Own a rental property? The ATO reveals what you need to know this tax time

author-avatar By on June 25, 2020
Own a rental property? The ATO reveals what you need to know this tax time

Photo by Danny Howe on Unsplash

It's been a tumultuous year for landlords to say the least. That's why the ATO has revealed a tell-all list of things landlords need to know this tax season.

Between floods, bushfires and COVID-19, most residential property owners have probably seen their rental income reduced in some way. 

The Australian Tax Office (ATO) said it recognised the tough period rental owners had gone through and has revealed what they need to know at tax time.

ATO 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," Ms Foat said.

Buying an investment property or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for investors.

Lender
Advertised rate Comparison rate Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
GET A FULL OFFSET ACCOUNT FOR NO EXTRA COST

Low Rate Home Loan - Prime (Principal and Interest) (Investment) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
GET A FULL OFFSET ACCOUNT FOR NO EXTRA COST

Low Rate Home Loan - Prime (Principal and Interest) (Investment) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Investor, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Investor, Principal and Interest (Refinance Only)

  • Refinance only. Fast online application
  • No Nano fees. Free 100% offset sub account
  • Mobile app, Visa debit card & instant payments
VariableMore details
AN EASY ONLINE APPLICATION

Yard Investment Loan (Principal and Interest) (LVR < 80%)

  • No application fee
  • Unlimited additional repayments
  • Unlimited free redraws
AN EASY ONLINE APPLICATION

Yard Investment Loan (Principal and Interest) (LVR < 80%)

  • No application fee
  • Unlimited additional repayments
  • Unlimited free redraws
VariableMore details
FREE REDRAW FACILITY

Smart Investor Home Loan (Principal and Interest) (LVR < 80%)

  • Option to add an offset for 0.10%
  • Fast turnaround times, can meet 30 day settlement
  • No on-going or monthly fees
FREE REDRAW FACILITY

Smart Investor Home Loan (Principal and Interest) (LVR < 80%)

  • Option to add an offset for 0.10%
  • Fast turnaround times, can meet 30 day settlement
  • No on-going or monthly fees

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. Rates correct as of October 28, 2021. View disclaimer.

Reduced rental income

As a result of the pandemic, the Federal and State Governments have asked landlords and renters to come to an agreement on rental payments if the renter has experienced financial hardship. 

Many tenants have received rent reductions, deferrals or waivers to get through this period. 

The ATO said 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 and the ATO said 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

Bushfires and the pandemic have seen the use of Airbnbs and other short-term rentals plummet.

The ATO said if these factors had adversely affected demand, deductions were 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,” Ms Foat said.

Deductions for vacant land no longer available

The ATO said 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 rental owners make

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,” Ms Foat said.

Residential property owners can't claim any deductions for costs incurred in travelling to a 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. 

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. Others claim the initial work needed to get a property ready for rent immediately instead of spreading the cost over a number of years,” Ms Foat said.

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. 

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.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

Latest Articles

author-avatar
Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy