Claiming Rental Expenses For Holiday Homes
The ATO has often focused its attention on deductions relating to rental properties. This year that focus is on holiday home investors who rent out their properties. Early this year the ATO started contacting these homeowners, and the guidelines are issued in April 2016 appear to be a result of this process. If you own this type of property, it is particularly important to be aware of the ATO guidelines and carefully consider whether the money you’ve spent on your property is eligible to be claimed as rental property deductions.
This article examines the principles that apply to claiming rental expenses, with a focus on the deductions available to holiday home owners who rent out their properties. It is also relevant to owners whose rental properties are not on the holiday market.
Claiming Rental Expenses: The Basic Concept
You are generally allowed to claim rental expenses during the period when your property is rented or is available for rent. While the principles for rental properties also apply to holiday homes, the ATO has recently issued guidelines that change the “available for rent” criteria. Broadly, for a holiday home, it must be clear that the property is “genuinely available for rent” to determine that you can claim rental expenses on the property as deductions.
Categories of expenses
Rental property owners and holiday home investors generally incur the following types of expenditure:
- expenditure available for immediate deduction;
- expenditure deductible over a number of years; and
- expenditure not eligible for any deduction.
Expenditure available for immediate deduction
Broadly, rental property owners can claim an immediate deduction for ongoing expenses incurred in producing rental income. Commonly, this includes interest on loans to finance purchasing the property and depreciating assets, property maintenance costs (eg gardening services, property agent fees) and rates and charges (eg council rates, land tax).
The following other expenditures that may require further consideration about whether they are revenue or capital in nature include:
- Repairs and maintenance are generally deductible unless they are capital in nature (eg replacement of an entire structure, renovations, extensions, initial repairs to remedy defects that existed at acquisition). Capital costs may be deductible as capital works under Div 43 of theIncome Tax Assessment Act 1997 (ITAA 1997) or may be eligible for capital allowance claims under Div 40 of ITAA 1997.
- Body corporate charges are generally deductible, but the invoice provided by the body corporate should be reviewed carefully, as certain types of special purpose fund levies (eg to pay for certain capital expenditure) may not be deductible.
- Although some legal costs can be capital in nature, costs incurred in producing rental income such as when evicting non-paying tenants and taking court action for loss of income are deductible during the year they are incurred.
Expenditure deductible over a number of years
Certain expenses that are not deductible outright can still be claimed over a number of years. These include:
- borrowing expenses incurred in taking out a loan for the property (eg loan establishment fees); where the expenses exceed $100, the deduction is spread over the lesser of a five-year period or the term of the loan (s 25-25 of ITAA 1997);
- capital allowances for depreciating assets (Div 40 of ITAA 1997); and
- deductions for capital works (Div 43 of ITAA 1997).
|If a rental property owner changes their intention and decides to use their property for private purposes, they may no longer be able to claim rental deductions from the time the intention changes, or when the property is no longer available for rent.|
Expenditure not eligible for any deduction
Rental property owners generally cannot claim capital expenses. These include acquisition and disposal costs that form part of the property’s cost base for CGT purposes, travel costs to inspect a property prior to purchase and the costs of capital improvements to the property. Some costs of initial improvements and repairs undertaken to improve the condition in which the property was originally purchased can also be capital in nature.
Holiday homes: “genuinely available for rent”
In its holiday home guidelines, the ATO states that owners can only claim rental deductions based on the proportion of the income year their property was rented out or was “genuinely available for rent”. The ATO has not specifically defined this, but has outlined factors it considers would indicate that a property is not “genuinely available for rent”. These include:
- that the property has limited advertising exposure (eg it is only advertised at the owner’s workplace, by word of mouth or during off-peak periods when demand is low);
- that the property’s location, condition or accessibility are not attractive to potential tenants;
- the imposition of unreasonable conditions (eg requiring references for short holiday stays or having a rental rate higher than comparable properties in the area); and
- refusals, without adequate justification, to rent the property to interested parties.
Apportioning rental expenses
Where a holiday home is genuinely available for rent but is partially held for private use, the deductible property expenses must be apportioned on a time basis. For the purpose of apportioning the expenses for holiday homes, the ATO considers “private use” to include providing free accommodation to family or friends.
In addition, if a holiday home is rented out to family or friends at below market rates, deductions are limited to the rent received for that period.
Example one: private use by owners
Jessica and Brad have a holiday home that they rent out at market rates. It is advertised through a real estate agent. During the year, the following occurs:
- They receive total rental income of $25,000.
- They use the property themselves for four weeks.
- They incur expenses of $26,000. This includes costs such as insurance, repairs and maintenance, council rates, the agent’s commission and the interest on their borrowings.
As they used their property during the year, they have to apportion the rental expenses between the private use for four weeks and the rest of the year, when the property was rented out or was genuinely available for rent: (48 weeks / 52 weeks) x 26,000 = rental deduction of $24,000.
Example two: private use by owners and rented to friends at a discounted rate
Suppose that during that same year Jessica and Brad had rented out the property at a discounted rate ($200 per week for three weeks) to their friends. The market rental rate is $500 per week.
They would need to apportion their $26,000 expenditure to take into account:
- the four weeks when they had used the property themselves – no deduction is allowed;
- the three weeks when their friends rented the property at a below-rate – the allowable deduction is limited to the amount of rent received.
They must calculate what amount of expenditure would have been allowable had they rented out the property at the market rate during the three weeks. Assuming that expenses are spread consistently throughout the year, this works out to be: (3 weeks / 52 weeks) x 26,000 = $1,500.
They can only claim $600 for the discounted period (3 weeks x $200).
Accordingly, the rental expenditure that they can claim equals $23,100, made up of:
- $22,500 for the 45 weeks when the property is genuinely available for rent, plus
- $600 for the three weeks period when the property was rented out below market rate.
Holiday Homes: Additional Matters to Consider
Private use during peak periods
Holiday homeowners must be careful when determining whether they can claim rental deductions where the significant private use of the property occurs during peak rental period.
For example, if Jessica and Brad’s holiday home is located in a beach town, and they decided to spend time and allow their friends and families to use the property over the majority of the summer holidays, this could be considered a private use of the holiday home during the peak season. In addition, if the property is advertised at all other times except over summer and there is little to no demand for the property outside the summer holiday period, the ATO is likely to take the view that the couple did not have a genuine intention to rent their holiday home out. Their claims for deductions may, therefore, be disallowed.
Travel expenses for inspections and repairs
When considering whether travel expenses incurred for travelling to and from the property are deductible, it is important to substantiate the underlying purpose of the travel.
For example, if Jessica and Brad were at the property for a holiday and they carried out repair work over the course of their stay, carrying out the repairs would not necessarily be the main purpose of travelling to the property. The costs of the travel would not generally be deductible.
However, if during the year Jessica and Brad travel to the property to undertake urgent repairs, and the repairs were the primary purpose for the trip, then the travel costs to and from the property should be deductible.