One of the success stories of the “sharing” economy has been Airbnb, the organisation which matches private accommodation to potential renters.  One of the challenges posed by this new way of renting has been getting to grips with the tax obligations. Sadly, one of the most often-encountered scenarios is where somebody rushes into an Airbnb arrangement with a view to quickly earing extra income and without any consideration at all of the potential tax consequences. The result can often be a shock down the line when they realise the ATO is taking an interest in what they’ve done. To help avoid any tax related traumas, here are five key tax tips for all current or potential Airbnb hosts.

Your income is taxable!

Any income derived from rent will typically be assessable income and must be disclosed in your tax return.

You are entitled to claim tax deductions

You can claim tax deductions for all expenses which are incurred in deriving your rental income. Typically, where the entire property is rented out, all of the costs involved in running the property will be deductible. Where you rent out part of the property you’re living in, some degree of apportionment is needed.

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; and
  • 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; and
  • 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, you can 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

One final thing to note in relation to expenses where you rent out part of the property you live in is that they are only deductible where an area of the property is actually rented out. That differs slightly to the situation where you are renting out the whole property, where you can claim deductions for the period the property is genuinely available for rent (rather than simply the time it’s actually rented).

Don’t forget the potential Capital Gains Tax (CGT)

If you own an investment property, you’ll pay CGT when you dispose of it based on the profit you make on sale. This is, in very simple terms, the difference between the amount you sold it for and the amount you paid to buy it. With property prices having risen rapidly in recent years, it’s easy to make substantial profits on sale and equally easy to forget that the taxman will want a slice of those profits.

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. This is an area that catches out many Airbnb hosts, many of whom are completely unaware of the CGT implications of renting out part of their home. Given the potentially long time lag between starting to rent out the property and ultimately selling it, CGT can be a costly trap for those who haven’t factored it into their cost/benefit analysis when they first decided to make part of the property available for rent.

Do I need to register for and pay GST?

Almost certainly not. 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.

Follow the H&R Block tax action plan for Airbnb hosts

  • Get advice from your accountant before becoming an Airbnb host. Make sure you are fully across all the potential tax impacts of renting your property before you list it.
  • Get a market valuation of the property at the date you start renting it out. This can be essential for CGT purposes, particularly where the house you are renting out is also the one you live in.
  • Disclose all you Airbnb income in your tax return and make sure you claim all the deductions you are entitled to.
  • Consider getting a quantity surveyors report to maximise your depreciation deductions.
  • Keep records of all your income and expenses. The ATO may ask to see them, particularly if they query an expense.

 

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Looking for a rewarding career?

Take the first step towards a rewarding career as a tax consultant with H&R Block. Register for Australia's leading Income Tax Course today!

FIND OUT MORE