Matthew McKee, Partner at Brown Wright Stein, discusses the ATO’s approach to determining whether holiday rental properties are “genuinely available for rent”, which affects the extent to which expenses incurred in relation to such assets are tax deductible. The ATO appears to have tightened their test in recent times, Matthew writes.
Expenses incurred in connection with a holiday rental property can be deductible, even when the property is used for private and domestic purposes from time to time throughout the year. But, the extent of deductibility of expenses depends upon whether the property is ‘genuinely available for rent’.
In recent times, the ATO appears to have adopted a stricter test to determine whether a holiday rental property is considered to be ‘genuinely available for rent’.
Understanding the ATO view on the meaning of ‘genuinely available for rent’ is important in ensuring that deductions for expenses incurred in connection with holiday rental properties are not lost.
Deductions for holiday rental properties
The general rules for deductibility of expenses apply to holiday rental properties. That is, expenses of a non-capital nature that are incurred for the purpose of gaining assessable income from the property will be deductible.
Where the expenditure incurred in connection with a holiday rental property relates to both an income producing purpose and a private and domestic purpose, it needs to be apportioned between the income producing use and the private use. This means, for a holiday rental property that is used by the owner for their own personal use, the expenses incurred in connection with the property will not be wholly deductible.
Generally, apportionment of deductible expenses incurred in connection with an income producing asset is done by comparing the time that the asset is used for income producing purposes and the time that it is used for the private use of an income producing. How this comparison is undertaken can vary. This is because apportionment of expenses between an income producing use and non-income producing use is undertaken on a ‘fair and reasonable’ basis and what is ‘fair and reasonable’ can depend upon the circumstances.
Where an asset is held for an income producing use for the whole of the income year (although not necessarily used for income producing purposes on each day in the income year) but it is used for private purposes on 10 days in the income year, then in determining an appropriate apportionment of deductible expenditure, it would likely be appropriate to reduce the deductible expenditure by 2.7% (10 private days/365 days).
Where an asset is not held for an income producing use, but it is used interchangeably for income producing and private purposes, then it would likely be appropriate to compare the actual time it is used for income producing purposes against the actual time it is used for non-income producing purposes. An example of this is work tools that are also used for private purposes, such as laptops and mobile phones.
However, in the case of holiday rental properties, where the ATO considers that the property was not made ‘genuinely available for rent’, a stricter rule is applied – a deduction will only be allowed for the actual number of days that the property is let. For example, if a property is let for 30 days in the income year and used for personal purposes of 10 days but the ATO considers that it was never made genuinely available for rent, then the deductible expenditure will be reduced to 8.5% (30 rental days/356 days). That is, the vacant days are treated as a non-income producing use of the property.
Establishing that a holiday rental property is ‘genuinely available for rent’ can make a big difference as to the amount of the deductions that can be claimed.
As a final point it is important to note that, from 1 July 2017, travel expenses relating to a residential investment property, which would include a holiday rental property, are not deductible for individuals and trustees of closely held trusts unless the individual or trustee is carrying on a business of property investing.
ATO view of ‘genuinely available for rent’
The ATO considers that a holiday rental property is not ‘genuinely available for rent’ where the circumstances indicate that it is really a private residence (i.e. the owner’s holiday home) but it is merely let out from time to time. The key question whether the taxpayer has made ‘active and bona fide efforts to let the property at a commercial rental were made during the relevant period’: see Taxation Ruling IT 2167 and Bonaccordo and Commissioner of Taxation  AATA 385.
In the author’s experience, the factors that the ATO will consider in determining whether a property is ‘genuinely available for rent’ include the following:
1. the amount of the expenses as compared to the amount of income being earned from the property and, assuming the expenses currently exceed the income, the likelihood that in future income years the income may exceed the expenses;
2. the number of letting platforms that are used. If only a single online platform is used, this is a factor that the ATO relies upon in concluding the property is not genuinely available for rent. In contrast, if a number of platforms are used in conjunction with one or more letting agents, this will be a factor in support of the property being genuinely available for rent. Advertising by word of mouth will likely never be sufficient: see Re Kathleen Isobel Inglis and William Stuart Inglis and Commissioner of Taxation  AATA 352;
3. the manner in which the property is marketed on the letting platform. For example, whether there are photos emphasising its attractiveness for holiday guests;
4. the number of days that the property is let out in the year. The more days, the better;
5. the number of days that the property is used for the personal use of the owners or their family and friends. The less days the better;
6. whether friends and family pay market value rent when they use the property;
7. the period that the property is used for personal use. If the owners use the property during peak holiday periods, this will be consideration strongly against the property being ‘genuinely available for rent’;
8. if the property is blocked out from being rented for any periods for the owner to use it, this will be a factor against it being ‘genuinely available for rent’;
9. the conditions (such as no parties, no guests under a certain age etc) placed on potential tenants for the property. The ATO considers that this is a consideration against the property being ‘genuinely available for rent’; and
10. the steps taken to make the property attractive to potential tenants. For example, where certain amenities have been constructed specifically with holiday guests in mind, such as barbeque and outdoor dining facilities.
The key takeaways from the above are as follows:
1. the rules around deductibility of expenditure for holiday rental properties will largely depend upon how the property is used in each income year;
2. where the holiday rental property is used by the owner for their own personal use and enjoyment, the expenditure will need to be apportioned;
3. the appropriate method of apportionment may not be the same in every income year due to changing circumstances, with the method depending upon whether the property is made ‘genuinely available for rent’;
4. a key factor in determining whether a holiday rental property is ‘genuinely available for rent’ is whether the property is personally used over peak holiday periods; and
5. it is important to be able to demonstrate the efforts made to rent out the property. The more letting platforms used, the better.
Matthew McKee, Partner at Brown Wright Stein, is an experienced tax and superannuation lawyer who regularly provides tax and commercial related advice to accountants, financial planners, small to medium enterprises and private clients. Matthew regularly advises on income tax, capital gains tax (CGT), fringe benefits tax (FBT), GST, stamp duties and the SIS Act. Matthew has experience in managing all aspects of taxation disputes, including: Managing Australian Taxation Office (ATO)/Office of State Revenue (OSR) audits and investigations, voluntary disclosures; Preparing taxation objections and private ruling applications; Conducting tax litigation in the Administrative Appeals Tribunal and Federal Court; and Negotiating settlements and payment arrangements with the ATO. Matthew also provides advice on trusts and structuring as well as commercial issues including asset and business acquisitions and disposals, share sale agreements, shareholder and joint venture agreements. Contact Matthew at MPM@bwslawyers.com.au