ATO Attack Holiday Homes

For many Aussies, having a beach house or a country getaway is like a dream come true—a perfect lifestyle purchase. However, considering the potential costs involved, one common way to make it financially viable is by renting out your holiday home to the public, either partially or for the whole year.

Here's the important thing to keep in mind: any income you earn from renting out your holiday home is taxable, which means you need to declare it on your tax return. But don't worry, there's a silver lining! Since the income is taxable, you can also claim a tax deduction for the costs you incur in earning that rental income.

Now, here's the catch: the Australian Taxation Office (ATO) keeps a close eye on tax claims related to holiday homes to ensure that people aren't over-claiming their tax deductions. They want to make sure everyone is playing by the rules.

The surge in holiday home ownership poses unique challenges for the ATO. They strive to accurately identify property ownership and ensure taxpayers aren't taking advantage of the system.

As part of their efforts, the ATO has explicitly stated that holiday rentals are a prime focus for compliance action. They want to crack down on any improper behavior or incorrect claims made by taxpayers.

So, it's crucial to stay on the right side of the taxman and follow the rules when it comes to declaring your rental income and claiming deductions for your holiday home. Being aware of your responsibilities and staying compliant will ensure you can enjoy your vacation property without any unwanted tax issues.

Holiday home tax traps you need to be aware of

Alright, here's what you need to know to stay on the right side of the taxman.
First off, if you decide to rent out your holiday home when you're not using it, it's crucial to declare the rental returns as income. That's right, the money you earn from renting out your vacation property needs to be included in your income tax return.

Now, here's the catch: when it comes to claiming deductions, you can only do so for the periods when the property is actually rented out or genuinely available for rent. You can't claim deductions for the periods when you or your family and friends use the property for personal purposes. This is a significant point to keep in mind, especially for holiday homes. The Australian Taxation Office (ATO) often discovers cases where homeowners wrongly claim deductions for their holiday pads, even when they're solely used by the owners and their loved ones, often without any rental income.

The ATO has a list of factors they consider to determine if a property is genuinely available for rent. These factors include how the property is advertised, its location, condition, and accessibility, as well as any unreasonable conditions placed on renting it out. For example, if you advertise the property in limited ways, set unreasonably high rent prices, or impose restrictions on certain types of renters, the ATO may view it as not genuinely available for rent.

Another red flag is refusing interested renters without valid reasons. If you decline potential tenants without adequate justification, it may raise concerns with the ATO.

To avoid falling into these tax traps, it's important to ensure your holiday home is genuinely available for rent during the periods you claim deductions. By understanding and following these guidelines, you can ensure you're on the right track and avoid any unwanted tax issues down the road.

Here are a few more things to keep in mind:

  1. If you're renting out your property to friends or relatives at a rate below the market value, such as charging them a token amount, it's important to know that your income tax deductions will be limited to the actual rent received during that period. So, be aware that deductions will correspond to the amount you actually earn.
  2. When it comes to costs related to repairs, pre-existing damages, or renovations that were present when you purchased the property, you can't claim those costs immediately. Instead, these expenses are deductible over a span of several years. The ATO pays close attention to such claims and may question those that don't align with the rules.
  3. If you only rent out a portion of your holiday home, deductions are limited to expenses directly related to the rented area or a proportionate share of expenses that relate to shared areas accessible to both you and your guests, like a common lounge or kitchen. Keep in mind the distinction between areas exclusively rented and areas shared by you and your guests.
  4. The ATO also keeps an eye out for situations where spouses split income and deductions to disproportionately benefit the higher-earning partner, even if the property is co-owned on a 50:50 basis. If you jointly acquire a property with your spouse, it's crucial to ensure that all aspects, including income and deductions, are split equally.

Expenses for your holiday home that are not  tax deductible

  1. Costs associated with acquiring and disposing of the property, such as conveyancing fees, advertising expenses, and stamp duty. These costs are typically considered capital expenses and are added to the property's cost base.
  2. Expenses that you don't actually incur as the property owner, like costs that are paid by the person renting the property.
  3. Expenses unrelated to the rental of the property, for instance, interest on a loan that was initially related to the property but additional funds have been used for private activities.
  4. Travel expenses associated with renting the property. Before July 1, 2017, you could deduct the costs of traveling to the property if it was for property management purposes. However, such deductions are no longer possible after that date.

There are other expenses that may not be immediately deductible but can be claimed over a period of years.

These include borrowing expenses (such as title search fees, loan establishment fees, and mortgage stamp duty) that are linked to property financing, depreciation costs for assets used in the building (like air conditioners or hot water systems), and capital works deductions for structural alterations, improvements, or extensions to the building.

Remember, when claiming these expenses, you can only deduct the proportion of costs that relate to the periods when the property was available for rent.

It's important to note that the Australian Taxation Office (ATO) now has access to various sources of third-party data, including popular rental listing sites for both long-term and holiday rentals. This enables them to easily verify whether a claim that a property was "available for rent" is accurate.

Arrange a chat with one of our expert team members to ensure you stay on top of your compliance obligations when renting out your holiday home.