Ask Ban Tacs Question
I have two investment properties. Because I am in the highest tax bracket this year but in the lowest next year I want to pre-pay as much expenses as possible. I know it’s possible with the interest for the loans.
What about estimating strata, council rates and electricity for the next year based on the last bills and pay a down payment before end of June? Would this be tax deductable in this year?
Thank you.
Answer
The trick is to make sure you don’t pay anything more than 12 months in advance. For example the last time you paid strata fees it may have been for the calendar year 1st January 2012 to 31st Dec 2012 so you could only prepay another 5 and a bit month’s worth in June 2012.
It is also important that the payee is aware of what you are paying and receipts the payment accordingly. So for example the bank must take the interest payment in advance as interest and charge it to your loan account 12 months in advance. It is no good just putting 12 months interest in the account ordinarily the bank would treat this as a principle repayment which of course will not be tax deductible.
Your strategy is a good idea but be careful of the ramifications if the property makes a profit for tax purposes. If you are in the maximum tax bracket now I doubt there will be anything but a benefit from drawing forward expenses. Though don’t forget to consider that the losses this year may draw you into a lower tax bracket.
Be careful if the reason you are doing this is because you are going overseas to work. A lot depends on our double tax agreement with that particular country but generally if you set up a home overseas and work there for more than 6 months you may be a non resident of Australia for tax purposes which means you will be taxed on the rental property at non resident tax rates which is at least 32.5% with no tax free threshold.
If you are taking time off to have a baby of course you need to look into whether there is any way you can qualify for Part B and baby bonus or the Parental leave payment.
The Baby Bonus is not taxable but will absorb your rental losses if applicable but Paid Parenting Leave is taxable so it will be offset against your losses anyway. Both payments are regularly adjusted for inflation, you can only qualify for one unless you have a multiple birth. Paid Parental Leave is around $570 per week over 18 weeks which is a total of $10,260 before tax is taken into account. The Baby Bonus is tax free but only around $5,300 over 26 weeks but you can still qualify for the Baby Bonus while working. If you do not work but choose the Baby Bonus instead of Paid Parental Leave you may also qualify for Part B which is also tax free and pays around $140 per fortnight with a year end supplement of around $360. The differing conditions for the payments maybe enough to make the decision for you.
Paid Parental Leave
Under $150,000 ATI in previous year.
Must not return to work after birth
Must have worked before birth
Baby bonus
Under $75,000 ATI 6 months after birth.
Can continue to work
No need to meet work test
Note ATI is adjusted Taxable income, which is your taxable income after adding back investment losses, adding in tax free pensions etc, Targeted foreign income, reportable fringe benefits multiplied by 0.535 and reportable superannuation contributions, then deducting child support payments you make.
