When someone rents out all or part of their home through a website or app such as Airbnb or Stayz this is treated in many respects in much the same way as any other rental arrangement. If the property is being rented out at market rates then the rent is assessable to the owner, regardless of the platform used to find the tenants. Deductions can be claimed for expenses incurred in deriving the income.
If a client is only renting out part of their home then a deduction can only be claimed for the expenses relating to that portion of the home. A reasonable apportionment needs to be undertaken for expenses that relate to the property as a whole. The ATO’s guidance in this area states that you generally need to apportion expenses based on the floor area solely occupied by the renter and then add that to a reasonable amount based on the renter’s access to common areas.
Apportionment – ATO example
Jane has a two-bedroom unit with two bathrooms in a popular downtown area. Jane lives alone and only uses her spare room as an occasional home office, for storage and when she has guests. Jane mainly uses the ensuite bathroom. The second bathroom is accessible from the main areas and is mainly used by visitors.
Jane decides to rent out the spare room on a sharing economy website to earn extra income.
The unit is 80 square metres in total. The spare room being rented is 10 square metres.
Jane also gives paying guests access to common areas including the second bathroom, kitchen, living area and balcony, which totals 50 square metres. She also offers her guests access to her wi-fi for free.
For the period guests are staying and have access to common areas (along with Jane), Jane can claim 50% of the deductible portion of associated costs related to the common areas.
Jane had the room occupied 150 days in the year.
Jane calculates what she can claim based on the following questions:
She works out she can claim 17.97% of her general expenses after adding the two calculations together:
Jane can claim a deduction of 17.97% of her general expenses such as electricity, interest on her mortgage, internet expenses, rates and body corporate fees.
She can claim 100% of the expenses associated solely with renting out the room, such as the facilitator’s commission or administration fee.
If a home is rented out on an occasional basis then a time based apportionment needs to be undertaken for expenses that relate to the property in general.
If the taxpayer’s letting activities amount to a business then there may be scope to apply the simplified deprecation rules to claim immediate deductions for assets costing less than the relevant threshold as well as the pooling rules. Normally it is not possible to apply these rules to assets used in a rental property because there is a specific exclusion for assets subject to a depreciating asset lease. However, if the property and assets in the property are only expected to be let on a short-term basis this means that the simplified depreciation rules could potentially apply (assuming the taxpayer carries on a business and is classified as a small business entity).
Capital Gains Tax issues
One of the major tax implications of renting out part of a home is that this would prevent a full exemption from being available on future sale. In this case a partial exemption will typically be available. The capital gain needs to be apportioned and this is generally done with reference to the interest deductions that can be claimed in relation to the home (or would be available if funds were borrowed to acquire the property). The main exception to this is where the owner moves out of the property completely. This is because the absence rule in section 118-145 ITAA 1997 can apply in this case and the owner can continue to treat the property as if it was still their main residence.
If a property has been someone’s main residence for the entire ownership period and the owner starts using the property to produce assessable income then the ‘home first used to produce income rule’ in section 118-192 needs to be considered. This rule is triggered if:
- A property does not qualify for a full exemption under the main residence rules because it has been used to produce income for some of the ownership period;
- The property would have qualified for a full exemption had it been sold just before the time it was first used to produce income; and
- The property was first used to produce income after 7.30pm ACT time on 20 August 1996.
If these conditions are met then owner of the property is treated as having reacquired the property for its market value at that time.
GST queries also often arise when clients are renting out their home or part of their home through Airbnb etc. However, the GST position is often quite straightforward if the client is merely deriving rental income from a property that is classified as residential premises. In this case the rent should be input taxed which also means that no GST credits can be claimed for expenses relating to the activity. The rent should not be included in the client’s GST turnover calculations either.
The main exception to this is if the property is classified as commercial premises (e.g., has features similar to a hotel, motel etc.,). This means that GST could potentially apply to some bed and breakfast operations or serviced apartments. Guidance on whether property is classified as commercial residential premises is contained in GSTR 2012/6.
Is the property genuinely available for rent?
In recent years the ATO has started to focus on properties located in popular holiday destinations with the aim of ensuring that deductions being claimed in relation to these properties are appropriate. In some cases the ATO seems to suspect that the properties are really just holiday homes to be used by the owners, their family and friends and that they are not genuine rental properties. If so, then deductions should not be claimed in relation to the properties, even if the owners have taken some steps to make it look like they have attempted to find tenants for the property.
The ATO will disallow deductions for properties if they are not used to derive rent or they are not genuinely available for rent. In the ATO’s holiday homes guide the ATO sets out the following factors that may indicate that a property is not genuinely available for rent:
- It is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised:
- At the owner’s workplace
- By word of mouth
- Outside annual holiday periods when the likelihood of it being rented out is very low
- The location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it
- The owners place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as:
- Setting the rent above the rate of comparable properties in the area
- Placing a combination of restrictions on renting out the property – such as requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” and “no pets”.
- The owners refuse to rent out the property to interested people without adequate reasons.
These factors generally indicate the owner does not have a genuine intention to make income from the property and may be reserving it for private use.
Example – ATO guide to holiday homes
Daniel and Kate have two school aged children and own a holiday house near the beach. The house is located in an area that is popular with summer holiday makers but is only accessible by four-wheel drive vehicle.
During the year Daniel and Kate advertise the property for rent through a local real estate agent. However, Daniel and Kate advise the agent that during each school holiday period the property is not to be rented out. They want to reserve the property for their own use.
While there would be demand for the property during the summer holiday period, there is no demand outside this period because of the small number of holiday makers and the location and limited access to the property.
The house is not rented out at all during the income year.
In Daniel and Kate’s circumstances, they cannot claim any deductions for the property. They did not have a genuine intention to make income from the property. It was essentially for private use.
If in the circumstances Daniel and Kate happened to rent out the property for a period, they can claim a deduction for a proportion of their expenses based on period the property was actually rented out. For example, if the house was rented out for two weeks, they could claim a deduction for 2/52 of their expenses.
Daniel and Kate need to keep records of their expenses. If they make a capital gain when they sell the property, the proportion of expenses (interest, insurance, maintenance costs and council rates) they could not claim a deduction for are taken into account in working out their capital gain.
When it comes to travel costs for properties like this, the ATO’s view is that if you rent out a holiday home, you can claim reasonable costs that relate to inspecting, maintaining and making repairs to the property.
However, if the owner is primarily visiting the property to have a holiday and they subsequently undertake repairs and maintenance during this period, they can only claim repair and maintenance costs based on the proportion of the income year the property was rented out or was genuinely available for rent. They cannot claim a deduction for the costs of travelling to and from the property.