6 months rent payment up front - in which tax year is it deemed as income?

Hi,
I have a potential tenant who said he'd be willing to pay the full rent for 6 months upfront. :D Blame that on a tight rental market. The rental's going to start in the second half of May. If I collect that full amount this tax year, do I have to declare the whole amount as income for this year, or can I prorata it?

Linda
 
You're up for it. If they were able to get a deduction for the rent paid, they'd be claiming it this year too.

If you can, prepay your interest for the year so it won't hit you as hard.

PS: will they be running a meth lab from the place?
 
Perhaps it will stay in the real estate agent's trust account and you can receive it when it falls due and payable.
 
Perhaps it will stay in the real estate agent's trust account and you can receive it when it falls due and payable.

Its income when received by the agent, you don't have to receive it yourself.

You need to consider what your potential income/s will be like next year if you proceed. You could end up +ve geared this year and well -ve geared next. Marginla tax rates may or may not be the same. Then there could be impact on family benefits, childcare etc which could further impact esp since budget will see changes.

You could try and see if your bank will do six month prepaid interest on the loan to offset it ?
 
Its income when received by the agent, you don't have to receive it yourself.

You need to consider what your potential income/s will be like next year if you proceed. You could end up +ve geared this year and well -ve geared next. Marginla tax rates may or may not be the same. Then there could be impact on family benefits, childcare etc which could further impact esp since budget will see changes.

You could try and see if your bank will do six month prepaid interest on the loan to offset it ?

The agent is the landlords agent in the legal sense, so when they receive payment the landlord would receive payment. But if it is held in trust then it would belong to the tenant until it was released.

Similar to a deposit on sale.
 
The agent is the landlords agent in the legal sense, so when they receive payment the landlord would receive payment. But if it is held in trust then it would belong to the tenant until it was released.

Similar to a deposit on sale.

More likely a bare trust.

Transparent for tax purposes.
 
If you don't want it this financial year why not have normal rent until 30 June and then accept six months in advance after new year clicks over?
 
The agent is the landlords agent in the legal sense, so when they receive payment the landlord would receive payment. But if it is held in trust then it would belong to the tenant until it was released.

Similar to a deposit on sale.

Ok you take that one to the AAT, Federal Court and HC. The ATO consider it received by the owner when the REA receives it. REA Trust accounts are maintained in the name of the property owner and the vendor when its a sale transaction. (Their client). The account isn't in the tenant name.
 
Section 6-5(4) ITAA97

Constructive receipt.

No deferral for cash basis passive income.

Thanks Rob, but that ss covers money held on your behalf. I guess the agent is the landlord for these purposes - but it is held on trust so I would still think it depends on the terms of the trust. Is the tenant handing over money to be held on trust for themselves to be applied and paid each week to the landlord, or is the money held on bare trust for the landlord immediately the cash hits the account?
 
Arthur Murray case.

Any money received that is for the provision of future services/goods that is subject to the provision of those future services/goods is likely to be assessed over the time of the provision and not, if received as a cash lump sum, at the time of that receipt.

If the agreement is that the tenant is not entitled to a refund of the prepayment, it is assessable upon receipt.

If the agreement is merely the 'front loading' of the rental agreement, being the provision of the property over 'x' time period, then it isn't derived at that point in time; the landlord must make, and continue to do so, the premises available to the tenant.

In respect of the reference to a deduction for prepaid expenditure, this is irrelevant, as income relies on the principle of deriving income, whereas expenditure is in the incurring of expenditure; they're different concepts (generally speaking).
 
Thanks Rob, but that ss covers money held on your behalf. I guess the agent is the landlord for these purposes - but it is held on trust so I would still think it depends on the terms of the trust. Is the tenant handing over money to be held on trust for themselves to be applied and paid each week to the landlord, or is the money held on bare trust for the landlord immediately the cash hits the account?

My understanding ...

The estate agent is normally acting as agent for the landlord.

Whilst an agent may owe fiduciary duties to the principal, it would normally fall far short of being a trustee for the landlord. The agent does not hold legal title to the property, nor the income derived from that property.

The "trust account" is merely an equitable instrument used by agents to protect the Landlord's interest in the money from the agent's own creditors as well as their own misappropriation through fund mingling.

Depending upon the terms, the landlord may be able to trace misappropriated money into the hands of third parties because of the way that the funds are held in a fiduciary capacity.

Alternatively, if the account balance is deemed to be held on a bare (resulting) trust it does not matter since it is a transparent trust and the tax result is the same. It is assessable income of the landlord (beneficiary) when received by the agent and no trust tax return is needed.

However, we are conflating two separate concepts:

1) The overall agency relationship; and

2) The temporary holding of amounts in a "trust account"
 
Will the NSW RTA allow this payment?

The agent or owner can accept any amount as rent in advance however the agent can't ask for more than 2 weeks.

The other issue yet to be raised is what if the tenant wants to break the lease & the owner has spent the rent money?
 
Looking at the NSW legislation for these agency trust accounts, s 86 PROPERTY, STOCK AND BUSINESS AGENTS ACT 2002

http://www.austlii.edu.au/au/legis/nsw/consol_act/psabaa2002385/s86.html

86 Trust money to be paid into trust account

(1) Money received for or on behalf of any person by a licensee in connection with the licensee?s business as a licensee:

(a) is to be held by the licensee or (if the licensee is employed by a corporation) by the corporation, exclusively for that person, and

(b) is to be paid to the person or disbursed as the person directs, and ....

If the tenant pays money into the trust account for the landlord to hold for the landlord then there are 2 possibilities.

1. It is the tenant's money until that week/months rental income becomes payable. Therefore it is not derived as income by the landlord until the week or month it falls due.

or

2.. It is the landlord's money at the point of receipt. Therefore all accrued when paid.

Which one applies will depend on the instructions of the tenant - which would most likely be 'here is the rent' sort of thing which wouldn't help.

I guess the question to ask is if the tenant paid 6 months in advance but moved out after 1 month who would be entitlted to the other 5 months rent?

Arther Murray was a case that involved a dance instructor recieving payments for multiple dance classes up front. But it was determined the income was only derived once the lessons were given as there was a chance that the payments in advance could be refunded - ie they were contingent on the dance class actually happening.

The case with the rent is similar, but it involves a trust account, so I am inclined to say the tenant could argue that the money is still their's until it falls due and payable.

s 33 of the RTA (NSW) also prohibits a landlord requiring a tenant from paying more than 2 weeks in advance.

I am away from my books, but there may be caselaw which says otherwise.
 
A bit of background,
I am a private landlord, and will lodge the bond properly, and do the normal rental tenancy paperwork and documentation. The potential tenant offered to pay me the 6 months rent upfront without any prompting from me. Seeing his application, I decided I would like to have him as a tenant.

As a private landlord, there would be no trust account involved with the payment, the payment would go straight into my bank account. If he was to leave the tenancy early there would be a break lease fee applied, but he would be able to get a prorated amount back based on the amount of time left on his tenancy.

So the question remains, can I rely on the precedent set by the Arthur Murray case? I feel like I can, but I'd love to get a straight out and clear resounding yes from a tax law specialist so I don't end up having to pay much more tax than required!

Ps. Thanks Devoni for finding the applicable case law. That's an awesomely helpful first post. May you become a forum regular. :)
Ta,
Linda
 
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