By: Melissa Browne
This year, the Tax Office issued a warning it was targeting “the large number of mistakes, errors and false” claims made by rental property owners who use this property for their own personal holidays.
If you own a rental property and it’s being rented consistently by the one tenant, this warning doesn’t apply to you. However, if you’re one of the many taxpayers claiming deductions on a holiday home, it’s important that you understand the rules of play.
The Tax Office is using new technology, data matching and checking social media to check what you’re up to and if your claims are legitimate. So, if you have a holiday home and you want to use it for yourself but also claim it for a tax deduction, it’s important to understand what the Tax Office is looking for when it comes to tax deductions and holiday homes.
Are you using the property for your own use?
First things first, you are entitled to use your holiday home for your own holidays. The important thing is to ensure that you’re not claiming deductions for the times when you’re using it or it’s not genuinely available to be rented out. So, if you’re using your holiday home for four weeks of the year and other family members are using it rent free for another four weeks, you cannot claim for eight weeks’ worth of deductions in your tax return. This means apportioning interest, rates, levies and other expenses for this private use component.
Are you renting the property out for mates’ rates?
Again, you are entitled to rent your property at a cheaper rate for friends and family. However, you cannot then expect to claim the full tax deduction for expenses incurred during that time. Therefore, if your mates are only paying half of what you normally charge out, then you will only be able to claim half of the costs during that time or the equivalent of the rent charged. Of course, if you have seasonal pricing and you can prove that this is commercial practice in the area, and your mates are paying half price because they’re staying during the low season when rents are genuinely halved, you may still be able to claim the full amount of your costs during this time.
Is the property genuinely available to rent?
This is an important part of the Tax Office’s focus and one it has taken care to outline in its warning. That’s because you may be arguing that your property is available for rent but the only thing you’ve done is set up a Facebook page that no-one other than friends or family has liked. Or you may have listed it with a real estate agent but the rent is set at 50 per cent over market rent and as a result your property hasn’t been booked for more than eight weeks during the year. The Tax Office has listed four things it will be looking at closely when determining if a property is genuinely available to rent:
1. Are you advertising the property to a wide audience? This may be a real estate agent or an online site but this alone may not be enough if the rest of the conditions are not met.
2. Is the property in good condition? If the property is in a remote location and run-down, it may not be realistic to expect that it will appeal to anyone.
3. Are you charging market rates? Charging rent above market rates to deter tenants from applying could mean your property is considered not to be genuinely available for rent. Of course, there may be good reasons you’re charging more but you’ll need to show proof of why as well as the resulting bookings.
4. Are you knocking back bookings without a good reason? If you refuse to rent out your property without a good reason, this may indicate you don’t have a genuine intention to make income from the property and are reserving it for private use.
What’s clear is the Tax Office will be closely scrutinising deductions related to holiday home letting so it’s more important than ever before to keep great records. This includes records of income and expenses as well as evidence of the property being rented or genuinely available for rent at market rates. It would also be wise to keep the records of who stayed at the holiday home and when, including the time you and your family stayed at the property.
Renting a holiday home is much like running a business and the more the Tax Office can see evidence that this is how you’re treating your endeavour, the more likely they’ll allow your claim.
Source: The Sydney Morning Herald
