Rental property – deductions when there is no rent

If you own a rental property and there is currently no rent being earned from the property, can you still claim a tax deduction for the outgoings connected to the property?

The answer does depend on the facts, but it is often the case that you can continue to claim a tax deduction for the expenses that relate to a rental property even if no income is being earned from the property. A tax case was recently decided in the Administrative
Appeals Tribunal (AAT) where this was the issue.

In 2006, a person bought a property at a beach location just north of Sydney. Money was borrowed to acquire it. The person hoped to get good rents from the property from short-term stays because it was in such a desirable location. However, that didn’t happen. It was sparsely rented, and the property was vandalised and became run-down.

In 2010, the owner decided to rent it out to a permanent tenant. That tenant stayed until 2012. At this time the property was in a poor state of repair and uninhabitable.

During the following income years (2013 – 2017) the owner continued to claim deductions for interest, land tax, council rates and other outgoings. For the year ended 30 June 2017, the ATO decided to deny the claim for tax deductions and the owner appealed the decision to the AAT.

The AAT allowed the deductions, and the owner won his case. The key point was that the owner had maintained a desire to derive rental income from the property all through the years in which there was no rental income. He had the property inspected by various professionals and had drawn up a plan to redevelop the property so that it could continue to earn rent. This plan had been approved by the local council.

The important tax principle involved with this case is to focus on the reason for the incurring of (say) the interest and not to focus on whether income was being derived. It is a well-established principle of Australian tax law that outgoings can be deductible even though
income is not currently earned but has either been earned in the past or there is a prospect of income being earned in the future.