If the ATO considers that a holiday home is “mainly” used to produce rental income – rather than being “mainly” for personal use – then all expenses currently considered tax-deductible are likely to remain so.
But if the property is “mainly” for personal use, expenses such as mortgage interest, rates and insurance may not be deductible, said Tony Greco, a senior tax advisor at the Institute of Public Accountants.
“If it’s not used mainly [as a rental], then you’re denied all deductions around holding costs,” he said.
But costs directly related to renting the property out, such as cleaning or advertising, can continue to be claimed.
The tax office’s long-standing approach to holiday rentals has been that so long as legitimate efforts to rent a property out were made, it was considered “available for rent” – and deductions could be claimed for this period, even if the property was not actually tenanted.
“That was the golden rule,” Greco said. “So all of a sudden that golden rule has now changed.”
How is the property used during peak periods?
What the ATO considers constitutes “mainly” will be key, and it may not be as simple as proving that a holiday home is available for rent at least 50 per cent of the year.
This is where the definition of a peak period will be important. If a holiday home is not legitimately available for rent during “peak periods” it may not be considered “mainly” a rental.
“The ATO’s draft interpretation states that using such properties during peak periods may lead to a conclusion that the holiday home is not mainly used to produce assessable income – regardless of the proportion of the entire year that this private use may comprise,” Greco said.
If “peak periods” include occasions such as Christmas and New Year, Easter, public holiday long weekends and school holidays, these are the times when holiday home owners typically reserve their properties for personal use, raising the prospect they will be denied deductions.
Greco said the ATO’s definition of a peak period may go even further.
“If you’ve got a lodge in a ski resort, obviously peak period is when there’s snow, but peak period could also be in summer, when a lot of people are attracted to the mountains,” he said.
“On the Mornington Peninsula, you might say peak periods are the warmer months. But then there are festivals in the cooler months.
“In Melbourne, for example, every weekend there’s a footy game, is that a peak period?”
Greco said that by requiring a holiday home to be available for rent during peak periods, the ATO was suggesting that its owners should be trying to maximise the income they earn from the property.
“There’s no legislation that says you have to maximise your revenue, and that is where we’re going with this. The tax legislation just says, ‘Are you trying to produce accessible income? Then we’ll allow you the deductions’.”
The definition of what constitutes ‘mainly’ or a ‘peak period’ is likely to be subject to legal challenge, while Greco expects the requirement for a holiday home owner to maximise revenue will also be open to challenge in the courts.
Fair or an overstep?
“The ATO has been looking at short-stay rentals such as Airbnbs as a focus area for individual tax compliance for several years,” KPMG tax partner Hayley Lock said.
“They’ve used this activity to gather intelligence on what people are claiming and [form] their own views on whether those deductions for ownership costs should be allowed.”
Greco said the change would hit Victorian holiday home owners – who are already paying high rates of state land tax and a short stay levy – particularly hard.
“In Victoria, people are hurting with their holiday rentals because of land tax. So a lot of them have made their properties available for rent to soften the land tax bill.”
But some may find the change in interpretation is fair.
“Some may consider that the ATO’s approach is harsh, and it will challenge long-standing concepts” Jacobson said. “But think about it – why should ordinary Australian taxpayers subsidise the cost of the personal use of holiday homes by their owners?”
Further changes unlikely
The guidance released by the ATO this week is in draft form and is now open for consultation until January 30, but significant changes should not be expected.
“The ATO typically consults on its guidance before releasing for public consultation, so while many submissions could be expected, it is unlikely that significant changes would be made to the guidance before it is finalised,” Jacobson said.
Lock said affected owners should assess whether their property is genuinely available for rent during peak periods, and if private use dominates they should expect deductions to be denied.
Owners will also be required to keep more detailed records of rental income – both through platforms and informal arrangements such as discounted rent for family and friends – advertising efforts, booking calendars and private use dates.
