The sharing economy connects buyers (users) and sellers (providers) through a facilitator who usually operates an app or a website. There are many sharing economy websites and apps. They provides a great opportunity for individuals with spare rooms or spare entire properties to rent out space and earn rental income using facilitators such as Airbnb. In 2017, approximately 2.1 million individuals reported rental income of $42 billion. This comes as the ATO announces a new data-matching program specifically targeting around 190,000 taxpayers receiving income from short-term rentals.
The temptation of course is to skip declaring this income. That’s because it might not amount to much or you’ve popped it into the too-hard basket of having to figure it out. Or perhaps you’re considering declaring the income on your partner’s lower income return, regardless of who is listed as owner of the asset. After all, the lower income earner was organising everything so shouldn’t they be the one declaring the income? Unfortunately if the property is in both your names then this income needs to be split equally between you regardless of other income earned.
The Tax Office has a data-matching program that lets it pre-fill your tax return with income where you have supplied your tax file number. This includes typically interest, dividends and managed fund income. The trap is not to include income that isn’t pre-filled – just because the ATO doesn’t have that information now, doesn’t mean they won’t in the future so don’t rely on the pre-filled data as being your only source of these types of income.
The ATO have said it will examine the information provided by online platforms like Airbnb, Stayz and others to identify taxpayers who had left out rental income and over-claimed deductions. If you are renting out rooms of your home, or indeed entire properties – whether via Airbnb or another facilitator, or indeed just privately – there are a number of tax issues to be aware of:
This will need to be declared in your tax return, irrespective of whether you rent out a room or an entire property, and irrespective of whether this is your main source of income. If you report more than $2,000 of rental income on your most recently lodged tax return, you will likely receive a letter from the ATO notifying you that you are required to begin making periodic PAYG instalments. These are essentially prepayments of tax that are offset against your final tax liability at the end of the year upon lodging your tax return.
Expenses associated with renting out your property can be claimed as a tax deduction. However, there can be a number of complexities. Expenses directly associated with the rented area are deductible in full, while expenses that relate to shared areas (areas that you as the host may share with renters), must be apportioned. Expenses that relate to the host’s private area only are not deductible.
Expenses include claims for depreciation, and also capital works deductions (depreciation on the building structure). Expert advice should be sought as this is a complex area, with significant deductions potentially in play.
Capital Gains Tax
Broadly, the sale of your main residence is free from Capital Gains Tax (CGT) when you sell it, where it was the main residence for the entire time you owned it, and it was not used to produce income. However, if you are renting out a portion of your home, you will only be eligible for a partial main residence exemption. If you are renting out the entire home, then none of the property will enjoy the main residence exemption for that period. Exceptions however apply, including the ability to rent out your home for six-years, and yet still enjoy the full CGT main residence exemption. This exemption however is subject to a number of conditions, and professional advice should be sought.
It is important to note that pre-CGT properties (those purchased prior to 20 September 1985) are totally exempt from CGT, irrespective of whether they are rented out.
Goods and Services Tax
Income from renting out part or all of a residential property is typically “input-taxed”. This means that you should not charge GST on the rent that you earn from guests. Conversely, you cannot claim GST credits for any rental expenses that you incur, but are entitled to claim the GST-inclusive amount of any rental expenses as a tax deduction. All told, there is no requirement to register for GST on account of your rental property alone.
Remember if you have a tax-related question you need help with please get in touch!