Many Australians will spend part of their summer down at the beach and, whilst they are there, thousands of them will browse the local estate agents window and dream wistfully of buying a seaside holiday pad. Thousands of them will actually take the plunge and make a purchase.
Every year, the ATO looks closely at tax claims which relate to holiday homes to ensure that people aren’t over-claiming tax deductions. The boom in holiday home ownership throws up particular challenges for the taxman, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren’t rorting the system.
As part of that process, the ATO has made it very clear that holiday rentals will be high on its list of targets for compliance action where taxpayers do the wrong thing.
So what do you need to know to get it right?
- If you rent out your holiday home during the period you’re not using it, you need to declare the rental returns as income
- You can only claim deductions for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out when in reality the only people using it are the owners, their family and friends, often rent-free.The ATO lists a number of factors they look for which indicate property is not genuinely available for rent, including:
- it is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised through a card in the newsagent window or is only rented out during periods of the year when the likelihood of anyone renting it is very low
- the location, condition of the property, or accessibility to the property, meaning that it is unlikely tenants will seek to rent it
- you place unreasonable or stringent conditions on renting out the property that restricts the likelihood of the property being rented out, such as looking to charge a rent that is substantially higher than others are charging for similar properties in the same area or preventing families with children from renting, or even demanding references from prospective holiday renters
- you refuse to rent out the property to interested people without adequate reasons.
- Where the property is let at less than market rent – to friends or relatives for example, who might pay you a token amount – income tax deductions for that period will be restricted to the amount of rent received.
- The costs to repair the damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years. Expect to see the ATO checking such claims and pushing back against claims which do not stack up.
- Where only part of the holiday home is let, deductions are restricted to those expenses which relate either directly to the rented area or to a proportion of expenses which relate to shared areas which are available for both you and your guests to use (such as a communal lounge or kitchen).
- The ATO is concerned that husbands and wives are in some cases splitting income and deductions so that the bulk of the tax benefit goes to the higher earning spouse, even though the property is actually owned 50:50. Make sure that if you jointly acquire a property with your spouse, everything – income and deductions – needs to be split equally.
- There are also a number of costs which you can’t deduct, including costs associated with:
- Acquiring and disposing of the property, including conveyancing costs, advertising costs and stamp duty. These costs would normally be of a capital nature and would be added to the cost base of the property
- Expenses you don’t actually incur as the owner of the property, for example, costs in relation to the property which the person renting the property pays
- Travel costs associated with visits to the property. Whilst these used to be claimable, the law was changed from 1 July 2017 to block travel deductions associated with rental properties. So, visiting the property to clean it, to undertake maintenance, to speak to managing agents or simply to inspect the property – all commonly claimed in the past – are now denied.
- Expenses not related to the rental of the property, for example, interest on a loan which might originally have related to the property but where additional funds have been drawn down to fund private activities
- There are other expenses which, whilst not immediately deductible, can be claimed over a number of years. These include borrowing expenses (ie, those costs linked to the financing of the property such as title search fees, loan establishment fees, stamp duty on the mortgage, etc), depreciation costs on assets used in the building (such as air conditioners, hot water systems, etc) and capital works deductions (such as costs spent on altering, improving or extending the structure of the building). But remember, you can only claim the proportion of costs which relate to periods the property was available for rent.
Importantly, the ATO now has access to numerous sources of third-party data, including access to popular rental listing sites for both long term and holiday rentals, so it is relatively easy for them to establish whether a claim that property was ‘available for rent’ is correct.
In all cases, my advice to taxpayers is to be careful – don’t claim what you’re not entitled to and make sure you have records to support and justify every item. Tread carefully this year – as the ATO is watching you!