Making the most of rental and holiday properties

Although a rental or holiday house can be a good way to build wealth or diversify your existing property portfolio, investors need to take care before diving in, as the Australian Taxation Office (ATO) is paying much closer attention to the deductions that go hand-in-hand with property investing.

“The government is tightening things up – you can see that from the new legislation – while the ATO is increasingly focussing on this area,” explains Peter Bembrick, a taxation services partner in the Sydney office of national accounting firm, HLB Mann Judd.

“It has gone from the ATO just looking at the area – as it is with work deductions – to it now being a sufficiently serious issue for the government to make things black and white with legislation.”

Goodbye to travel deductions

The most recent legislative target is the expenses property investors have traditionally claimed for travelling to inspect their holiday home or investment property. The size of these deductions is clear, with Treasury anticipating $540 million in additional revenue over the next four financial years from eliminating these claims.

“People were taking the mickey and making excessive deductions when they were really using the trip for a holiday. It’s clear in many situations what the intent was with the travel,” says Bembrick.

“The question is whether this was a cost that was really necessary when you were employing a property agent.”

Since 1 July 2017, property investors can no longer claim for travel to maintain or collect rent for their residential rental property, or to inspect it either during or at the end of a tenancy unless they are in the business of property investing.

In addition, travel expense claims for preparing the property for new tenants, or visiting an agent to discuss the rental property, will also cease.

Holiday homes under the microscope

The ATO is also taking a closer look at deductions where holiday homes are partly used by the owner. Of particular interest are properties that are vacant for long periods, or where the owners reserve it for family and friends.

“If a holiday home is tenanted full-time, tax deductions are available. It’s more of an issue when a holiday home is only used for generating income part of the time,” explains Bembrick.

To avoid problems, the key is only claiming deductions for periods when the property is rented out, or genuinely available for rent.

For example, if you rent the property for nine months but use it privately the rest of the year, you can only claim three-quarters of your annual expenses.

Simply claiming your property is available for rent will not cut it with the taxman either, as owners must widely advertise their property to potential tenants, place reasonable conditions on renters, and not refuse rentals without adequate reasons.

Tips for potential investors

If undeterred by the tighter rules, potential investors should still carefully consider the potential for wealth creation, not just the lifestyle or tax benefits.

“When it comes to these sorts of investments, don’t just be driven by the tax considerations, think about the return on investment and the potential capital gain,” says Bembrick.

This is particularly important if you plan to negatively gear. “You need to remember you are losing money when it comes to negative gearing. You really need to assess the investment side-by-side with the potential capital gains to ensure it is a worthwhile investment.”

As with everything related to tax, having paperwork to back up deductions is vital.

“If you are paying the local handyman in cash to fix up the property or maintain the gardens, you could have a problem,” warns Bembrick.

Claiming large deductions when the property is only tenanted for short periods is also a recipe for trouble. “Check the amount of deductions you are claiming make sense in relation to the income being generated,” he says.

Get the right advice

Navigating the rules around owning a rental or holiday property can be difficult, so speaking to a financial adviser can help you find the approach best suited to your future needs.’