This counter-question is usually followed by some uncomfortable shuffling, some mumbles and the sheepish question, “I don’t have to put it in my tax return do I?”
The answer is yes, and you do need to keep some records. If you are using Airbnb or any other sharing economy platform, they retain records and yes, the ATO can and will access those records.
By the way, if you’re putting your main residence on Airbnb, this will limit your Capital Gains Tax (CGT) exemption on that residence.
Wide eyes and uncomfortable silence tends to follow this answer.
“What about GST, surely…”
The answer here is usually a more straightforward no, but that will depend on exactly what you are renting out.
Let’s look at what we have.
Does it go in my tax return?
The Australian Taxation Office’s published view is that renting out your property via the sharing economy is no different to more traditional methods, and hence the income needs to go in your tax return. The only exception the ATO see is if you were to offer the property below market value – say as a favour to family or a friend – and you ask to claim a loss for tax purposes.
The only other circumstance that could potentially fall outside this interpretation is where rooms in a share house are on AirBnB just to recover costs while their regular occupants are on holidays etc. This is very common among 20-somethings paying Sydney rents!
What deductions can I claim?
Understanding deductions and what the net impact on your tax return will be is the key to stripping away the mystery and making an informed decision on continuing to rent out part or all of your property on Airbnb, and how hard you push the prices.
The expenses you can claim fall into two broad categories:
- Cash or out of pocket costs that reduce your net return before tax. These include fees or commissions from the facilitator/agent, electricity and gas costs, council rates, land tax, insurance, cleaning and maintenance, repairs, and of course, interest charged (but not the whole repayment!) It’s worth noting that if you are positive here, you may pay tax, but you are still ahead after tax. A loss here – analogous to ‘negative gearing’ if you like – costs real cash flow, regardless of the tax benefits.
- Non-cash deductions that reduce your tax position. These are capital allowances; allowed depreciation or deductions over time for identified building (structure) costs – at a generous 2.5% per annum where eligible – and higher rates for furniture and fixtures such as carpet, stoves, hot water systems, air-condition, curtains, light fittings and so on.
The cost of these is usually embedded in your purchase price, but also will apply where you purchase new items or undertake renovations where that cost cannot be claimed as a repair. The real beauty of these items is that taxable income is reduced and tax saved on something that is not a weekly or monthly out of pocket expense.
Can I claim it all?
Yes, but only where you rent out your whole property for the whole of the year. Other than that you must apportion for time rented, including when it’s on the market and empty/ available, and also where only part of the property is rented.
There is plenty of guidance available regarding this on the ATO website, but for the sake of an example, let’s say you leased one of two bedrooms out for six months of the year and your guest also had equal access to common areas.
You take 50% of the claim as relating to the rented area and reduce another 50% for only half of the year, which means 25% of your expenses can be claimed against the six months’ income.
For more complex arrangements, floor area calculations are required.
You can of course claim 100% of expenses just in regard to the letting – such as the facilitator or agent’s fees and depreciation on furniture and fittings in the leased room.
Do the calculations, know where you stand, and get advice if you need it.
What about CGT and other taxes?
Properties, like other assets, are normally subject to CGT where they are later sold for more than your cost base – which includes the purchase price, eligible improvements and sometimes holding costs provided they are not claimed for tax.
Your main residence is however normally exempt from CGT, but people who are leasing out part or all of their main residence need to be concerned.
In short, an apportionment will need to be made for the period and usage that will prorata your exemption and result in part of any gain being not exempt and subject to CGT.
There are many options and some complex calculations here, so I do recommend that you get advice if you are using your main residence in the sharing economy.
Letting your property may also subject you to land tax in your state. This applies in all states, but the rules, thresholds and exemptions are different in each state, so you may need further advice.
Here’s some good news. GST will not normally apply to residential premises, which covers most of Airbnb. However there are always exceptions. If you are leasing out something that looks and feels like a hotel room or commercial residential accommodation and you are providing things such as food and board, internet, concierge, transport services etc. you may have an issue and GST may apply.
You will also have an issue and may need to charge GST if the property is commercial or industrial or indeed does not have a house on it (such as a spot to camp or park a caravan).
There is however a threshold of $75,000, and provided you are under this income amount per annum you are pretty safe. Once again, if you’re in any doubt, you should get advice.
Hopefully this has allayed a few concerns and highlighted where you may need assistance – for which we are more than happy to help you find a workable solution.