Property Tax time Tips 2020
Last-minute tax planning tactics -INVESTMENT PROPERTY
Expenses stemming from your rental property can be claimed in full or in part, so, if possible, it can be helpful to bring forward any expenses that can be undertaken before June 30 and claim them in the current financial year. If you know that your investment property needs some repairs, some gutter clean up or some tree lopping, for example, see if you can bring the maintenance and (deductible) payments into the 2019-20 year. It should also be noted that deductible rental property expenses remain deductible even if the property is not rented, as long as it is genuinely available for rent (and this may be relevant in the current COVID-19 environment).
Rental (passive) income and ‘carrying on a business’ for JobKeeper eligibility
When assessing eligibility for JobKeeper assistance, the first question that must be answered is whether the entity was carrying on a business as at 1 March 2020. This question is of particular relevance to entities that have solely or predominantly rental income (other than input taxed supplies). One Administrative Appeals Tribunal case noted that “the letting of a property by itself is an activity in the nature of investment rather than a business, or an adventure or concern in the nature of trade”. But another High Court case looking at the same
issue stated that “whether the activities of an entity constitute the carrying on of a business is a question of fact, and must be answered based on a wide survey, and the overall impression gained, of the activities of the entity having regard to the indicia of carrying on a business as a whole”. The moral of the story is that where an entity with rental income, or more generally passive income, is concluding on the question of whether it is carrying on a business, comprehensive analysis and documentation must be undertaken, particularly where the conclusion is in the affirmative. This analysis may be irrelevant for entities making solely input taxed supplies (for example, the supply of residential premises) as these supplies are excluded from the determination of a decline in turnover.
COVID-19 and residential rental property claims
Many residential rental property owners have had their rental income affected by COVID-19. As a result of this income year not being business as usual, the ATO has provided answers to some typical scenarios that may crop up in this area for tax time.
QIf tenants are not paying their full rent of have temporarily stopped paying rent as their income has been affected due to COVID-19, can a property owner still claim deductions on their rental property expenses?
Yes. If tenants are not meeting their payment obligations under the lease agreement due to COVID19 and you continue to incur normal expenses on your property, then you will still be able to claim these expenses in your tax return.
QA property owner is considering reducing the rent for tenants whose income has been adversely affected by COVID-19 to enable these tenants to stay in the property (they are not in default of their rent). Will the owner’s deduction for rental property expenses be reduced because of this?
No. If they decide to reduce the rent to enable tenants to remain in the property (thereby maximising rental return in a changed rental market), their deduction for rental property expenses will not be reduced.
QIf an owner receives a back payment of rent or an amount of insurance for lost rent, is this assessable income to the property owner?
Yes. These amounts should be declared as income in the tax year in which you receive the amounts.
QIf the bank defers loan repayments for a period due to COVID-19, can a property owner continue to claim interest on the loan as a deduction?
Yes. If interest continues to accumulate on your loan, it will be an expense that you have incurred and is therefore deductible. Interest remains deductible on the loan even if the bank defers the repayments.
QIs a rental property owner able to access the new increased instant asset write off for their property?
No. If you are a property investor, you cannot access the instant asset write-off deduction.
COVID-19 is adversely affecting demand, including cancellation of existing bookings, for a property that is usually rented out for short-term accommodation but has also previously had some private use by the owner. Will they be able to continue to deduct expenses associated with this property in the same proportion
as they were entitled to claim before COVID-19 for the period that demand is adversely affected? The amount you can claim will depend on how the property had been used before COVID-19 and how the owner had planned to use it during the COVID-19 period. If the reason for the adverse effect on demand for the property is because of COVID-19 (or the bushfires before that), a property owner can continue to deduct expenses associated with their property in the same proportion as they were entitled to deduct before COVID-19.
If they had started to use the property in a different way than before COVID-19, the proportion of expenses able to be claimed as a deduction may change. Examples of changed use include:
■ increased private use of the property by the owner, their family or friends
■ a decision to permanently stop renting out the property once the COVID-19 restrictions end.
QA rental property owner is using their holiday home privately for themselves and family so they can isolate during COVID-19. Can they continue to claim deductions for the property for this period, as they are unable to rent the property commercially?
No. If the owner is using the property themselves or providing it to friends or family, this will increase the private usage of the property and reduce the deductions available to claim.
QA rental property investor would like to stop paying for advertising on their short-term rental property during COVID-19 as they are not getting any queries for the property.
Can they still claim deductions associated with holding the property?
It depends on a wider range of factors, not just one. Whether active and bona fide efforts are made to ensure a property is available for rent is only one factor to consider when determining the appropriate method to apportion deductions for a short term rental property. The owner would need to consider how the property had been used before COVID-19 and how
they plan to use it during the period now adversely affected by COVID-19. During this time the ATO acknowledges that it may be a reasonable commercial decision to temporarily
reduce the level of paid advertising for such a property, depending on the restrictions in its locality. However, this factor alone doesn’t necessarily determine the allowable proportion of deductions.
Concerns on property development and SMSFs
The ATO, as a regulator of self-managed superannuation funds, has reported an increase in the number of SMSF trustees entering into arrangements involving buying and then developing property (either with related or unrelated parties) that is subsequently sold or leased.
Trustees should be aware that the ATO is taking an active interest in property development investments undertaken by SMSFs. While it says this is not specifically prohibited, the ATO
recently published guidance that indicates that these arrangements need to be carefully approached to ensure compliance with relevant regulations and laws.
For example, could investments of this sort be viewed as having what it calls a “collateral purpose” (that is, not within what would be considered compliant with the sole purpose test), or if it crosses a line regarding the in-house asset rules. An SMSF, to remain compliant in the view of the regulator, should continue to meet the relevant operating standards, including record-keeping requirements, ensuring assets are appropriately valued and recorded at market value, and keeping the fund’s assets separate from members’ assets.
A key feature of property investment — borrowed funds and loans — figures largely in the ATO’s concerns.
For example, if the arrangement features the SMSF borrowing money, the ATO focus will be on whether that borrowing fails to meet the requirements to be exempted from the prohibition on borrowing for a limited recourse borrowing arrangement (LRBA). Also whether the arrangement includes the provisions of a loan or financial assistance (directly or indirectly) to a member or they’re relative. Another tripping point here is the question of whether payments out of the SMSF under the arrangement are in fact payments of benefits contravening the relevant payment standards (more usually known as illegal early release of superannuation).
Where the ATO’s concerns are particularly awakened is over arrangements in which the investment activity is undertaken utilising joint venture arrangements, partnerships, or investments through an ungeared related unit trust or company. Complex structures used in property development can also obscure, the ATO says, where income may be
inappropriately diverted into the concessionally treated superannuation arena, possibly in a way that may also be contrary to proper retirement outcomes (again, the
sole purpose test). Trustees must be aware of issues that could expose compliance weaknesses, the ATO says, such as ensuring proper arm’s length dealings, including but not limited to:
■ the purchase of land or other assets
■ the value of services provided
■ the terms (including the use of personal or related party guarantees) of any borrowing arrangements of the SMSF or other entities involved in the development, and
■ the return on investment and income or capital entitlements.
Manipulation of the transfer balance account (through deliberate undervaluing for example) is another concern when a fund enters retirement phase and the asset would count towards the cap. This may allow a greater amount of earnings within the fund to be treated as exempt current pension income. Before entering into property development arrangements,
it may be prudent to have professional advice as there may be significant adverse consequences for trustees and members of an SMSF, including the forced sale of assets or having to wind up the SMSF.
If you have an SMSF already developing property, or that has invested in a related property development entity or venture, it could be important to also seek professional advice or your fund’s auditor to make sure that investment stays on track, with no possible contraventions or regulatory concerns.
For further information from the SRO of Victoria, please see Click Here
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