Any landlord here received rental in advance before?
If I earn $50k pa, rental is $20k pa, does it mean I need to pay tax for $70k? When i do tax return, I'll need to pay ATO instead of getting money back?
How can I reduce tax?
(I understand this is a forum. ..just wanted to see if someone share the same experience)
I think only businesses can use accrual accounting. Individuals must use cash based accounting.
Correct. That money is all in this year's return.
I believe family trusts can use this method as well.
***You pay the tax for $70k.
this tenant can afford pay a year in advance. Terrible example to be pushing that view.
Happy to pay 2 years in advance, throw in a hamper, a bottle of champas, and 2 tickets to a show.
This reply is a valid answer to OP's question
How can I reduce tax?
Grudge trumps valid, ………apparently
the truth is out there (and not in your tax return)
What sort of idiot would prepay 1 year in rent
International students often come over with the full amount and prefer to pay it all up front.
Probably someone worried about rental increases over 5%?
Someone with no rental history, or currently looking for work or similar situations.
I did it when I returned from living abroad.
Intl students who love to spend most of their time at The Star.
Rich parents who want to ensure their kids only spend the rent portion on rent :)
Someone who is renting it on, at a premium?
Mr Go Between?
Not like the landlord has DNA samples of the tenant/s
Someone who wants to be accepted out of the dozens of applicants.
Absolutely. Competing for rentals in the city, especially when seeking a 6 month lease, is a nightmare. You have to offer something substantial or you will not be considered.
obviously someone with more money than you
Are the tennants Walter White and Jesse Pinkman ?
Maybe pay attention to what's going on in the world.
Yes you need to pay tax on 70k.
50k + 20k this year and 50k next year = $2700 more tax over two years as you are over the $45k threshold this year
If you want to reduce tax, reduce your income. Or see an accountant.
That's incorrect, they're in the same tax bracket for both years, ie $60k average for two rather than $70k & $50k in each, therefore it is just a timing issue
Although it is a very simplified example they have provided
No I am saying that if it is a 20k this year and next year there is no payment at all ( as it is prepaid).
For example
50k + 20k this year. 50k next year
vs
50k + 0k this year. He works less and makes 30k + 20k next year.
But if it's a rental wouldn't it be 50k + 28k? Next year not 0?
This is incorrect. The tax bracket is the same for both years: $45k-$120k (32.5c payable for income over $45k).
So the same amount of tax is paid overall.
He can work less next year (if he wanted)
If he works less, he gets less income. If he works more, he gets more income.
Don't see that your point is.
@mandelbrot: My point is he obviously cares how much tax he pays. He has already worked and made 50k this year - he can't exactly get his time back and give back the money. He's over the $45k threshold whether he likes it or not and needs to pay more tax on each dollar over.
He however, has the OPTION of working less next year if he does not want to pay the additional tax rate over 45k.
Get it?
@Tech5: He’s been fired and give 4 weeks to leave making 31st June his last pay cheque?
So next year he’s only got the rental as income?
Do you have a REA managing the property for you? If so, you can ask them to pay you the rental proceeds monthly so you declare what is received and the full upfront amount is on trust with them so you have not technically received the full year's prepaid income in your bank account. That way, for this FY you will only need to declare 2 months of income from the rental as long as that is what was provided to you by the REA. Of course, also speak with an accountant as well who will be able to advise you further depending on your other circumstances.
I googled and according to ATO "Prepaid rent, whether paid directly to you or to your agent, is your income at the time it's paid"
But if the money is paid to agent, how can ATO find out?
Ah fair enough, well it only will come up if you get audited and they request for the REA Annual Statement which will show the full amount received that year. But that will be a risk that you will need to take.
So just to clarify things, getting the agent to pay you the cash months later won't have any legal effect - it's the wrong answer, as all the taxable income was earned when the payment was initially made (whether directly to landlord or agent).
@Crow K: that's what I read too….and if the agent keep the lump sum, they are earning money on the interest….
it doesn't benefit the landlord….
agent keep the lump sum, they are earning money on the interest….it doesn't benefit the landlord….
Agent do not have the landlord's benefit in mind when they do anything anyway.
@LKJ899: Perhaps do what cheapjunkie said, except instead of having them pay in monthly installments, only do that for the first 2 months, then in July, have the REA pay you the full further 10 months in advance.
I'd do that.
If you keep the rest of your tax return as normal looking as possible, I doubt you would get audited, and then audited to the extent that they pull the REAs records too.
@LKJ899: since your tenant has prepaid the whole year, why don't you use some of those funds to prepay some rental expenses for up to 12 months?
prepay some interest / council rates / water rates / landlord insurance etc
you can claim the prepaid expenses this year too (for up to 12 months on advance)
If you are of this mindset, why don't you just claim 70k worth of expenses and call it net zero for the year?
The test is when it is first applied to your benefit or direction - so this won't help.
Don't do this. Even if they were willing (unlikely as it gives them similar tax implications depending on scale), if they go broke that money is GONE. You then have the situation of paying a mortgage with rates increasing with no rent for 12 months. You'll even struggle to sell as the next owner won't be able to collect a dime for 12 months. No no no no.
This sort of thing is always more headache than it's worth.
What happens if they move out after 6 months and they want that money back and you've already spent it?
You essentially need to "hold onto" that money.
I haven't spent the money
I'm starting to regret taking the lump sum coz the tax thing seems to make it complicated. I'd rather them pay me monthly.
Invest the cash while you have it. Holding it is the worst option.
it's in my PPOR offset…i guess it helps to reduce my interest
@LKJ899: That's a pretty good place for it. Much better than a deposit account and tax-free. That's probably better than the stock market's average return.
@SlickMick: Pre-tax it's not better than the stock market's average return over any long term timeframe. Post tax - perhaps - depends on the timeframe.
@drfuzzy: Why would you not consider the tax implications? And what does timeframe have to do with it?
Mortgage Interest Rate * (1 + marginal tax rate %) > average ASX return
@LKJ899: You better hold onto it and prepare to pay your investment property taxes the government just bought in.
Dno man I think the worst option is crypto
All on NFTs.
You could put it into your Super and be taxed 15%. Ask for a discount from the PM as they don't have to do as much accounting.
Cash in your pocket is better than no cash. This is not complicated. Since individuals can report on cash basis, the ATO also receives tax prepaid in advance. Net net, you are actually better off because your cash generates additional interests and gives your other opportunities.
I did the same for 3 months before and regret it!
new tenant also wanted to pay in advance for 6 month i declined! My taxes are crazy even without rental income !!
The real issue here is whether the prepayment causes you to move into the next tax bracket. If it does, you'll end up getting stiffed over a two year cycle, all else being equal. If not, it will wash out over two years notwithstanding the intricacies of timing and your specific circumstances.
Which is the way things go around and then come around, and it's the way of investments.
One of the reasons why I believe a tax position should be able to be smoothed over (say) rolling three year periods. The system is designed to ensure the government get maximum chop on windfalls (that while it obviously crystallises at a point in time have often been many years in the making), yet often leaves the taxpayer shortchanged where there is a temporarily dip in income.
If you have a mortgage you may be able to prepay the next year's interest payments to offset against the prepayment of rent.
Yes, you will have to declare the rental income amount in the tax year it was paid. That may mean you have to pay extra income tax when you submit your tax return.
To minimise the tax paid in the current year, you can consider prepaying your property expenses for the next financial year, in the current year, eg loan interest, insurance, rates etc.
Or if you usually receive a tax refund, you could delay submitting your tax return and submit this year and next year together in July 2024 which should even things out and might help you out with cash flow.
if the rental property is on variable, can i still repay the interest? (But i don't know how much is the interest?)
I would love to know how these guys reckon future interest can be paid for. (I might be about to learn something??) The loan provider would need to provide a facility for this.
Otherwise, any payment towards a loan would reduce the future interest, not repay it. There'd be a small reduction in tax this year and more next year, but nothing like the full $20K.
I have prepaid interest in advance previously and it's something that needs to be arranged with your bank. Simplifying the matter for me was that it was a fixed interest, interest only loan. In this example, it's worth investigating but I only did it once and wouldn't do it again. It can shift your tax burden to different periods, but all others things being equal, probably won't reduce it (ie it will smooth the tax payable over two years)
many banks do provide this facility for various loan types. e.g. I can prepay my margin loan interest upto 12 months in advance.
I just enquired with my bank. They don't accept prepayment
No, you’d have to change to a fixed rate interest only loan
I pre-pay interest every year on 20 June. I first did it to reduce tax when I initially bought my IP but have been stuck on the same loop ever since.
OP can request a fixed 12-month interest in advance loan. If he starts the process now, he may be able to close it by 30 June.
Another way is to make catch up concessional contributions to your super to cover the last 5 years if he's eligible to do so. That could knock off the prepaid rent plus more.
not all bank does this. my bank doesn't….
You got greedy, now pay the piper.
If the ATO insists on taxing this guy on a cash basis rather than accrual, then can he just dump the 20k prepayment into his loan account and call it an interest prepayment?
Alternatively OP can probably characterise the prepayment as unearned income i.e. like a deposit of sorts, and only recognise what's earned as income
Re the interest prepayment, I seriously think that is not true even on an interest-only loan. All you did was pay off principal (which probably isn't allowed on an interest only loan??) to reduce the interest, hence resulting in even less of a deduction.
If it isn't an interest-only loan then this is absolutely incorrect.
I note your question mark, but I'd replace it with strikethrough of the whole sentence.
Not sure why you keep saying, interest can’t be pre paid.
It can, it does usually has to be fixed rate interest only loan but a borrower can switch to a fixed rate IO loan if they don’t already have one.
It’s not unusual and all the big lenders facilitate it.
If you still don’t believe it, read this https://www.commbank.com.au/support.home-loan.explain-intere…
This is true. I was a lender at St.George for many years and I always took holidays in June because it was an absolute PITA setting up the interest only fixed rate loans for those that wanted to prepay their interest. It was basically all you did that month.
So many customers would request prepayment but have the wrong type of loan, then get hostile when they were told they'd have to switch their loan over if they wanted to prepay. And heaven help us if the fixed rates fluctuated before the loan was established.
I do not miss branch land.
I am not a tax accountant.
But I believe OP can elect to use receipts base or earnings based, whatever is more appropriate at the time.
Definitely prepay property expenses before 30 June - Rates, Water, Electricity, Internet, Body Corporates, etc can all be paid 12 months in advance and will just sit in credit on the relevant accounts. This will give you a big deduction.
What did your accountant say when you asked?
asking but just want to see if ppl share the same experience : )
Ask for it in cash :)
Yes the income is assessable when received, unless it is at risk, in which case there would be uncertainty as to whether it has been earned
With a residential tenancy and fixed term agreement, this is unlikely to be the case
For tax planning purposes you should have postponed the lump sum receipt until 1 July, however that doesnt help now
Your agent will document it as being received by them and then paid to you in the annual statement they'll provide
Be ready for the ATO being in touch next year when your deductions are significantly higher than expected in comparison to the income you'll declare. It will be easy to address, but given you'll fall outside of the expected ratios, it will likely trigger their system for a letter; assuming the tenant doesnt prepay next year of course
Nice try ATO
Do all the value adding reno before june and use them as deductions.
Renovations are considered capital works and add to base cost when calculating capital gain. Only repairs can be deducted against rent.
😐 what is the problem here? You’re not going to get taxed on $70k. You’re not at risk of a high tax bracket and fortnight or monthly rent makes ZERO difference to your tax situation.
$20k is gross. An apartment/unit at ~$500k @ 4%?
You will have interest, council, water, body corp, insurance, maintenance, agent letting and depreciation expenses that will bring you down anywhere from negative income to best case $5-10k positive if you happen to have no mortgage on it
the salary and rental figures are just an example
You seem to have a very basic understanding of finance. Your salary and rental figures don't change the following:
The answer to your original question is simple.
1) Gross Income + Rental Income - Rental Expenses = Net Taxable Income
2) https://www.ato.gov.au/Rates/Individual-income-tax-rates/
This works out your Income Tax Liability
3) If your EOFY total PAYG exceeds your Income tax Liability. You get a refund
4) If your EOFY total PAYG is less than your Income tax Liability in 2), You pay the balance
….. Common this is basic sh7t…
Mate I think it's you who has a basic understanding.
If the bloke gets paid in a lump sum this year and is on a high income he might pay 45% marginal tax on the income less deductions.
Alternatively let's say he didn't receive the lump sum and got 5k this year, and 15k next year. Say he got retrenched on July 1, and his only income was the 15k. He now has an effectove tax rate of 0%.
Mate I think it's you who has a basic understanding. If the bloke gets paid in a lump sum this year and is on a high income he might pay 45% marginal tax on the income less deductions. Alternatively let's say he didn't receive the lump sum and got 5k this year, and 15k next year. Say he got retrenched on July 1, and his only income was the 15k. He now has an effectove tax rate of 0%.
Nah mate. Are you high or something?
Nothing you said makes any sense. On one hand 45% marginal tax? So old mate earns $180k, loses their job July 1, then sits on their arse for 12months earning zero dollars, but celebrates the 0% tax free rent secured while not servicing 2 loans?
Please stop dreaming of the dumbest, most implausible scenarios. If you had any idea what you were talking about you’d know old mate is not copping +$20k this year.
They are not earning $0 next year.
Maybe they could get 19% marginal if rent was ad hoc and the stars aligned.
In reality, OP is in the same 32.5% as next year making zero difference.
@RatBargain: I think you need to admit your comment was wrong.
The OP is saying the rental income and other income amounts he quoted were just examples. You said the salary and rental figures don't change anything. I clearly showed the rental and income assumptions do change the outcome.
Your salary and rental figures don't change the following:
I said they don’t change the calculation
does it mean I need to pay tax for $70k? When i do tax return, I'll need to pay ATO instead of getting money back?
Did you not read this?
The OP is saying the rental income and other income amounts he quoted were just examples.
Op asked for help giving those figures with 4 weeks to July. If op thinks there’s some benefit to asking for advice with wrong information then he’s definitely your mate.
you mean "come on"?
You've done well to be a landlord with 50k salary.
Many Gen Zs can't comprehend they need to give up avo on toast and holidays for a short time to make it in this world.
50k is just an example
You can ask the agent not to pay it all to you yet.
You earn, you pay. simples.
you also get to deduct on interest charged on mortgage.
tricky part happens if
It is May, you get paid 12m in advance.
Prop became avail to rent in May
so come eofy
you declare income for the 12m you got paid
then only deduct May + June of interest .
but then the following year, you declare no income
but still deduct the whole year's worth of interest