COVID-19 has seen landlords being encouraged to provide relief to their tenants as well as being able to seek relief from their bank.  This has several potential tax implications in addition to other recently introduced government measures. 

How will providing rent relief to my tenants affect my tax liability?

Rental income is generally derived by investors on receipt. Any rent deferrals offered to tenants may result in the income being recognised in the following year, despite the rent being due under the lease earlier.  For example, rental income for May 2020 that is received in July 2020 as a result of relief provided should be taxed in the 30 June 2021 financial year.

Landlords who waive some of the rent owing to them or who are not able to collect unpaid rent will not have to recognise the rent due as income if it is not ultimately received (i.e. they will not have to recognise it in the 2020 financial year and then claim a deduction for a bad debt in 2021).

Any backpay of unpaid rent received, from the tenant or under an insurance policy, will likewise be taxed in the financial year it is received.

Will not receiving rent affect my ability to claim deductions?

The Australian Taxation Office (“ATO”) have stated that landlords are able to claim their rental expenses in their tax return as normal if tenants are not meeting their payment obligations under the lease due to COVID-19.

Similarly, expenses will continue to be deductible in full if the rent has been reduced to enable tenants to remain in the property and maximise the rental return in the current market.

Separate considerations apply for short-term rentals and holiday homes that may remain vacant or used privately as a result of COVID-19.

Will I be able to deduct interest if the bank has deferred my mortgage repayments?

Interest incurred on a loan that accumulates remains deductible even if the date for repayment is deferred.  Depending on the terms provided by the bank, the interest accumulated prior to 30 June 2020 may be deductible in the 2020 financial year even if paid after 30 June 2020.

Can I access the instant asset write-off for any capital expenses I incur?

Property investors cannot normally access the instant asset write-off for depreciating assets (e.g. a new split system) installed in their rental property. The instant-asset write off in 2020 for assets costing up to $150,000 is limited to entities that carry on a business. Owners of investment properties are generally not regarded as business entities.

Are there any benefits from a state taxes perspective?

Landlords who offer rent relief to tenants in Victoria impacted by COVID-19 may be eligible to apply to the State Revenue Office (“SRO”) for a reduction in their 2020 land tax assessment of up to 25% of the land tax payable in respect of the property. To get the full 25% reduction, an equivalent level of rent reduction must be provided between 29 March 2020 and 29 September 2020.

Any recoupment of land tax could provide some timing benefits from an income tax perspective if the land tax relief is obtained after 1 July 2020. Land tax is deductible when the liability is incurred, generally at the start of the calendar year. If land tax relief is obtained from the SRO after 30 June 2020, the original liability may be deductible in the 2020 financial year with the relief assessable in the 2021 financial year.

Can I access the $25,000 HomeBuilder grant for renovations on my rental property?

No. The HomeBuilder scheme is only applicable for owner-occupiers and not landlords.

What are some other recent changes that I should be aware of?

From 1 July 2019, costs of holding vacant land (e.g. rates, land tax and interest) will not be deductible. For these purposes, residential properties undergoing substantial renovations are considered vacant while they are not lawfully able to be occupied.  Various exceptions apply to these rules which are significantly complex.

From 1 July 2017, travel expenses relating to residential investment properties were made non-deductible. These can include costs such as airfares and taxi charges to inspect or maintain the property or collect rent.

Also, from 1 July 2017, any second-hand depreciating assets will not qualify for depreciation deductions. This includes second-hand assets purchased and installed by a landlord, assets previously installed and taken over by the new landlord on purchase of an existing property and assets that were first used by the landlord for private purposes (e.g. when they were an owner-occupier prior to renting the property out).

This article was written by Michael Hay and Leo Gouzenfiter of Pitcher Partners 

Contact: [email protected] or [email protected] 

 Article date: 21 July 2020