Edited version of private advice

Authorisation Number: 1051633062986

Date of advice: 26 February 2020

Ruling

Subject: Prepaid rental property expenses

Question 1

Are you entitled to a deduction for your share of the upfront expenses relating to rental income protection insurance and custodian house and garden care services?

Answer

Yes. Having considered your circumstances, the rental income protection insurance and custodian house and garden care services are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). You can claim a deduction in the income year you incurred the expenses as the expenses have the necessary connection with the earning of your assessable rental income.

In your case the possible application of section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) was considered. This section requires the deduction to be apportioned over multiple income years if the 12 month period over which the services are provided ends after the last day of the income year after the one in which the expenditure was incurred. The presented facts show that the expenditure was incurred in the 20XX-XX income year and the 12 month eligible service period started in the 20XX-XX income year and ends part-way through the following income year being 20XX-XX. That is, it does not end after 30 June 20XX; therefore this section of the legislation is not applicable.

Further information in relation to rental properties can be found by searching 'QC 58664' on ato.gov.au

Question 2

Are you entitled to a deduction for your share of the upfront fee relating to a quantity surveyor's report in the year it was occurred?

Answer

Yes. In this instance we consider that the quantity surveyor's report you obtained to be considered as an expense in managing your tax affairs. 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.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You jointly entered into a contract to purchase a house and land package to be used as an investment property.

The construction of the house occurred.

You jointly entered into an agreement with an entity, and prepaid expenses, in relation to the services that the entity will provide. You provided an invoice dated, listing a breakdown of the expenses as follows:

1. Custodian house and garden care service

·         a minimum of 15 visits per year,

·         mow, weed, edge, prune trim and clean up the front yard,

·         mow, weed, edge, prune trim and clean up the backyard from handover to the commencement of a lease over the property,

·         fertilise front yard annually,

·         provide photographic updates on the house two times per year; and

·         liaise with property managers to assist in satisfying tenant/owner garden care queries.

An entity agrees to provide or arrange for the service for twelve months from the handover date.

2. Rental Income Protection Guarantee

·         a guaranteed 75% of market rent for any period the house and land is vacant during the term of the Rental Income Protection

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

3. A quantity surveyor's report

·         depreciable assets and capital works figures to be ascertained through inspections with the builder at the lying of the slab, lockup and final stages of construction.

The property was rented out.

You are not carrying on a business of renting out 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 1997 Subsection 82KZL(1)