The ATO is aware that residential rental property owners (the owners), due to COVID-19, floods, or bushfires, may be experiencing reduced income from tenants paying less or entering deferred payment plans, or travel restrictions which have affected demand for short-term rental properties.
Assistant Commissioner Karen Foat explained that whatever the circumstances, the most important first step is to keep records of all expenses.
Owners are advised to include rent as income at the time it is paid, so they only need to declare the rent received as income. If payments by tenants are deferred until the next financial year owners do not need to include these deferred payments until received.
While rental income may be reduced, owners will continue to incur normal expenses on their rental property and will still be able to claim these expenses in their tax return as long as the reduced rent charged is determined at arms’ length, having regard to the current market conditions.
The ATO reminds owners that any payouts from rental insurance that covers a loss of income are assessable income and must be included in tax returns. For deferred loan repayments to banks, the interest being charged on the loan are still claimable.
For short-term rentals adversely affected due to COVID-19 or natural disasters, including the cancellation of existing bookings, deductions are still available provided the property was still genuinely available for rent. If owners decided to use the property for private purposes, offered the property to family or friends for free, offered the property to others in need or stopped renting the property out they cannot claim deductions in respect of those periods.
“Generally speaking, if your plans to rent a property in 2020 were the same as those for 2019, but were disrupted by COVID-19 or bushfires, you will still be able to claim the same proportion of expenses you would have been entitled to claim previously,” Ms Foat said.
To determine the proportion of expenses that can be claimed for short-term rental properties impacted by COVID-19 or bushfires, a reasonable approach is to apportion expenses based on the previous year’s usage pattern, unless the property is shown as genuinely available for rent for a longer period of time in 2020.
For the 2020 year, expenses for holding vacant land are no longer deductible for individuals intending to build a rental property on that land but the property is not yet built. This also applies to land for which owners may have been claiming expenses in previous years. However, this does not apply to land that is used in a business, or if there has been an exceptional circumstance like a fire or flood leading to the land being vacant.
The ATO also provides clarification to some examples of common mistakes:
- Claiming deductions for travel to inspect their rental properties – owners cannot claim any deductions for costs incurred in travelling to residential rental property unless they are in the rare situation of being in the business of letting rental properties;
- Incorrectly claiming loan interest – owners taking out a loan to purchase a rental property can claim interest (or a portion of the interest) as a tax deduction but not for portions of the loan used for personal matters such as living expenses, buying a boat, or going on a holiday;
- Capital works and repairs – owners can immediately claim deductions for repairs and maintenance to restore something that’s broken, damaged or deteriorating in a property they already rent out. However, improvements or renovations are categorized as capital works and are deductible over a number of years. In addition, initial repairs for damage that existed when the property was purchased must also be claimed over a number of years as a capital works deduction;
- Short term residential rental – if a property is not genuinely available for rent, owners need to limit deductions to the days when it is. If owners are allowing friends or family to stay in the property at a reduced price, they need to limit their deductions to the amount of rent received for these periods.
If you wish to find out more information regarding rental income and your situation, contact one of our professional tax advisers/accountants.
Important: Clients should not act solely on the basis of the material contained in this article. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.