Given that over 2.2 million Aussies claimed just under $50 billion in rental deductions in 2017–2019, the Tax Office has flagged potential misperceptions, detailing deductions that are and are not available under the law.
Noting changes as a result of COVID-19, assistant commissioner Karen Foat explained that rent will be included as income at the time it is paid, meaning that if payments are deferred until next financial year, they should not be included.
Ms Foat, however, underlined that insurance payouts that cover loss of income are assessable income and must be included in tax returns.
Moreover, the assistant commissioner noted that while many banks have moved to defer loan repayments for stressed mortgagees, interest being charged on these loans is still a legitimate tax deduction, despite the repayment deferrals.
The ATO has, however, cautioned that it will look closely to ensure that deductions are only claimed on the portion of the loan that relates directly to the rental property, stressing that directing some of the loan money to personal use, such as paying for living expenses, is not deductible use.
“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,” Ms Foat said.
In circumstances where COVID-19 or natural disasters have adversely affected demand, deductions are still available provided the property was still genuinely available for rent.
Ms Foat explained that when deciding if active and genuine efforts are being made to ensure a property is available for rent, the ATO will look at 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.
“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 you can show it was genuinely available for rent for a longer period of time in 2020.”
Ms Foat stressed that if the owner of the property or their family or friends move into the property to live in it because of COVID-19 or bushfires, the owner needs to count this as private use when working out their claims in 2020.
Deductions for vacant land no longer available
Under laws passed by Parliament last year, deductions for vacant land are no longer available, even if the owner is intending to build a rental property on that land.
Ms Foat stressed that the change applies to land for which owners may have been claiming expenses in previous years.
She explained: “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 three years while you rebuild your rental property.”
The exception is land that is used in a business.
“Last year, we also saw a number of taxpayers make simple mistakes such as claiming deductions for travel to inspect their rental properties,” Ms Foat said.
She stressed that residential property owners can’t claim any deductions for costs incurred in travelling to the residential rental property.
Another common misconception relates to 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,” Ms Foat confirmed.
“Improvements or renovations are categorised as capital works and are deductible over a number of years.”
The ATO also flagged poor record keeping, stressing that this is the number one reason for disallowing a claim.
“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,” she said.