In recent years, the number of people offering short-term rental accommodation has grown significantly, particularly through online booking platforms like Airbnb, Stayz, and Booking.com. Many property owners rent out a holiday home, such as a house, apartment, or unit, for short periods to visitors seeking temporary lodging. Others rent out their entire primary residence occasionally, often during major events, or they offer part of their home, like a spare bedroom, sometimes with shared access to common areas.

This rapid increase in short-term rentals has drawn the attention of the ATO, which has raised concerns about widespread non-compliance with tax obligations among those providing short-term accommodation. Common mistakes include claiming deductions incorrectly for expenses related to holiday homes, such as interest, council rates, insurance, and utilities. Errors often stem from failing to properly apportion expenses during periods when the property is not rented, is used by the owner for personal purposes, or is occupied by friends or family at a reduced rate or no charge.

For tailored advice on managing your tax obligations in the short-term rental market, schedule a complimentary consultation with us today.

Why is the ATO targeting short-term holiday rentals?

Due to the ATO's increasing concerns about individuals providing short-term accommodation through online platforms, such as Airbnb, and failing to comply with their tax obligations as a result, data matching activities were initiated in the sharing economy as early as 2017. These activities involved the ATO obtaining data from online accommodation platforms to identify individuals earning income from these platforms. The data collected included information about the property owner, property details, listing dates, enquiry rates, responses, and nightly rental charges.

More recently, on 1 July 2023, the sharing economy reporting regime was introduced. This regime requires platform providers, including those offering short-term accommodation services, to report certain details to the ATO about the services provided through their platforms, including payments made to individuals offering short-term accommodation.

The main goal of this new reporting regime is to identify and educate service providers who are not meeting their tax obligations. According to the Treasury’s initial consultation paper, this regime is designed to be more comprehensive than the previous ATO data matching efforts, aiming to enhance overall compliance in the short-term accommodation sector.

How to correctly apportion deductions for holiday homes?

Expenses related to a holiday home or similar property used for short-term rental accommodation are generally deductible only for the periods when the property is actually rented out or genuinely available for rent.

In practice, this means you cannot claim deductions for expenses during times when the property is:

• used for private purposes by the owner
• not rented to tenants
• not genuinely available for rent

These expenses must be apportioned to reflect only the time when the property is being used as rental accommodation.

Holding costs

Holding costs, such as mortgage interest, council rates, building insurance, and land tax, should be apportioned on a time basis. These expenses are generally deductible only for the periods during the year when the property was rented to tenants or genuinely available for rent.

Utility costs

Utility costs, including electricity and gas, are deductible to the extent that they relate to the periods when the property was rented or genuinely available for rent. The deduction should reflect the additional utility costs incurred due to providing short-term accommodation.

Depreciation

Depreciation deductions for items like appliances, furniture, hot water systems, and heaters/air-conditioners can only be claimed for the periods when the property was rented or genuinely available for rent. Note that depreciation deductions cannot be claimed for second-hand assets acquired for use in a residential property after 9 May 2017, including those purchased with an existing property.

Capital works (building write-off)

Any building write-off deductions under Division 43 for eligible capital works expenditures can only be claimed for the periods when the property was rented or genuinely available for rent during the year.

Repairs and maintenance

Deductions for repairs and maintenance are available to the extent that they relate to damage or deterioration that occurred while the property was rented or genuinely available for rent as holiday accommodation.

General apportionment guidelines for holiday homes

It's important to note that if an expense is directly related to providing short-term rental accommodation (such as Airbnb activities), a full deduction is generally allowed.

Common expenses for short-term rental arrangements that typically do not require apportionment include:

• host service fees charged by online platforms like Airbnb
• real estate agent commissions for rental activities
• advertising costs for attracting tenants
• costs of purchasing and cleaning linen used exclusively by guests
• costs of food and drink provided solely for guest use
• cleaning costs incurred after a tenancy period or between tenancies

These expenses are fully deductible because they are directly tied to the short-term rental activity.

Example: Apportioning expenses for a holiday rental

Mark and Jane have owned a rural property in a scenic area for 12 years. They typically rent it out during peak seasons through platforms like Airbnb, covering weekends, school holidays, and holiday periods. During the quieter months, when demand is low, they use the property themselves for about eight weeks.

In the 2024 income year, the property was used as follows:

Mark and Jane earned $38,550 in rental income during the 2024 income year.

Expenses Related to the Property in 2024

Mark and Jane need to apportion their expenses based on the 310 days the property was either rented or genuinely available for rent out of the total 365 days. Only the expenses corresponding to the rental period can be claimed as deductions against their rental income.

Calculating the deductible expenses for the property in the 2024 financial year

Mark and Jane’s holding costs, such as interest, rates, insurance, and land tax, along with depreciation, are deductible based on the number of days their property was rented or genuinely available for rent during the 2024 financial year (310 days out of 365 days).

The deductible amount for these expenses is calculated as follows:

$30,750 x 310 days/365 days = $26,045 (rounded)

The utility expenses ($835), host fees ($4,890), and guest-related costs ($3,710) are fully deductible because they directly relate to the rental activities and do not require apportionment.

Thus, the total deductible expenses for Mark and Jane’s rental activities in 2024 amount to $35,480 ($26,045 + $835 + $4,890 + $3,710).

How to avoid the ATO’s scrutiny when renting out a holiday home

If a holiday home isn't rented to tenants and is not being used for private purposes, deductions for the property, such as holding costs, can generally only be claimed when it is genuinely available for rent.

The ATO has identified that some individuals may misuse online accommodation platforms to make it appear as though their property is available for rent. For instance, this can occur when a holiday home is listed on platforms like Airbnb or Stayz, but the owner doesn't respond to inquiries from potential tenants.

In these situations, the ATO may determine that the property is not genuinely available for rent, meaning deductions for property-related expenses, such as holding costs, may not be allowed during these periods.

How to handle holiday homes used for private purposes during peak periods

There are situations where a holiday home is used for private purposes, such as by the owner and their family, during peak holiday periods when it could generate the highest rental income, such as the December/January school holidays or Easter.

In such cases, some holiday homeowners may attempt to:

• Claim deductions for property-related expenses, like holding costs and depreciation, for off-peak periods when the property is listed for rent, arguing that it is genuinely available for rent.
• Apportion these expenses on a time basis, claiming deductions for the number of days the property was listed for rent during off-peak times.

However, in these circumstances, the ATO may scrutinise the homeowner's intention in owning or holding the holiday home, particularly considering whether there is a dual purpose.

As a result, the ATO might apply a different apportionment method or reduce the taxpayer’s deductions in the following ways:

Limiting deductions to rental income

The ATO may allow property-related deductions only up to the amount of rental income earned from the property during the year.

Using an alternative apportionment method

Instead of a time-based apportionment, the ATO might argue for a method based on the rent received during off-peak periods relative to the potential rent during peak periods when the property was used privately.

Denying deductions for off-peak periods

The ATO could disallow deductions for off-peak periods when the property was listed for rent, if it determines that the property was not genuinely available for rent. In this case, deductions may only be allowed for periods when the property was actually rented to tenants.

Apportionment guidelines for properties used by friends and relatives

When a property used for short-term rental accommodation, such as a holiday home, is also used by friends or relatives of the owner, the ability to claim deductions depends on the rent charged during these periods, according to ATO guidelines.

Market value rent charged

If friends or relatives are charged market value rent, the owner can generally claim full deductions against assessable rental income for property-related expenses, such as holding costs.

No rent charged

If no rent is charged when friends or relatives use the property, no deductions can be claimed for expenses during that period.

Discounted rent charged

If friends or relatives are charged a discounted rent, deductions may be available, but this depends on whether the property-related expenses exceed the rental income received:

Expenses exceed rental income

Deductions are generally limited to the amount of rental income received. Additional deductions may be allowed depending on the owner’s circumstances, including the purpose for acquiring the holiday home.

Expenses do not exceed rental income

Deductions can generally be claimed in full for the actual expenses incurred during these periods, including depreciation and building write-off.

These guidelines ensure that deductions align with the property’s use and the income earned, maintaining compliance with tax obligations.

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