Tax and your Holiday home

For many Australians, a beach house or a country retreat is the ultimate lifestyle purchase. Given the potentially substantial costs involved, often the only way to make it pay is to rent your holiday pad out to the public for part or all of the year.

Any income you earn from renting out your holiday home is assessable income  and needs to be declared on your tax return. Generally, if income is taxable, you can also claim a tax deduction for any costs in earning that income, subject to some restrictions.

However, in the case of ‘holiday homes’, the ATO have recently issued guidelines that will restrict the deductions that can be claimed against rental income from a holiday home unless the property is used or held for use mainly to produce assessable income. This is determined based on the consideration of several factors, including the way the property is used, the time it is dedicated to income-producing as opposed to private use and also the extent to which the holiday home is actually available or used as a rental at a time when use of such a property is desirable (such as school holidays, Christmas and New Year). Where the private use of the property is prioritised over the income generation, no deduction will be allowed for expenses that relate to the ownership or the use of the holiday home. 

This means, expenses such as mortgage interest, council rates, land tax and repairs and maintenance will not be deductible. Expenses that do not relate to the ownership or use of a holiday home, such as advertising costs to rent the property or cleaning costs after a guest stay, are deductible to the extent they are incurred in gaining or producing your assessable income.

Whilst this appears to contradictory to the rules of deductibility with which we are familiar, these deductions are denied because a holiday home fits the definition of a ‘leisure facility’. Deductions for expenses that relate to the ownership or the use of ‘leisure facilities’ are specifically denied under the Income Tax Assessment Act.

The ATO have advised they will not devote resources to apply this restriction to the deductions for holiday homes before 1 July 2026.

Even if your rental property is used or held mainly to produce assessable income, care must be taken to ensure expenses are apportioned accurately between income production and private expenses.

Every year, the ATO looks closely at tax claims which relate to holiday homes to ensure that people aren’t over-claiming their tax deductions.  The boom in holiday home ownership throws up particular challenges for the taxman, both in making sure that they know exactly who owns what and also in making sure that taxpayers aren’t rorting the system.

Genuine Intention to Earn Rental Income 

As part of that process, the ATO has made it very clear that holiday rentals are high on its list of targets for compliance action where taxpayers do the wrong thing. 

So what do you need to know to get it right? 
 

• If you rent out your holiday home during the period you’re not using it, you need to declare the rental returns as income 
• You can only claim deductions for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed. This is particularly important for holiday homes, where the ATO regularly finds evidence of home-owners claiming deductions for their holiday pad on the grounds that it is being rented out, when in reality the only people using it are the owners, their family and friends, often rent-free.

ATO Factors that Indicate Property is Not Available for Rent

The ATO lists a number of factors they look for which indicate a property is not genuinely available for rent, including: 
 

• Advertising: If the property is advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised through a card in the newsagent window or is only rented out during periods of the year when the likelihood of anyone renting it is very low 
• Location: Whether the location, condition of the property, or accessibility to the property, mean that it is unlikely tenants will seek to rent it 
• Rental Conditions: Placing of any unreasonable or stringent conditions that inhibit renting out the property, or that restrict the likelihood of the property being rented out. For example the requested rent is priced substantially higher compared to other similar properties in the same area, or preventing families with children from renting, or even demanding references from prospective holiday renters 
• Refusal to Rent: Any refusal to rent out the property to interested people without providing adequate reasons for this decision 
• Mates Rates: Where the property is let at less than market rent – to friends or relatives for example, who might pay you a token amount – income tax deductions for that period will be restricted to the amount of rent received.

 
Holiday Home Expenses You Cannot Claim for Deductions 

• Cost of Initial Repairs and renovations: The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are instead deductible over a number of years. Expect to see the ATO checking such claims and pushing back against claims which do not stack up. 
• Partially Rented: Where only part of the holiday home is let, deductions are restricted to those expenses which relate either directly to the rented area or to a proportion of expenses which relate to shared areas which are available for both you and your guests to use (such as a communal lounge or kitchen). 
• Joint Income: The ATO is concerned that husbands and wives are in some cases splitting income and deductions so that the bulk of the tax benefit goes to the higher earning spouse, even though the property is actually owned 50:50. Make sure that if you jointly acquire a property with your spouse, everything – income and deductions – needs to be split equally. 

There are also a number of costs which you can’t deduct, including costs associated with: 
 

• Acquiring and disposing of the property: including conveyancing costs, advertising costs and stamp duty.  These costs would normally be of a capital nature and would be added to the cost base of the property 
• Expenses you don’t actually incur as the owner of the property, for example costs in relation to the property which the person renting the property pays 
• Expenses not related to the rental of the property, for example interest on a loan which might originally have related to the property but where additional funds have been drawn down to fund private activities 
• Travel expenses associated with renting the property. Prior to 1 July 2017, you could claim a deduction for the costs of any travel you undertook to visit the property provided the visit was related to the management of the property. From 1 July 2017, such claims are no longer possible. 
• There are other expenses which, whilst not immediately deductible, can be claimed over a number of years.  These include borrowing expenses (i.e., those costs linked to the financing of the property such as title search fees, loan establishment fees, stamp duty on the mortgage, etc), depreciation costs on new assets purchased to use in the building (such as air conditioners, hot water systems, etc) and capital works deductions (such as costs spent on altering, improving, or extending the structure of the building). But remember, you can only claim the proportion of costs which relate to periods the property was available for rent.

Key Takeaway: only claim real deductions 

Importantly, the ATO now has access to numerous sources of third party data, including access to popular rental listing sites for both long term and holiday rentals, so it is relatively easy for them to establish whether a claim that a property was in fact ‘available for rent’ is correct. 
 
In all cases, investment property owners should practise diligence by staying well informed of tax implications– only claim deductions you are entitled to and make sure you have records to support and justify every tax deduction. 
 
Be mindful to pay extra attention when completing this year’s tax return. Exercise extra caution to avoid any mistakes. Or, have an experienced H&R Block Tax Expert navigate any hidden risks and help you with your investment property related claims.