The ATO will be closely scrutinising deductions claimed for short-term rental properties.
Excessive claims for holiday homes in the ATO’s firing line
In this year’s federal budget, the government announced a huge injection of funding for the ATO to expand the scope of its personal tax compliance program to address emerging areas of risk.
The government’s announcement makes it clear that one of these emerging areas of risk involves “deductions relating to short-term rental properties to ensure they are genuinely available for rent”.
According to James Deliyannis, spokeperson for the National Tax and Accountants’ Association (NTAA), “this sends a clear message that excessive claims in relation to holiday homes are in the ATO’s firing line”.
“The ATO’s deduction guidelines for holiday homes make it clear that deductions are generally only available for periods that a property is either:
- Actually rented at market value rent; or
- Genuinely available for rent (e.g., a property is genuinely advertised for rent through an agent and/or an online accommodation platform).”
“In recent years, there have been growing concerns that deductions are being claimed for holiday homes while a property is not actually rented nor genuinely available for rent.”
“This includes deductions being claimed in situations that indicate a property is not genuinely available for rent, such as the following:
- A property is advertised in such a way that limits its exposure to potential tenants (e.g., the property is advertised only outside holiday periods where the likelihood of it being rented is low).
- A combination of unreasonable or stringent conditions on renting the property are imposed (e.g., requiring holiday-makers to provide references and imposing ‘no children’ and ‘no pets’ conditions).
“Deductions for holding costs, such as mortgage interest, council rates, building insurance and land tax are generally claimed for the number of days during the year that the relevant property is actually rented or genuinely available for rent and not used for private purposes.”
“However, based on discussions with practitioners at the NTAA’s annual Tax Schools seminars, some taxpayers who own holiday homes are ‘blocking-out’ the availability of their holiday homes for rent during peak periods (e.g., over the summer school holidays and Easter) so that they can be used by their owners for private purposes. For the remainder of the year (i.e., during off-peak periods), it is argued that the relevant property is genuinely available for rent to holiday-makers so that some of the property’s holding costs can be claimed as a tax deduction.
“In these situations, the ATO may deny claims for holding costs that relate to off-peak periods during which the property is available for rent. For example, deductions for holding costs may be limited to only those costs that relate to periods during which the property is actually rented at market value rent.”
“This approach is illustrated in an ATO example, which involves a taxpayer (Marie) who owns a property in a seaside holiday town. In the ATO’s example, the property is rented out to holiday-makers via an accommodation sharing platform, but the property is ‘blocked-out’ for the taxpayer’s own use during the school holiday periods, including the summer school holidays and Easter.
For the relevant year, the property is actually rented out to holiday-makers for only 25 days outside the school holiday and Easter periods. The ATO’s example concludes that the taxpayer can only claim property-related expenses that relate to the 25-day period their property is actually rented during the year.
James Deliyannis is a senior taxation manager of Corporate Seminars Australia on behalf of the National Tax and Accountants’ Association (NTAA) who is currently presenting the NTAA’s 2023 Day 1 Tax Schools seminar in relation to the most current developments relating to the 2023 Individual tax return.