Edited version of private advice

Authorisation Number: 1052210509354

Date of advice: 12 January 2024

Ruling

Subject: Rental expenses

Question 1

Was the property genuinely available for rent in the 2023 income year (FY23) for the purposes of claiming a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) other than for the period it was being used for private purposes from 26 December 2022 -28 January 2023?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in a popular holiday destination in Australia.

The property sleeps up to ten people.

You have stated you purchased the property as an investment to be rented for short stays and for limited private use.

The property was first available for rent in June 20XX.

The property was managed and actively advertised by a short stay agency. It was listed on their website and on a short stay accommodation website.

You changed property managers approximately 18 months after purchasing.

The new property manager promised to actively manage the pricing, communication, marketing, photos, guest services etc in order to try and increase bookings and net rental income.

Your property manager retains 10% of booking payments as a management fee.

There was an increased in bookings after engaging the new property manager.

During the ruling period, the property was used for private purposes for 34 nights during a peak period.

The property was available for rent at commercial rates for the other 331 nights of the year.

The property was rented for a total of 43 nights during the period it was available for rent in the ruling period.

You have made the property available during peak periods throughout the year and have received rental bookings at premium rates during those periods.

You have provided an estimate of assessable income from renting the property during the ruling period.

You have provided an estimate of expenses, as well as costs associated with listing the property during the ruling period.

You refused a booking on few occasions in relation to the risk the group posed to the property, you provided an example of schoolies groups and a group of 10 who were disrespectful to you during the booking process. You did not refuse based on house availability.

The pricing schedule for the property in the ruling period reflected market intelligence provided by your property manager and air BNB analytics.

The pricing schedule included

•         Higher weekend rates (Friday and Saturday nights) compared to week nights

•         Higher rates for Easter, long weekends and School holidays throughout the year

•         Higher prices in warmer months relative to colder months

•         Needing to adjust prices downwards to try and attract bookings

•         Offering discounts through the short stay accommodation website to drive traffic to your listing and get bookings

•         Ensuring your communications and guest experience was of the highest possible standard.

During the ruling period, you secured bookings with premium rates of at least $100 more than regular rates during public holiday weekends, school holidays and the Easter break.

Your property manager stated that there is generally a premium for bookings in January and Easter compared to other times of the year although the premium has declined significantly each year from its peak in previous income years, Long weekends and other school holidays also attract premiums throughout the year although less than the January and Easter premium.

Your property manager has noted that the nights actually booked in January have declined significantly from previous income years (approximately 90% occupancy) to now (approximately 50%).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Under section 8-1 of the ITAA 1997 an individual can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income. However, a loss or outgoing cannot be deducted to the extent that it is of a capital, private or domestic nature.

Where the property is held for the purpose of producing assessable income, a taxpayer is entitled to deductions for expenses incurred. Some expenses are deductible in the year they are incurred (under sections 8-1, or 25-10 of the ITAA 1997) while others are deductible over a number of income years (under divisions 40 and 43 of the ITAA 1997).

In Case No. P116, 82 ATC 590: Case No 21/1982 (1982) 82 ATC 590, a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let, i.e. 4.4%.

The approach the Board has taken to apportion the income tax deduction allowable on a time basis should be followed in comparable cases. A period of time where the property was available for rent, but not actually rented, should only be taken into consideration where it can be established that there are active and bona fide attempts to let the property during the relevant period.

Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases outlines the Commissioners position in relation to a property that is used for private and income producing purposes throughout the income year:

25. A question which may arise in cases coming under this heading is whether the apportionment of losses and outgoings attributable to a property should take into account the periods during which the property was not only let at a commercial rental but also available for letting at a commercial rental. The question is, of course, one for decision in individual cases. Nevertheless, a period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period.

In summary, outgoings in respect of an empty rental property will only be deductible if the property is genuinely available for rent and there are active and bona fide attempts to let the property. This means that outgoings may not be deductible for any period during which the property owner does not actively seek to find a tenant.

The Rental Properties Guide 2023 provides that a property is genuinely available for rent when the property is advertised in ways that give it broad exposure to potential tenants and having regard to all the circumstances, tenants are reasonably likely to rent it. The absence of these factors generally indicates that the taxpayer does not have an intention to make income from the property and instead holds the property for a different purpose, such as reserving it for private use.

The Rental Properties Guide 2023 also provides a list of factors that may indicate a property is not genuinely available for rent. These include:

•         The property is advertised in a way that may limit its exposure, for example by word of mouth

•         The location and condition of the property mean it is unlikely tenants will seek to rent it

•         The taxpayer places unreasonable conditions on renting the property that restrict the likelihood of it being rented out, such as setting the rate higher than comparable properties in the area, no children, no pets, and requiring references

•         If the owner of the property refuses to rent it out to interested people without adequate reasons.

Application to your circumstances

You contend that you have made active and bona fide efforts to make the properties available for rent by doing the following:

•         The property was available to rent at commercial rates at all times during the ruling period except for a period of 34 nights where it was used for personal use

•         Pricing was actively adjusted to encourage bookings at commercial market rates at different times of the year

•         The property was managed by a local short stay agency until about 18 months after you purchased the property when you changed property managers in the hope of increasing rental bookings

•         This change in property management led to an increase in bookings for the ruling periods from previous years

•         There are no restrictions that would prevent at market rentals, pets and children are welcome, no minimum night stay requirements and there is no requirement for formal references

•         You did not refuse bookings without reason (eg large schoolies group, and a group of 10 for end of year celebration that showed little respect during the booking process)

•         The property is located in a popular holiday destination

•         The property is easily accessible by sealed road

•         The property has reverse cycle air conditioning (heating and cooling) and a wood fire (with wood provided) for year-round comfort

•         The property had been rented at least once in all calendar months in the ruling period, you contend this indicates the demand for the property is not limited to the period that it was used privately

The factors listed above show that you have made active and bona fide efforts to rent the property outside the 34 nights of personal usage during the ruling period. You have made the property available during peak periods throughout the year and have received rental bookings at premium rates during those periods.

When calculating your deductible expenses under section 8-1 of the ITAA 1997, you can include the period during which the property was available for rent, but not actually rented out, in the calculation of deductible expenses for the ruling period.