Holiday Homes

It comes as no great surprise that the holiday rental continues to be the ATO’s focus. The ATO has advised that from over 1500 audits on rental property tax deduction claims, they found 90% error rate in rental property claims and applied penalties totalling $1.3 million.

The ATO has advised that it has made holiday rental property deductions a top priority this year and is encouraging rental owners to check their claims are correct before lodging their tax return.

In particular, the ATO is paying close attention to:

• excessive deductions claimed for holiday homes (including fraudulent expenses and expenses related to the taxpayer’s private home); and
• whether the property is being rented or “genuinely and actively marketed for rent”.

The ATO says that it will be paying closer attention to these issues in 2019 and will also be actively educating rental property owners about what they can and cannot claim. The ATO is also currently in the process of rewriting the income tax ruling IT 2167 for rental property as the last ruling was issued back in 1985.

Genuinely and actively available for rent

Holiday homes are assumed to be private and domestic unless proven otherwise. Therefore, taxpayers have the burden of proving a holiday rental is rented out or genuinely and actively marketed for rent in order to claim deductions in respect of the property. It is important to keep accurate records to support this claim.

The ATO has seen holiday rental properties claimed as actively marketed for rent but which upon investigation shows there was little intention of actively renting it out. Following are the examples provided by the ATO of circumstances in which deductions were not available as the house was not found to be genuinely and actively marketed for rent:

Advertise the property

• Beside an advertisement on real estate website, there were no realistic efforts to let the property out. The ATO considers that simply advertising a holiday home through a real-estate agent or online website is not enough evidence to demonstrate that a property is genuinely and actively available for rent.

Property location and condition

• The holiday property is in a location and condition that no tenants will want to rent it.  If the property is run-down or in a remote location, it may not be realistic to expect that it will appeal to anyone.

Property not actually rented out

• The holiday property has never been rented out while minimal income is declared, and excessive deductions are claimed for the property.

Property part-year rental

• Calendar blocked out dates are set for peak periods by owner for private purposes e.g., long weekend or Easter break to stop travellers renting the property.

Property owner places unreasonable terms or restriction on renting out the property such as

• placing restrictions on renting out the property such as the requirement for a five-night minimum stay, ‘no children’, ‘no pets’ etc; and
• refuse to rent out the property to interested people without adequate reasons.

Charging unrealistic rent

• setting the rent above the rate of comparable surrounding properties; or
• renting the holiday home to family and friends during the year at less than market rate.

Apportionment of rental expenses for period actually rented at commercial rate.

Rent received at market value from renting of a holiday home is clearly assessable income. Generally, where the property is rented out for only part of the year, any losses and outgoings should be apportioned on a time basis or on a floor plan basis if the property is partly rented out.

The minimal amount received from friends or relatives are not considered to be assessable as these occupancy arrangements are in the nature of domestic or family arrangements and the amounts received by the owner from friends and family are reimbursements for costs incurred. The losses and outgoings can only be claimed up to the amount of income received.

Apportionment of rental expenses for period genuinely and actively advertised for rent

Deductions apportionment should take into accounts periods when the property was not rented out but was available for rental where active and bona fide efforts were made to rent the property out during these periods.

It is important to keep proper records of income and expenses, evidence of the property being rented or genuinely and actively advertised and available for rent at market rates and of who stayed at the holiday home and when, including the time when the property is used for personal purposes. The ATO Ruling IT 2167 provides guidance on the deductions incurred in connection with rent producing properties which are not wholly used for rental purposes are allowable deductions.

If you would like further information about the renting of a holiday home please contact our office.

By Wen Yee. Senior Accountant – Venture Private Advisory.