Private ruling: Prepaid investment expenses
Published: October 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the upfront expenses relating to custodian house and garden care services? | A1: Yes, apportioned over the eligible service period. | Q2: Are you entitled to a deduction for the portion of the upfront fee for rental income protection insurance? | A2: Yes, apportioned over the eligible service period. | Q3: Are you entitled to a deduction for the upfront fee relating to a quantity surveyors report in the year it was occurred? | A3: Yes.

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: 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 • checking of the irrigation system • fertilising of the front yard annually, and • provide condition updates on the house and land two times per year. 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. 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 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: Summary: 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: • the interest is otherwise deductible under section 8-1 of the ITAA 1997 • the taxpayer is an individual • the expenditure was not incurred in carrying on a business, 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 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 | Detailed Reasoning - 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: • you are an individual who is not carrying on a business of renting properties • the eligible service period for the service is 12 months • the expense for the service would be otherwise deductible under section 8-1 of the ITAA 1997, and • you incurred the expense during the 2013-14 financial year. However the eligible service period commenced in the 2014-15 financial year and will end after the last day of that financial year. 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. | Detailed Reasoning - 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: • you are an individual who is not carrying on a business of renting properties • the eligible service period for the service is 12 months • the expense would be otherwise deductible under section 8-1 of the ITAA 1997, and • you incurred the expense during the 2013-14 financial year. However the eligible service period commenced in the 2014-15 financial year and will end after the last day of that financial year. 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. | Detailed Reasoning - 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.