Air BnB How do they work for tax

This question has arisen a few times recently with the ease and steady uptake of the Airbnb sharing process taking hold. Essentially, I think it is reasonably well understood that a homeowner sets a price and conditions for guests to stay at their residence. Usually this will be paid for in cash and so it can sometimes not be some time before the tax professional is asked their advice on how all this should work for taxation purposes.

First and foremost, it is worth stating that the title of rent does not change the substance of what is occurring which is rental income which would normally be treated as assessable income in the hands of the landlord.

Expenses directly associated with the rented area would be costs incurred in earning the assessable income and thus deductible under the normal deduction provisions. Similarly, it is conventionally accepted that a reasonable apportionment of expenses directly related to a shared area may be deducted and expenses of the landlord that are related to the host's personally areas will be private in nature and not deductible at all. Of course, the challenge is separating what from what!

Sometimes it is easier to use examples to clarify what we mean in tax. The rent received from the tenant is assessable income. That is pretty clear. The direct costs of cleaning the guest bedroom, repairs to paint work that might be required over time in that area and breakfast provided for the guest would all be direct costs fully deductible. Rates and insurance and interest on the purchase of the property would not be fully deductible, rather they would have to be apportioned based on the floor area used for the tenant accommodation divided by the total floor area to determine the deductible portion. Shared common facilities such as TV, couch, internet might be equally shared and thus 50% apportionment applied.

Where the costs exceed the revenue, a taxable loss occurs which can usually be reduced against your other assessable income. If the ATO deems that the revenue is not commercial (ie $1 rental for $10,000 expenses might not pass the commerciality test) then they reserve the right to limit rental deductions to the extent of the rent received. Limiting property deductions to investment income has also come up in the news recently as political policy but I'm sure we will hear more about that in the run in to the election.

Finally, when the property is available for rent is the applicable time for the apportionment of expenses over a whole year, not just when the property is actually rented. Proving the property is available for rent in an Airbnb is normally as simple as showing that the public generally had been made aware that the property was available. If done through a website or agency, you are more able to show the ATO the substance of this assertion. As we always say, the ATO believe third party evidence over owner representations as a matter of course. If family come to stay and the spare bedroom is not available for rent, you can't claim any deductions for that period of time.

When you decide to upsize or downsize and sell the home, the portion of the home that has been used for income producing purposes becomes "non main residence exempt". Essentially, that means the floor area used earlier to determine tax deductibility will be used again to apportion the nominal gain (difference between what you sell it for and what you bought it for) into taxable and tax free portions before applying the CGT discount 50% general exemption for those who have owned the property for more than 12 months. Note - this too is subject to change following the federal election if the 50% general discount is reduced to 25% which has also been mentioned recently but is not yet before the parliament as a change to the law.

Depreciation is always a desired deduction to homeowners as it is a non cash deduction that can lead to a cash tax refund. Care should be taken with regard to depreciable assets, firstly to determine if they are eligible assets for depreciation purposes. The relevant nexus with income earning activity is key to this part and then if eligible, that they are depreciated at the right rate of depreciation. Many people use a quantity surveyor for this part of the job to provide the substantiation required to the tax office if the quantum of depreciable assets is of any great size.

Homeowners will be pleased they don't have to worry about GST - renting your home is input taxed so GST doesn't apply no matter what the level of turnover. Small mercies in the world of taxation are gratefully accepted.

With flat wage growth and inflated cost of housing, innovative methods like renting the spare room are likely to continue to be a part of young people in particular getting a foothold in housing and for empty nesters to utilise the asset they have, they too are likely to engage in quite a bit of this type of activity. Getting the tax right in keeping score can be a source of comfort in generating a little bit of extra income and something that readers might be interested in pursuing. Keeping records of what happened is always a good idea then speak to your tax professional to make sure you claim all that is allowed to be claimed and declare as income all that you are required to declare to keep your nose clean.