The Property Council has been lobbying the federal, state and territory governments for a comprehensive package of measures that will help commercial property owners during the coronavirus pandemic period.
Commercial landlords want to do the right thing by their tenants and have an overwhelming interest in supporting those experiencing hardship through this crisis period.
The Property Council has proposed several tax-related initiatives to provide immediate cashflow support for the industry, and put commercial landlords in a better position to support their tenants.
Action is required from all levels of government. They include:
Federal Government
Defer taxing point for GST and income tax on deferred rental income
Under ordinary tax principles, commercial landlords are subject to income tax and GST on their rental income on an accrual basis. However, we are in extraordinary times and landlords are being asked to defer rent or offer rent free periods to tenants at a significant scale. Without intervention, landlords will still be obligated to pay income tax and GST on the accrued but deferred rent (noting that where the asset is held in a property trust, the income tax obligations will flow through to the underlying investors of the trust).
The Government should allow commercial landlords to account for rental income on a cash basis during the pandemic crisis. That is, rent will become taxable at the point it is ultimately received from tenants for both income tax and GST purposes (i.e. moving from an accrual to a cash basis for rental income). This will provide immediate cashflow relief for commercial landlords (particularly for monthly GST remitters).
Relax rules for deductions for bad debts
Under ordinary tax principles, commercial landlords are entitled to a deduction for bad debts. Whether a debt is bad depends on an objective consideration of all the relevant circumstances. The ATO, in tax ruling TR 92/18, sets out various steps that it expects to be undertaken before a debt is considered bad – this includes formal notices, court proceedings and other legal recourse measures that would ordinarily be undertaken in normal circumstances. Such measures are not appropriate in the midst of the coronavirus crisis and gives rise to uncertainty by landlords on whether they are able to claim a deduction for bad debts in respect of accrued rent that is in arrears.
The Federal Government or ATO should provide guidance that landlords are able to make a commercial assessment on whether the debt is bad based on the facts and circumstances of their tenancy arrangements. Landlords should not be expected to have initiated any formal legal proceedings to be able to make this assessment.
State and Territory Governments
Provide relief on land tax, commercial rates and council rates (as applicable)
In most jurisdictions, commercial landlords are subject to both land tax and council rates.
In jurisdictions like the ACT and NT, they are subject to commercial rates. Generally, building owners will pay their land tax and rate notices annually. Landlords estimate outgoings for a future year and charge these costs to tenants through their regularly scheduled rental payments (either as outgoings or rent, depending on whether it is a net lease or gross lease). The need for urgent cashflow support means that landlords cannot wait for relief to be provided as part of the next, future assessment notice.
State and territory governments should provide a cash rebate equal to six months of the land tax and rates paid by landlords in the last available assessment. In addition, any upcoming land tax and rate assessments (for those that levy 30 June assessments) should also be deferred to 2021.
Building owners who receive the cash rebate could be legislatively obligated to pass this through to their tenants (unless rent relief has already been provided). Clawback provisions can apply if the building owner cannot produce evidence that they have applied the cash rebate to support their tenants.
These measures should also be extended to foreign investor / absentee owner surcharge arrangements where applicable.
Payroll tax relief
Staffing costs, including payroll tax, are a cost that commercial landlords are subject to. Commercial landlords aim to maintain staffing levels to the extent they can. Most states and territories have provided payroll tax relief for small businesses. NSW and Queensland have both gone further and allowed businesses with greater than $10 million in taxable wages to also apply for payroll tax deferral arrangements. This provides significant cash flow relief and allows commercial landlords to prioritize helping tenants, keeping staff employed and maintaining their buildings.
We are calling on all states and territories to adopt the approach taken by QLD and NSW and allow businesses with greater than $10 million in taxable wages to also apply for payroll tax deferral arrangements.