Holiday homes

Example: rental property not a holiday home

Cho owns an apartment in Geraldton, Western Australia that she markets to holidaymakers through a sharing economy platform. Cho also lives in Geraldton so she provides services for her guests which include tours of the local area.

As Cho has her own home in Geraldton, she never uses or reserves the apartment for her holidays and recreation. She also doesn't allow her family or friends to use the property for their holidays or recreation for free or reduced rates of rent.

Cho takes all reasonable steps to ensure the property is rented for as many days as possible during the income year, including:

• not placing unreasonable restrictions on the property
• keeping the rent comparable to similar properties in the area
• promptly replying to requests to rent the property.

The apartment Cho owns in Geraldton is not a holiday home. She doesn't use it or reserve it for her own holidays and recreation. Cho also doesn't allow family and friends to use the property for their holidays and recreation for free or for reduced rent.

Because Cho takes all reasonable steps to ensure the property is rented out, Cho can claim a deduction for the expenses she incurs to produce rental income from the apartment.

Example: mainly used (or held for use) for rental income

Viraji lives in Sydney and owns an apartment on the Gold Coast, Queensland. The property is near the beach and is managed by property managers as part of the apartment complex rental pool. All rental enquiries are managed and responded to by the dedicated property manager.

Viraji's property is regularly rented on a short-stay basis and has a high occupancy rate during the income year.

Each income year, Viraji blocks out 4 weeks so she can use the apartment for her own holiday. She selects a period during the income year when demand for her apartment is low. Viraji also occasionally stays at the apartment when visiting the area if it isn't already booked out or rented.

As Viraji uses the property for holidays, it is a holiday home.

Viraji is using the apartment or holding it for use mainly to produce rental income. This is because Viraji's use of the property and how she holds it for use shows that she prioritises renting the property out over her personal use.

Viraji can claim a deduction for the expenses she has incurred in earning rental income for her Gold Coast apartment.

Viraji can't claim a deduction for the expenses incurred during the periods that Viraji uses the property herself. Her expenses will need to be apportioned to take her personal use into account.

Example: limited personal use with high occupancy during peak periods – government restrictions

Bindi and Ash live in Sydney and own a house in a regional town close to several bushwalking tracks. There are government restrictions and rules for short-term rental properties located in the regional area the property is located which limit short-term stays of less than 21 days to a maximum of 180 days per year. Where a booking is for 21 or more consecutive days, those days don't count towards the 180 day limit.

Tourist demand is highest during the warmer summer months up to the end of the Easter school holidays, allowing the property to be rented at higher market rates. To maximise occupancy and rental income, Bindi and Ash advertise the property through a local real estate agent specialising in holiday accommodation and list it on several sharing economy platforms. The property has a high occupancy rate during this period.

During periods of high rental demand, Bindi and Ash don't block out the property for their personal use for their holidays or recreation. However, they stay at the property while on holiday for one week when it isn't already booked or rented.

Outside peak periods, when demand for the property is low, Bindi and Ash block out a total of 4 weeks for personal use while on holiday. At all other times, they actively manage the property to maximise rental income.

Once the 180 day limit is reached, Bindi and Ash continue to advertise the property for rent but restrict bookings to stays of 21 or more consecutive days. To maximise the income they receive in the offseason, they vary the rental rate to attract bookings.

Because Bindi and Ash use the house for their holidays and recreation, it is a holiday home. Bindi and Ash’s claim for deductions relating to their regional property wouldn't be denied because it is a holiday home that they use (or hold for use) mainly to produce income from rent. Their use of the property shows clear prioritisation of income-producing use over personal use.

Bindi and Ash will still be required to apportion deductions to account for their personal use of the property.

Example: property not mainly used (or held for use) for rental income

Josh lives in Perth and owns a beach house in Busselton, Western Australia. The beach house is advertised for rent year-round through an agent and on sharing economy platforms. The beach house is highly desirable during the summer months and is rented at a higher rate during this time. The beach house is always blocked out for use by Josh and his family and friends at Christmas and Easter, and during summer school holiday periods.

Josh and his family don't always use the property for the blocked-out dates, but Josh has instructed his agent not to let the property during these times just in case they wish to use it at short notice. Josh is very selective about who can rent the property and rejects many of the booking enquiries he receives. On average, the beach house is rented out to unrelated guests for about 10 weeks during the income year.

Because Josh uses the beach house for his and his families holidays and recreation, it is a holiday home. The beach house isn't mainly being used (or held for use) by Josh to produce assessable income. Josh is prioritising his personal use of the property over any income-earning use.

Josh can't claim a deduction for his ownership and use expenses for the property.

Example: not mainly used (or held for use) for rental income

Andy is an avid golfer. He purchased a property on a golf course in the Hunter Valley, New South Wales. The property is advertised online via sharing economy platforms. Andy stays at the property approximately one or two Sundays each month to play golf.

The property has a minimum stay requirement of 4 nights but has a recurring block-out period on Sundays to allow Andy to use the property if he wants to. Andy also makes sure that prospective tenants are aware that the property has poor mobile phone reception and doesn't have any internet available for use by tenants.

The property is let 5 or 6 times during the income year for the minimum 4-night stay. Andy receives rental income of $5,398 and incurs the following expenses:

• interest expenses on the mortgage – $52,127
• council and water rates – $4,712
• insurance – $3,691
• commission to the sharing economy platform – $1,079
• cleaning after a tenant stays – $637.

The property is a holiday home because it is used for Andy's holidays or recreation.

Andy is prioritising his personal use of the property over any income-producing use so it isn't being used (or held for use) mainly to produce rental income.

Andy must declare the rent he receives as rental income ($5,398). However, as the property isn't used (or held for use) mainly to produce assessable rental income, Andy can't claim a deduction for any of the ownership and use expenses he incurs (interest, council and water rates, or insurance expenses).

Andy can claim deductions for the expenses that aren't ownership or use expenses, that is, the commission to the sharing economy platform and the cleaning expenses he incurs after a tenant has stayed in the property.

The net rent from the property is:

• rent received = $5,398
• deductible rental expenses $1,079 + $637 = $1,716
• net rental income = $5,398 − $1,716 = $3,682.

Andy includes net rental income of $3,682 in his tax return.

Example: not used or held for use mainly for rental income

Ashkay and Jesminda jointly own a cabin at a caravan park. They use the cabin and reserve it for their family holidays. As the cabin is used by Ashkay and Jesminda for their family vacations, the cabin is a holiday home.

Occasionally, when Ashkay and Jesminda know they won't be using the cabin for their own use, they advertise and rent it out to guests through a sharing economy platform. In total, the cabin is rented for 42 days during the income year.

During the income year, Ashkay and Jesminda receive rental income of $4,525 and they incur the following expenses:

• interest on a loan used to purchase the cabin – $4,263
• repairs and maintenance – $465
• site fees – $4,678
• insurance – $684
• commission to the sharing economy platform – $679.

The cabin is not used (or held for use) by Ashkay and Jesminda mainly to produce rental income during the income year, it is used and held mainly for family holidays.

Ashkay and Jesminda must include the rent they receive during the income year as assessable income in their tax return ($4,525).

Ashkay and Jesminda can't claim any of the ownership or use expenses as a deduction. This means they can't claim a deduction for amount they incurred for interest expenses, repairs and maintenance, site fees or insurance.

The commission of $679 paid to the sharing economy platform can be claimed as a deduction because it isn't an ownership or use expense and it relates solely to earning rental income from the property.

As Ashkay and Jesminda own the cabin jointly, they will each declare 50% of the net rent which is calculated as follows:

• rent received = 50% × $4,525 = $2262
• deductible expenses – commission = 50% × $679 = $340
• net rental income = $2,262 - $340 = $1,922

Example: used or held for use mainly to produce rental income with minor private use for holidays

Natalie owns a house in the Barossa Valley. She advertises the property year-round on a sharing economy platform. The property has a high occupancy rate during the usual 4 month peak period, and lower occupancy rate at other times during the year (the low period).

During the income year, Natalie:

• responds to all enquiries to rent the property promptly
• doesn't place unreasonable restrictions on renting the property
• keeps the rate of rent similar to comparable properties in the area during the peak period and the low period
• uses the property for a one week holiday during peak period.

Based on the above, Natalie actively manages the property to maximise rental income and her use for her holidays and recreation is incidental. The property is mainly used (or held for use) to earn assessable rental income so Natalie can claim her ownership and use expenses.

During the income year, Natalie receives rent of $35,432 and incurs booking and commission fees for the sharing economy platform of $3,543, cleaning expenses of $5,485 and other expenses of $28,641.

Natalie can claim the full amount of the commission and cleaning expenses as a deduction. However, she must apportion the other expenses to account for her private use of the property (one week).

Natalie's rental income and deductions for the year are:

• rent received = $35,432
• rental expenses = [$3,543 + $5,485 + ($28,641 × 51 weeks + 52 weeks)] = $37,118
• net rental loss = $35,432 - $37,118 = ($1,686).

Example: clear change of main use

Carla, who lives with her family in Sydney, owns a beach house in the Whitsundays. The beach house is rented out through an agent and is advertised year-round. However, each income year Carla has owned the property it has been blocked out for use by her and her family and unavailable for rent during Easter, the Christmas and New Year period and school holidays.

Although Carla's family haven't always used the property during the blocked out periods, the property isn't made available for paying guests. In addition, Carla rejects most applicants who attempt to rent the beach house and has, in the past, cancelled a couple of booking so she could use it herself.

On 1 January, Carla and her family move overseas. From that date onwards:

• all the restrictions on the use of Carla's holiday home are removed
• no dates are blocked out for personal use
• Carla's agent actively markets her holiday home
• the beach house is almost always occupied by paying guests.

During the period from 1 July to 31 December, the beach house is a holiday home which is mainly used (or held for use) by Carla and her family, and the property isn't used (or held for use) mainly to produce assessable income from rent. Carla must include any rent derived from the beach house as income but she can't claim a deduction for any ownership or use expenses in relation to the beach house.

From 1 January, there is a clear change in use and from that date, it is used or held for use mainly to produce assessable income. Carla won't be prevented from claiming a deduction for her rental expenses from that date onwards however she may still need to apportion her expenses to exclude any non-income producing use or private use.