In this month’s article JULIA HARTMAN, the Founder of BAN TACS – National Accountants Group explains the dreaded legislation that prevents investors from claiming interest and other expenses on an investment property when it is not rented out.

Last month the much dreaded legislation preventing investors from claiming interest and other expenses on vacant land passed through parliament. However, the new legislation catches a lot more than vacant land and applies from 1st July, 2019.

What does the legislation cover?

This legislation applies to property that is not used in a business, and residential properties that are not listed for rent or being rented.

Accordingly, costs during construction or a renovation are not tax deductible. It is a question of the property being lawfully habitable, actually rented or genuinely listed for rent.

There is a carve out for properties damaged by “natural disasters or other exceptional circumstances”.

Tenant damage

The question is whether tenant damage is considered exceptional circumstances.

The 1997 ITAA says Section 26-102(6)(c) ‘The circumstance was exceptional and beyond the reasonable control of you and your associates (paraphrased).’

The legislation also goes on to say you are only allowed three years to undertake the repair, and you must keep records to prove the exceptional circumstances. The heading for that section is natural disasters or other exceptional circumstances.

Therefore, the Australian Taxation Office (ATO) can’t narrow it down to just natural disasters. Though I wonder if they can argue tenant damage was within the control of your property manager.

I expect this section was intended to allow time to repair tenant damage, but it doesn’t actually say so, nor does the explanatory memorandum.

You have got to ask why they didn’t specifically list tenant damage considering they mentioned natural disasters.

The ATO will eventually come out with a ruling providing more detail. They may just limit it to initial structural problems such as the Opal tower. In fact, it may be those recent problems that are the reason for this new exception.

Bad news for Mum and Dad investors

The worry is that the ATO will take a very narrow view knowing Mum and Dad investors are unlikely to be able to afford to fight them in court, the legislation already has a carve out for the bigger investors that are likely to arch up.

Yes, these expenses can be saved and used to increase the cost base under Section 110-25(4), but they can only reduce a capital gain, they cannot be used to increase a capital loss, so the ATO doesn’t share in the risk at all.

As it seems to be a growing trend, this legislation only applies to Mum and Dad investors and self-managed superannuation funds, bigger organisations are still entitled to the deduction.

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Julia Hartman is the founder of the BAN TACS National Accountants Group which has offices on the east and south coast of Australia, from Mackay to Adelaide.

General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.

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Accounting Claiming Expenses When a Property is Not Rented Out