As the end of the financial year ticks nearer in one of our most unprecedented years, the Australian Taxation Office has issued advice for residential rental property owners where COVID-19, floods and bushfires may 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.

At a Glance:

• Landlords only need to declare the rent you have received as income
• Landlords can still claim expenses they need to pay, even if receiving less rent
• Any payouts from insurance policies are assessable income and must be included in tax returns.

Assistant Commissioner Karen Foat said whatever the circumstances, the most important first step was to keep records of all expenses.

“Without good records, you will find it difficult to declare all your rental-related income in your tax return and work out what expenses you can claim as deductions.” said Ms Foat.

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.

Many banks have moved to defer loan repayments for stressed mortgagees.

In these circumstances, rental property owners are still able to claim interest being charged on the loan as a deduction- even if the bank defers the repayments.

Short-term rentals 

“We recognise that circumstances over the past six months have seen many short-term rentals see cancellations or sit vacant as a result of either COVID-19 or bushfires,” said Ms Foat.

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.  

“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,”said Ms Foat.

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 you can show it was genuinely available for rent for a longer period of time in 2020.

If you or your family or friends move into the property to live in it because of COVID-19 or bushfires, you need to count this as private use when working out your claims in 2020.

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.

So, if you are building a rental property, you cannot claim the deductions for the costs of holding the land, such as interest.

However, if your rental property was destroyed in the bushfires and you are currently rebuilding, you can claim the costs of holding your now vacant land for up to 3 years whilst you rebuild your rental property.

Common Mistakes - Travel to rental properties

“Last year, we also saw a number of taxpayers make simple mistakes such as claiming deductions for travel to inspect their rental properties,” said Ms Foat.

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.

The ATO uses data and analytics to look closely to ensure that deductions are only claimed on the portion of the loan that relates directly to the rental property.

Capital works and repairs

“Each year, some taxpayers claim capital works as a lump sum rather than spreading the cost over a number of years," said Ms Foat.

"Others claim the initial work needed to get a property ready for rent immediately instead of spreading the cost over a number of years."

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.

Short term rentals

We often see people with short term rental properties claiming for 100 per cent of their expenses when they actually use the property for their own use or provide it to family and friends for free or at a reduced rate.

Properties need to be rented out or be genuinely available for rent to claim a deduction.

Factors such as reserving the property or leaving it vacant over peak periods, not charging the market rate and the types of terms and conditions of the bookings are all taken into consideration when deciding if active and genuine efforts are being made to ensure a property is available for rent.

If a property is not genuinely available for rent, you need to limit your deductions to the days when it is. 

If you are allowing friends or family to stay in the property at a reduced price, you need to limit your deductions to the amount of rent received for these periods.

Don’t forget to include all your rental income, especially from sharing economy platforms.

The ATO are matching data received from these providers to information in tax returns and will be following up discrepancies.

Poor record keeping

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.

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