PS Paul@PFI can issue a large invoice and if its paid before 30 June he will ensure its deductible. :rolleyes:
     
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  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Changing banks may trigger a early repayment fee. Deductible but best avoided.
     
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  12. kierank

    kierank Well-Known Member

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    Sorry, I was not totally clear. I meant when the fixed rate period has expired. Doesn't help with this year but paying interest in advance becomes an option for future years.
     
  13. Kirsti327

    Kirsti327 Active Member

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    I knew there would be break costs and would be happy to pay it if it was just an estimate of future economic cost of the loan + switch fee, but my biggest loan is through NAB Homeside and apparently they don't offer interest in advance under that brand anymore so it would mean a full discharge, new application to NAB proper, and paying LMI again. Absolutely ridiculous since the NAB group already has an LMI policy for me. I did get a valuation done and it wasn't high enough to avoid LMI.
    Apart from that I've got Adelaide Bank and they don't have an interest in advance option. The external refinance costs would be more than expected interest saving and might not be done in time anyway.

    Also FYI, I heard back from Brisbane Council and my strata managers and neither can invoice me for the full 12 months (or even 6 months) in advance :( Really surprised me with BCC, since I live in Newcastle Council and they always bill for the full 12 months upfront, with the option of quarterly installments, but in Brisbane quarterly is the only option.
     
  14. Kirsti327

    Kirsti327 Active Member

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    Hmm.. when you say "tough sale" it sounds like "not impossible"

    What happens if I BPAY council 4 times the quarterly installment before 30 June and use my bank statement as proof of payment? Individuals are assessed on a cash basis aren't they?
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Not deductible as you haven't incurred the expense.
     
  16. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    How are prepaid council rates any different to prepaid interest?

    I've never looked at this before but there are a number of cases referred to in TR 94/25 which suggest that a prepaid expense which is on revenue account is fully deductible in the year in which the payment is made (regardless of whether the prepayment was voluntary).

    If the prepayment is for more than 12 months there are specific prepayment rules which require the deduction to be appotioned across the relevant income years to which the expense relates.
     
  17. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Para 4 of that ruling is key to understanding :

    ....a prepaid expense means a payment which extinguishes an existing liability or prevents a liability coming into existence at some time in the future, provided that the payment is:
    (a)
    in respect of goods and services to be provided, in full or in part, on or after the date the payment is made; and
    (b)
    on revenue account

    The decision in FCT v Raymor is of specific relevance. TR 94/25 and the decision in Coles Myer really only addresses the issue of the 12month rule.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    An expense must be 'incurred' before being deductible - s8-1. With interest the lender charges upfront - it is added to the loan. If council rates that haven't been invoiced yet - is this incurred even if paid? I don't know for sure, but expect not.
     
  19. Daniel Taborsky

    Daniel Taborsky Well-Known Member Premium Member

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    I'm not sure either.

    You incur an expense when, broadly, you have a current legal obligation to pay the expense. Generally, this is the same time as when an invoice is issued (but not always). It doesn't matter if the expense hasn't been paid - it is incurred regardless of payment.

    Can an expense also be incurred if you don't have a current legal obligation to pay it but you make a voluntary prepayment to prevent a liability coming into existence at some time in the future (e.g. council rates for the following year)? I'm not sure and it doesn't look like it has been explicitly considered before by the courts. It would be interesting to apply for a private ruling and get the ATO's view on it.

    Do you get a discount for prepaying interest these days? Or is the only benefit in doing so the tax benefit?
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I've just looked up the Master Tax Guide - there is a whole chapter on 'timing issues' so it is relatively complex.

    There are prepayment rules which prevent claims for prepayments of expenses in certain situations.

    But it seems expenditure under $1000 are not effected by these prepayment rules.

    But the expense will still have to be incurred.

    A debt is incurred one the payer is legally obligated to pay. Paying rates which haven't been charged by the council yet would mean there is no actual legal requirement to pay them.

    I don't think it would be deductible in that case.