The Australian Taxation Office (ATO) has released a set of guidelines to help all rental property owners whose incomes are affected due to recent events in the country, which include the bushfires, the flooding, and the ongoing COVID-19 pandemic.

The most important thing landlords need to keep in mind as they prepare to file their tax returns is keeping a record of all expenses. Without good records, the ATO said landlords will find it difficult to declare all their rental-related income and work out what expenses they can claim as deductions.

Dealing with reduced rental income

In addition to the moratorium on evictions, landlords are requested by the federal and state governments to negotiate with their tenants about rental deductions or waivers.

The ATO said in cases where there is an agreement to reduce rent payments, landlords only need to declare the rent they have received as income. This means that they do not need to include deferred payments in their declared income until they receive them.

"While rental income may be reduced, owners will continue to incur normal expenses on their rental property and will still be able to claim these expenses in their tax return as long as the reduced rent charged is determined at arms' length, having regard to the current market conditions," the ATO said.

Furthermore, landlords can still claim their mortgage interest charges even if they have deferred their loan repayments. However, any payouts from insurance policies that cover loss of income must be included in their tax returns.

Also read: Landlords' Post-Pandemic Guide

Affected short-term rentals

For short-term rental owners, deductions will still be available provided that the property remains available for rent.

However, if the owners used the property for private purposes, they will not be able to claim deductions over the period that the property was off the market.

"To determine the proportion of expenses that can be claimed for short-term rental properties impacted by COVID-19 or bushfires, a reasonable approach is to apportion expenses based on the previous year's usage pattern, unless you can show it was genuinely available for rent for a longer period of time in 2020," the ATO said.

Changes to vacant land deductions

The ATO also clarified that for this year, expenses for holding vacant land will no longer be deductible for owners who intend to build a rental property that has yet to be constructed.

However, this does not apply to land that is used in a business. Furthermore, expenses are deductible if circumstances like a fire or flood led to the land being vacant.

"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," the ATO said.

If the property is not genuinely available for rent, landlords need to limit their deductions to the days when the home is listed. Landlords who are allowing their friends and families stay in the property at a reduced price should also limit their deductions to the amount of rent received.

"Don't forget to include all your rental income, especially from sharing economy platforms. We are matching data received from these providers to information in tax returns and will be following up discrepancies," the ATO said.

Avoiding common mistakes

The ATO also outlined several common mistakes rental property owners make when they file their tax returns.

The first mistake was claiming deductions for travel expenses they incur when they inspect their rental properties. The ATO said landlords can only claim these costs if they are in the business of letting rental properties.

Another common error was claiming interest for a portion of a loan that has been used for personal transactions such as paying for living expenses, going on a holiday, or buying big-ticket items. The ATO said it employs data and analytics to ensure claims on interest was only for the portion of the loan that relates directly to the rental property.

The tax office also clarified how capital works should be claimed. It said that repairs or maintenance expenses are deductible immediately while improvements and renovations are categorised as capital works and are deductible over a number of years.

Landlords cannot claim initial repairs for damages that existed when the property was purchased. The ATO classifies such as capital works and should be claimed over a certain number of years.