By: Melissa Browne
A holiday home in Eden, on the NSW South Coast. There are rules worth knowing about letting out properties and tax. Photo: Melanie Leach
If you’re one of the many Australians who purchased a rental property during the 2016 financial year, moved out of their home and rented it out, or are using part of your home for holiday lettings, it’s important to know what you can and cannot claim.
You don’t want to miss out on vital deductions but you also don’t want to cross the line and end up in the the Australian Tax Office’s cross hairs.
This year, the Tax Office highlighted it would look closely at Airbnb-type letting of homes as well as initial repairs when properties are purchased.
It’s not because the tax rules have changed but because, with more people becoming landlords even part time, there is the chance some taxpayers will inadvertently overclaim on their tax returns.
So if you’ve let out your home or investment property on Airbnb, you’ve purchased a rental property for the first time or you’re renting the home you moved out of, what do you need to know?
Initial repairs
You’ve purchased your investment property during the 2016 year but it needs a whole lot of love before it can be rented out. So you list it with a real estate agent as you want to lock in a tenant and you’ve heard that as long as it’s available for rent, the work you’re doing can be expensed, right?
Not necessarily. If you’re making minor repairs such as replacing taps or door handles and these cost less than $300, you may be able to claim the costs in full. However, generally repairs incurred before a home is rented are capital in nature which means you can still make a claim, but it needs to be for depreciation rather than an outright expense.
Improvement versus repairs
You decided not to organise the repairs straight away but instead you rented your property out and then after six months you started carrying out the repairs. You’ve heard this means you can now claim them all the repairs in full, right?
Again, not necessarily. That’s because while you can claim repairs as an expense, improvements are a capital cost that can’t be claimed upfront. The Tax Office has issued guidance to help you understand whether or not an expense is an improvement and therefore unable to be claimed as a repair:
* Whether or not the thing replaced or renewed was a major and important part of the structure of the property
* Whether the work performed did more than meet the need for restoration of “efficiency of function” (“repair” involves a restoration of a thing to a condition it formerly had without changing its character)
* Whether the thing was replaced with a new and better one
* Whether the new thing has considerable advantages over the old, including the advantage that it reduces the likelihood of repair bills in the future.
If you answered yes to some or all of the above considerations, then the expenditure is more likely to be an improvement and therefore a capital cost that is depreciated rather than expensed in full.
Claiming additional depreciation
If the property you purchased is less than 40 years old or has major renovations that are less than 40 years old, it may be worthwhile organising a quantity surveyor report.
The depreciation calculated within this report can sometimes equate to thousands of dollars saved in tax and is often a very worthwhile and forgotten exercise. You can still organise the report this year and claim the depreciation the report calculates for the 2016 year – you just won’t be able to claim the cost of the report itself until the 2017 financial year.
Holiday Rentals
You’ve caught the Airbnb bug and have been able to rent your holiday home for part of the year which has brought in some extra cash. The danger is when you try to claim the entire expenses for your holiday home which isn’t being rented for the entire year.
The issue isn’t that it’s lying vacant – as long as the property is available for rent then the Tax Office may allow you to continue to claim expenses. However, if you’re also using the property on weekends or during the summertime then you need to apportion the expenses for the time that you or your family were using it.
Renting a room in your home
You’ve decided to be financially savvy during the 2016 financial year and have started renting your spare room on Airbnb. You’ve done your sums and you believe you haven’t really made that much money after expenses, plus you have a large mortgage so you’re not going to worry about declaring the income. That’s OK, right?
Again, potentially not. In May 2015 the Tax Office released official guidelines informing Airbnb hosts of their obligations to declare any money they make from this service. Which means the sharing economy is on the Tax Office’s watch list and as all income can be tracked via the app you’d better believe the next step will be data matching income. Of course, you don’t just need to declare the income, you can also claim proportional expenses that will reduce any tax payable and potentially even create a negative gearing situation.
It’s also important to be aware of the capital gains tax (CGT) implications of renting out your own home which means when you sell your home, a percentage of the profit may need to be declared for CGT.
The most important thing you can do if you have started receiving rental income is to become educated about what you can and cannot claim so you’re not inadvertently claiming too much or claiming too little. Of course, if you’re concerned you’ll do the wrong thing, the best thing to do is visit a great accountant in your first year so you can understand the ins and outs of what you should and shouldn’t be doing.
Source: Sydney Morning Herald
