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.

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”.

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:

Since 1 October 2005 Mr C has failed to make rental payment in time. Rent payable for the 3 months from 1 January 2006 to 31 March 2006 was outstanding as at 30 June 2006. He vacated the premises on 1 July 2006 without paying up the rent for the 6 months from 1 January 2006 to 30 June 2006. All your attempts to recover the rent were unfruitful and you lost contact with him in September 2006.

Consequently, after a period of vacancy for 4 months, you let the unit to a new tenant, Ms L, on 1 November 2006. 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 2005/06 and 2006/07 as follows:

• Year of assessment 2005/06

  	$
  Rental income ($10,000 x 12)	120,000
  Less: Rates paid by you as owner ($1,000 x 4)	4,000
  Assessable value	116,000
  Less: 20% allowance for repairs and outgoings	23,200
  Net assessable value	92,800
  Property tax payable @ 16%	14,848

(Note: As Mr C still lived in your property, the rent for January to March 2006 was considered as rent receivables, not irrecoverable rent and thus was included as rental income for the year)

• Year of assessment 2006/07

  	$
  Rental income ($10,000 x 3 + 13,000 x 5)	95,000
  Less: Irrecoverable rent for 1 January 2006 – 30 June 2006	60,000
  Rates paid by you as owner ($1,000 x 4)	4,000
  Assessable value	31,000
  Less: 20% allowance for repairs and outgoings	6,200
  Net assessable value	24,800
  Property tax payable @ 16%	3,968

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 2006/07

  	$
  Rental income ($10,000 x 3 + $5,000 x 5)	55,000
  Less: Irrecoverable rent	60,000
  Assessable value	NIL
  Property tax payable @ 16%	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 2005/06 (Revised)

  	$
  Rental income ($10,000 x 12)	120,000
  Less: Balance of irrecoverable rent ($60,000 - $55,000)	5,000
  Rates paid by you as owner ($1,000 x 4)	4,000
  Revised assessable value	111,000
  Less: 20% allowance for repairs and outgoings	22,200
  Revised net assessable value	88,800
  Revised property tax payable @ 16%	14,208
  Tax to be refunded ($14,848 - $14,208)	640

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.

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.