Tax relief for some SMSFs with rental properties

The past financial year has been exceptional with the uncertainty created by the natural disasters we have all faced, both locally and internationally. With the 2019/20 tax year now over, maybe it’s time for members and trustees to take stock of some of the things they might need sort out with their SMSFs before the inevitable meeting with the fund’s accountant or administrator.

This is especially so with some of the concessions SMSF trustees may have provided to tenants for property owned by the fund. It could include rent waivers, reductions, lease renewals or seeking deferrals of loan repayments for limited recourse borrowings.

What’s different for the 2019/20 tax year

For the tax year just gone, given the effects of the floods and bushfires that occurred earlier in 2020 and COVID-19, rental income may have reduced, or ceased, as a result of changes in rental arrangements, or due to travel restrictions short-term accommodation may have been impacted. There have also been changes to tax deductions for owners of vacant land.

Keeping Records

To start with, there are some lessons to be learned for anyone owning a rental property whether it is an individual, company, trust or SMSF. It is important to make sure, whatever the circumstances being faced, that records of all income and expenses, as well as changes to the lease arrangements for the property are kept. Without those documents it is difficult to work out what can be claimed, and it may be hard to justify the expense was actually incurred.

What’s included or allowed?

Any rent paid to the SMSF directly, or to a real estate agent managing the property, should be declared as income at the time it is paid. For example, if the SMSF has an arrangement with the tenants to defer rent until the next financial year, the rent is not included as income until it has been received. Additionally, if the SMSF has taken out tenant or rental insurance that covers for the loss of rent, any payouts are to be included in the fund’s assessable income.

If there has been an agreement to reduce or defer the rent on the property, the SMSF will continue to incur ongoing expenses such as council rates, water and electricity charges, strata levies, maintenance costs and so on. The fund will still be able to claim these expenses as long as the reduced rent charged is determined at arms’ length, having regard to the current market conditions.

In some situations, if the SMSF has a limited recourse loan, the trustees may have made arrangements with the lender to defer the loan repayments. In these situations, the SMSF can claim interest being charged on the loan as a deduction - even if the bank defers the repayments.

Holiday houses and short-term accommodation

If an SMSF owns a holiday house or a bed and breakfast during the past financial year, there may have been cancellations of bookings or the property may have experienced a period when it was sitting idle as a result of the bushfires or travel restrictions due to COVID-19. Providing the short-term rental accommodation remains available for rent, deductions that relate to the property will still be available to the SMSF.

One issue that may arise is that due to the natural disasters, if a person who is a related party of the SMSF, such as a member, trustee or a relative, has decided to live in the property then there are a number of compliance issues that may arise. This could include: a breach of the in-house asset test, which limits the amount of fund assets that can be invested in; lent to or leased to a related party; a breach of members using assets of the fund; and arm’s length investment requirements. Also, it may bring into question whether the fund is being used solely to provide retirement and associated benefits for members and their dependants.

Deductions for vacant land no longer available

From 1 July 2019 expenses incurred by the SMSF for holding vacant land are no longer deductible if the fund is intending to build a rental property on the land, but construction has not been completed. This also applies to land for which the SMSF may have been claiming expenses in previous years.

In situations where an SMSF is having a rental property constructed, deductions cannot be claimed for the costs of holding the land, such as interest. However, if the rental property, which is owned by the SMSF, was destroyed in the bushfires and it is subsequently being rebuilt or repaired, a deduction can be claimed for the costs of holding the land which is now vacant, for up to three years, while the rebuilding is taking place.

These rental issues are some things to think about when getting the accounts and records ready for the SMSF’s annual returns for the 2019/20 financial year. In the next article, we will discuss the common mistakes that occur for rental properties and claiming tax deductions.