How safe is a holiday home – not from burglars or raging bush fires but from the taxman?
It’s an incredible life achievement to be able to afford and run a holiday home. Of course, many owners will want it to double-up as a rental, especially during various public holidays through the year, to help pay down any mortgage.
The capital return on a holiday home can be substantial if you bought before the post-Covid value spike or during the last 12 months of rising prices in regional areas.
All this has not gone unnoticed by the Australian Taxation Department (ATO). According to recent media reports, the ATO has issued a guidance that now describes holiday homes as “leisure facilities”.
Owners are being urged to seek advice from their licensed accountant or financial adviser about this apparent change.
The ATO currently differentiates between a holiday home that is “genuinely” for rent and one that claims to be. It even has a case study on its website in which an owner advertises the property for rent but prices it so high that no one would want it.
If you are genuinely renting your holiday home when you’re not using it, you need to include the rental income you receive as income in your tax return. You can claim expenses for the property based on the extent they are incurred for the purpose of producing rental income.
The ATO says it “may not be appropriate to apportion all expenses on the same basis”. In other words, you might be able to claim 100% of a property manager’s commission on rental income, but not all your phone calls because you used the phone to talk to a tenant.
The sorts of expenses that can be claimed include real estate commissions, cost of advertising and the cost of removing rubbish left by tenants.
However, no claims can be made for when the property is not genuinely available for rent, or part of the property is not rented out.
You may find yourself on the ATO’s radar if it thinks you’re not genuine about renting the property but still claiming expenses. Here are some of the tactics the ATO notices:
Advertising strategy – You limit exposure to potential tenants by relying on word of mouth, promoting to restricted groups on social media, or only advertising availability outside of annual holiday periods.
Location – The ATO will consider whether the location of your property is actually suitable for rent. It also tries to assess the condition of the property and accessibility. If it thinks the property is an unlikely candidate for short-term rents, you may find yourself being asked some serious questions.
The rules – If you place “unreasonable or stringent conditions” on renting out the property, the ATO may make inquiries. It lists such conditions as asking for an above-market rent, or saying that children or pets are not permitted, or refusing a rental request without reason.
The information provided in this article is general in nature and is not a substitute for professional advice tailored to your specific situation.