Do You Own a Holiday Home?

The ATO is of the view that holiday home investors may be misinterpreting the rules regarding tax deductions for rental properties and, as a result, may be over-claiming on tax deductions for periods when a property is not being rented out.

There are suggestions that the confusion amongst taxpayers as to what constitutes personal use or reasonable (or realistic) efforts to lease out a holiday home has resulted in homes that are not genuinely available for rent.

The ATO has indicated that it will focus on the following:

• excessive deductions claimed for holiday homes
• properties that are located in remote locations, with limited rental period and minimal income
• the use of risk detection data models and market analysis to identify and investigate claims where taxpayers have unusual rental income and deductions patterns compared to other investors in similar locations
• writing to owners to remind them of what they cannot claim
• holiday homes that are jointly owned where spouses unequally divide income and deductions.

To us here at Propel Business Group, it seems clear that it is important that the ATO continues to educate rental property owners about what they can and cannot claim. Taxpayers may have negatively geared investment properties giving rise to significant deductions, meaning that the need for review and monitoring is inevitable.

The ATO has also provided guidance on when it will consider that a holiday home is not “genuinely available for rent”. Factors that made indicate that a property is not genuinely available for rent include:

• it is advertised in ways that limit its exposure to potential tenants
• the location, condition or accessibility of the property mean that it is undesirable
• you place such unreasonable or stringent conditions on renting out the property that the likelihood of the property being rented out is hugely reduced
• you refuse to give adequate reasons as to why you won’t rent out the property to interested people.

The ATO says these factors generally indicate the owner does not have a genuine intention to make income from the property and may be reserving it for private use.

Having said that, if the ATO were to commence a review or audit on a holiday home rental property, it is hoped that it would not make any conclusions regarding the use of the holiday home or the intention of the taxpayer before objectively considering all the available evidence. This is especially the case if the holiday home is subject to seasonal demand.

Propel Business Group advise you to be aware that the ATO appears to be taking a broad approach in monitoring rental deductions. Where relevant, it may be wise to take this opportunity to review the rules surrounding holiday home tax deductions to ensure you address any risks or issues.

It may also be a good idea to review your records so that you are prepared, should the ATO seek you out. If you need any help regarding your holiday home, don’t hesitate to contact us.