Rental Income - Allowable Expenses

Accountancy Fees

Issue 25 of Tax Briefing contained an article on rental income. The article covered the tax treatment of accountancy fees incurred for the purposes of preparing a rent account and management expenses incurred by property rental companies. We have been asked to respond to the following questions which were asked in relation to the article.

• What is a rent account?
A set of accounts relating to a rental property or properties is commonly known as a rent account.

• Do accountancy fees include the actual cost of keeping records, maintaining primary documents and preparing financial statements?
Yes. Receipts for accountancy fees which are claimed as a deduction against rental income should be held by the claimant.

• Are fees in respect of company audits which are statutorily required to be carried out treated as allowable?
Yes.

• Are amounts in excess of the 10% and 15% limits in respect of directors remuneration automatically disallowed?
No. The 10% and 15% limits are the limits below which remuneration will not be queried by the Inspector. Amounts above these limits are not automatically disallowed, although they may be queried by the Inspector.

Pre-Letting Expenses

We have been asked whether pre- letting expenses are allowable. The question arises following the introduction of Section 82 Taxes Consolidation Act 1997 which allows a Case I/Case II deduction for certain pre-trading expenses. It has been suggested that, since Case V deductions are computed by applying Case I principles, a corresponding deduction should be allowed for pre letting expenses. The correct position is that no deduction is allowable for pre-letting expenses. The technical explanation for this is as follows:

The list of Case V expenses which are allowed as deductions in computing profit rent is given in Section 97(2) Taxes Consolidation Act 1997. Section 97(3) Taxes Consolidation Act 1997 applies Case I principles in computing the amount which is allowable - it does not authorise any deductions. Only deductions specifically authorised by Section 97(2) are allowable.

A deduction for pre-letting expenses is not specifically authorised by Section 97(2).

In addition, under Section 97(3), the amount of the deductions authorised under Section 97(2) is the amount which would be deducted under Case I if the receipt of rent were deemed to be a trade carried on during the currency of the lease or the period during which the recipient of the rent was entitled to that rent. Accordingly, Section 97(3) is triggered only where there is receipt of rent. Since, in a pre-letting situation there is no receipt of rent, Section 97(3) does not invoke Section 82 Taxes Consolidation Act 1997 for the purpose of authorising a deduction of pre-letting expenses.

In considering amounts allowable under Section 97(2), regard should be had to Section 105 which disallows interest payable and rent payable in respect of premises before the premises in question is first occupied for the purposes of a trade or undertaking or as a residence.

LEASING

Defeasance Payments

In many leasing transactions, the lessee enters into a defeasance agreement with a third party where, in consideration for an upfront payment, the third party agrees to make the rental payments under the lease. Revenue takes the view that the upfront payment (the defeasance payment) is a Capital item.

Tax Treatment

Irrespective of the capital nature of the payment Revenue are prepared to allow the defeasance payment to be deducted as an expense provided the amount is written off over the life of the lease.