The changing financial circumstances of many tenants (and landlords) have had a significant impact on many residential tenancy arrangements. The ATO has provided brief guidance on its approach to the most common changes, including:
- Tenants being unable to pay rent: In these cases the ATO indicates landlords can still claim deductions for rental expenses where tenants can’t pay their rent under the lease agreement because their income has been affected by COVID-19 and the landlord received less rental income as a result but continued to incur normal expenses on the property. The same principles apply if landlords reduce rent payable by tenants to allow them to stay in the property due to COVID-19 for commercial, arm’s-length reasons.
- Interest deductibility: Interest should remain deductible on rental property loans if it continues to accumulate because it is an expense that is still incurred, even if the bank defers the obligation to make loan repayments.
- Back payments of rent and insurance recoveries: The ATO confirms that a back payment of rent or insurance payment for lost rental income should be declared as assessable income in the tax year in which it is received.
- Short term rentals: Many landlords offering short term rentals will have experienced reduced demand for the short-term rental accommodation, including cancellation of existing bookings, which may affect the income received. However, deductions may still be available. Where a client’s ability to rent a property has been affected and nothing else changes, the ATO indicates the client can continue to deduct expenses, based on how they used the property in the equivalent period in earlier years. Clients can only claim a deduction for the portion of expenses that relate to an income-producing use. For example, if clients use a short-term rental property for some private use, deductions would not be available for this period.
Another common scenario is that some landlords have ceased advertising their properties for rent (on the basis that holiday traffic etc has slowed/ceased). To claim deductions for periods when a property is vacant, clients generally must show that the property is genuinely available for rent. The ATO indicates that this factor alone will not determine the allowable proportion of deductions. Where clients have made a reasonable commercial decision to temporarily stop or reduce advertising for a property during a COVID-19 lockdown, they may still be able to claim deductions for this period, but this will need to be considered carefully.