Deductibility when tenants reduce or suspend rent
The COVID-19 pandemic’s knock-on effect on the economy has meant that many landlords are feeling the strain as their tenants seek to delay paying rent or reducing rent in response to job loss. To reduce the uncertainty for landlords, the ATO has provided some guidance on the deductibility of certain expenses in various situations including guidance for those that own short-term accommodation.
First, to the most common scenario, the tenant not paying full rent or temporarily suspending rent with or without the landlord’s consent. According to the ATO, in those circumstances, where a landlord continues to incur normal expenses on the property, the full amount of those expenses can be claimed in the tax return. It doesn’t matter whether the landlord voluntarily provides a reduction or whether the tenant requests one.
Treatment of rent paid in arrears and insurance payouts
If, due to economic recovery, tenants are able to pay back rent in arrears, whether full or partial, the ATO notes that these amounts will be considered income in the year they are received. The same treatment applies to any insurance payouts for lost rent. These amounts must be declared as income in the year of receipt.
Claiming interest during loan repayment deferrals
Where a tenant is not paying rent or paying reduced rent, landlords are likely to rely on loan repayment deferrals offered by banks. Because interest continues to accrue on the loan, landlords who defer repayments can still claim the interest deduction. The interest is considered incurred even if it has not been paid.
Additional considerations for short-term accommodation
According to the ATO, landlords with short-term accommodation need to be particularly careful during this period. COVID-19 has significantly reduced demand, and any increase in private use of the property may reduce the proportion of deductions that can be claimed. If property owners want to maximise their deductions, they need to ensure they do not materially change how the property is used during this time.
Impact of reducing advertising expenditure
Owners who stop or significantly reduce advertising for short-term rentals due to lower demand must also proceed with caution. The ATO accepts that reducing paid advertising may be a reasonable commercial decision. However, when combined with other factors, it may still lead to reduced allowable deductions if it indicates a change in the property’s purpose or level of commercial availability.
Contact one of our accountants in North Sydney for further information on how rental property changes due to the impact of COVID 19.
Frequently Asked Questions
Can I still claim deductions if my tenant is paying reduced rent or not paying at all?
Yes. If you continue to incur normal expenses on the rental property, you can generally claim the full amount of those expenses even if your tenant is paying reduced or no rent, whether or not you agreed to the reduction.
Are there special issues for short-term accommodation owners?
Yes. If you use the property more for private purposes during COVID-19, or significantly reduce advertising, the proportion of expenses you can claim may need to be reduced to reflect the change in use. This can impact your overall deductions.
What should landlords do to protect their tax position during COVID-19?
Keep clear records of rental agreements, rent reductions, arrears, loan deferrals, advertising and any changes in personal use. This helps support your deductions and makes it easier to respond if the ATO reviews your rental claims.
