Edited version of private advice

Authorisation Number: 1051934082211

Date of advice: 20 December 2021

Ruling

Subject: Rental - prepaid expenditure

Question 1

Is the Taxpayer entitled to a deduction for the portion of the Care and Rental Support (CARS) prepaid expense relating to Custodian House and Garden Care Services?

Answer

Yes. However, apportioned over the eligible service period should the eligible service period end after the last day of the 20XX-XX financial year.

Question 2

Is the Taxpayer entitled to a deduction for the portion of the CARS prepaid expense relating to the Rental Income Protection Guarantee?

Answer

Yes. However, apportioned over the eligible service period should the eligible service period end after the last day of the 20XX-XX financial year.

Question 3

Is the Taxpayer entitled to a deduction for the upfront expense relating to a Quantity Surveyor's Report in the year it was incurred?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer purchased a house and land package as an investment property (Property) and settled on the land in the 20XX financial year before construction of the house commenced.

The Taxpayer is sole owner of the Property.

The construction of the house was completed in the 20XX financial year.

The Property was made available for rent as soon as practical after the Handover Date, being the date on which the house is handed over to the owner by the builder.

On settlement date the Taxpayer entered into a Care and Rental Support (CARS) Agreement with the Company and paid a CARS fee in exchange for services that the Company will provide.

The services covered by the CARS fee is outlined in the CARS Agreement. In summary:

1.    Custodian House and Garden Care Service

CWB agrees to provide or arrange for the following services for twelve months from the Handover Date:

a)    A minimum of 15 visits to the House per year

b)    Mow, edge, weed, prune, trim and clean up the front yard as required

c)    Mow, edge and weed the back yard from handover to the date of commencement of the lease over the Property (following which the commencement of a lease over the Property, the back yard is the responsibility of the Owner or tenant)

d)    Fertilise the front yard annually

e)    Provide photographic updates on House two times per year

f)     Liaise with property managers to assist in satisfying tenant/owner garden care queries.

2.    Rental Income Protection Guarantee

CWB agrees to guarantee 75% of the Market Rental (calculated on a daily basis) for any period during the Term of this Rental Income Protection Guarantee that the House and Land are Vacant if certain conditions have been satisfied. Such as the Taxpayer entered into and maintained a Landlord's Protection Policy of insurance in respect of the House and Land and maintained the insurance cover during the whole of the Term of this Rental Income Protection Guarantee

The term of this Rental Income Protection Guarantee will commence to run where the Land purchased under the Land Contract does not already have a house built on it, thirty-two (32) weeks after commencement of construction of the House on the Land.

The Term of this Rental Income Protection shall be a period of fifty-two (52) weeks from the relevant Commencement Date

3.    Custodian Care Programme (Quantity Surveyor Report)

CWB agrees to provide or arrange for a Quantity Surveyor's Report on the depreciable assets and capital works of the House and Land to be ascertained through inspections with the Builder at the laying of the slab, lockup and final stages of construction.

The CARS Agreement says CWB's obligation to perform the services will commence on the Handover Date or the date on which CWB considered that the Property is ready to be prepared for leasing to a tenant.

Additional information was also provided about the services as part of the application for private ruling as follows:

1.    Custodian House and Garden Care Service - Although paid for before the home was ready for rental, the service period was provided for 12 months starting from the time the home was ready to be tenanted

2.    Rental Income Protection Guarantee - An insurance for loss of income or inability to rent the property out. Although paid for before the home was ready for rental, the service period was provided for 12 months starting from the time the home was ready to be tenanted

3.    Quantity Surveyor's Report - A depreciation report on the property that would be received by the Taxpayer following the completion of construction of the property but paid for upfront

The Taxpayer provided a Tax Invoice from the Company with a description of the expenses

A Rates Notice and Water and Sewerage Rate Notice shows the residential address of the Property as Address A.

CoreLogic RP Data shows Address A was listed for rent in the 20XX financial year.

The Taxpayer is not in the 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

Reasons for decision

Section 8-1 of the 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 expenses are deductible under section 8-1 of the ITAA 1997 but are prepaid expenses, section 82KZM of the ITAA 1936 needs to be considered.

A prepaid expense is a cost incurred under an agreement for services to be done (in whole or in part) in a later income year.

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 expenditure was not incurred in carrying on a business

•         the expenditure is not excluded expenditure, 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.

However where the eligible service period is 12 months or less and ends after the last day of the income year 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:

Custodian House and Garden Care Service

General gardening and lawn mowing expenses are allowable deductions under section 8-1 of the ITAA 1997. The Custodian House and Garden Care Service expense relates to the maintaining the upkeep of the Property. Therefore ordinarily the expense would be deductable under section 8-1 of the ITAA 1997.

However as the expense was prepaid under the CARS agreement, the application of section 82KZM of the ITAA 1936 will need to be considered. In order to determine the timing of the deductibility of the prepaid expense, we considered the following factors:

•         The Taxpayer is an individual who is not carrying on a business of renting properties

•         The eligible service period is for 12 months commencing from the Handover Date, or the date on which CWB considered that the Property is ready to be prepared for leasing to a tenant. This appears to be in the 20XX-XX financial year.

•         With the eligible service period likely commencing in the 20XX-XX financial year, the eligible service period will end before the last day of the income year following the year in which the fee was incurred, that is, before 30 June 20XX.

Therefore, the Taxpayer is entitled to an immediate deduction for the expense incurred for the Custodian House and Garden Care service in the 20XX-XX financial year.

Note however, if the eligible service period did not end before 30 June 20XX, the deduction for the prepaid expenditure would be apportioned over the 20XX-XX and 20XX-XX financial years using the formula outlined above.

Rental Income Protection Guarantee

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 expense is therefore an allowable deduction under section 8-1 of the ITAA 1997.

However as the Rental Income Protection Guarantee expense was prepaid under the CARS agreement, section 82KZM of the ITAA 1936 needs to be considered. The relevant facts are:

•         The Taxpayer is an individual who is not carrying on a business of renting properties

•         The eligible service period is for 12 months (52 weeks) commencing from 32 weeks after commencement of construction of the house. We are not aware of the date construction of the house commenced. However the CARS Agreement also says the eligible service period started from the time the home was ready to be prepared for leasing to a tenant. Given the Property was listed for rent in April 20XX, it appears the eligible service period started in the 20XX-XX financial year.

•         With the eligible service period likely commencing in the 20XX-XX financial year, the eligible service period will end before the last day of the income year following the year in which the expense was incurred, that is, before 30 June 20XX.

Therefore the Taxpayer is entitled to an immediate deduction for the Rental Income Protection Guarantee expense incurred in the 20XX-XX financial year.

However, if the eligible service period did not end before 30 June 20XX, the taxpayer would need to apportion the deduction for the expense over the 20XX-XX and 20XX-XX financial years using the formula provided above.

Further information in relation to pre-paid rental property expenses can be found by entering Quick Code reference QC 23635 into the search function of our website ato.gov.au. Information for individual taxpayers incurring non-business prepaid expenditure can be found at QC 64888.

Custodian Care Programme (Quantity Surveyor's 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 surveyor's report is required to create and maintain records to determine the Taxpayer's tax liability.

The expense in obtaining the report is considered to be an expense in managing tax affairs. Therefore the Taxpayer is entitled to a deduction for the upfront expense incurred in order to obtain the quantity surveyor's report in the 20XX-XX financial year.