Holiday-home perks under spotlight in ATO clampdown

The rich are said to be getting richer and the poor get the picture, but it’s less clear exactly how much less richer Australians can pay to have more.

But for the wealthy who boast holiday homes, the trick to making the most of their assets is about to become much more transparent, thanks to the Australian Taxation Office.

Take, for example, an understanding couple we will call the Smiths.

They’ve been successful enough to settle into a multi-million dollar mansion in Melbourne’s inner east, but they also have a gorgeous holiday flat on the Gold Coast for when they want to escape the rain.

From the outside looking in, the Smiths have it easy, but maintaining their luxurious lifestyle doesn’t come cheap.

They still owe a few bucks on the waterfront property, so there are repayments to consider as well as interest, which is starting to hurt as rates rise again.

The escape from Millionaire’s Row also attracts high council rates, made worse by the so-called opinion tax the Smiths are dealing with.

Then there are land taxes, insurance and the never-ending maintenance bill.

So what to do about this?

To start, the Smiths are advertising their costly-to-run property for year-round rental through a real estate agent.

However, they generally block their own usage periods by canceling the reservations they received for the Easter, Christmas and New Year periods.

But somewhat generous, Mr. and Mrs. Smith also reserve their home away from home for the use of their extended family and friends.

With five children, some old enough to have a partner, and a couple with their own little ones, the number of people enjoying stays at the property at deeply discounted rents is starting to increase.

Then there are the in-laws and cousins, and soon the place is packed every school holiday too.

Despite this, and despite having done nothing untoward, the Smiths continued to make claims against the cost of owning the luxury unit as a rental investment.

Traditionally referred to as smart accounting, easing their burden by reducing their tax bills is actually a financial masterstroke.

At least so far.

According to the ATO’s new draft decision, the Smiths and other holiday home owners working with the same notice could face a major shock.

At issue is their ability to claim a deduction on interest, rates or maintenance costs unless the home is rented ‘primarily’ to generate income and is unavailable during peak periods.

This is a big deal from a tax perspective. The ATO calculates that more than two million Australian investment properties apply for tax relief each year, with the average claim being around $20,000.

Susan Franks, tax leader at Chartered Accountants, says with the changes expected to come into force from July 1, tax authorities will look at the period over which a house can be rented, including popular seasonal periods.

“If you have a holiday home and it’s in a seasonal area, you need to make sure it’s used primarily for rental income during that period,” he told AAP.

The tax office, which published the proposal in draft form, stated that it would tighten aspects of the current legislation that had not been implemented before.

It is also monitoring holiday home owners who make limited attempts to rent out the property or keep parts of the home off-limits to guests.

That sentiment wouldn’t apply to the Smiths, whose residence is in a high-rise tower, so they inflated council prices for beach views.

However, someone who owns a two-story rental closer to the sand, perhaps, but regularly quarantines the upper floor for himself, may attract scrutiny.

It will also be frowned upon to publicly price the property well above rental market rates and leave the property significantly undervalued to family or friends in order to deliberately drive away interest.

“(The ATO’s) interpretation of the law will be questioned by some,” Ms Franks says.

“But there is a section of society whose disruption of holiday home use needs to be reined in.”

Of course, the ATO can now use third-party data from holiday letting platforms such as Airbnb to match income and expenses and identify omitted rental income or overclaimed deductions.

Tax returns will be compared with platform data, bank records and even property listings to detect differences.

Tax services specialist H&R Block advises clients to exercise caution.

“Don’t demand something you’re not entitled to, and make sure you have the records to support and justify anything,” the company recently warned.

“Tread carefully this year, because ATO is watching you!”

Landlords will still be able to claim a reasonable deduction for things like rent advertising and cleaning costs after the rental accommodation.