Australia ATO warns rental property owners coronavirus, bushfires and floods do not mean they can avoid tax
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Rental property owners that have had their mortgage repayments deferred due to COVID-19 can still claim the interest on their tax bills, the Australian Taxation Office (ATO) says.
But those that have been awarded insurance payouts for loss of rental income due to COVID-19, bushfires or floods will still be taxed on it.
The agency is also reminding people this tax time that, under laws which passed Federal Parliament last year, they cannot claim deductions for vacant land even if they are building it to rent out.
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More than 2.2 million Australians claimed $50 billion in rental deductions in 2017-18.
The agency contacts about 150,000 taxpayers, or their agents, each year about their rental claims.
In 2017-18, more than 9,000 people either amended their returns themselves or had their returns amended by the ATO as part of an audit.
These amendments added up to more than $25 million clawed back by the agency.
Assistant Commissioner Karen Foat said the agency recognised the COVID-19 pandemic had placed property owners and tenants in "unforeseen circumstances", but reminded taxpayers about what deductions were and were not available under the law.
Banks have been offering mortgage holders loan repayment holidays.
The ATO says that since the interest is still accumulating on the loan, it is a legitimate tax deduction for those renting out their property.
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"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," Ms Foat said.
Many tenants have been paying reduced rent or ceased paying during the pandemic.
Ms Foat said people still needed to include rent as income at the time it was paid.
"If payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them," she said.
"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."
Ms Foat said some owners may have rental insurance that covered a loss of income.
"It is important to remember that any payouts from these types of policies are assessable income and must be included in tax returns," she said.
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Limited deductions for holding vacant land
Ms Foat also reminded Australians that deductions for vacant land were no longer available.
Previously those holding vacant land could claim a tax deduction for the costs of holding the land if it was held for income-producing purposes, or if they were carrying on a business to produce income.
But in the 2018–19 budget the Federal Government announced that from July 1, 2019, it would limit deductions for expenses associated with holding vacant land to land that was used for a business or was available for rent.
"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," Ms Foat said.
"So, if you are building a rental property, you cannot claim the deductions for the costs of holding the land, such as interest."
Ms Foat said the change also applied to land people may have been claiming expenses on in the previous year.
"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," she said.
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The exception was for people whose rental property was destroyed in the bushfires and who were currently rebuilding.
"[In that case] you can claim the costs of holding your now-vacant land for up to three years while you rebuild your rental property," Ms Foat said.
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The impact of the coronavirus pandemic has been severe on short-term rentals such as Airbnb.
Ms Foat said despite the cancellation of existing bookings for a short-term rental property, deductions were still available provided the property was still genuinely available for rent.
"We recognise that circumstances over the past six months have seen many short-term rentals see cancellations or sit vacant as a result of either COVID-19 or bushfires," Ms Foat said.
But she said 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 could not claim deductions.
"If a property is not genuinely available for rent, you need to limit your deductions to the days when it is," Ms Foat said.
"If you are allowing friends or family to stay in the property at a reduced price, you need to limit your deductions to the amount of rent received.
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"If you or your family or friends move into the property to live in it because of COVID-19 or bushfires, you need to count this as private use when working out your claims in 2020."
But generally speaking, she said people renting out a property in the 2019-20 financial year who had their income disrupted by COVID-19 or bushfires would still be able to claim expenses as tax deductions.
Steer clear of common errors
Ms Foat also reminded rental property owners to avoid common mistakes.
These include people claiming deductions for travel to inspect their rental properties, claiming interest on loan money for living expenses or holidays and claiming capital works as a lump sum rather than spreading the cost over a number of years.
"Repairs or maintenance to restore something that's broken, damaged or deteriorating in a property you already rent out are deductible immediately," she said.
"Improvements or renovations are categorised as capital works and are deductible over a number of years."
The agency has also clarified the rulesand has warned people to wait until July to lodge their tax returns in order to minimise errors.
And generally it has advised people to have good records.
"The number one cause of the ATO disallowing a claim is taxpayers being unable to produce receipts or other documents to support a claim," Ms Foat said.
"Furnishing fraudulent or doctored records will attract higher penalties and may also result in prosecution."
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