Assessing income from real estate and timeshare 108-04130020

Customers may get various types of income from real estate. If the property, or part of it, is being used as a source of income, then generally there are expenses incurred. These expenses can be offset against the income to give a net income amount. This net amount is generally the assessable income.

A capital gain is not assessed as income, unless it forms part of the normal activity of a business, for example property development. If a capital loss is made it cannot be offset against other income amounts.

Income from real estate is not employment income. Real estate income is ordinary income. The customer is unable to deplete their Working Credit balance to offset this real estate income.

Complex cases must be referred to the Complex Assessment Officer (CAO).

If a customer advises the real estate is no longer tenanted (vacant), no income is assessable from the date of event. Expenses will continue to be recorded as per previous assessment.

The value of the real estate would remain an assessable asset.

Once the property is again occupied and is being rented out as a source of income, the new income is assessable. Expenses are assessed as previously advised, unless customer provides updated details of expenses.

On 29 March 2020 in response to the COVID-19 pandemic, the National Cabinet announced a six-month moratorium on evictions for residential and commercial tenancies, and encouraged landlords and tenants to make negotiations regarding rent payments.

All Australian states and territories have their own residential tenancies legislation, which were updated as part of the emergency response. Each state and territory then individually ceased these emergency measures throughout early 2021.

If a customer advises their tenants were unable to pay rent due to the Coronavirus pandemic, the rental income is removed from the Real Estate (RE) screen. If the tenant later makes a lump sum payment of rent arrears, this will be assessed separately to the real estate income. The customer will be able to deduct expenses incurred while the rent was not being paid.

When a customer supplies an income tax return, check the period of occupancy. If the property has not been rented for the entire year, the income must be pro rata for the period of occupancy. Expenses are assessed as per income tax return and are not pro rata. The Resources page contains an example of rental income only received for part of the financial year.

When a customer who has previously provided income tax returns, contacts to advise rental income has changed, income must be updated from date of the change. Expenses are assessed as previously advised, unless the customer provides updated details of expenses.

The Resources page contains a link to the types of expenses that are allowable deductions. Expenses of a capital nature, which would increase the value of the asset that has been improved, are not allowed to be offset against the rental income. For example, adding a new veranda or pergola, landscaping the garden or putting up a picket fence.

Income is assessed as above, if a property in which the customer has a life interest is:

• rented out, and
• the person is required under the terms of the will to maintain the property, and
• pay all the running expenses

However, if the customer has only the right to occupy a property, they are not automatically entitled to income from rent. It will depend upon the actual terms of the bequest, which must be checked before any reassessment of the entitlement is made.

Where customers leave their principal home due to illness and enter a care situation, their home and any rental income received may be exempted from the Income Test and Assets Test in certain situations.

Where customers have an interest in a business (that is, a sole trader or a partnership) and the business owns real estate, the net income from the business must be determined.

If this is a customer's first contact about real estate or there are changes, Service Officers should obtain a Real Estate Details (MOD R) and tax returns from the customer. An updated Business Details (MOD F) may also be required.

A customer may get income from short term (temporary) boarders and lodgers.

Examples include:

• a homeowner or tenant who only rents out a room when there is a sports event at the nearby ground, or
• someone who rents out a room via a home share site such as Airbnb

This income is treated in the same manner as other board and lodging. For details, see Income from boarders and lodgers.

If the customer cannot provide their latest tax return as evidence of income and expenses, the 'one third rule' must be used as an interim measure until more detailed evidence is provided.

Once an assessment is based on actual evidence, the customer cannot revert to the 'one third rule'.

If the customer did not lodge an income tax return, as their income was too low, a profit and loss type statement must be provided.

The Resources page contains a link to the Australian Taxation Office Rental Properties publication. This publication provides information and a worksheet that may assist customers to prepare a profit and loss for rental income.

Note: if a customer has an interest in a private company or trust that has an interest in a property, this is not assessed using this method. Attribution of income is the method generally used to assess income from investment properties owned by separate entities such as trusts and companies. The Complex Assessment Officer (CAO) will assess the income and assets from trusts and companies.

A property owner may receive a payment or a tax offset to provide housing. For example, the National Rent Affordability Scheme. These payments are included in the income assessed for the rental property.

Customers may have invested in a timeshare in a property. A MOD R is not required for timeshares in most cases, and valuations must not be requested for timeshare assets. The value used is the purchase price unless the customer can provide evidence the recent sales indicate the value has fallen.

Before December 2015, income from a timeshare was assessed the same as income from other real estate assets. That is, rental income received for the period the timeshare was rented - allowable expenses for the same period = net assessable income.

From December 2015, timeshare investments are treated as managed investments. Income received from a timeshare are not recorded, as deeming will apply to the investment.