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PKF Australia

Accountants and Business Advisers

ATO to crack down on holiday rental properties

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Sara Crevillen

Partner

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ATO to crack down on holiday rental properties

Context

For some months now, the ATO has signalled its intention to penalise holiday home owners who they suspect are rorting the system.

Indeed, you may have been one of the 110,000 rental property owners they have sent a letter to in the past six months or so.

ATO strategy

The initial focus is on properties located in popular holiday locations that are tagged as ‘suspicious’ by their database filtering software. This may be because rental prices fall outside market benchmarks or deductions seem ‘over the top’ for the period of time the property was apportioned for rent.

Getting property deductions ‘right’

Naturally, the first priority is to keep accurate records of revenue and expenses.

For revenue, if a flag is raised by the ATO they will want to know:

  • When you rented the property
  • Who rented it
  • Rate charged for each renter.

For expenses, the ATO will want to see tax invoices and understand the nature of the expense and timing.

Target areas

1. Repairs and maintenance

The ATO will accept reasonable repairs and maintenance expenses on a rental property. However, they have highlighted that they will disallow significant expenditure for newly acquired properties. This expenditure will need to be capitalised and depreciated over time.

2. Rental income formula

For properties that are used privately and for rental purposes, deductions are calculated according to the proportion of time between private/rental.

The ATO has indicated that it believes that deductions for thousands of properties are being potentially overstated and for 14/15 will apply the magnifying glass on tax deductions when:

  • You rent to family and friends at a lower market rate
  • Your market rental price is deemed unreasonable (too big) against properties in the same area
  • You claim travel expenses for undertaking or supervising repairs and maintenance when you also used the property for private use.

3. Property "available for rent"

The ATO may question the period your property was ‘available for rent’ if occupancy rates differ from market benchmarks. A case study refers to an owner who claimed their property was ‘available for rent’ for most of the year but upon investigation, the ATO discovered the owners had unreasonably knocked back potential tenants their leasing agent had put forward. This directly impacted the amount of allowable deductions.

Further information

The ATO has provided a number of case studies in the following link:

ATO holiday rental - case studies


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