Holiday homes not genuinely available for rent

Grahame Allen • Dec 08, 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.

Trust reporting changes from 1 July 2024

By Grahame Allen • 26 Apr, 2024
Changes to simplify reporting for trustees and beneficiaries are commencing from 1 July 2024 as a part of the Modernisation of Trust Administration Systems (MTAS) project. From that date, labels in the statement of distribution, which is a part of the trust tax return, will be modified, a new schedule will be introduced for all trust beneficiary types, and new data validations will be added. Looking at each of these changes in depth, from the 2023-24 income year and onward, four new capital gains tax (CGT) labels have been added into the trust tax return statement of distribution. These changes will enhance the ability of trustees to appropriately notify beneficiaries of their entitlement to income and support the calculation of the CGT amount in individual tax returns. The ATO recommends that all beneficiaries obtain copies of the trust statement of distribution as it relates to their individual entitlements. This will allow beneficiaries to include the correct information in the new trust income schedule. The trust income schedule instructions will demonstrate how the information on the tax statement provided should be reported on the trust income schedule. This also includes trust income from a managed fund. It should be noted that beneficiaries will still need to complete existing trust income labels in beneficiary income tax returns as this new trust income schedule will not replace any existing trust income labels. Individual beneficiaries who lodge via MyTax will receive prompts about the additional reporting of trust income. In addition to these reporting changes, the ATO has reminded trustees that where beneficiaries’ entitlements reflected in trust resolutions are subsequently changed by either arguing the resolution as invalid, defective or made at a different time, it should be notified as an affected party where the change triggers tax consequences. For context, to ensure that beneficiaries are presently entitled to trust income, discretionary trusts are usually required to make a resolution by 30 June of any specific income year. For those specifically entitled to a capital gain, trustees of discretionary trusts must make a resolution in respect of that capital gain by 31 August following the income year in which the capital gain is made. According to the ATO, high-risk behaviours by trustees can include altering trust resolutions after tax returns are lodged, failing to inform the ATO of errors in trust deeds or their administration, and making decisions that affect the tax liabilities of a trust, such as early vesting, without notifying the ATO. These actions can lead to disputes over entitlements, amended assessments, and the potential for tax fraud or evasion charges if the issues are not promptly and transparently addressed with the ATO. The ATO notes that it is critical for trustees of trusts to maintain open and honest communication with the ATO, as failure to do so may lead to serious consequences, including the possibility of amended tax assessments for fraud or evasion (which are not limited by the standard four-year review period) and the imposition of significant penalties. The need for trustees to promptly advise the ATO of any mistakes in the trust deed or in the administration of the trust to prevent legal and financial complications cannot be overstated.

Old ATO debts: IGTO weighs in

By Grahame Allen • 19 Apr, 2024
In response to the ATO's recent actions on re-activating or off-setting old debts, the Commonwealth Ombudsman/ACT Ombudsman, and the Inspector-General of Taxation and Taxation Ombudsman (IGTO) have jointly issued new guidelines aimed at improving how Australians are notified about government debts. The publication outlines principles designed to ensure that the process of debt notification is handled with transparency, clarity and sensitivity towards impacted individuals. Mr Iain Anderson, serving as both Commonwealth Ombudsman and ACT Ombudsman, together with Ms. Karen Payne, Inspector-General of Taxation and Taxation Ombudsman, emphasized the importance of government agencies adopting a compassionate and principled approach when dealing with debt notification. "While the law may require agencies to take certain actions, it is crucial that these actions are taken in a manner that minimizes distress," they stated. The guidelines propose five key principles for the ATO and other government departments to consider when conducting programs: Transparency and Accountability - agencies should communicate clearly why the debt has arisen, fostering trust and confidence in the process. Clarity on the Debt's Origin - individuals should understand the source and nature of the debt, tailored to the recipient's circumstances. Clear Pathways for Review - information on how to request a review of the debt, apply for waivers, and arrange repayments should be readily accessible, ensuring individuals understand their rights and options. Accessible Support - contacts for further assistance must be provided, acknowledging that people may have additional questions or need personalized support. Commitment to Improvement - the process of debt recovery should be viewed as an opportunity to learn and enhance future practices based on oversight recommendations and past experiences. Also noted was the significance of reflecting on past interactions and the recommendations from oversight bodies to continually elevate how agencies engage with the community regarding sensitive matters such as debt recovery. Taxpayers who have an unresolved complaint or dispute with the ATO are able to lodge a dispute with the IGTO to receive independent assurance. IGTO will conduct an independent investigation of the actions and decisions that are subject of the dispute and can help taxpayers better understand the actions taken by the ATO and/or independently verify whether shortcomings exist in ATO’s action or decision which should be rectified, as well as identifying other options taxpayers may have to resolve their concerns. For example, in one case study, the IGTO assisted a taxpayer to verify whether the full amount of general interest charge had been remitted on their tax debts. In another, after a taxpayer’s original request for the Commissioner to exercise his discretion to advance their refund instead of offsetting against their tax debt due to imminent risk of homelessness was denied, the taxpayer lodged a dispute with the IGTO. Following urgent discussions between the IGTO and senior ATO officers, the ATO reversed their decision, and the taxpayer received his refund. The IGTO can also intervene in cases where the ATO has used family assistance payments to offset tax debts. According to another one of IGTO’s case studies, the ATO used a Centrelink Family Assistance (CFA) payment to offset a tax debt that a taxpayer had. At the time, the taxpayer was unemployed and supported two minors along with an ageing parent and relied on the payment. After IGTO intervention, the ATO agreed to refund the offset recognising it was not appropriate to pursue debt collection given the circumstances. Taxpayers interested in lodging a dispute with the IGTO should note that they must have first attempted to resolve the complaint directly with the ATO unless special circumstances exist. Those that remain unsatisfied with the ATO response should then lodge a formal complaint with the ATO for review. If taxpayers are still unsatisfied with the outcome of the ATO review, they can then lodge a dispute with the IGTO for an independent investigation either online or via post or phone.

Get ready for FBT time

By Grahame Allen • 12 Apr, 2024
The end of the FBT year is upon us once again. Employers that have provided their employees with fringe benefits any time during the 2024 FBT year – 1 April 2023 to 31 March 2024 – will need to lodge an FBT return and pay any liability by 28 May 2024. With the landscape of FBT evolving every year due to legislative amendments and administrative updates, employers need to be mindful of the changes applying for the current FBT year. While the electric vehicle exemption came into effect on 1 July 2022, many employers have only recently started ramping up the purchase or leasing of electric vehicles due to a combination of waiting for previous leases to expire and a temporary shortage of electric vehicles. As a refresher, employers are now exempt from paying FBT on benefits related to eligible electric vehicles under the condition that the vehicles are zero or low emissions, first held and used after 1 July 2022, never subjected to luxury car tax, and utilised by current employees or their associates. It should be noted that car expenses associated with providing eligible electric vehicles are also exempt, which includes registration, insurance, repairs and maintenance and fuel (including the cost of electricity to charge electric cars). Other expenses that are not exempt may be reduced by the otherwise deductible rule if the expenditure would have been deductible to the employee had they incurred it themselves. To provide certainty for employers, the ATO recently issued Practical Compliance Guideline PCG 2024/2, offering guidance on calculating electricity costs for charging electric vehicles at an employee’s home. This guideline provides a methodology for employers and individuals to calculate electricity costs, either by using the outlined approach or by determining the actual cost, facilitating the inclusion of these costs in FBT and income tax calculations. In addition, employers that provide cars to their employees should also be aware of the recent updates to the car parking fringe benefits to reflect the latest Taxation Ruling, TR 2021/2, offering clarity on modern car parking arrangements and compliance requirements. In another change for the 2024 FBT year, the ATO has simplified employee declarations in relation to some fringe benefits to ease the administrative burden for both employees and employers. The new declarations remove the requirement for employees to declare the make and model of cars for specific transport-related benefits, including remote area holiday transport and overseas employment holiday transport, among others. Similar to previous FBT years, employers that lodge FBT returns electronically through tax practitioners will have access to a deferred due and payment date of 25 June. This only applies to electronic lodgments and any paper returns lodged through tax practitioners will still have 25 May as the due and payment date. For employers that have registered for FBT but do not need to lodge a return for the 2024 FBT year, a notice of non-lodgment should be submitted to the ATO by the time the FBT return would normally be due (ie by either 25 May or 25 June) to prevent the ATO from seeking a return at a later date. The regulatory environment surrounding FBT continues to evolve; for example, recently the ATO registered instruments to allow employers the option to utilise existing records instead of statutory evidentiary documents for certain benefits from 1 April 2024 (ie the 2025 FBT year). Therefore it is crucial to stay up-to-date and well-informed to navigate the complexities of FBT compliance.
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