Renting out one’s own home, separate accommodation or spare room can provide a useful source of income. At the same time though, there are tax obligations to be aware of and address.
This article is intended to provide an overview of the rules and associated tax implications. If you’re considering providing short term accommodation we would suggest having a chat with us to delve into the rules further and in particular talk through what records need to be kept.
Separate dwelling on the same property as your home
If you rent out a separate dwelling on the same property as your home (for example, a sleep-out or a cottage on the property) for short-stay accommodation, the dwelling is looked at as a separate asset. If the accommodation is never used privately or provided at “mates’ rates” (occupancy provided for less than 80% of market rate), the standard tax rules apply in which case all of the rental income is taxable and you may claim 100% of your deductible expenses in relation to the dwelling.
If, the dwelling is occasionally used privately or provided at “mates’ rates”, the deductibility of the costs is limited to the days available for “public use”. This means that costs incurred while the property is used privately or provided at “mates’ rates” cannot be claimed. There is a further limitation if the property is unused for 62 days. In these instances the mixed use asset rules apply to limit expenses not directly related to earning income, to the ratio of private to “public use”.
Dwellings can flip in and out of the mixed-use asset rules from one year to the next, so one needs to look at which rules are relevant to the dwelling for each income year.
Renting out all or part of your home
If you rent out all or part of your home as short-stay accommodation, any amounts you receive from the guests will be taxable as rental income. The activity doesn’t need to be run as a business for the amounts you receive to be income.
For any income year, a taxpayer can choose to use standard cost approach to claiming deduction or the actual costs of providing the accommodation.
These are simplified rules that can be used by many hosts providing short-stay accommodation in their own home. The standard costs for the 2020-21 income year is $52 a night if the host owns their home, and $47 a night if the host rents their home.
If you qualify to use the rules, and choose to use the standard cost approach it means you don’t have to work out the actual costs incurred (which would involve apportionment calculations) so saves time and complexity.
You are able to use the standard cost approach if all of the following apply:
- Rooms are rented out for 100 or less nights in the year (counting each room that’s rented out separately);
- The property isn’t held in a trust, unless as the occupant your covering all the outgoings
- The short-stay accommodation isn’t provided as part of a GST taxable activity; and
- You’re a natural person (i.e., an individual not a company).
If you can’t or choose not to use the standard-cost approach, your deductions will be based on actual costs related to earning the income. Expenses that relate solely to your rental activity (eg, advertising fees) are 100% deductible. Mixed expenses, that relate to both your rental activity and your own use of your home (eg, mortgage interest, insurance and rates), need to be apportioned.
In most situations where you rent out all or part of your home, to work out what proportion of the mixed expenses you may claim, the floor area of different parts of your house; and the number of nights during the year that the room was rented out will be the appropriate way to apportion the costs.
The provision of short-stay accommodation is subject to GST unless the provider is not registered for GST. Note though that if income from short stay accommodation is likely to or does exceed $60,000 registration for GST is compulsory. These rules put those that provide short term accommodation in their own homes or spare home on a similar footing to moteliers.
It is important to note that if you are already GST registered for an activity (eg self-employed Tradie) and also provide short term accommodation, the short term accommodation is automatically caught in the GST net irrespective of turnover from the accommodation. It would be different if the trade services were provided through a company and the accommodation by the individual because they are then different business structures.