Tax Tip 328: Claiming Deductions While a Property is Vacant

Discussion in 'Accounting & Tax' started by Terry_w, 25th Jan, 2021.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    To be able to claim an expense in relation to a rental property that expense generally has to be connected to income somehow.

    When a property is vacant there can still be a connection to income if the property is genuinely available for rent.

    Some people have tried to rort the system by advertising a property they own at a high rent so as to try to keep it empty yet justify it being available for rent and thereby be eligible to claim the deductions on.


    Example

    Homer has a property which he uses to make sexy time with his mistress in. He keeps the property empty so that he has a place to use every second day if he needs it. His mate suggested this as he argues it will be a deductible expense if he advertises it for rent. If Homer went to a hotel it would cost around the same price as the lost rent, but it wouldn’t be deductible.

    Barney tells Homer that since the market rent is $500 pw, Homer should advertise it for $1,000 p.w. Furthermore, he should just put a notice on the board at the local supermarket and in the local butcher’s newsletter.


    The ATO audit Homer as he has held the property for 12 months and no income has been received yet, Homer has still claimed the expenses in full.

    Homer argues that it was available for rent.

    The ATO say it was not genuinely available for rent as it was advertised double what the market value rent would have been and not advertised in a manner which would attract tenants, especially vegetarian tenants.

    They don’t even know about the personal use yet deny the claim for deductions in full.


    Where the property is vacant and genuinely available for rent at market value, then the interest and other costs can remain deductible. An example is where one set of tenants leave and it takes a few weeks, or even months to find a new set.


    This can be the case where the property is vacant and not available for rent because of repairs or improvements being done to the property – as long as the property is not vacant land.
     
    craigc and Blueskies like this.
  2. Mike A

    Mike A Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    2,656
    Location:
    UNIVERSE
    and the taxpayer needs to consider the new rules re interest if it is vacant land.

    no interest deduction will be allowed, unless they are carrying on a business, until residential premises are constructed on the land and

    - able to be occupied ; and
    - leased, hired or licensed or available for lease, hire or license.

    this test means a taxpayer cannot deduct the costs of holding land containing residential premises until the taxpayer is actively seeking to derive income from the property.

    the test is only relevant once land has a substantive permanent building or structure on it that is in use or ready for use.

    Before this time the basic requirements for deductibility are not satisfied as the land will be vacant.
     
    craigc likes this.
  3. Jobeki

    Jobeki Well-Known Member

    Joined:
    19th May, 2016
    Posts:
    63
    Location:
    Brisbane
    I take it being advertised for sale (vacant) would not count given you are not earning income?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Not deductible in that case. capital cost.
     
  5. Curious2019

    Curious2019 Well-Known Member

    Joined:
    27th Sep, 2019
    Posts:
    217
    Location:
    VIC
    Keep in mind that different tax rules apply to companies that hold vacant land, companies can claim costs while land is vacant.
     
    Beano and Terry_w like this.
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Not to mention depreciation and travel.
     
    Curious2019 likes this.
  7. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    In ATO property reviews (ie a audit review) they seek information on the lease, tennacy agreement and how rent was determined. When there is no agent they look even closer. They look at market rates as part of the process. It works several ways.

    Rent too high - Not genuinely available
    Rent too low - % loss of deductions or other issues could be evident
     
  8. Baker

    Baker Well-Known Member

    Joined:
    21st Jun, 2015
    Posts:
    1,003
    Location:
    I like bread
    What if, whilst the property is vacant between tenants, after repairs/improvements the owner makes the decision to move in? Is that period of vacancy and the costs still deductible?
     
    inpersuitofhappiness likes this.
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    It would depend on when the decision is made and the circumstances. Once the advertising for a tenant stops they would no longer be deductible, but it could be sooner.
     
    Baker likes this.
  10. Blueskies

    Blueskies Well-Known Member

    Joined:
    24th Aug, 2015
    Posts:
    1,769
    Location:
    Brisbane
    Maybe homer should request his mistress pays him a nominal amount for "services provided", then it becomes a place of business. Plus make sure to use every room in the house so no need to apportion.
     
    datto likes this.
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    It might be better to claim off the CGT when sold
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Possibly. If the taxpayers can demonstrate a intention to relet and the property is "available" to rent wont be a issue. We see this with a gap in leases, a gap to allow repairs to be made and gap for slow tenancies. But if you stopped renting so Fred the friend can move in for three weeks then no. The property isnt available if someother use is intended or actual.
     
    Baker likes this.
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    There is a tax ruling on this which denies a % of deductions to the extent of actual income received or to a reduced deduction for non-market rents. A sham rent would also be unacceptable since the ATO may expect a tenancy lease. They ask every time a property is audited and even a agent agreement.
     
  14. inpersuitofhappiness

    inpersuitofhappiness Well-Known Member

    Joined:
    3rd Oct, 2021
    Posts:
    155
    Location:
    Perth
    What would happen lets say you purchase a property as an IP and after settlement decide to get some work done such as painting, aircon fixes, blinds, repairs on the garden etc so as to increase its rentability, the work goes on for 30-45 days or so on the property.

    However, after this tenure and the works getting completed you decide to move into the property as a PPOR.

    Would the works be considered as tax deductible? or partially?
    And would the interest portion of the loan be claimable during the time from settlement till the time you move into as PPOR.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    if available for general rent things could be deductible. But you cannot claim capital costs anyway
     
  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    1. These are initial repairs at best. Cannot be related to rental prior to tenancy as only tenancy repairs etc are allowed as deductions.
    2. They are capital expenditure. Only depreciable for the period where income is produced...which is 0 days

    These assets will add to the costbase.
     
  17. inpersuitofhappiness

    inpersuitofhappiness Well-Known Member

    Joined:
    3rd Oct, 2021
    Posts:
    155
    Location:
    Perth
    Understand, so only the interest component will be deductible i.e if available for rent.
     
  18. inpersuitofhappiness

    inpersuitofhappiness Well-Known Member

    Joined:
    3rd Oct, 2021
    Posts:
    155
    Location:
    Perth
    When you say its added to the cost base, that means the purchase price lets say was 400k and these expenses add upto 25k, the price for the purpose of capital gains would be calculated @ 425K ?
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Hmmm....At a start. There are other costs such as legals, stamp duty and so on...Selling costs etc. However later on the costbase could change.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide