Are you a landlord?
In 2019–20, over 1.8 million Australians owned rental properties and claimed $38 billion in deductions.
According to the ATO, the most common mistake rental property and holiday homeowners make is neglecting to declare all their income. This includes failing to declare any capital gains from selling an investment property.
The ATO is expanding the rental income data it receives directly from third-party sources such as sharing economy platforms, rental bond authorities and property managers.
Deliberate attempts to avoid tax on rental income will see the ATO take action.
If you take out a loan to buy a rental property and rent it out at market rates, the interest on that loan is deductible. However, if you redraw money from that mortgage for personal use, such as buying a boat, or going on a holiday, you can’t claim the interest on that part of the loan.
Note: An asset used mainly to derive rent does not qualify for the small business CGT concessions.
Reduced rent during COVID-19 pandemic
If you negotiated a reduced or deferred rent, you only need to declare the rent you have received as income. Deferred payments are taxed in the income year in which you receive them.
While your rental income may be reduced, you can still claim normal expenses made on your property as long as the reduced rent is determined at arm’s length and considers current market conditions.
Generally, if your plans to rent a property in 2020–21 were the same as in previous years, but were disrupted by COVID-19, you will still be able to claim the same proportion of expenses. This only applies where the property was not used privately. If you, your family or friends stayed at the property for free or at a reduced rate, at best you will only be able to claim a portion of the expenses.
Travel to inspect properties
If you incur travel expenses in order to inspect a residential rental property you own, carry out repairs to the property, collect rent or attend an apartment building owner’s corporation meeting, you cannot claim a deduction for those expenses.
Restriction on deducting travel expenses: Who does it apply to?
Travel expenses include airfares, taxi charges, motor vehicle expenses and the cost of associated meals and accommodation.
These rules were introduced to address concerns that some taxpayers had been claiming travel deductions (eg for a flight from Sydney or Melbourne where the property owner lived to the Gold Coast where the rental property was located) without correctly apportioning costs, or had even claimed travel costs that were for private purposes (eg using the Gold Coast property just for a holiday).
The restriction on deducting travel expenses also applies to a tenant who subleases a residential property and to an SMSF that owns a residential property.
Who doesn’t it apply to?
The restriction does not apply to expenses incurred by a company.
The restriction also does not apply to travel expenditure incurred in carrying on a business, including a business of providing property management services.
Whether owning residential rental properties constitutes a business depends on the facts of each particular case. For example, an individual who derives income from renting out one or two residential properties would not normally be thought of as carrying on a business.
On the other hand, deriving rent from a number of properties or from a block of apartments may indicate the existence of a business. For example, the Administrative Appeals Tribunal recently decided that a man who rented out 7 units in one block and 2 houses was carrying on a rental property business. This was largely because he was heavily involved in managing the properties (particularly after he was made redundant from his day job as a banker) and the capital invested was sizable (net $3.475 million).
Do you hold vacant land?
Deductions are limited for expenses associated with holding vacant land. The ATO has issued a draft ruling (TR 2021/D5) setting out its views on how the rules operate.
Land is vacant if there is no substantial and permanent structure in use or available for use on the land.
If there is a structure on the land, it must have an independent purpose in the context of the land on which it is located. For example, fences and a garage on residential land do not have a purpose independent of the main residence. Accordingly, if there is no main residence on the land, it will be vacant even if there is fencing or a garage on it.
Residential premises that you construct or substantially renovate are not a substantial and permanent structure unless they can lawfully be occupied and are leased, hired or licensed (or available for lease, hire or licence).
Examples of expenses associated with holding land include any interest or borrowing costs to acquire the land, council rates, land tax and maintenance costs. However, the costs of constructing a substantial and permanent structure on the land, or any interest or borrowing costs (to the extent they are associated with the construction), are not regarded as expenses associated with holding the land.
The limitation on deducting expenses does not apply if the land is used in carrying on a business.
If you hold vacant land, talk to Southern Business Solutions about whether the holding costs are deductible.
Ref: TaxWise Business October 2021