Tax implications of rent concessions
There may be tax implications when you give or receive rent concessions as a result of COVID-19. It’s important to understand these changes and your obligations as a landlord or tenant.
The rent concession can be:
- A waiver: the tenant no longer needs to pay the amount of rent that is waived
- A deferral: the tenant still needs to pay the amount of rent deferred but they can pay at a later stage
If you have given a rent waiver
When you agree to give a rent waiver to a tenant, you don’t pay income tax on the rent that is waived because you never collect that amount.
If you account for GST on a cash basis and agree to waive rent, you don’t need to collect or pay the GST that would normally be payable, as you haven’t collected the rent.
Generally, you account for accrued rental income for occupancy up to the date of any change to rent you will receive and include it in your assessable income.
If accrued rent for past periods of occupancy has already been included in your assessable income and you later waive that rent, you may be entitled to a deduction.
If you have agreed to change the rent you will receive for future periods of occupancy, your assessable income should only include the reduced rent you have agreed to receive and you should not claim a deduction for the waived rent (which would relate to the future period of occupancy).
If you account for GST on a non-cash (accruals) basis and have already paid GST in the tax period in which the lease payment was due under the rental schedule or invoice (if issued separately), you may be eligible to make a decreasing adjustment to claim back any overpaid GST.
You will have overpaid GST on rent where you adjusted the rental agreement by reducing the amount payable.
You should account for the decreasing adjustment in your BAS in the tax period when you become aware of the adjustment, and you should issue an adjustment note notifying the tenant of a possible corresponding increasing adjustment that they must make, if they have already claimed GST paid as a GST credit in a previous BAS.
If you have not already accounted for GST for the lease period subject to the agreed waiver, there are no GST implications.
Capital gains tax
There are no capital gains tax (CGT) consequences if an existing agreement between a landlord and tenant is changed without payment or other consideration.
For example, when a landlord agrees to a rent concession on an existing lease and the tenant doesn’t pay money or give them anything else for the reduction in the rent they have to pay under the lease.
If a new or additional agreement is created, there may be CGT consequences.
If you have given a rent deferral
When you agree to give a rent deferral, the rent will only become taxable at the point it is ultimately received from your tenants.
If you account for GST on a cash basis when you agree to give a rent deferral, GST will not apply to the rent that is deferred until you receive it.
You need to pay income tax on the accrued but deferred rent even if there’s a change to the pattern of receiving the payments. If you have included deferred rent in your assessable income but don’t eventually receive it from your tenant, you may be entitled to a deduction.
If you account for GST on a non-cash (accruals) basis, you will need to pay GST on the entire amount payable for each lease period identified in the lease agreement, even if you haven’t received the deferred amount yet. For example, a two-year lease agreement may have a payment schedule showing 24 payments of $660 each, covering a one-month lease period. If in a month, part of the $660 monthly lease payment is deferred, the GST payable is still 1/11th of the $660.
If you subsequently write off the deferred rent or the deferred rent has been overdue for 12 months or more, you may claim a GST decreasing adjustment, provided you account for GST on an accruals basis and have already paid GST on the rent written off as bad or outstanding for over 12 months. You are not required to give an adjustment note to the tenant where your decreasing adjustment results from a bad debt adjustment.
Future rent increases
There is a difference between a rent deferral and a future rent increase:
- Under a rent deferral, the total amount of rent over the period of the tenancy does not change.
- Under a future rent increase, the total amount of rent to be paid for the period of the tenancy does change.
If you increase rent in the future as part of your negotiations with your tenant, make sure you carefully document the future use of the property in your agreement (for example, that the property will continue to be used for the running of their business, and the rent will increase as per the agreement). The documentation would need to ensure that it is not a rent deferral – that is, deferred payment for the previous period – which would be assessable sooner.
- Deductions for ongoing expenses
You can still claim deductions for normal expenses you incur in holding and maintaining your property in your tax return if:
- Your tenants can’t pay their rent under the lease agreement because their income has been affected by COVID-19
- You receive less rental income as a result.
You can also claim deductions for those expenses if you reduced your tenants’ rent to allow them to stay in the property due to COVID-19 for commercial, arm’s-length reasons.
Loan interest deductions
Even if the bank defers the repayments, you can claim a deduction for interest on your loan if it continues to accumulate because it is an expense you have incurred.
Deduction for bad debts
You may be able to claim a bad debt deduction for accrued rent that’s included in assessable income but not collected. For example, if you give a tenant a deferral of rent that is related to a past period of occupancy and have used accruals accounting to already include the deferred rent amount in your assessable income.
To claim a deduction, you need to write off the unpaid amount as a bad debt. If you receive payment after you write off the debt, the amount you receive is included in your assessable income when you receive it.
Writing off a debt as bad is not the same as waiving or forgiving a debt for unpaid rent. There are different income tax consequences, particularly for a debt forgiveness.