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What happens if you pay expenses early? Could that help with Ring Fencing?

14 March 2019

 

What happens if you pay expenses early?  Could that help with Ring Fencing?


This information is really for property investors making large losses, and operating through a structure that allows this loss to offset their personal income, and get a large tax refund.  If Ring Fencing comes in from 1/4/19 as expected, the refunds will stop.
 
Possible outcome:   If large deductible expenses are paid in March 2019, this would create a larger loss in 2019 financial year (year ending 31/3/19), before Ring Fencing comes in.  Therefore, depending on the structure, it would be possible to get a refund in the 2019 year, rather than have the expenses Ring Fenced in the future and no extra refund.
 
 
Rules for paying expenses early and what is deductible
 

  • Rates – If you pay rates early = non deductible.  You can claim rates that have been invoiced.  So if you haven’t paid the full year's rates that council has invoiced, you could pay the final instalments early in March to get an extra tax deduction in the year ending 31/3/19.
  • Insurance – You can prepay up to $12,000 per insurance contract!   So if your insurance is due in April and each contract is under $12,000, you could prepay in March and it would be deducting in the year ending 31/3/19
  • Repairs – not really.  If you had service contracts in place, for example for monthly lift servicing, you could prepay this and it will be deductible.  For normal residential property investors, no.
  • Subscriptions – You can prepay up to $6,000 and it would be deductible.  So you could pay your Property Investors Association membership early and it would be deductible.
  • Legal and Accounting – not really and 99% of work would not fit within the rules, so no.

 
 
Should you pay expenses early?
 
In general, if you pay an expense like insurance early, then you are paying the cash out now and then it’s costing you interest.  So you need to factor in the cost of the extra interest.  For example, if $9,000 Insurance was due in February 2020, you could get a $3,300 tax refund for the year ending 31/3/19 (in the right structure and losses that can offset other income), but you would have to pay the $9,000 insurance 11 months early.  So at say 4% interest, this would cost you $330 of interest.  Even with this interest cost, the benefit could far outweigh the cost!
 
If you have cash sitting unused, and you are in the situation of possibly losing your tax refund, then paying insurance and subscriptions in advance would make sense.
 
What happens if Ring Fencing doesn’t come in?  You would have received the deduction in the 31/3/19 year, instead of the 31/3/20 year, so overall the outcome is the same for you.
 
 
 
Overall

I would personally focus on improving profits and trying to move from a loss to a profit.  But if you have large losses, and the cash available to prepay some expenses, and you are in the situation of offsetting this loss against other income and getting a tax refund, then it is worth looking at the costs above that you can pay in March!
 
 
I hope you have found this useful and make sure you read my recent blog on other ideas to help with Ring Fencing.
 
 
NOTE – if you are making a profit, then Ring Fencing does not affect you, and there would be no real advantage in paying things early!
 

 
Kind regards
Ross Barnett

 
 
 
 

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