Deduction of Irrecoverable Rent

If you are a property owner and derive rental income from it, you can claim deduction of irrecoverable rent. Only the amount of rent confirmed to be irrecoverable during the year is deductible. This article will tell you more about deduction of irrecoverable rent and illustrated by examples.

Definition of Irrecoverable Rent

For various reasons, the tenant may not be able to pay rent in time. Usually that is merely a delay in payment and the tenant will pay up the outstanding rent within a few months. In that event, the rent receivable should be included in the property tax assessment. You cannot claim a deduction for “irrecoverable rent” because rent is merely unpaid, and hence outstanding, but not “irrecoverable”.

Irrecoverable Rent is Deductible

Any claim for deduction of irrecoverable rent may be allowed in the year of assessment during which it is proved to the satisfaction of the Assessor that it has become irrecoverable.

Example 1

You let your property for rental income as shown below:

Name of tenant Monthly rental Period covered
Mr C $20,000 1 April 2014 – 31 March 2016
Ms L $23,000 1 November 2015 – 31 October 2016

 

Since 1 October 2014 Mr C has failed to make rental payment in time. Rent payable for the 3 months from 1 January 2015 to 31 March 2015 was outstanding as at 30 June 2015. He vacated the premises on 1 July 2015 without paying up the rent for the 6 months from 1 January 2015 to 30 June 2015. All your attempts to recover the rent were unfruitful and you lost contact with him in September 2015.

Consequently, after a period of vacancy for 4 months, you let the unit to a new tenant, Ms L, on 1 November 2015. At all material times, you paid rates at $1,000 per quarter.

You should report your rental income and irrecoverable rent in the tax returns for 2014/15 and 2015/16 as follows:

  • Year of assessment 2014/15
                   $
    Rental income ($20,000 x 12)        240,000
    Less: Rates paid by you as owner ($1,000 x 4)            4,000
    Assessable value        236,000
    Less: 20% allowance for repairs and outgoings          47,200
    Net assessable value        188,800
    Property tax payable @ 15%          28,320

(Note: As Mr C still lived in your property, the rent for January to March 2015 was considered as rent receivables, not irrecoverable rent and thus was included as rental income for the year)

  • Year of assessment 2015/16
                    $
    Rental income ($20,000 x 3 + 23,000 x 5)        175,000
    Less: Irrecoverable rent for 1 January 2015 – 30 June 2015        120,000
             Rates paid by you as owner ($1,000 x 4)            4,000
    Assessable value          51,000
    Less: 20% allowance for repairs and outgoings          10,200
    Net assessable value          40,800
    Property tax payable @ 15%            6,120

 

Treatment of Irrecoverable Rent When It Exceeds the Assessable Value of the Year

When irrecoverable rent is greater than the assessable value (AV), the excess will be deducted in the latest year of assessment in which the AV is sufficient for the deduction.

Example 2

Facts as per Example 1, but the rent payable by Ms L is $5,000 per month:

  • Year of assessment 2015/16
                 $
    Rental income ($20,000 x 3 + $5,000 x 5)        85,000
    Less: Irrecoverable rent       120,000
    Assessable value              NIL
    Property tax payable @ 15%              NIL


The excess of irrecoverable rent over your rental income should be deducted from the assessable value of the preceding year, calculated as follows:

  • Year of assessment 2014/15 (Revised)
                $
    Rental income ($20,000 x 12)     240,000
    Less: Balance of irrecoverable rent ($120,000 - $85,000)       35,000
             Rates paid by you as owner ($1,000 x 4)         4,000
    Revised assessable value     201,000
    Less: 20% allowance for repairs and outgoings       40,200
    Revised net assessable value     160,800
    Revised property tax payable @ 15%       24,120
    Tax to be refunded ($28,320 - $24,120)         4,200

However, if in future you recover any part of the “irrecoverable rent” deducted from these assessments, you must report the amount recovered as part of the assessable value of the year of recovery.

How to Report Irrecoverable Rent When Recovered

You need to report the amount recovered as rental income for the year of recovery. The Assessor will also include the amount recovered in the AV of that year.

Last revision date: April 2016