While tax isn’t necessarily on people’s minds at the moment, Adam O’Grady, assistant commissioner from the ATO, advised that the ATO has been working hard to provide property investors with information and answers to their questions to help them understand how COVID-19 and government legislated changes may affect their rental income and deductions.
Mr O’Grady stated: “A number of residential property investors have had their rental income adversely affected by COVID-19, whether it is through reduced rental income, tenants under deferred payment plans, or travel restrictions which are impacting demand for short-term rental properties. Given these impacts, people may be starting to worry about what this means for them. By providing this information early we are hoping to alleviate people’s worries, so they can focus on keeping themselves, families and communities safe.”
Should your tenants stop paying rent or be paying less rent due to the direct effects of COVID-19 you will still be able to claim your normal expenses for the investment property in your tax return, no apportionment is necessary.
When your tenants are able to return to paying the full weekly rent which may also include some back payments, this should be included as income in the year it was received.
Depending on the agreement you have made with the tenant about repaying the back rent (rent in arrears) this may take a substantial time and may need to be declared over multiple years. If you get an insurance payout for loss of rent, you should include this as rental income in the year it was received.
Short-term rentals are also impacted with restrictions on travelling and social distancing. What you can still claim and how you apportion your deductions depend on how you were using the property before COVID-19 and how you were planning on using it during the COVID-19 period. This usage and intended usage will impact how you apportion expenses between when the property was available for rent and when it was used for private purposes.
If you are using the property yourself or providing it to friends or family to self-isolate, this will increase your private usage of the property and reduce the deductions you can claim. If you had started to use the property in a different way than before COVID-19, the proportion of expenses you can claim as a deduction may change. To find out more go to the FAQ COVID-19 on the ATO website.
Mr O’Grady has stated that: “We are trying to make it easier for people to get things right and encourage you to make use of the information we have published”.
He would also like smart investors to be aware of some recent law changes. Depreciation is no longer deductible on second-hand assets purchased after 1 July 2017. This impacts people who buy a previously used property, as there will be items within the property, such as the hot water system, dishwasher or stove that are no longer depreciable, rather they are included in the cost base for calculating the capital gain when the property is sold.
Also, from 1 July 2019 expenses for holding vacant land are no longer deductible for most people, this applies even if the land was acquired or held before that date. This applies to land you may have been claiming expenses for over a number of years.
Whilst the world has changed significantly in the last few months, smart property investors can still ensure they are keeping up with their tax obligations by following these tips and tricks to avoid common mistakes such as apportioning income and expenses for co-owned properties, getting initial repairs and capital improvements right, claiming the correct amount of interest on your loan and keeping the right records.
To find the answers to more questions about COVID-19, click here. There is also a whole raft of other available support information which you can access on our website, such as, extensions to lodge your tax returns, low-interest payment plans to help pay existing and ongoing tax liabilities or access to your instalments you may have already paid.
If you have other COVID-19-related questions that aren’t covered in our information please contact ATO CommunityExternal.
Adam O’Grady is the assistant commissioner for individuals & intermediaries at the Australian Taxation Office (ATO).
Mr O’Grady leads the pay as you go instalments system across all market segments with a focus on ensuring the instalments system is being used appropriately by educating taxpayers and their representatives of their obligations under the PAYGI system. In addition, he leads the risk and strategy function for individuals not in business where he has responsibility for the risk assessment and development of compliance strategies for the individuals’ client experience, including developing strategies that making easier for our clients to comply and hard not to.
Mr O’Grady has over 16 years’ experience with the ATO and has spent most of that time developing opportunities to better use data and technology to enhance our management of risk and improve the client experience.