The ATO is on the lookout for holiday home owners who may be over-claiming their expenses. Where a property is used partly for private purposes and partly to earn rental income, it is essential to identify what proportion of the income year is attributable to each use. Importantly, some property owners may be over-claiming their expenses because their property is not “genuinely available” for rent, despite the property being advertised to some extent.
Renting out your holiday home for part of the year can help to finance the costs associated with purchasing and maintaining the property. As well as providing an income stream, this will also allow you to deduct some of the expenses such as interest payments on a loan you have taken out to buy the property, repairs, cleaning services, council rates and insurance. Last year the ATO announced it will scrutinise holiday home deductions because of concerns that some taxpayers with mixed-use properties are over-claiming. Holiday home owners should therefore ensure they understand the ATO’s guidance on claiming deductions.
The basic rules
Your total expenses relating to the property for an income year should be apportioned on a time basis, ie how much of the income year the holiday house was rented out. You should apportion between three time periods:
- When it was rented out or genuinely available for rent – you may deduct a proportion of your expenses equal to this proportion of the year. For example, if your holiday house was rented out (or available for rent) for 80% of the year, you may deduct 80% of your expenses.
- When it was used privately by you, or by family, relatives or friends free of charge – you may not deduct the proportion of expenses that relates to this private use period.
- When it was rented out to family, relatives or friends below market rates – you may deduct a proportion of your expenses equal to this proportion of the year, but only up to the amount of rent actually received during this period. That is, the dollar amount of total deductions claimed in respect of this period cannot exceed the dollar amount of rental income received.
If your expenses are not fully deductible today, they may be taken into account if you make a capital gain when you eventually sell the property. The proportion of expenses that you are not able to deduct now may reduce the size of the future capital gain.
“Genuinely available” for rent
You may deduct expenses for a period when the holiday home is not rented out but is “genuinely available” for rent. However, the ATO is concerned that some taxpayers have been incorrectly claiming deductions for properties that are not genuinely available. The ATO considers the following to be indicators that a taxpayer does not have a genuine intention to make income from their property:
- Setting a rental rate that is above market rates.
- Using the property for private use during high-demand periods, and only making the property available to rent when there is little or no demand for the property.
- Failing to advertise the property to a wide audience. (Advertising to restricted social media groups, at your workplace or by word-of-mouth is considered insufficient.)
- Placing unreasonable conditions on prospective tenants, such as requiring tenants to provide references for a short holiday stay.
- Turning away prospective tenants without providing adequate reasons.
Check your holiday home expenses
Given the ATO’s compliance focus in this area, it is vital that holiday home owners maintain good records and ensure they are not over-claiming deductions. Contact us to discuss your property and review your expenses. We can also check whether you have any additional deductible expenses that you might have previously overlooked.