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.
Base criteria of: a $400,000 loan amount, variable, principal & interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the product provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 July 2020. 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.
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.
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.
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 2019. They are (in descending order): Credit Union Australia, 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 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
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 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.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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