Private ruling: Prepaid rental property expenses
Date of advice: 10 November 2020
Published: January 2021
Ruling period: Financial year ended 30 June 20XX | Financial year ended 30 June 20XX | Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your share of the portion of the Development Management Fee (DMF) incurred in respect of Property Maintenance and Rental Insurance a deductible expense? | A1: Yes. Property Maintenance and Rental Insurance are ordinarily allowable deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). However, as the expenses were prepaid you may need to apportion the expenses over the eligible service period, should the eligible service period end after the last day of the 2020-21 financial year as per section 82KZM of the Income Tax Assessment Act 1936 . Further information in relation to rental properties can be found by searching 'QC 62062' on ato.gov.au | Q2: Does your share of the portion of the DMF incurred in respect of the Inspection Fee and the Builder's Inspection Report form part of your capital works expenditure? | A2: Yes. A deduction under Division 43 of the ITAA 1997 for capital works is dependent, among other things, on whether there is 'construction expenditure' for the capital works, which is defined in subsection 43-70(1) of the ITAA 1997 as 'capital expenditure incurred in respect of the construction of capital works'. Paragraph 9 of Taxation Ruling TR 97/25 states that construction expenditure includes preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits. These expenses are accepted as being 'in respect of' the construction of capital works. Likewise, the portions of the DMF relating to the Inspection Fee and the Builder's Inspection Report are considered to form part of your total construction expenditure, which is deductible at 2.5% per annum from the time the property is rented or available for rent. | Q3: Is your share of the portion of the DMF incurred in respect of the Quantity Surveyors Report deductible in the year it was incurred? | A3: Yes. 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 portion of the DMF expense incurred in obtaining the Quantity Surveyors Report is considered an expense in managing your tax affairs and is therefore deductible in the year it was incurred.

Relevant facts and circumstances: You and your spouse entered into a Development Management Agreement (DMA) to purchase a house and land package as tenants in common from a property development entity, to be used as an investment property. Settlement occurred on early in 20XX and the completion date is expected to be some time in the 20XX-XX financial year. In January 20XX you and your spouse incurred a DMF comprising of prepaid expenses, which contained the following elements as defined in the DMA: 1. Inspection Fee Procure advice from relevant consultants to ensure that the design of the building works does not breach the building covenants. 2. Quantity surveyor's report Procure a quantity surveyor's report on the value of the completed works. 3. Builder's Inspection Report Independent quality inspections on completion of the works to ensure that the works comply with the terms of the building contract. 4. Rental Insurance The developer will provide a rental compensation guarantee amount to the owner, where the owner satisfies several criteria, and where the property does not have an executed lease in place within a defined period after construction is completed. The eligible service period for this service is 52 weeks, commencing 30 calendar days after the earlier of receipt of the final invoice payment under the building contract or the guaranteed completion date. 5. Property Maintenance Attend upon the land to carry out property maintenance as determined by the managing agent. Property maintenance means maintenance required to the property which includes: (a) mowing, edging, weeding and other general garden maintenance required until the Property is leased (b) repairing faulty equipment or appliances (such as dishwashers) provided that no warranty or indemnity covering such equipment or appliances is available whether under the building contract or otherwise; and (c) repairing fences and retaining walls provided that no warranty or indemnity covering such fences or retaining walls is available, whether under the building contract or otherwise but excludes fair wear and tear, defects and other issues which are the responsibility of the builder under the building contract or the supplier or installer of the item, and excludes damage caused by a tenant. The eligible service period for this service commences six months after practical completion is achieved. The property will be made available for rent as soon as practical after the handover date. You and your spouse 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 1997 subsection 43-70(1) | Income Tax Assessment Act 1997 section 43-215 | Income Tax Assessment Act 1936 section 82KZM