Property tax issues arising from COVID-19 arrangements
The COVID-19 shutdown has had a devastating impact on residential and commercial property arrangements. For landlords and tenants, the Government has supported an ‘everyone shares the pain’ framework to alleviate cash flow pressure on both sides.
The legal framework has been dissected in our dedicated COVID-19 insights page covering various real estate announcements from the Government to date, which can be accessed here.
As financial year-end approaches, landlords and tenants are turning their mind to year-end tax issues in this unique property environment. The deductibility of property and related expenses has been a hot topic garnering a lot of interest with cash flow remaining a primary concern.
In the summary table below, we work through some key year-end tax considerations focussing on residential and commercial property cash flows in the context of COVID-19 rental management strategies.
Please be aware that particular measures have been implemented in each State with specific eligibility requirements and the summary below considers broad implications from a Federal tax perspective.
| Property tax issues | Residential properties | Commercial properties |
|---|---|---|
| General landlord property expenses | Deductible expenses where property is rented out or available for rent - the usual suspects: • Mortgage interest expenses • Water and council charges • Repairs and maintenance • Depreciation of capital assets • Insurances • Body corporate and agent fees • Land tax | Deductible expenses are broadly the same as residential, with an emphasis on: • Immediate deductions for management and maintenance costs • Depreciation of eligible categories of assets which can be lucrative • Eligible businesses can claim the instant asset write off up to $150,000 this financial year |
| Extension of lease term | • No adverse tax consequences should arise for the landlord or tenant under a mere extension of the lease term | • Same as residential |
| Rent-free or reduced period (permanent) | • Rental income is taxed on the actual reduced amount received • Rental deductions remain available even if the quantum of rental income is reduced • Any net rental property losses can be carried forward to future years | • Tax implications broadly the same for residential |
| Deferred loan repayments | • Accrued interest that continues to accumulate on the loan, will remain deductible as incurred, even if the financier defers the repayments | • Tax treatment broadly the same for residential |
| Other common arrangements | Short term arrangements • Deductions for holding short term rental properties (such as AirBnb) that are vacant due to COVID-19, can continue to be claimed in the same proportion as pre-COVID, provided it remains available for rent Foreign resident landlords • Under Federal law, foreign owners of residential dwellings in Australia are required to pay an annual vacancy fee if their dwelling is not residentially occupied or rented out for more than 183 days (six months) in a year • Taxpayers can engage with the ATO if COVID-19 impacted the residential occupation of property | • Tax implications for short term residential arrangements equally applicable to commercial arrangements |