Rental property owners along with the rest of the economy have taken a hit to their bottom line as a result of the COVID-19 pandemic. In this uncertain time, the ATO has provided some guidance on the deductibility of rental property expenses in various situations.

What can be claimed if your tenant is not paying rent in part or in full?

The most common scenario during this period is the tenant not paying rent in full, or temporarily suspending rent payments with or without the landlord’s consent. According to the ATO, in these circumstances, where a landlord continues to incur normal expenses on the property, those expenses can be claimed in full.

What if the tenant repays rent in a later period?

If, due to economic recovery, the tenants are able to pay back the rent in arrears (whether it be the full amount or a partial amount), the ATO notes that these amounts will be considered to be income in the year that you receive them. The same treatment will apply to any amount of insurance claim received for lost rent (ie. it should be declared as income in the year of receipt).

Can you claim interest if the payment has been deferred and added to the loan balance?

Where a tenant is not paying rent or paying reduced rent, it is possible the landlord will be taking advantage of the loan payment deferrals offered by most banks. By far the most common deferral option offered is a 6-month deferral period where no repayments are required, however, during this time, interest and fees will be added to the loan balance and the balance will progressively increase. As the interest continues to accumulate on the loan, landlords that take advantage of this option will still be able to claim an interest deduction as the interest has been incurred even though it has not been paid.

Is there any change for short term accommodation owners?

The ATO have advised that landlords with short-term accommodation need to be especially careful during this period. With COVID-19 adversely affecting demand, if there has been a change in proportion of use (ie. more private use of property), there may be corresponding changes in the proportion of deductions that can be claimed.

For example, if due to the decrease in demand, you, your family or friends start using the property more for isolating or other private purposes (eg. holidays), then the proportion of expenses you’re entitled to deduct for the property will change from what it was pre-COVID-19.

Further, owners that would like to stop or reduce the amount spent on advertising short-term property during COVID-19 due to the drop in demand, need to be careful as it may affect the proportion of deductions that can be claimed. Whilst the ATO acknowledges that it may be a reasonable commercial decision to temporarily reduce the level of paid advertising, this, combined with other factors may change the allowable proportion of deductions.

What to do now?

During this difficult period, the last thing landlords need is to be confused about what expenses can be deducted. While the ATO has provided some broad guidance, depending on your personal circumstances (particularly if you own short-term accommodation), the answer is not always clear cut. If you need advice in relation to the deductibility of your rental property expenses during COVID-19, please contact Catalyst Financial.