Property investors
Rental income
Waiving or deferring rent - Assessment of revenue
Landlords should consider the tax implications of any agreed rent waiver/deferral, and in particular the taxing point of the portion of rent that is agreed to be deferred (e.g. is the deferral structured as merely a deferral of cash but still assessable as it has accrued, or is the taxing point also deferred to a later time?)
The GST position for any rent deferrals will also have important cashflow implications. Specifically, a simple deferral of rent is likely to leave landlords needing to fund GST on amounts they have not yet received.
Code of Coduct
Landlords may currently be negotiating rental waivers or deferrals with tenants. Where tenants are eligible for the JobKeeper program (see further details below) and have an annual turnover of up to AUD50 million (SME tenants), these negotiations will be covered by the mandatory Code of Conduct (Code) for commercial leasing agreed by the National Cabinet (and which will be legislated in each State and Territory).
Relevantly under the Code and unless agreed otherwise, landlords will need at a minimum to waive 50 per cent of any agreed rent reduction, with the balance deferred over the remainder of the lease (with a minimal deferral period of 24 months, meaning that if a lease has six months to run after the pandemic period, the tenant will still have 24 months to pay the deferred rent).
Debt deductions
Loan agreements – reduction of interest
Where a lender agrees to defer interest under a loan agreement, the following income tax issues should be considered by lenders and borrowers (as applicable):
- Whether the accruals basis can continue to be used as the basis for deriving or deducting interest;
- Where the terms of the loan agreement are changed, whether the loan agreement should be retested under the debt/equity classification rules (for example, a new loan arrangement may come into existence);
- Whether the commercial debt forgiveness rules apply to any interest that has accrued and is waived; and
- Whether the capital gains tax (CGT) rules apply.
Where the lender is a non-resident, the following additional income tax issues should be considered by the parties:
- Withholding tax implications of interest waivers or deferrals; and
- Transfer pricing implications.
In addition to the matters considered above, where it is contemplated reducing interest under a related party or cross-staple loan, the following issues should also be considered by the parties:
- Value shifting provisions; and
- Governance arrangements in place between the asset and operating entities.
The accounting treatment of any deferral or waiver of interest should also be considered by the parties in case this may have a bearing on the income tax treatment.
Depreciation
Instant asset write-off - temporary expansion until 30 June 2020
An immediate tax deduction for the cost of a depreciating asset (new or second hand) that is less than AUD150,000 is available for small and medium businesses with an aggregated turnover of less than AUD500 million. The asset must first be used (or installed ready for use) from 12 March 2020 to 31 December 2020.
The aggregated turnover test includes turnover of Australian and non-resident connected and affiliated entities (whether or not the income is assessable in Australia).
Accelerated depreciation deduction
A tax deduction is available for 50 per cent of the cost of an eligible depreciating asset on installation, with existing depreciation rules applying to the balance of the asset’s cost. It applies to new assets acquired in the period 12 March to 30 June 2021, and is available for those businesses with aggregated turnover of less than AUD500m. There is no limit on the cost of an asset.
Consider applying accelerated depreciation deduction where the instant asset write-off is not available.
PAYG instalments (corporate tax entities)
Variations to PAYG instalments
Where a business expects its tax liability for the year to reduce as a result of COVID-19, it can vary its PAYG income tax instalment amounts for the March and June 2020 quarters (or relevant months if making monthly instalments).
Businesses that vary their PAYG instalments can also claim a refund for any prior instalments made during the current income year. The ATO has issued guidance on the application of penalties and interest during COVID-19, including over-varing PAYG income tax instalments.
The Commissioner has indicated that any franking deficit tax (FDT) liability which arises as a result of a refund of PAYG instalments cannot be waived or remitted, but the ATO will consider a deferral of the FDT payment to 30 September 2020 (from the generally due date of 31 July 2020). The Commissioner may also allow a franking entity to fully utilise any tax offset created by the FDT liability (i.e. without the usual 30 per cent reduction), in the case where the franking account deficit was due to the unexpected downturn in business directly related to COVID-19, and the deficit relates to franked dividends paid before 1 March 2020.
Vacancy charges
Unrented apartments which will be subject to vacancy charges
Foreign owners of Australian residential real estate with a dwelling must provide to the Commissioner of Taxation an annual ‘vacancy fee return’, within 30 days after the end of a ‘vacancy year’. The ATO will impose a vacancy fee on the foreign owner where the property is not residentially occupied in the specified manner for at least 183 days in the ‘vacancy year’, or in cases where the annual vacancy fee return is not lodged. The return is required to be lodged, even if there is no liability to a vacancy fee. The relevant ‘vacancy year’ is broadly based on the first, and each successive, twelve-month period commencing from the owner’s initial right to occupy the dwelling. As such, there is no standard annual due date for lodging the return. That is, the due date will not be the same for affected property owners. The Treasurer or the Commissioner of Taxation will notify the owner of the applicable vacancy fee which will be equivalent to the foreign investment application fee paid (or payable if not for a certain exemption) at the time of application to the FIRB for its approval to purchase the real estate. For example, a current application fee of AUD5,500 generally applies when acquiring an interest in residential land where the price of the acquisition is AUD1 million or less.
Property developers
Trading Stock
Trading stock valuation at year end
Landowners who are holding sites that will be developed and sold should consider the most appropriate method of valuing the land held as trading stock at year end. The methods available are;
- Cost,
- Market Value, and
- The replacement value method.
Where the market value is chosen as the method, a market valuation of the property is required. Consideration should also be given to the future impact of recognising higher or lower trading stock value in the current year.
Consideration of development agreements - unsold stock
Derivation of income and timing for residual unsold stock
Property developers should review their existing property development agreements and their right to collect a development fee in the situation where stock is developed but remains unsold at year end.
Where a development agreement has not anticipated this situation, property developers should consider what rights they have under the existing contract to request a revision of the arrangement, including temporarily renting the developed site until a buyer can be located.
GST adjustments on unsold stock arising from rented apartments
Where developers rent instead of sell, GST credits will need to be repaid
An entity that is registered for GST may construct ‘new residential premises’ for the purpose of sale. In these circumstances, the entity would be entitled to GST credits for acquisitions relating to the construction of the new residential premises.
However, circumstances may arise such that the premises or some of the premises are leased prior to their sale. Where this occurs, consideration must be given to the application of Division 129 of the GST Act to consider whether GST adjustments are required to be made to repay any GST credits claimed on construction.
This is because the sale of new residential premises is a taxable supply but the lease of new residential premises is an input taxed supply. An acquisition is not applied for a creditable purpose to the extent that part or all of its application relates to making input taxed supplies (i.e. GST credits are not able to be claimed).
Issues around re-financing of assets and on-lending
Re-financing assets and on-lending to other group members
Developers may procure further outside funding to alleviate cash flow pressure during COVID-19.
Where this cash is subsequently on-lent around a group, interest should be on-charged at a rate at least equal to the cost of funds in the borrower, to ensure that costs are deductible
Borrowing from overseas lenders and withholding tax
Where an overseas lender agrees to defer interest under a loan agreement, the following income tax issues should be considered:
- Whether the accruals basis is being used as the basis for deriving or deducting interest;
- Where the terms of the loan agreement are changed,
- Whether the loan agreement should be retested under the debt/equity classification rules (for example, a new loan arrangement may come into existence);
- Withholding tax implications of interest waivers or deferrals;
- The deductiblity (or lack thereof) of any interest where withholding tax is not remitted (and should have been);
- Whether the commercial debt forgiveness rules apply to any interest that has accrued and is waived; and
- Whether the capital gains tax (CGT) rules apply.
JobKeeper
Meeting the Decline in Turnover test
- Developers should consider whether they meet the decline tests with potential need to look at alternative tests due to nature of "lumpy" income.
- Developers should consider the alternate tests, in addition to the Basic Test, and ensure as much support and evidence is compiled supporting the qualification for the rules.
- Developers should consider whether they meet more that one test as a means to further demonstrate they qualify.
- Where a developer uses a special purpose employment services entity, the grouping rules may be available.
Land tax concessions
Where developers not able to sell and start renting
For developers who hold unsold stock for rent, consideration should be given to any reductions in rent to tennants ensures they qualify for a reduction in land tax.
Builders
Building Licences
How do they maintain compliance?
Consider the effect, if any, on meeting relevant state/territory licencing requirements regarding turnover or asset value, given the impact that COVID-19 may have on the business.
Property - All
Payroll Tax
Should make reference to various state/territory rules.
Land tax
| State | Eligibility | Details |
| QLD | All landowners for land tax purposes | 3 month deferral of issue of land tax notices for the 2020-21 assessment year. |
| All foreign entity landowners for land tax purposes | Waiver of the 2 per cent foreign land tax surcharge for foreign entities for the 2019-20 assessment year. Note there is no waiver of the 2 per cent absentee surcharge which applies to individuals. | |
Eligible landowners that lease property in compliance with the leasing principles and provide rent relief to tenants financially impacted by COVID-19 OR Eligible landowners that own property available for lease and comply with the leasing principles, whose ability to secure tenants has been affected by the COVID-19 pandemic and require relief to meet their financial obligations |
A 25 per cent land tax rebate for the 2019-20 assessment year will be available for landowners in respect of their properties that meet the eligibility criteria. If eligible, it is expected that the rebate will firstly be applied to provide rent relief to tenants, with any remaining amount then able to be applied to the landowner’s own financial obligations. The rebate will only apply to each property that meets the eligibility requirements and conditions, rather than applying to the entire taxable land holdings of the landowner. In circumstances where there are multiple tenants for a single property (i.e. apartment buildings), including mixed-use developments, where the eligibility requirements are met for at least one tenancy, then the whole property is eligible for the land tax rebate. Applications can be made up to 30 June 2020 through the QLD Office of State Revenue Online portal. |
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| VIC | Land owners for land tax purposes that have at least one non-residential property (e.g. commercial, industrial, vacant land that is not residential vacant land) and total taxable landholdings < AUD1m | The land tax payment for 2020 (i.e. in relation to land owned as at 31 December 2019) can be deferred until after 1 January 2021 and will need to be paid in full by 31 March 2021. To the extent that land tax for 2020 has already been paid, a refund of the tax paid may be requested. The land tax will however be required to be paid in full by 31 March 2021. |
Residential and commercial landlords who provide tenants impacted by COVID-19 with ‘rent relief’ Commercial landholders only eligible where they cannot secure a tenant due to COVID-19 or the property is rented to a tenant with an annual turnover of up to AUD50 million and is eligible for the JobKeeper Payment |
A 25 per cent land tax reduction on 2020 land tax will be available, and landlords can also defer this land tax (or its remainder) to 31 March 2021. Relief is also available to residential landowners who are unable to secure a tenant because of COVID-19. 'Rent relief’ requires that residential and commercial landlords pass on at least an amount equivalent to the 25 per cent reduction to their tenants. Eligible landlords will be able to apply for the land tax reduction through My Land Tax from Friday 1 May 2020. |
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| NSW | Eligible residential and commercial landlords who provide tenants impacted by COVID-19 with 'rent relief' Commercial tenants must have annual turnover of up to AUD50 million and be eligible for the JobKeeper Payment Both residential and commercial tenants must be able to demonstrate financial distress resulting from COVID-19 |
Up to 25 per cent reduction of 2020 land tax payable on a parcel of land in the 2020 land tax year and a three month deferral for outstanding land tax payments where a rebate or waiver has been received. Financial distress is considered to be:
Land tax reduction will only be granted where it is directly related to the property for which 'rent relief' is provided to a tenant. The 'rent relief' must be at least as much as the land tax reduction. The NSW Government is applying the Federal Government National Cabinet Mandatory Code of Conduct for the duration of the pandemic which requires landlords to negotiate rent relief agreements with tenants in financial distress due to COVID-19. The leasing principles set out in the Code must be applied in negotiating and enacting appropriate temporary arrangements. Application instructions have not been provided at this stage however some guidance on the sorts of evidence required can be found on the NSW Revenue website. |
| All land owners for land tax purposes | The land tax payment date for 2020 land tax liabilities may be able to be extended and instalment payment arrangements may be entered into. Applications can be made through the Revenue NSW Online portal. | |
| TAS | Commercial property land owners who can demonstrate that their business operations have been affected by COVID-19 | Land tax for 2020-21 on commercial property owners financially impacted by the COVID-19 response will be waived, where the tax is paid by the business owner. ‘Commercial property’ refers to property classified as such for government valuation purposes. The Tasmanian State Revenue Office will publish more details in due course. |
| All land owners for land tax purposes | The Commissioner will consider deferring outstanding land tax until 30 June 2020 or other payment arrangements for those experiencing financial hardship. No interest will apply to the 2019-20 debt. Applications can be made through completion of a pre-filled email via the TAS Online portal. | |
| SA | Entities with SA 2019-20 land tax liabilities | Individuals and businesses with outstanding quarterly bills for 2019-20 are able to defer payments for six months (3rd and 4th quarter instalments). For 2020-21 Land Tax Transition Fund relief will be increased from 50 per cent to 100 per cent of the land tax increase based on existing relief criteria guidelines. |
Commercial and residential landlords that provide rent relief to tenants impacted by COVID-19 and those able to demonstrate they are unable to secure a tenant due to COVID-19. Commercial tenants must have annual turnover of up to AUD50 million and must be eligible for JobKeeper Payment Both residential and commercial tenants must be able to demonstrate they have been financially impacted by COVID-19 |
A 25 per cent reduction of the land tax payable on a parcel of land in the 2020 land tax year. Financially impacted is considered to be:
Land tax reduction will only be granted where it is directly related to the property for which 'rent relief' is provided to a tenant. The 'rent relief' must be at least as much as the land tax reduction. Land tax relief is limited only to land occupied by affected tenants or vacant due to the impact of COVID-19. Landlords who have already fully paid their 2019-20 land tax liability and are eligible for relief under this scheme will be issued a refund equal to the value of eligible land tax relief. |
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| WA | Taxpayers that can demonstrate COVID-19 has directly or indirectly affected their financial circumstances | "From 23 March 2020, the WA Office of State Revenue is remitting late payment penalties in full for taxpayers in certain circumstances. Extension of time for paying tax and tax instalment arrangements can be made on application. From 23 March 2020 new payment arrangements will be interest-free. Also applies to transfer duty, landholder duty, land tax and payroll tax. Applications can be made through a web enquiry form via the WA online portal." |
| Commercial landlords that provide rent relief for a minimum of 3 months and freeze outgoings to small businesses that have suffered at least a 30 per cent reduction in turnover due to COVID-19 | A grant equal to 25 per cent of the landlord’s 2019-20 land tax bill for the property in which an eligible tenant (i.e. small business with 30 per cent turnover reduction) is provided rent relief. The grant will be paid to landlords that meet the eligibility criteria. It is a condition of applying that the landlord will not seek to wholly or partially recover the rent and outgoings from the tenant(s) at the end of the 3 month period. In addition, to be eligible, the full waiver of rent and outgoings for 3 months must occur between 1 March 2020 and 31 May 2020. Applications for the grant open 1 May 2020. In the meantime, landlords can register for more information. |
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Contact us
Jason Habak
Partner, Advisory, Private National Leader, PwC Australia
Tel: +61 2 8266 2960