The Australian Taxation Office is aware that residential rental property owners may be concerned about how COVID-19, floods, or bushfires have reduced their income. This may be a result of tenants paying less or entering deferred payments plans, or travel restrictions which have affected demand for short-term rental properties. New legislation also affects the tax deductions that owners of vacant land can claim.
Reduced rental income
The COVID-19 pandemic has placed property owners and tenants in unforeseen circumstances. Many tenants are paying reduced rent or have ceased paying because their income has been adversely affected by COVID-19.
You should include rent as income at the time it is paid, so you only need to declare the rent you have received as income. If payments by your tenants are deferred until the next financial year you do not need to include these payments until you receive them.
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.
This applies whether the reduction in rent was initiated by the tenants or the owner.
Some owners may have rental insurance that covers a loss of income. It is important to remember that any payouts from these types of policies are assessable income and must be included in tax returns.
In circumstances where COVID-19 or natural disasters have adversely affected demand, including the cancellation of existing bookings for a short-term rental property, 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.
Deductions for vacant land no longer available
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 you 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.
Travel to rental properties
Residential property owners can’t 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
Taxpayers that take out a loan to purchase a rental property can claim interest (or a portion of the interest) as a tax deduction. However, directing some of the loan money to personal use, such as paying for living expenses, buying a boat, or going on a holiday is not deductible use.
Capital works and repairs
Repairs or maintenance to restore something that’s broken, damaged or deteriorating in a property you already rent out are deductible immediately. Improvements or renovations are categorised as capital works and are deductible over a number of years.
Initial repairs for damage that existed when the property was purchased can’t be claimed as an immediate deduction but may be claimed over a number of years as a capital works deduction.
The number one cause of the ATO disallowing a claim is taxpayers being unable to produce receipts or other documents to support a claim. Furnishing fraudulent or doctored records will attract higher penalties and may also result in prosecution.
If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.
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