When there are tax implications
There may be income tax and goods and services tax (GST) implications, if:
- you give a rent waiver or deferral to your tenant
- your tenant can't pay their rent, including where their obligation to pay is varied or released under a bankruptcy or insolvency law. This could be by way of a:
- personal insolvency agreement
- debt agreement under the Bankruptcy Act 1966
- deed of company arrangement.
Leasing premises
If you lease premises to a tenant, in your tax return you:
- must include your rental income as assessable income
- may claim deductions for your expenses incurred in earning.
If you are registered or required to be registered for GST and you are leasing commercial premises, you must include GST on the supply of the premises in your business activity statement (BAS).
If you give your tenant a rent waiver or deferral or they cannot pay, including where their obligation is varied or released under a bankruptcy or insolvency law, the income you must declare, deductions you can claim and your GST and CGT obligations depend on:
- if your existing agreement with your tenant has changed or a new or additional agreement has been created
- your accounting method, which is either the
- cash method of accounting, which recognises income when it's received
- accrual method of accounting, which recognises income when earned, instead of when payment is received.
Find out more about accounting methods for business income and choosing an accounting method for GST.
Waiver or release of rent you are owed
Your income tax and GST position may be affected if you give a rent waiver or the obligation of your tenant to pay is varied or released under a bankruptcy or insolvency law.
Cash accounting
When you agree to give a rent waiver to a tenant, you don't include rent that is never collected, including any waived amounts, in your assessable income.
If you account for GST on a cash basis, you only pay GST on the amount of rent you receive. If you waive rent, you don't need to pay the GST on the waived amount because you haven't received it.
Accruals accounting
Generally, you account for rental income and include it in your assessable income once you have right to receive it.
If 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 under the general deduction rules. If you have written that debt off as bad, you may be entitled to a bad debt deduction.
If you waived rent for future occupancy of your premises, only include the reduced rent you agreed to receive in your assessable income. Do not claim a deduction for the waived future rent.
If you account for GST on a non-cash (accruals) basis and have already paid GST on the full rent amount under the rental schedule or invoice before you give the waiver, you:
- have to make a decreasing adjustment to claim back GST overpaid
- should issue an adjustment note to the tenant.
You must make the decreasing adjustment in your BAS in the tax period when you give the waiver. If the adjustment is for GST over $75, you cannot make the decreasing adjustment until you have the adjustment note.
If you have not already accounted for GST for the lease period subject to the waiver, there are no GST implications for the amount waived.
If you give a rent deferral
Cash accounting
If you agree to give a deferral or rent is deferred under a bankruptcy or insolvency law, you only include the rent in your assessable income when you receive it.
If you account for GST on a cash basis when you agree to give a deferral, you will not need to report GST for the deferred rent until you receive it.
Accruals accounting
In your assessable income, include rent you have a right to receive even if the time for its payment has been deferred. If you included deferred rent but the debt is later written off as bad, you may be entitled to a deduction when you write it off.
If you account for GST on a non-cash (accruals) basis, you need to pay GST on the entire rent amount payable for each lease period in the lease agreement, even if you haven't received the deferred amount yet.
For example, a 2 year lease agreement may have a payment schedule showing 24 payments of $660 each, covering a monthly 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 later write off the deferred rent or it has been overdue for 12 months or more, you can claim a GST decreasing adjustment for the amount overdue or written off.
You are not required to give an adjustment note to the tenant where your decreasing adjustment results from a bad debt adjustment.
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, if you agree to a rent concession on an existing lease and the tenant doesn't pay money or give you anything else for the reduction, they have to pay under the lease.
If a new or additional agreement is created, there may be CGT consequences.
If your tenant becomes bankrupt or goes into liquidation
Your tax obligations and GST obligations may change if rent is not paid because your tenant becomes bankrupt or goes into liquidation.
Cash accounting
If you account for income tax on a cash basis, you only include the amount of rent you actually receive in your assessable income.
No adjustment is necessary if you account for GST on a cash basis.
Accruals accounting
You can claim a deduction for the part of the rent you included in your assessable income that you don’t recover because of the bankruptcy or liquidation.
If you account for GST on a non-cash (accruals) basis you can make an adjustment in your BAS for the GST you paid on rent not recovered and written off.
Deductions for bad debts
You may be able to claim a bad debt deduction for accrued rent that's included in assessable income but can't be collected.
For example, if you give a tenant a deferral of rent related to a past period of occupancy and have used accruals accounting to already include the deferred 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 it off, the amount is included in your assessable income when you receive it.
Writing off a debt as bad debt is not the same as waiving or forgiving a debt for unpaid rent. There are different income tax consequences, particularly for a debt forgiveness.
Deductions and GST credits for renting your property
If you give a rent waiver or deferral to your tenant, or they cannot pay, including where their obligation is varied or released under a bankruptcy or insolvency law, you can claim:
- deductions and GST credits for normal expenses you incur in holding and maintaining your rental property if:
- your tenants can't pay their rent under the lease agreement because their income has been affected
- your tenant becomes bankrupt or goes into liquidation
- you receive less rental income as a result.
- deductions for those expenses if you reduced your tenants' rent to allow them to stay in the property for commercial, arm's-length reasons.