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If COVID-19 has impacted commercial or residential premises you own and rent out, from a tax perspective there is very little that has changed.
- If tenants remain in the property or the property remains genuinely available for rent, you can continue to claim expenses as usual, even if the rental rate has been reduced on a temporary basis or tenants have been unable to pay rent for a period of time.
- If you negotiated with your bank to defer mortgage repayments, you can continue to claim interest as the deferred interest is capitalised.
- If you received an insurance payment for rent defaults, or your tenant made a back payment of rent they owe, this income is taxable and will need to be declared in your tax return.
Outside of COVID-19 related issues, the ATO continues to find errors in rental property claims made with up to 90% of tax returns containing an error, particularly for ‘other’ deductions and interest. Common issues include:
- Claiming deductions for properties that are not genuinely available for rent
- Claiming deductions for an entire property when only part of the property was available for rent
- Claiming deductions for loan interest expenses when a portion of the loan was used for private purposes
- Incorrect categorisation of expenditure incurred in order to repair or improve the property
- Not having records to substantiate income received and deductions claimed. If you are claiming a rental property expense it is important to substantiate the claim. In the event of an ATO audit, if you cannot produce a tax invoice or other evidence for an expense, it is likely the deduction will be denied.
- Incorrectly apportioned claims for interest deductions
Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim.
If your rental property is outside of Australia, and you are an Australian resident for tax purposes, you must recognise the rental income you received in your tax return (excluding any tax you have paid overseas), unless you are classified as a temporary resident for tax purposes. You can claim expenses related to the property, although there are some special rules that need to be considered when it comes to interest deductions. For example, if you have borrowed money from an overseas lender you might be subject to withholding tax obligations.