The ATO has updated its webpage that addresses questions about residential rental properties and the financial impact of COVID-19. Some of the more interesting issues are outlined here.
• Reduced or temporary cessation of rent: If tenants are not meeting their payment obligations under the lease agreement due to COVID-19 and a landlord continues to incur normal expenses on the property, the landlord will still be able to claim those expenses.
• Reduced rent to assist tenants affected by COVID-19: If landlords reduce rent to enable tenants to remain in the property (thereby maximising rental return in a changed rental market), there will be no corresponding reduction for rental property expenses.
• Back payments/insurance: Receipts of back payment of rent or an amount of insurance for lost rent should be declared as income in the tax year in which the amounts are received.
• Interest on deferred bank loans: If a bank defers loan repayments for a period of time as a result of COVID-19, any interest accrued will be deductible.
• Instant asset write-off: The new instant asset write-off deduction is not available for property investors.
Private use of short-term accommodation
The ATO has also addressed a number of questions related to short-term accommodation being used for private purposes.
One question asks whether, in relation to a property that has suffered rental downturn due to COVID-19, the owner will be able to continue to deduct expenses associated with this property in the same proportion as before COVID-19 for the period when demand is adversely affected. The ATO says that the amount to be claimed will depend on how the property had been used before COVID-19 and how the owner planned to use it during the period that is now affected by the pandemic. If the reason for the adverse effect on demand for the property is COVID-19 (or the bushfires immediately beforehand), the owner can continue to deduct expenses associated with the property in the same proportion as they were entitled to deduct before the pandemic (or the bushfires). However, if they had started to use the property in a different way beforehand, the proportion of expenses to be claimed as a deduction may change. The ATO provides the following examples of changed use:
• increased private use of the property by the owner, their family or their friends; and
• a decision to permanently stop renting out the property once the COVID-19 restrictions end.
A flow-on question involves a taxpayer using a holiday home to self-isolate and whether deductions can continue to be claimed, given that the taxpayer was unable to rent the property commercially. Perhaps unsurprisingly, the ATO says that the increased private usage will reduce the amount that the taxpayer can claim.
The last question addresses rental advertising and is interesting. If a taxpayer stops paying for advertising during the COVID-19 lockdown period, can deductions associated with holding the property still be claimed? It is worth quoting the ATO’s answer in full:
“It depends on a wider range of factors, not just one. Whether active and bona fide efforts are made to ensure a property is available for rent is only one factor to consider when determining the appropriate method to apportion deductions for a short term rental property. You would need to consider how the property had been used before COVID-19 and how you plan to use it during the period now adversely affected by COVID-19.
During this time we acknowledge it may be a reasonable commercial decision to temporarily reduce the level of paid advertising for your property, depending on the restrictions in your property’s locality. However, this factor alone doesn’t necessarily determine the allowable proportion of your deductions.”
If you would like to know more please contact one of our accountants on 07 4639 1099 or come in and see us at 4 Bowen Street Toowoomba.