Do you own a holiday home – and are you being 100 per cent honest with the tax department about how you use it?
Landlords with holiday homes need to be on their best behaviour, as the Australian Taxation Office (ATO) has announced plans to get tough on those who are cheating the system and unfairly claiming tax deductions to fund their own holidays.
Current legislation permits owners of holiday homes to claim deductions if they are renting the property out as a holiday let.
However, the ATO has revealed that many owners have been making false claims and receiving deductions, effectively getting paid by the taxpayer to take their own family on holidays.
If you own a holiday home as an investment property, it’s essential that you make sure you’re only claiming legitimate deductions – as the ATO has their sights set on those who are unfairly profiting by exploiting this legislative loophole.
What are the rules around holiday homes?
Repairs and maintenance, cleaning and council rates can all be claimed for holiday homes, so long as they are rented out to members of the public.
However, if owners are renting to family or friends at “mates rates”, the ATO has warned that any deductions claimed must not exceed the total income received.
If you try to claim deductions on a holiday-let property that is used mainly by yourself, family and friends, and you don’t advertise it to the general public, you may also find yourself in hot water.
One case in point cited by Assistant Tax Commissioner Kath Anderson is that of a Victorian man, who claimed more than $750,000 in tax deductions for his Mornington Peninsula property.
This was despite the fact that the holiday home had been used by either himself or his family for 87 per cent of the year – and he had declared a mere $27,000 in income from the property.
While negative gearing can be a fantastic strategy to help you acquire and manage property assets in an affordable way, claiming deductions related to your holiday home when doing your taxes requires careful due diligence.
In essence, what this means is that you have to tell the truth, the whole truth, and nothing but the truth.
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In order to fulfill the ATO’s requirements, you must make the property available as a holiday rental, advertise appropriately and charge reasonable rental rates in line with the current market.
If you don’t advertise the property as available for rent, or you advertise in an obscure manner or with unreasonable conditions attached, be warned that the ATO will be watching.
Assistant Commissioner Anderson said that failing to advertise the property in a way that genuinely targets prospective renters will be on their radar, and new technology will help the ATO keep tabs on such situations.
For instance, if you advertise the property for rent for an inflated rent of $500 per night, when you know that market rent for similar properties is $250 per night, then clearly you’re not trying to genuinely attract a renter.
The ATO will also be using data matching and online research to check up on holiday homeowners, and ensure that the properties are being used as specified on their tax returns.
If you own a holiday home and you have been claiming generous tax deductions in the past, be warned: this crackdown might impact you in a big way.
As with anything tax-related, good record-keeping is the best way to ensure you don’t fall foul of the ATO when it comes to claiming holiday home deductions, and substantiation of any claims is key.
It’s vital that you keep accurate, detailed records of any income you earn or expenses you incur from the property, along with evidence that it has been available for rent at genuine market rates.
Assistant Commissioner Anderson says it’s also a good idea to keep track of when your family and friends have stayed at the property, to avoid any confusion.
This way your accountant or tax agent will be able to easily separate the private portion of any deductible items, and ensure they only lodge claims for those times when the property was genuinely being used to generate income.