Before venturing out and renting all or part of your residential property for income producing purposes, know the tax implications beforehand.
When you engage in ‘sharing economy’ websites such as Airbnb, Stayz or similar:
- All income earned is classed as assessible income and must be recorded and declared in your income tax return
- All expenses are to be recorded in order to claim deductions against assessable income
- GST does not apply on residential rent earned.
- Deductions must be apportioned to the time the room/s are being rented
- Income tax and GST obligations differ when carrying on an enterprise renting out commercial residential premises, these will not be addressed in this blog.
- Capital Gains Tax (CGT) can apply upon the sale of your house or unit, regardless of whether the property is your main residence, renting out any part of it usually means losing part of your CGT main residence exemption.
Renting Out Your Home
Renting out part of your home
When renting out part of your home, such as a single room, only expenses related to renting that part of the house are claimable. Expenses must be apportioned. As a general rule, expenses are apportioned based on the floor area occupied by the renter on top of a reasonable amount based on the renter’s access to common areas.
You can only claim expenses for when the room was rented to a client – Or when the room was advertised to be rented (ATO have data matching technology with Airbnb to confirm whether your property/room was available for rent).
Example: renting out part of your home
*The following examples are taken directly from the ATO.
Click HERE to be redirected to the ATO.
Jane has a two-bedroom unit with two bathrooms in a popular downtown area. Jane lives alone and only uses her spare room as an occasional home office, for storage and when she has guests. Jane mainly uses the en suite bathroom. The second bathroom is accessible from the main areas and is mainly used by visitors.
Jane decides to rent out the spare room on a sharing economy website to earn extra income.
The unit is 80 square metres in total. The spare room being rented is 10 square metres.
Jane also gives paying guests access to common areas including the second bathroom, kitchen, living area and balcony, which totals 50 square metres. She also offers her guests access to her wi-fi for free.
For the period guests are staying and have access to common areas (along with Jane), Jane can claim 50% of the deductible portion of associated costs related to the common areas.
Jane had the room occupied 150 days in the year.
Jane calculates what she can claim based on the following questions:
- How big is the room? (10 square metres)
- How big is the house? (80 square metres)
- How big are the common areas? (50 square metres)
- How many days is the room rented out? (150 days).
She works out she can claim 17.97% of her general expenses after adding the two calculations together:
- room occupancy − (10÷80 × 150 ÷ 365) × 100 = 5.13%
- common areas − ((50÷80 × 150 ÷ 3 65) × 50%) × 100 = 12.84%.
Jane can claim a deduction of 17.97% of her general expenses such as electricity, interest on her mortgage, internet expenses, rates and body corporate fees.
She can claim 100% of the expenses associated solely with renting out the room, such as the facilitator’s commission or administration fee.
Renting out your main residence on an occasional basis
When you rent out your whole house or unit on an occasional basis, such as renting it out when you’re away for a period of time or vacate the premises to allow paying guests to stay, then 100% of expenses relating to when it was rented out are claimable.
Example: renting out your main residence on an occasional basis
John and Mary live in a one-bedroom unit in the city which they list as available for rent on a sharing economy app for paying guests. When John and Mary accept a booking for their unit they stay with Mary’s parents.
Because the unit is John and Mary’s main residence, and they only vacate the place when there's a booking, they can only claim expenses based on the time that it was rented out.
Last year John and Mary rented out the unit for 100 nights. This means they can claim 27.93% of expenses (100 ÷ 365 × 100).
John and Mary can claim 100% of the expenses associated solely to renting out the unit, such as the facilitator’s commission or administration fee.
Rental Property Expenses
What You Can Claim
Expenses relating to your property being rented out for a portion of the year can include:
- advertising for tenants
- bank charges
- body corporate fees and charges
- borrowing expenses
- capital works
- council rates
- decline in value of depreciating assets
- gardening and lawn mowing
- insurance – building, contents and public liability
- interest expenses
- land tax
- legal expenses (excluding acquisition costs and borrowing costs)
- pest control
- property agent fees and commissions
- repairs and maintenance
- stationery and postage
- water charges.
The above examples are used to demonstrate the percentage available to calculate your expenses claimable.
Taxation Ruling IT 2167 Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases will give you more details about apportionment.
How Capital Gains Tax Applies
A CGT exists where an asset is sold, such as a house, and a profit is made. Any gains made are classified as assessable income and must be declared in your income tax return for that corresponding year. Capital gains are calculated based on a range of factors including when the asset was bought and sold, your other assessable income and how the asset was used. Main residences are primarily exempt from CGT. However, if the property was used to earn income then you are no longer eligible to receive the full CGT exemption. A portion of your property, based on the floor area rented out and the length of time it was rented will be subject to CGT.
There are limited circumstances where the CGT main residence exemption will still apply, for example where you move out of the property completely to live in another home for a period of time (6-year residential rule).
If you’re renting your property, then the CGT does not apply to you. However, if you rent your property from someone else, you generally need written consent from your landlord if you wish to list on Airbnb. Technically, when you’re renting a property and plan on then renting out a portion of that property it is classed as a sub-let agreement, which in some states requires a tenancy agreement. Speak with your landlord or real estate agent to consider all risks prior to listing the property. Do not IGNORE this or try to be sneaky and re-rent the property on Airbnb, you could get into a lot of trouble!
Example: Renting out part of a home
Thomas bought a house under a contract that settled on 1 July 1999 and sold it under a contract that settled on 30 June 2018. The house was his main residence for the entire time.
Throughout the period Thomas owned the house, a tenant rented one bedroom, which represented 20% of the house. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the house. Only Thomas used the remainder of the house. Therefore, Thomas would be entitled to a 35% deduction for interest (if he incurred it) on money borrowed to acquire his house.
Thomas made a capital gain of $400,000 when he sold the house. The following proportion of the gain is assessable:
Capital gain × Percentage of floor area = Assessable portion
$400,000 × 35% = $140,000
As Thomas entered into the contract to acquire the house before 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, he can use either the indexation or discount method to calculate his capital gain.
The 'home first used to produce income' rule is irrelevant because Thomas used the house to produce income from the date he purchased it.
Value of home when first used to produce income
After the 20 August 1996, if you started using your main residence for income producing purposes, you’re generally taken to have acquired it at the time you first used it for this purpose. This means when calculating the capital gain when the asset is sold, the market value at the time you first used it to produce income is used, not the market value of when the property was purchased. There is no way around this.
This rule applies if all of the following are true:
- you acquired the dwelling on or after 20 September 1985
- you first used the dwelling to produce income after 20 August 1996
- when you sell the dwelling (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce assessable income during the period you owned it
- you would have been entitled to a full exemption if the sale or other CGT event happened to the dwelling immediately before you first used it to produce income.
A similar rule applies when you inherit a property that was the deceased’s main residence and you use it for income producing purposes.
If the ‘home first used to produce income’ rule applies and the period between when you first use the dwelling to produce income and the CGT event happening is less than 12 months, you can't use the CGT discount method. If you use your home to produce income from the time you acquire it, the rule doesn't affect you. If you choose to continue treating a dwelling as your main residence after you move out, and the dwelling is fully exempt, the ‘home first used to produce income’ rule does not apply.