This was originally published in the Australian on 27 Jan 2023 by James Gerrard. Click here to access the original.
Tax breaks are claimed on more than two million investment properties each year, with the average claim being almost $20,000 in 2021.
Although that volume of claims may seem high, the ATO is fine with this when it comes to legitimate deductions on pure investment properties.
However, the ATO is cracking down on holiday homes where taxpayers claim deductions outside of the rules.
If you have or are thinking about a holiday house that you intend to rent out for part of the year to help cover costs, you need to be careful so that you do not fall foul of the ATO when it comes to claiming investment property tax deductions.
ATO assistant commissioner Kath Anderson recently spoke at an accounting strategy day about the focus on holiday homes and the occurrence of incorrect tax deductions claimed.
“Holiday homes might sound minor in the scheme of things, but if we applied the pub test, I don’t think we would find many Australians would think it’s OK for someone to claim thousands – in some cases hundreds of thousands – of dollars in deductions for their holiday home … claiming deductions and effectively taking money from the community to pay for your holiday home is not OK,” Ms Anderson says.
The ATO provides guidance on how to treat income and expenses relating to holiday homes. The simplest situation is where you have a holiday home that is not rented at all.
Star & Associates accountant Luke Star says: “Where you do not generate rental income from the holiday home, although you cannot claim the ongoing costs in your annual tax return as a deduction, when you sell the property, as it is not your main residence you are likely to be subject to capital gains tax.
“One positive thing to note is that you can add expenses such as interest, insurance, maintenance costs and council rates to the cost base to help reduce the capital gains tax payable.”
The situation gets more complex when you rent out the holiday home for part of the year or where the ATO deems it is not genuinely available for rent or in a condition to be rented. “We are very mindful of the increased audit activity of the ATO and their data matching capabilities,” Mr Star says.
“The ATO has been issuing warning letters for at least the past four years targeting Airbnb and other letting platform users regarding unreported income. Common taxpayer errors around reporting holiday home income and expenses include rent being collected under market value typically to friends and family and undeclared personal usage of the property.”
The ATO is aware of non-compliant tactics used by some holiday home owners to maximise personal usage while also maximising tax deductibility.
Here are some examples:
ON the surface it appears that the property is available for rent and as such, the owner is able to claim a tax deduction on the outgoings. But in reality, there are unreasonable rental conditions placed on the property, which means the chances of it being rented are very slim. The ATO provides examples of what may be a “restrictive condition”, such as no pets, no children and multiple references in order to book it.
WHERE the holiday home is blocked out and used by the owner in the peak periods and there is limited demand in other parts of the year (such as blocking out a lodge investment for the whole of the skiing season), the ATO may rule that no tax deduction can be claimed on the property if the owners do not have a genuine intention to earn income from the property.
IF you block out the peak periods for personal usage, such as school holidays, the ATO would be able to easily work this out by reviewing the bookings for the year and seeing if popular dates are consistently blocked out and disallow property deductions.
IF you set high barriers to renting the property or price it too high, the ATO would be able to tell by looking at average vacancy rates, average rental rates for comparable properties and benchmarking the property’s yearly income to see if it is outside the norm and again disallow property deductions.
When it comes to the overall guiding principles on holiday home taxes, Mr Star says: “Taxpayers should be aware that the ATO is looking closely at claims relating to holiday homes to ensure they haven’t been overstated. Record-keeping is critical in supporting the validity of the usage.
“Taxpayers should avoid being too cute with the limiting the availability of a property as the ATO could go as far as scrutinising whether your terms are too stringent, your personal usage is excessive, your method of advertising is obscure or you are refusing tenants without an adequate reason.”
The ATO has not yet advised the exact details on how they are conducting their blitz of holiday home owners. But given the ATO receives information from various sources such as Airbnb and financial institutions in addition to the millions it has spent on advanced data matching and tax avoidance profiling algorithms, it is hard to see a situation where a holiday home owner can sneak anything past the ATO moving forward.
If you have an investment property that you also use personally as a holiday home, this is fine in the eyes of the ATO. You will however need to understand the various tax rules around private usage of the property and apportionment of deductions depending on how much time you intend to spend in the property.
James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au