The ATO are targeting incorrectly claimed rental deductions, specifically ones relating to holiday homes. The focus on deductions being claimed will be based on information being shared between the ATO and holiday rental providers. The target will be over the next four years, however any consistent misuse of the rental deduction may bring a backdated audit process.
For clients who have holiday homes being claimed in a rental schedule, a clear understanding of the allowable deductions is pertinent. An investor should also have a clear understanding of what is meant by ‘available for rent”.
What are the rules?
If a taxpayer owns a holiday home and does not rent out the property, there is no need to include any income or deductions in the tax return. None of the expenses are allowable deductions for income tax purposes, however some of the costs will add to the cost base of the asset.
If a holiday home is rented out, then the general principles that apply to rental properties apply. Therefore, the costs associated for owning the property is an allowable deduction to the extent it produces assessable income. This means that expenses can reduce assessable income on the proportion of the income year the holiday home was rented out or was genuinely available for rent.
ATO focus — “genuinely available for rent”
The ATO has identified the following circumstances where they believe a property is not genuinely available for rent:
- Advertising which limits exposure to potential tenants — for example, word of mouth, restricted social media and outside holiday “high-season” periods.
- Location, condition and access to the property is poor.
- Requiring prospective tenants to provide references for short-stay periods.
- Setting the minimum stay for five or more nights but excluding weekends.
- Refusal to rent to interested people without adequate reasons.
- Setting the rent well above the rate for comparable properties in the area.
These factors will make the ATO determine that the property is not genuinely available for rent, as it is unlikely tenants will seek to rent it.
The easiest way to mitigate any potential audit action from the ATO is to make the holiday home available for rent with either:
- a listed agent, or
- an online provider.
However, for owners who do not wish to do this, there are other steps outlined above that will help remove the option to deny certain tax deductions.
Important to know
Where the holiday home does not meet the condition of being genuinely “available for rent”, then a proportionate approach is necessary for allowable deductions.
However, clients should also understand that in the majority of cases, these costs that are not allowable deductions should still be recorded. It is likely that they will be able to be added to the cost base of the asset, as a holding cost, which would reduce a future capital gain.
For more information https://www.ato.gov.au/general/property/in-detail/holiday-homes/