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Rental Properties – What You Need to Know About Tax Compliance

With the rise of short-term rental platforms like Airbnb and Stayz, many Australians have turned to holiday rentals as an investment strategy. However, the ATO has a keen interest in ensuring deductions are only claimed where appropriate. If you rent out a holiday home, here’s what you need to know.

1. Apportioning Expenses Correctly

Unlike long-term rentals, holiday homes often have mixed-use periods where they are available for rent but also used personally. The key tax rule is that you can only claim deductions for the portion of expenses that relate to the time the property is genuinely available for rent.

For example:

  • If your holiday home was rented out for 60 days in the year and used personally for 30 days, you cannot claim deductions for the remaining 275 days unless you can prove it was actively available for rent.

  • If your property was only listed on a small, private website and never received enquiries, the ATO may determine it was not genuinely available for rent.

To strengthen your claims:

  • Advertise through mainstream platforms.

  • Keep records of rental enquiries.

  • Document reasons for vacancies (e.g., lack of demand, seasonal factors).

2. CGT Implications for Holiday and other Rentals where it was a Main Residence

A house that was the main residence of the owner may be offered for rent (short term or otherwise).  Renting out the former home will affect your Capital Gains Tax (CGT) obligations when you sell. There are special rules in the CGT law that deal with this situation.

Key considerations:

  • If a property was once your main residence, using it as a rental property will mean that the sale of the property will not attract full CGT exemption.

  • The ‘first used to produce income’ rule means the property’s market value at the time it was first rented out will be used to determine the cost base in computing the capital gain.  In most cases you will need to obtain a market valuation of the property at the time it is first used to produce rent.

  • Keep records of all rental and personal use periods to accurately calculate any CGT liability.

3. Foreign Owners – Additional Taxes Apply

If you are a foreign owner of a holiday rental in Australia, you may be subject to additional taxes, including:

  • Vacancy fees if the property is not occupied or genuinely available for rent for at least 183 days in a 12-month period.  These fees are sourced in state-based legislation, so check with your accountant in the relevant state.

  • Higher CGT rates and reduced discounts if you sell the property while classified as a foreign resident.

If you are a non-resident considering selling an Australian property that was formerly your home, the main residence exemption does not apply unless certain exemptions (such as a terminal illness or spouse’s death) apply.

4. Record-Keeping and Evidence Retention

Since the ATO closely scrutinises holiday rental deductions, keeping thorough records is critical. You should retain:

  • Bank statements and rental income records.

  • Proof of property advertising.

  • Utility bills to show low usage when not rented.

  • Any communications with property managers regarding bookings.

Final Thoughts

Ensuring that you only claim deductions for genuine rental use, keep detailed records, and plan for CGT consequences will help you avoid issues with the ATO. If in doubt, consult an accountant to ensure you’re on the right track.

 

 

Harper Group Pty Ltd – Chartered Accountants Frankston - Ph 9770 1547

Disclaimer: All information provided in this article is of a general nature only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

Please note we at Harper Group Pty Ltd are not licensed to provide financial product advice under the Corporations Act 2001 (Cth) and taxation is only one of the matters that must be considered when making a decision on a financial product, including on whether to make superannuation contributions. You should consider taking advice from the holder of an Australian financial services license before making a decision on a financial product.

Andi Sibal