One of the success stories of the 'sharing' economy has been Airbnb, the organisation which matches private accommodation to potential renters.

The site brings together property owners looking to rent out rooms or whole properties with potential guests looking for a stay in the chosen location. Landlords get to set their own prices, minimum and maximum stays and other conditions whilst guests get accommodation with a personal touch, often at a lower price than a conventional hotel or apartment and in a more interesting neighbourhood.

Like other so-called ‘sharing’ services (like ride-sharing app, Uber), Airbnb has posed a challenge to the tax authorities who have struggled to come to terms with the new business model and are only now – in a piecemeal way – starting to provide guidance to landlords around the way Airbnb transactions are taxed.

Income tax

Whilst it’s possible to run something like a full time accommodation business through Airbnb (check out their website and notice that some people own multiple properties in some cities), the vast majority of people are engaged with Airbnb in a much smaller way, typically letting out one or two spare rooms in their own private residence. These are the people we will consider in this article.

Although these people are generating income from their Airbnb activities, they are not running a business. That means that the many complex rules around business taxation are not relevant for most Airbnb landlords.

Rental income

Any income derived from rent will typically be assessable income. It is possible that the ATO may attempt to argue that you are not charging a commercial rent to your guests, an argument that could be particularly relevant if you are making a loss on your Airbnb activities (see below).  Given that the rooms are advertised to the public online, the presumption would normally be that the rent is being charged at an ‘arms-length’ price and therefore should a challenge would normally be difficult to sustain.

Rental expenses

If rental income is assessable, landlords are generally entitled to tax deductions for expenses incurred in deriving that rental income.

These expenses fall into three categories:

  1. Expenses that are directly associated with the rented area can be deducted in full
  2. Expenses that relate to shared areas need to be apportioned
  3. Expenses that relate to the host’s private area only cannot be deducted

Some examples of expenses that may be deductible in full include:

  • Depreciation of furniture used in the rented room (such as beds, desks and drawers);
  • Commercial cleaning of the rented area;
  • Repairs and maintenance;
  • Food (such as breakfast provisions) made available to the guest;
  • Professional photography for the listing;
  • Service fees and commissions charged by Airbnb

Where there are expenses that relate to the entire property, apportionment is required, typically based on the floor area used for renting compared to the total floor area of the property.  

Some examples of expenses that relate to the entire property that may be apportioned include:

  • Mortgage interest or rent;
  • Council rates;
  • Utilities;     
  • Insurance     

Expenses that relate to shared areas can be apportioned based on access. So, if the host and the landlord both have equal access to, say, the lounge and the kitchen, the landlord could deduct 50% of these expenses.  

Examples of expenses that relate to shared areas only include:

  • Depreciation on furniture and appliances located in shared areas (such as sofas, TV’s, kitchen equipment)
  • Internet, phone and cable TV costs

If rental expenses exceed rental income, a loss will arise. The excess of rental expenses over rental income (the loss) can effectively be claimed against the landlord’s other income such as salary.

Care is required if that is the case. As noted above, the ATO may seek to argue that that the landlord is charging a non-commercial rate of rent (i.e. a rate lower than market rate). If successful, they could limit the rental deductions to the extent that they exceed the amount of rental income received.

One final thing to note in relation to expenses is that they are only deductible where an area of the house is either actually rented out, or available for rent.

For example, where a room is available for rent for 180 days a year then only the portion of rental expenses that were incurred over that 180-day period are deductible.  

Note, it is not a requirement that the room is actually rented for the (in our example) 180 day period for rental expenses deductions to be claimed. The room simply needs to be available for rent. Therefore, even if no guests stayed on the property during the 180 day vacancy period, if the room is advertised on Airbnb as vacant and available for rent, the landlord would still be able to claim deductions for the 180 day period.

Capital Gains Tax

In most cases, when you sell your private residence, the sale is free of capital gains tax. However, if you have used part of the property for income earning activities – like renting it out through Airbnb – part of the gain will be taxable. This might mean that you have to do a tricky calculation on sale to work out how much of the gain is taxable and how much is covered by the main residence exemption. Typically, the floor area calculation used in working out your deductible expenses will also be used here. Starting from the date on which the property was first used to generate income, a proportion of the gain based on the floor area which was available for rent will be chargeable to tax. This gain will also usually qualify for the 50% CGT discount.

Goods and Services Tax

Good and services tax (GST) doesn't apply to residential rents, so you're not liable for GST on the rent you charge, and can't claim GST credits for associated costs. This is the case even if your turnover exceeds the GST threshold of $75,000.

Example

The ATO has provided a comprehensive example covering all the above points:

Sue owns a house that contains two furnished bedrooms. She enters into an arrangement with a facilitator to have the rooms separately advertised to guests who will pay a fee for being able to rent the rooms on a nightly or weekly basis. Sue provides linen but does not supply meals or other services to the guests who have access to the kitchen to prepare their own meals as required.

Renting out a room in your house is an input taxed supply of residential rent. Sue is not required to charge GST. Sue will also not be able to claim any GST included in expenses she incurs in relation to renting out the rooms.

At the end of the year, Sue includes all the rental income in her income tax return. She also claims a deduction for the fees charged by the facilitator and for a proportion of her mortgage, electricity and other expenses relative to her renting activity.

Sue is also aware that if she sells the home she will have some capital gains to account for as the home has been used partially for rental income purposes.

Keeping records

Finally, a word of warning: The ATO is looking closely at those participating in the shared economy, including Airbnb. In order to minimise the chances of falling foul of the ATO’s auditors, keep proper records of all income earned and allowable deductions for which you’re claiming (such as invoices, receipts, bank statements, etc), including details of how you have apportioned expenses which are partially for private use (with floor plans to support apportionments).