Holiday house owners who rent only occasionally may be in for some shocks. Chartered accountant GAIL FREEMAN explains how the ATO is planning to redefine the way tax deductions are arrived at.

The tax office (ATO) has issued a draft ruling on rental properties. It replaces an old ruling which
has been around since 1985.

There have been a lot of changes in the rental area since this time, so updating the old ruling is probably a good idea.

Most of the draft ruling is as expected. However, the sting in the tail relates to holiday houses. So if you have a holiday home, please read this carefully. The ATO says it will not take compliance action for events before July 1 2026.

If this draft ruling becomes the final ruling, there are significant concerns for people who rent their holiday home or part of it.

As I see it, there will be two classes of holiday home owners going forward. If you rent out your holiday home for most of the year and do not use it in peak periods, then it is probably regarded as a rental property.

However, if you rent it out for some of the year and use it mainly for private purposes, then the ATO regards it as a leisure facility and it will apply those rules to your holiday home.

The key is that the property must be available for rent all year and if you, the owner, wish to use it during peak periods, this may be sufficient to confirm that it is not a rental property.

In that case, deductions for such things as interest, land tax, rates, strata levies, repairs and insurance are not claimable.

The critical factor is whether it is used mainly to produce rental income. It’s hard to see how a property that’s not available during peak periods is used mainly to produce rental income.

Basically, the ATO is applying the leisure facility rules to holiday homes.

It is also clear that the rent charged must be commercial for deductions to be allowed. This means that if you let friends stay in your holiday home for reduced or no rent, deductions for that period would not be allowable.

Costs directly related to renting the property, such as agent’s fees, cleaning or advertising would continue to be deductible. However, these are relatively minor in the scheme of things.

It used to be that if property was available for rent then deductions could be claimed. However, this draft ruling indicates that the concept of “available for rent” is being tightened up. It is important that your holiday home is advertised in as many places as possible and that no restrictions are included.

The draft ruling indicates how you work out if your home is a holiday home. The draft is full of examples and three draft practical compliance guides have been issued to be read with the draft ruling so that the Commissioner of Taxation’s view is abundantly clear.

So, where to from here? If you have a holiday home that’s not available for rent the whole year and you use it substantially, you need to get advice so that when the final ruling is issued, you comply with the requirements, if you wish to continue to claim tax deductions.

If you need any information about the new draft ruling or any other tax matter contact the expert team at Gail Freeman & Co Pty Ltd on 02 6295 2844, email [email protected] or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.

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