Holiday home rental deductions being targeted

Recently the ATO issued a media release in which they have committed a greater focus on the deductions claimed by individuals for holiday homes. This focus is centred on whether these properties are genuinely available for rent in the periods which are indicated by taxpayers.

General rules for holiday homes

If a taxpayer owns a holiday home and does not rent out the property, there is no need to include any income or deductions in the tax return. None of the expenses are allowable deductions for income tax purposes, however, some of the costs will add to the cost base of the asset.

If a holiday home is rented out, then the general principles that apply to rental properties apply. Therefore, the costs associated with owning the property is an allowable deduction to the extent it produces assessable income. This means that expenses can reduce assessable income on the proportion of the income year the holiday home was rented out or was genuinely available for rent.

ATO focus — “genuinely available for rent”

The ATO has identified the following circumstances where they believe a property is not genuinely available for rent:

• • Advertising which limits exposure to potential tenants — for example, word of mouth, restricted social media and outside holiday “high-season” periods.
• • Location, condition and access to the property are poor.
• • Requiring prospective tenants to provide references for short-stay periods.
• • Setting the minimum stay for five or more nights but excluding weekends.
• • Refusal to rent to interested people without adequate reasons.
• • Setting the rent well above the rate for comparable properties in the area.

These factors will make the ATO determine that the property is not genuinely available for rent, as it is unlikely tenants will seek to rent it.

Risk mitigation steps

The easiest way to mitigate any potential audit action from the ATO is to make the holiday home available for rent with either:

• • a listed agent, or
• • an online provider.

However, for owners who do not wish to do this, there are other steps outlined above that will help remove the option to deny certain tax deductions.

Further actions

Where the holiday home does not meet the condition of being genuinely “available for rent”, then a proportionate approach is necessary for allowable deductions.

However, clients should also understand that in the majority of cases, these costs that are not allowable deductions should still be recorded. It is likely that they will be able to be added to the cost base of the asset, as a holding cost, which would reduce a future capital gain. If you require any advice regarding this issue, please contact our office.