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.
You let your property for rental income as shown below:
|Name of tenant||Monthly rental||Period covered|
|Mr C||$20,000||1 April 2015 – 31 March 2017|
|Ms L||$23,000||1 November 2016 – 31 October 2017|
Since 1 October 2015 Mr C has failed to make rental payment in time. Rent payable for the 3 months from 1 January 2016 to 31 March 2016 was outstanding as at 30 June 2016. He vacated the premises on 1 July 2016 without paying up the rent for the 6 months from 1 January 2016 to 30 June 2016. All your attempts to recover the rent were unfruitful and you lost contact with him in September 2016.
Consequently, after a period of vacancy for 4 months, you let the unit to a new tenant, Ms L, on 1 November 2016. 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 2015/16 and 2016/17 as follows:
- Year of assessment 2015/16
$ 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 2016 was considered as rent receivables, not irrecoverable rent and thus was included as rental income for the year)
- Year of assessment 2016/17
$ Rental income ($20,000 x 3 + 23,000 x 5) 175,000 Less: Irrecoverable rent for 1 January 2016 – 30 June 2016 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.
Facts as per Example 1, but the rent payable by Ms L is $5,000 per month:
- Year of assessment 2016/17
$ 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 2015/16 (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.