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The ATO has advised it will continue to focus on rental deduction claims in tax time 2020. It doubled its in-depth audits last year after findings that nine out of 10 claims contained an error.

The ATO has recognised that COVID-19, bushfires and floods have placed residential rental property owners in unforeseen circumstances, resulting in reduced rent, deferred payment plans and mortgage repayment deferrals.

Rental income only needs to be included as income at the time it is paid, meaning if tenants have been given a rent deferral until the next financial year, these payments should not be included. However, rental insurance that covers a loss of income will still need to be included in tax returns as assessable income.

Where mortgage loan repayments deferrals have been given, interest charged on the loan can still be claimed as a deduction despite the repayment deferrals. Note however, if you are directing some of the loan money to personal use, such as paying for living expenses, buying a boat or going on a holiday, and then claiming that private portion of the loan interest as a deduction, the ATO will disallow this deduction. Be aware the ATO gets data on these loans directly from the banks through their data matching programs.

Airbnb rentals

The ATO advises that deductions are still available for Airbnb properties provided the property was genuinely available for rent. Examples of factors the ATO will look at in determining if a property was genuinely available for rent are availability of the property, whether charging the market rate and the types of terms and conditions of the bookings.

Data matching between the ATO and share economy platforms, such as Airbnb give the ATO greater oversight into your Airbnb properties. ATO assistant commissioner Karen Foat advises “Generally speaking, if your plans to rent a property in 2020 were the same as those for 2019, but were disrupted by COVID-19 or bushfires, you will still be able to claim the same proportion of expenses you would have been entitled to claim previously”.

“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 cannot claim deductions in respect of those periods.

“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.”

Vacant land deductions

Recently legislated changes to tax deductions for vacant land mean that from 1 July 2019, taxpayers will no longer be able to claim deductions for holding vacant land with the intention of building rental property.

“So, if you are building a rental property, you cannot claim the deductions for the costs of holding the land, such as interest, however, if your rental property was destroyed in the bushfires and you are currently rebuilding, 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.

The new law will not apply to land that is used in a business.

Other common errors

Common recurring errors the ATO have found are claiming deductions for travel to inspect rental properties, not differentiating between capital works and repairs, and not apportioning claims for short-term rental properties when they are not genuinely available for rent. These deductions will be disallowed and penalties and interest charges may be levied. An ATO audit may also be conducted on the taxpayer.

Please consult a registered tax professional should you require clarification on any of the above.