With large swathes of the population currently in lockdown, many businesses may be using this downtime to finalise their 2020-21 tax returns in order to get a refund to assist with their business cash flow. Due to the effects of COVID-19 in the past financial year, one of the big issues vexing both tenants and landlords may be the tax treatment of rental concessions provided and received. Many factors determine whether a rental concession, including waivers and deferrals, are taxable or deductible, and care should be taken to avoid mistakes.
As many tenants and landlords turn their attention to their 2020-21 tax returns, one of the big questions is perhaps how they should treat rental concessions provided and received during the last financial year as a result of COVID-19. Tax treatment of these rental concessions depends on a variety of factors including whether it was a waiver (ie the tenant does not have to pay the rental amount outstanding), a deferral (ie the tenant is still required to pay the amount of outstanding rent but at a later date), the period of tenancy, and the accounting method used.
For tenants the tax treatment of a rental waiver depends on whether it is related to a past or future occupancy. In relation to past occupancies, tenants that have already paid the incurred rent which was subsequently refunded will need to include this amount in their assessable income when it is received. In instances where the tenant has not paid the incurred rent which has been waived, the rent waiver will be considered to be debt forgiveness. The commercial debt forgiveness rules may apply in some instances.
If the rental waiver is in relation to a future period of occupancy, tenants will not be entitled to a deduction for the amount. Businesses will need to account for the reduced amount of rent paid, or if your business has already accounted for the original rent in your accounts, you’ll need to make appropriate adjustments in either the accounts or your tax return to ensure you don’t claim the waived amount as a tax deduction.
Tenants that have received a rental deferral will be entitled to a deduction for the deferred rent when it is incurred. Rent is generally incurred in the period that the rent relates to or when it is paid.
The tax treatment of rental waivers for landlords depends on the accounting method used (ie cash or accruals accounting). For landlords that use cash accounting, rental waivers mean that you never collect the waived amount of rent and therefore you don’t have to pay any income tax on that amount.
For landlords that use the accruals accounting method, if the waived rent relates to past periods of occupancy and has already been included in your assessable income, you may be entitled to a deduction. If the rental waiver relates to future periods of occupancy, the assessable income that you account for should only include the reduced rent that you have agreed to receive and therefore cannot claim a deduction for the waived rent (which would relate to the future period of occupancy).
There’ll be no tax effects for landlords that give rental deferrals and uses the cash accounting method as the rent only becomes taxable when it is received. However, those that use the accruals accounting method will need to pay income tax on the accrued but deferred rent even if there is a change to the pattern of receiving the payments (ie rent not paid until a later date). In those circumstances, if you as a landlord have included the deferred rent in your assessable income, but do not later receive the accrued rent from your tenant, you may be able to claim a deduction for the amount.
Rental deferral or waiver question?
If your business has given or received a rental deferral or waiver and are not sure of the specific amounts to include in your assessable income or to deduct, we can help you work figure it out. Call us today to get it right and save yourself the hassle at tax time.