Whether speaking to clients or simply to people at a barbecue, I still find myself regularly asked the question, 'Is Airbnb a problem for me or my tax?'.
I usually respond with, 'No, not really, as long as you know what you’re doing … are you doing it? Does it work for you?'.
This counter-question is usually followed by some uncomfortable shuffling, some mumbles and the sheepish question, 'I don’t have to put it in my tax return, do I?'.
I’m sure we’ve all had similar conversations with our clients and friends, and of course the answer is yes, and you do need to keep some records. What’s more, putting a main residence on Airbnb will limit capital gains tax (CGT) exemption on that residence.
Wide eyes and uncomfortable silence tend to follow this answer.
'What about GST, surely…'
The answer here is usually a more straightforward no, but that will depend on exactly what’s being rented out.
Let’s look at what we have.
Does it go in my tax return?
The Australian Taxation Office’s published view is that renting out a property via the sharing economy is no different to more traditional methods, and hence the income needs to go in your client’s tax return. The only exception the ATO sees is if the property is offered below market value, say as a favour to family or a friend, and the client seeks to claim a loss for tax purposes.
The only other circumstance that could potentially fall outside this interpretation is where rooms in a share house are on Airbnb just to recover costs while their regular occupants are on holidays etc. This is very common among 20-somethings paying Sydney rents.
What deductions can I claim?
Helping clients to understand deductions and their net impact on tax returns is the key to stripping away the mystery and assisting them in making an informed decision on continuing to rent out part or all of their property on Airbnb.
The expenses clients can claim fall into two broad categories.
The first is cash or out-of-pocket costs that reduce net return before tax. These include fees or commissions from the facilitator/agent, electricity and gas costs, council rates, land tax, insurance, cleaning and maintenance, repairs, and of course interest charged (but not the whole repayment).
It’s worth noting that if the client is positive here, they may pay tax, but they’ll still be ahead after tax. A loss here, analogous to ‘negative gearing’ if you like, costs real cash flow, regardless of the tax benefits.
The second claimable expense category is non-cash deductions that reduce the client’s tax position. These are capital allowances: allowed depreciation or deductions over time for identified building (structure) costs, at a generous 2.5 per cent per annum where eligible, and higher rates for furniture and fixtures such as carpet, stoves, hot water systems, air-conditioning, curtains, light fittings and so on.
The cost of these is usually embedded in a property’s purchase price, but also will apply where the client purchases new items or undertakes renovations where that cost cannot be claimed as a repair. The real beauty of these items is that taxable income is reduced and tax saved on something that is not a weekly or monthly out-of-pocket expense.
Can I claim it all?
Clients can only claim all deductions if the whole property is rented out for the whole of the year. Otherwise they must apportion for time rented, including when it’s on the market and empty/available, and also when only part of the property is rented.
There is plenty of guidance available regarding this on the ATO website, but for the sake of an example, let’s say a client has leased one of two bedrooms out for six months of the year and their guest also had equal access to common areas.
You would then take 50 per cent of the claim as relating to the rented area and reduce another 50 per cent for only half of the year, which means 25 per cent of your expenses can be claimed against the six months’ income. For more complex arrangements, floor area calculations are required.
All of the expenses directly in regard to the letting can be claimed, such as the facilitator or agent’s fees and depreciation on furniture and fittings in the leased room.
What about CGT and other taxes?
Properties, like other assets, are normally subject to CGT when they are later sold for more than cost base, which includes the purchase price, eligible improvements and sometimes holding costs provided they are not claimed for tax.
A main residence is however normally exempt from CGT, but people who are leasing out part or all of their main residence may have reason to be concerned.
In short, an apportionment will need to be made for the period and usage that will pro-rata the exemption and result in part of any gain being not exempt and subject to CGT. There are many options and some complex calculations here; clients need to consult their accountants if they are using their main residence in the sharing economy.
Letting a property may also subject clients to land tax in their state. This applies in all states, but the rules, thresholds and exemptions are different in each state.
GST will not apply to residential premises, which will cover most of Airbnb. However, there are always exceptions. If the client is leasing out something that looks and feels like a hotel room, boarding house, hostel or similar, and provides things such as food and board, internet, concierge, transport services etc, it may be considered commercial residential premises. This will create an issue and GST may apply.
They will also have an issue and may need to charge GST if the property is commercial or industrial, or indeed does not have a house on it (such as a spot to camp or park a caravan).
There is, however, a threshold of $75,000: if they’re under this income amount per annum they should be pretty safe.