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Many Australians will spend part of their summer down at the beach and, whilst they are there, thousands of them will browse the local estate agents window and dream wistfully of buying a seaside holiday pad. Thousands of them will actually take the plunge and make a purchase.
Every year, the ATO looks closely at tax claims which relate to holiday homes to ensure that people aren’t over-claiming 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.
As part of that process, the ATO stated last year that it will write to property investors who own properties in popular holiday areas to remind them to claim only the deductions to which they are entitled.
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.
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 deductible instead over a number of years. Expect to see the ATO checking such claims and pushing back against claims which do not stack up.
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:
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 ‘available for rent’ is correct.
In all cases, H&R Block is advising taxpayers to be careful – don’t claim what you’re not entitled to and make sure you have records to support and justify every item. Tread carefully – as the ATO is watching you!
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