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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012717689962

Ruling

Subject: Prepaid investment expenses

Question 1

Are you entitled to a deduction for the upfront expenses relating to custodian house and garden care services?

Answer

Yes, apportioned over the eligible service period.

Question 2

Are you entitled to a deduction for the portion of the upfront fee for rental income protection insurance?

Answer

Yes, apportioned over the eligible service period.

Question 3

Are you entitled to a deduction for the upfront fee relating to a quantity surveyors report in the year it was occurred?  

Answer

Yes.

This ruling applies for the following periods:

The scheme commences on:

1 July 2013

Relevant facts and circumstances

During the 2014 financial year you entered into a contract to purchase a house and land package to be used as an investment property.

The construction of the house commenced during July 2014 and is expected to be completed by the end of 2014.

You entered into a Customer and Rental Support (CARS) agreement with a company (the company), and prepaid expenses incurred in relation to the services that the company will provide. You provided an invoice dated in the 2013-14 financial year, listing a breakdown of the expenses as follows:

The eligible service period for this service will commence from the date of practical completion of the house, and will be for a service period of 12 months.

The eligible service period for this service is 52 weeks, the commencement date being 32 weeks after the commencement of construction of the house.

The property will be made available for rent as soon as practical after the handover date.

You are not carrying on a business of renting properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1936 Section 82KZM

Income Tax Assessment Act 1936 Subsection 82KZL(1)

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.  

However, if the expense is deductible under section 8-1 of the ITAA 1997 but is a prepaid expense, section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) needs to be considered. 

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

However where the eligible service period is 12 months or less and ends after the last day of income after the one in which the expenditure was incurred, the deduction for the expenditure must be apportioned over the eligible service period by using the formula:

Expenditure

x

number of days of eligible service period in the income year
total number of days of eligible service period

Custodian house and garden care service

General garden maintenance expenses are incurred to maintain the upkeep of your rental property and as such are allowable deductions under section 8-1 of the ITAA 1997.

However as the expenses were prepaid, the application of section 82KZM of the ITAA 1936 will need to be considered. The relevant facts are:

Therefore you are not entitled to an outright deduction for the expense incurred for the custodian house and garden care in the 2013-14 financial year. You will need to apportion the deduction for the expense over the 2014-15 and 2015-16 financial years using the formula provided in the explanation above.

Rental income protection plan

Expenses incurred by a taxpayer in protecting investment income and in managing investments are generally deductible.

Premiums paid under a policy which provides against loss of rental income in the event of vacancy of a rental property are considered to be incurred in protecting investment income.

There is sufficient connection between the purchase of a cover against the loss of rental income and the consequent earning of assessable income. The outgoing is not of a capital, private or domestic nature, and is therefore an allowable deduction under section 8-1 of the ITAA 1997.

However as the rental income protection expense is prepaid, section 82KZM of the ITAA 1936 needs to be considered. The relevant facts are:

Therefore you are not entitled to an outright deduction for the expense incurred for the rental income protection plan in the 2013-14 financial year. You will need to apportion the deduction for the expense over the 2014-15 and 2015-16 financial years using the formula provided in the explanation above.

Services post construction - quantity surveyors report 

Section 25-5 of the ITAA 1997 allows a deduction where an expense is incurred by a taxpayer in order to manage their tax affairs. The cost of creating and maintaining records for income tax purposes qualify as an allowable deduction under this section.

The quantity surveyors report is required to create and maintain records to determine your tax liability.

The expense in obtaining the report is considered to be an expense in managing your tax affairs. Therefore you are entitled to a deduction for the upfront fee incurred which relates to obtaining the quantity surveyors report in the year that the expense was incurred.

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