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By Grahame Allen 28 Mar, 2024
Investment property owners beware! The ATO has signalled that its rental bond data matching program will continue to the 2025-26 income year. This program first commenced in 2005 and collected data dating back to 1985, the year that CGT was first introduced. It has continued since then. Rental bond data will be collected from the following State and Territory bond regulators twice a year for the 2023-24 to 2025-26 years: New South Wales Fair Trading – Professional Standards and Bonds; Department of Justice and Community Safety – Consumer Affairs, Victoria; Residential Tenancies Bond Authority – Consumer and Business Services, South Australia; Bond Administrator – Department of Mines, Industry Regulation and Safety, Western Australia; ACT Office of Rental Bonds – Access Canberra; Department of Justice – Office of the Residential Tenancy Commission, Tasmania; and Residential Tenancies Authority, Queensland. Specific data items collected will include: Individual client details (names, addresses, email addresses, phone numbers, unique identifier for the landlord). Landlord and Managing agent identification details (business names, addresses, contact names, email addresses, phone numbers, unique identifier of the managing agent). Rental bond transaction details (rental property address, period of lease, commencement of lease, expiration of lease, amount of rental bond held, number of weeks the rental bond is for, amount of rent payable for each period, period of rental payments, type of dwelling, number of bedrooms, and unique identifier of the rental property). According to ATO estimates, records relating to around 900,000 properties will be obtained each financial year. This data will be used to identify under-reporting or non-reporting of income in tax returns, the misapplication of CGT provisions leading to under or non-reporting in relation to sale of properties, and non-compliance with foreign investment laws. In combination with other data matching and compliance strategies, the ATO notes that the rental bond data matching program identified approximately 5,600 taxpayers where real property dealings had not been treated correctly in the 2022-23 financial year alone. This led to an additional$23m in revenue being raised. The identity matching process within any ATO data matching program employs over 60 sophisticated identity-matching techniques to ensure the correct taxpayer is linked to the data and uses multiple identifiers to obtain a match. An additional manual process may be undertaken in instances where a high confidence identity match does not occur and involves an ATO officer reviewing and comparing third-party data identity elements against ATO information on a one-on-one basis. Once an identity match is obtained, data analysts within the ATO then use various models and techniques to detect potential under-reported income or over-reported deductions. Higher risk discrepancy matches are then loaded into ATO’s case management system and allocated to compliance staff for actioning. Lower risk discrepancy match will be further analysed to discern whether further action is required. The compliance team will then contact the taxpayer usually by phone, letter or email to clarify or verify the discrepancy. Taxpayers will have up to 28 days to verify the accuracy of the information from the data matching and respond prior to the initiation of any administrative action. Taxpayers that disagree with any ATO decision regarding the information obtained from data matching programs can request a review by lodging an objection.
By Grahame Allen 01 Mar, 2024
With the year-on-year growth in the number of SMSFs in Australia, the ATO is finally rolling out a extra security feature for SMSFs that use the Small Business Superannuation Clearing House (SBSCH) in terms of bank account validation. Briefly, the SBSCH is a free, online superannuation payments service that small businesses can use to pay their super contributions in one transaction. It is designed to simplify the process of making superannuation contributions on behalf of employees. The service is available to small businesses with 19 or fewer employees or businesses with an annual aggregated turnover of less than $10 million. The SBSCH is part of ATO online services and allows employers to meet their superannuation guarantee obligations easily. By using the clearing house, employers can make a single electronic payment to the SBSCH, which then distributes the funds to each employee's super fund or SMSF. This service helps reduce the time and paperwork associated with superannuation contributions for multiple employees across different super funds. The rollout of the new security feature, expected around 15 March 2024, will check whether an employee’s SMSF bank account details match their SMSF records. Where there is a mismatch, or where an employee has not listed their bank account details, the employer will receive an “invalid super fund bank details” error on the SBSCH payment instruction. According to the ATO, where this error occurs, the SBSCH cannot accept payments to an employee’s SMSF until it is resolved. To resolve this error, the ATO recommends employers check with employees that their SMSF’s bank account details exactly match those listed on the SMSF records. If those details are incorrect, or if there are no details listed, the employee should approach the trustee of the fund or a tax professional associated with the fund to update the information through ATO online services. Employees with SMSFs are encouraged to ensure that fund details are correct ahead of the change to avoid any delays in their super. Where the discrepancy is resolved, employers will be able to update the employee’s SMSF bank details in SBSCH and submit payment instructions. To avoid delays for other employees, the ATO notes that SBSCH payment instructions can still be submitted for employees with valid super fund details ahead of resolution of any discrepancy. This security feature is just one of many that the ATO has been rolling out late last year and early this year to safeguard retirement savings held in SMSFs from fraud and misconduct. For example, the ATO commenced sending rollover alerts to members of SMSFs when a super fund uses the SMSF verification service to verify a fund’s details with the intent to roll super benefits into an SMSF. This alerts members of SMSFs to an unauthorised rollover and potentially stop it in its tracks. Other alerts for SMSF changes have also been implemented by the ATO to tackle fraudulent use of taxpayer details to register new SMSFs. These are often then used to commit further offences, such as illegal early release. Taxpayers that have been alerted by the ATO in relation to a change made to an existing SMSF should either contact the trustees or the tax professional associated with the fund to verify the change in the first instance. Where it is subsequently determined that the change was incorrect or unauthorised, taxpayers are encouraged to contact the ATO immediately.
By Grahame Allen 23 Feb, 2024
Establishing a self managed superannuation fund (SMSF) offers a variety of benefits, chief among them being the unparalleled control and flexibility this type of fund can afford its members over their retirement savings. This control extends to the ability to tailor investment strategies to personal financial goals, risk tolerance and preferences, with access to a broader array of investment options than those typically available in retail or industry super funds. Such options include not just traditional stocks and bonds but also direct property, precious metals and even cryptocurrencies, allowing for a highly diversified investment portfolio. Beyond investment choices, SMSFs provide significant tax advantages. Members can employ strategic tax planning to minimise liabilities and enhance their retirement nest egg, benefiting from the ability to manage the timing of tax events and utilise imputation credits. In addition, SMSFs can offer enhanced estate planning flexibility, enabling members to specify how their assets are distributed upon their death, which can be particularly beneficial in complex family situations. The pooling of resources in an SMSF, which can include up to six members, allows for increased buying power, making it easier to invest in assets like real estate that might otherwise be out of reach for a single individual. Additionally, the direct ownership of investment assets through an SMSF can provide a sense of security and personal involvement not found in other superannuation arrangements. It is perhaps no surprise then that in the latest data released by the ATO, the number of SMSFs in Australia continues to grow as more people seek to take advantage of all the benefits offered. In the 5 years to 30 June 2023, the ATO estimates that there were on average 24,000 establishments and only 13,800 wind-ups of SMSFs, leading to an overall growth rate of 9%. As at 30 June 2023, there were 610,000 SMSFs holding roughly $876bn in assets, which accounts for around 25% of all super assets. However, taxpayers seeking to establish SMSFs should also be aware of the challenges and considerations that can significantly impact this type of fund’s suitability for individual retirement planning. One of the primary concerns is the complexity and responsibilities involved in managing an SMSF, as trustees must navigate a maze of financial, legal and tax regulations to ensure compliance with the ATO. This complexity is compounded by the potentially high costs associated with setting up and running an SMSF, including auditing, tax advice, legal advice and investment fees, which can erode investment returns, especially in funds with smaller balances. The autonomy in investment decision-making, while a key advantage, also introduces significant investment risks – trustees' lack of experience or knowledge can lead to poor investment choices. It should also be noted that not all investments are created equal. SMSFs need to meet the sole purpose test, which means the fund’s investments are required to be for the sole purpose of providing retirement benefits to the fund’s members. The sole purpose test may be contravened if a related party to the fund obtains a financial benefit (directly or indirectly) when making investment decisions. The SMSF will also fail the sole purpose test if it provides a pre-retirement benefit to an individual, for example, if one of the members engages in personal use of a fund asset. In addition to these potential drawbacks, there is the time commitment required to research investments, monitor fund performance and stay updated on regulatory changes; liquidity challenges for funds investing in real estate or other illiquid assets; and in most cases, more expensive or complex insurance (ie life, total and permanent disability [TPD], income protection) access to consider when starting an SMSF. Taxpayers thinking about starting an SMSF should carefully weigh these potential drawbacks against the benefits, and consult relevant qualified advisers for further advice where required.
By Grahame Allen 16 Feb, 2024
Since the introduction of EV incentives by various state governments to encourage the uptake of EVs and other zero emissions vehicles, the market share of EVs has significantly increased from around 0.78% in 2022 to 7.2% in 2023. According to the Federal Chamber of Automotive Industries, while EV sales only account for a small proportion of overall vehicle sales, the sales have increased 185% since 2022 (80,446 sales 2023 vs 33,410 in 2022). Due to the increasing number of EVs being used for business purposes, the ATO released a draft compliance guideline last year setting out the methodology for calculating the cost of electricity when an eligible electric vehicle is charged at an employee’s or an individual’s home. This draft guideline has now been finalised and applies from 1 April 2022. According to the guideline, in terms of FBT, the employer has the choice of using either the methodology outlined in the guideline or determining the cost of the electricity by determining the actual cost incurred. However, this choice applies to each vehicle for the entire year, although this choice can be changed from one FBT year to another. It should be noted that the guideline only applies to zero emission electric vehicles and not to plug-in hybrid vehicles which have an internal combustion engine. It also does not apply to electric motorcycles or electric scooters. For FBT purposes, the guideline may only be relied on to calculate electricity costs of charging an electric vehicle at an employee’s home if an employer: provides the electric vehicle to an employee or their associate for private use resulting in the provision of either car fringe benefit, a residual fringe benefit, or an expense payment benefit; provides the electric vehicle to an employee or their associate who charges the electric vehicle using electricity at a residential premises, where the electricity cost directly attributable to charging the electric vehicle cannot be practically segregated from the cost of running other electrical appliances in the home; and is required to calculate the taxable value as a part of FBT obligations (ie car fringe benefit, residual fringe benefit, car expense payment benefit, or reportable fringe benefits amount). The rate that the Commissioner will accept for calculating electricity costs of charging an electric vehicle at a residential premises for FBT purposes for the FBT year commencing 1 April 2022 and later FBT years is 4.20 cents per km. A transitional approach applies for the 2022-23 and 2023-24 fringe benefits years, whereby if odometer records have not been maintained, a reasonable estimate may be used based on service records, logbooks or other available information. After the transitional period ends, employers will need to keep a record of the distance travelled by the car and a valid logbook must be maintained if the operating cost method is used. Employers are reminded that even if an electric vehicle is eligible for a fringe benefits tax exemption, the benefit is still required to be included in an employee’s reportable fringe benefits amount. Therefore, the taxable value must be determined and where the employee home-charged the electric vehicle throughout the year and paid their electricity bills and provided the employer with the necessary declaration for electricity costs, the home charging electricity cost will form a part of the recipient contribution amount.
By Grahame Allen 09 Feb, 2024
Offshore tax evasion was once the domain of the very wealthy, but as the world becomes more globalised, many ordinary professional individuals both with and without accounting experience are increasing turning to establishing offshore companies to decrease the amount of tax paid in Australia. In response, the ATO is using the many tools in its arsenal to tackle the problem before it becomes established. As shown by recently offshore tax evasion case studies, one of the most effective tools employed by the ATO is advanced data analytics to identify patterns and anomalies indicative of tax evasion. By cross-referencing information from various sources, including those obtained through international agreements as well as domestically through share market trading data and payments made to domestic bank accounts, the ATO is able to detect unreported offshore income. The ATO also actively participates in international agreements for the exchange of tax information. The list of countries that the ATO has Tax Information Exchange Agreements (TIEAs) with include many famed tax havens as well as other countries: Andorra; Anguilla; Antigua and Barbuda; Aruba; The Bahamas; Bahrain; Belize; Bermuda; British Virgin Islands; Brunei; The Cayman Islands; Cook Islands; Costa Rica; Dominica; Gibraltar; Grenda; Guatemala; Guernsey; Isle of Man; Jersey; Liberia; Liechtenstein; Macao, Marshall Islands, Mauritius; Monaco, Montserrat; Netherlands Antilles; Samoa; San Marino; St Kitts and Nevis; St Lucia; St Vincent and the Grenadines; Turks and Caicos Islands; Uruguay; and Vanuatu. TIEAs allow the automatic exchange of financial account information between countries and allows the ATO to receive detailed information about Australians with financial accounts in other countries. In addition to these two very effective tools, the ATO also gathers information of tax evasion through the multi-agency Serious Financial Crime Taskforce (SFCT) which started operating on 1 July 2015, and combines the expertise and resources of the ATO, AFP, AUSTRAC, ASIC and ACIC, to name a few. The composition of the taskforce changes depending on the financial crime being investigated. As at 31 December 2023, the taskforce had investigated cases that resulted in the completion of 1,994 audits and reviews and the conviction and sentencing of 33 people, raising liabilities of over $2bn and collecting around $800m. In terms of international presence, the ATO is also a part of the J5 (Joint Chiefs of Global Tax Enforcement) along with Canada, UK, US, and Netherlands, which share intelligence and carry out operational activities. The most recent focus of the J5 include optimising the usage of data acquired from a variety of open and investigative sources available to each country to detect threats from crypto-assets. While these active approaches occupy most of ATO’s focus under normal operating conditions, where there is a substantial data leak from whistleblowers or investigative journalists such as the Panama Papers, the ATO will scrutinise the data and conduct investigations and audits of individuals and businesses with suspected links to offshore tax evasion. For individuals who inadvertently or mistakenly find themselves as part of possible offshore tax evasion structures, the ATO encourages making a voluntary disclosure before the commencement of potential audits to reduce the penalties and interest which may apply. However, those that deliberately flout the system may find themselves mired in legal action which can result in significant penalties or even criminal charges.
By Grahame Allen 02 Feb, 2024
The talk about the stage 3 tax cuts has reached fever pitch in recent days. The changes were originally legislated by the previous government in 2019 with support of the then Labor opposition. During the election campaign and since coming o government, the Prime Minister had reassured voters on multiple occasions that the stage 3 tax cuts would remain. However, with the recent inflationary stressors, the government has been under increasing pressure to scrap the already legislated tax cuts in favour of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation. As a refresher, stage 3 tax cuts are due to come in place from 1 July 2024, and will benefit individuals that earn above $45,000 of taxable income. Under the current rates, individuals that earn between: $0 and $18,200 pay no tax; $18,201 and $45,000 are taxed at 19% of excess over $18,200. $45,001 and $120,000 are taxed at $5,092 plus 32.5% of excess over $45,000; $120,001 and $180,000 are taxed at $29,467 plus 37% of excess over $120,000; and $180,001 and more are taxed at $51,667 plus 45% of excess over $180,000. From 1 July 2024 however, those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of excess over $45,000. In addition, individuals that earn $200,001 and more are taxed at $51,592 plus 45% of excess over $200,000. According to the latest ABS data, the median earnings of full-time Australian workers are around $1,600 per week equating to $83,200 per year. Under the current rates this worker would be paying $17,507 in tax; however, when stage 3 tax cuts come into play for the 2024-25 income year, this same worker would only be paying $16,552, a saving of $955. Of course, as the critics of the tax cuts have pointed out, those earning more will be saving more. For example, the same ABS data indicates that individuals earning $2,820 per week are in the 90th percentile of workers in Australia. This figure equates to annual earnings of $146,640 and under the current tax rates this worker would be paying around $39,323. When the stage 3 tax cuts come into place, this worker will only be paying $35,584, a tax saving of around $3,739. This effect becomes even more pronounced at the edge of the stage 3 threshold of $200,000. These individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates vs $51,592 under the stage 3 tax cuts). Under the government’s proposed changes, those earning between $18,201 and $45,000 will see their tax rate reduced from 19% to 16%. In addition, those that earn between $45,001 and $135,000 will be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate will be retained but will apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% will also remain for those that earn $190,001 and above. An average worker earning $83,200 per year will be better off under the government’s proposed changes, paying around $15,748 in tax versus $16,552 under stage 3 and $17,507 under the current rates. While those in the 90th percentile of workers will be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), they will still be better off than under the current system ($39,323 in tax). The government will now be working to get these proposed changes passed before 1 July 2024. It is widely speculated that the Coalition will largely vote against the change. It is likely that the proposed changes will still go through given the previous verbal support for scrapping the stage 3 tax cuts from the Greens and some independent senators.
By Grahame Allen 19 Jan, 2024
Following on from two prominent High Court decisions in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2, the ATO has issued a Ruling clarifying the issue of whether certain individuals are employees or independent contractors. In brief, the High Court’s decisions deal with the distinction between employees and independent contractors in the context of a labour hire company and two truck drivers operating through partnerships to provide delivery services to their former employer. In the first case, the High Court ruled that a labourer engaged by a labour hire company to work on construction sites under the supervision and control of a builder was an employee of the labour hire company. The High Court noted that this right of control, and the ability to supply a compliant workforce, was the key asset of the business as a labour-hire agency and constituted an employment relationship. That the parties chose the label "contractor" to describe the labourer did not change the character of that relationship, the High Court said. This decision also overruled a earlier Full Federal Court decision which held that the labourer was an independent contractor after applying a ”multifactorial approach”. In the second case, the High Court held that two truck drivers were not employees of a company for the purposes of the Fair Work Act 2009 and Superannuation Guarantee (Administration) Act 1992. The Court also observed that the provision of such services has consistently been held, both in Australia and in England, to have been characteristic of independent contractors (and not employees). In the present case, the High Court said there was no reason to reach a different conclusion. Due to these landmark High Court decisions, the ATO has now released Taxation Ruling TR 2023/4 which states that whether an individual (ie worker) is an employee of an entity (“engaging entity”) under the term's ordinary meaning is a question of fact to be determined by reference to an objective assessment of the totality of the relationship between the parties, having regard only to the legal rights and obligations which constitute that relationship. In addition, where the worker and the engaging entity have comprehensively committed the terms of their relationship to a written contract and the validity of that contract has not been challenged as a sham, nor have the terms of the contract otherwise been varied, waived, discharged or the subject of an estoppel or any equitable, legal or statutory right or remedy, it is the legal rights and obligations in the contract alone that are relevant in determining whether the worker is an employee of an engaging entity. The Ruling notes that evidence of how the contract was performed including subsequent conduct and work practices cannot be considered for the purpose of determining the nature of the legal relationship between the parties. However, this evidence can be considered to establish the contractual terms or to challenge the validity of a written contract with general contract law principles. It should be noted that the Ruling now states that the various indicia of employment that have been identified in case law (ie control and right to control, ability to delegate subcontract or assign work, achieve a specified result, bearer of risk, or generation of goodwill) remain relevant, but are only to be considered in respect of the legal rights and obligations between the parties. Therefore, according to the Ruling, the most important factor is the holistic consideration of the contract between the parties to determine whether, on balance, the worker is an employee or independent contractor. This requires an approach which involves standing back and viewing the contract from a distance such that an informed, considered, qualitative appreciation of the whole can be undertaken. In conjunction with the Ruling, the ATO has also released a Practical Compliance Guideline (PCG 2023/2) which sets out its compliance approach for businesses that engage workers and classify them as employees or independent contractors.
By Grahame Allen 15 Dec, 2023
As the year draws to an end, the focus of the ATO has moved to the 2024 year. At a recent conference, the Second Commissioner of Client Engagement, Jeremy Hirschhorn, highlighted three areas of focus for the ATO which it says are likely to impact suppliers and clients of all businesses. With the advent of increased cyber-crimes, scams and hacks in Australia in recent times, the ATO, like any other large organisation has taken additional steps to address cyber security and increased protection of personal data to deal with an unprecedented rise in identity-related fraud attempts. For all businesses, it has introduced “client-to-agent linking”, which requires all entities with ABNs (excluding sole traders) to digitally nominate their agent through ATO’s secure online services before the agent can access any data. This will cover approximately 4.7m businesses and will only apply if businesses engage a new agent, change their existing agent, or want to provide additional authorisation for their existing agent. For all individuals interacting with the tax system, the ATO encourages the use of myGovID. This coincides with the Government announcing a tightening of the way in which individuals access the myGov account. The Assistant Treasurer noted that individuals who use their myGovID to log into the ATO will need to use that myGovID for future logins from now on. In other words, it will not be possible to access an ATO account without it. myGovID is an app that proves an individual’s digital identity., Once set up, the app can be used to access government online services without having to prove identity or remember passwords. This can be used for personal or business services, although the myGovID must be linked to an ABN through the relationship authorisation manager to allow users to act on behalf of the business. Anyone over 15 years who has access to a smart device and has a personal email address can set up the service. Protecting the system and taxpayers against fraud will continue to be a key theme in 2024 for the ATO. In 2024, the ATO will also be seeking to address the growth in the collectable debt book. Currently, the collectable component of debt sits at about $50bn and consists of mostly self-assessed debt, with small businesses owing 67% of this $50bn of collectable debt. This does not include disputed debt which is treated separately. According to the ATO, during the pandemic it took a different audit position, chased fewer lodgements, and recovered less debt. This has led to a concerning behavioural shift in businesses after the pandemic which de-prioritised paying tax and super and is increasing relying on unpaid tax and super to prop up the cashflow of some business. While the ATO notes that it is seeking to engage with those businesses to help them understand and pay tax debts and employee super, it is also using its full arsenal to protect employees, clients and customers. One of the ways the ATO is seeking to level the playing field on uncooperative businesses is the reporting of debt information to credit reporting bureaus. Since 1 July 2023, it has disclosed the debts of more than 10,500 businesses that have significantly overdue undisputed tax debts of at least $100,000. Staying on the topic of small businesses, the ATO will be seeking to improve tax performance in 2024. Even though the tax performance of small businesses is currently running at around 87%, the ATO notes that there is a small minority of dishonest businesses operating wholly or partly in the shadow economy that is contributing to the underperformance. To eliminate businesses operating in the shadow economy and reduce honest mistakes by small businesses, the ATO is seeking to build a digital-first ecosystem which will move tax reporting closer to the tax event and have seamless tax and reporting from business source to the ATO. The takeaway message for businesses, especially small businesses for the coming new year is to be proactive and engaged with the ATO in terms of any unpaid tax or super debts. Businesses in general should also be very careful with their data, and should use the most secure method to access government services to prevent financial losses.
By Grahame Allen 08 Dec, 2023
As the traditional holiday period approaches, many individuals may be heading to their holiday properties to celebrate with family or friends or letting their loved ones make use of the properties. Owners of holiday properties that claim deductions for property costs should be careful to ensure that their holiday property is genuinely available for rent, otherwise deduction for expenses may be denied. According to the ATO, factors that may indicate a property is not genuinely available for rent include: the way that it is advertised which may limit exposure to potential tenants (ie if it is only advertised by word of mouth, at a particular workplace, on restricted social media groups, outside of holiday periods/school holidays when the likelihood of it being rented out is very low). the location, condition, or accessibility of the property which may mean that it is unlikely that tenants will seek to rent it. unreasonable or stringent conditions placed on renting out the property (ie rent above the rate of comparable properties in the area, requiring prospective tenants to give references for short holiday stays, or conditions such as “no children” and “no pets”). Refusing to rent out the property to interested parties without adequate reasons. While some of these factors will be familiar with most owners of holiday properties such as having rent above the comparable properties in the area, other factors such as conditions of having no pets, or only having the property available outside of holiday periods may surprise. This could mean that if owners of properties near the beach in an area popular with summer holiday makers with little or no demand at other times reserve the property for their own use during the summer period, the property may be deemed to be not genuinely available for rent. In a scenario where a holiday property is deemed to be not genuinely available for rent (ie it is essentially for private use and not for earning rental income), no deductions can be claimed for the property for that period. However, records of expenses should still be kept, as property expenses such as insurance, interest on borrowing costs, repair, maintenance, and council rates can all be used to reduce any capital gain made when the property is sold. It should be noted not all private use is considered equal. In situations where a holiday property is available for rent during all holiday periods, including weekends, school holidays, Easter, and Christmas, and the owners only use the property during “off-peak” periods where they are unlikely to find tenants, the property would be considered to be genuinely available for rent. However, as the holiday home was used for private purposes during the year, the expenses must be apportioned. This apportionment applies any time an owner rents out their holiday home but also uses it for private purposes, including when the property is reserved for own use, or the use of family and friends. It also applies in instances where there is a short-term accommodation restriction by the State or Local government. In addition, where the holiday is rented out to family or friends at below market rates, the deductions for the period are limited to the amount of rent received. Example Jerry owns a holiday home in an area that is close to beaches and bushwalking tracks. The area is popular with beach goers in summer and hikers in winter. The local government has imposed a short stay restriction to combat the shortage of housing in the area, consequently, Jerry can only let out his holiday home for less than 180 days a year. To keep within this limit, Jerry only lets out the property for 169 days per year from 1 December to 28 February (90 days) then again from 14 June to 31 August (79 days). During the time the property isn’t advertised or rented out, Jerry uses the property himself or allows his family and friends to use it. For the 196 days the property isn’t rented or genuinely available for rent, Jerry cannot claim a deduction for expenses incurred during this period. Jerry makes $18,500 from renting out the holiday home over the 169 days and incur expenses of $35,000 over the entire year including $2,000 of agent and advertising fees. The property was also rented out for 2 weeks during the year at minimal rate of $100 per week to friends. Jerry can calculate his deduction for the property as follows: [(169 days/365 days)x$33,000] + $2,000 = $17,279.45 In addition, Jerry can only claim deductions for the 2 weeks that he rented out the property to his friends equal to the amount of rent during that period (ie $200). This is because the rent is less than the market rate and the expenses are more than the rent received during the period. Jerry’s rental income is therefore: $18,500 – ($17,279.45 + $200) = $1,020.55 As the area of holiday homes becomes more complicated with restrictions to short stays and interpretations of when a residence is genuinely available for rent, it is prudent to consult a registered tax professional when questions arise to avoid tax pain down the line.
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