The ATO is increasing its focus on holiday home investors and, in particular, whether they are correctly claiming deductible expenses.
In the past, the ATO has written to taxpayers reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent.
If a property is rented at below market rates, for example to family or friends, deduction claims must be limited to the income earned while rented.
The ATO is of the view that holiday home investors may be misinterpreting the rules regarding tax deductions for rental properties and may therefore 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; and
- jointly owned holiday homes where spouses unequally divide the income and deductions.
Clearly, 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 and the need for review and monitoring is therefore inevitable.
The ATO has 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 – for example, the property is only advertised at your workplace, by word of mouth or outside annual holiday periods when the likelihood of it being rented out is very low;
- the location, condition of the property or accessibility to the property mean that it is unlikely tenants will seek to rent it;
- you place unreasonable or stringent conditions on renting out the property that restrict the likelihood of the property being rented out – such as setting the rent above the rate of comparable properties in the area or placing a combination of restrictions on renting out the property, for example, requiring prospective tenants to provide references for short holiday stays and having conditions like “no children” or “no pets”; or
- you refuse to rent out the property to interested people without adequate reasons.
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.
Take home message
Holiday home investors should be aware that the ATO appears to be taking a broad approach in monitoring rental deductions. Where relevant, it may be prudent 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 come knocking.
If you have any questions concerning the issues discussed in this article, please contact Carrick Aland in Dalby, Toowoomba or Chinchilla on 07 4669 9800.