New ATO ruling will affect rental income claims
A new draft decision from the Australian Taxation Office could significantly reduce the deductions holiday home owners can claim against rental income from the property, limiting it to advertising, cleaning and other costs directly related to earning the rent.
Unless the property is used “principally” to generate income and is held for specific purposes, you cannot claim property expenses such as rates, insurance, depreciation, interest, land tax or even repairs and maintenance.
The onus is now on landlords to show that the primary purpose of the property is to earn holiday rentals.
If you can meet the ATO’s criteria for keeping a property primarily for the purpose of generating income and using it for occasional holidays, then the only restriction is that you cannot claim part of the expenses and ownership costs associated with your stay there.
There is no hard and fast rule that a holiday home is used primarily to generate income. It’s not just based on a specific number of weeks. The ATO said it would look at the percentages where the home was rented or used for private purposes during peak periods such as Christmas and Easter.
The Tax Office will also consider other aspects, such as how proactive you are in promoting the property to potential guests. For example, would you downplay the venue by being honest and telling potential guests that mobile access is poor in the area? Do you answer all questions promptly?
Is the entire facility available to guests? Is there internet access? Is the rent too high? Is the property not in a good location for a holiday rental? Do restrictions on the property, such as no pets or children, make it unappealing?
You need to consider how many days of revenue it generates compared to private use and whether you monopolize the peak rental period.
The onus is now on you to show that the primary purpose of the property is to generate holiday rental income and that you have taken every opportunity to achieve this.
If your holiday home is used primarily to generate income, you are entitled to a deduction for part of the costs of ownership. So how do you allocate private use? Is this just by counting the number of days you have the property to yourself?
