‘Brace yourselves’: Imminent holiday home tax changes on the horizon

As previously reported by Accountants Daily, spokespeople from the Institute of Public Accountants (IPA) warned that taxpayers with rental properties also used as their holiday home would need to be aware of and brace for the imminent changes.

Following that, the IPA made a submission on the draft guidance during the consultation period, which closed on 30 January, and made note that overall, it supported and welcomed the ATO’s efforts to modernise the approach.

However, the submission did note some areas within the draft ruling needed extra guidance and clarity, such as paragraph 36, to assist taxpayers with their compliance with the refreshed approach, as well as a clearer definition around the ‘mainly test’.

“While we acknowledge that it would not be appropriate or helpful to be overly prescriptive, taxpayers and advisers would benefit greatly from more comprehensive, practical guidance.”

“The draft guidance increases the compliance burden in determining whether a holiday home satisfies a. 26-50 as taxpayers previously used a time-based quantitative measure.”

In addition, the IPA made clear that there needed to be more guidance around what constituted a “peak period”, as this was subject to changes and seasonal differences for every location within Australia.

Tony Greco, IPA senior tax adviser and submission author, told Accountants Daily that the qualitative factors the ATO had proposed would increase the compliance burden for practitioners in determining whether a holiday home satisfied the revised ATO approach.

“Historically taxpayers or their tax agents predominantly used a time-based quantitative measure based on genuine days available for rent to determine whether holiday home expenses are deductible. Holiday homes are subject to some additional tax rules (section 26-50 of the ITAA 1997) as they are classified as leisure facilities for tax purposes,” Greco said.

“This has been a bit of a sleeper until now. Unless the taxpayer can substantiate that the property is ‘mainly’ used to produce assessable income, deductions for holding costs – such as interest, rates or maintenance – are completely denied. Most practitioners are unaware of s. 26-50 and simply apportioned deductions on a time basis without regard to the ‘mainly test’.”

Greco added that tax advisers need to start communicating these changes to impacted clients as the financial result can be significant, particularly if all their holding costs were denied, and there was no apportionment based on days available anymore.

This advice was recently echoed by Accurium tax trainer, Lee-Ann Hayes, on the latest Under the Hood podcast episode (3 February), who said it was incredibly important for tax advisers and holiday home owners to assess whether a property usage was in line with the practical compliance guidelines.

Hayes also made the point that, based on the requirement that taxpayers could only stay within their holiday home during a specific point of the year, this could impact property sale decisions.

“I think you actually just have to crunch the numbers and see what works for clients. Tax accountants, get out there, get the message out to your clients, because this is one that’s not in the popular press yet. No one is saying they’re outraged yet – and they will be,” she said.

“This is something that we need to make sure the message gets out there because it will really change an important line in the sand for many clients about whether it's actually worth holding onto their holiday home anymore.”

Hayes noted the most interesting aspect of the draft ruling and practical compliance guidelines was the fact that the Tax Office considered a holiday home to be a leisure facility.

However, according to Hayes, this was the biggest “wow factor”, as the ATO had never made clear or publicly stated that it had always viewed a holiday home as a leisure facility, which it did acknowledge.

“For all tax professionals, that was the kind of jaw-dropping, earth-shattering moment for us all when we read that.”