Feb 09, 2021 / News

Property and Construction / Taxation

Property Update: Holiday Rentals and Vacant Land Changes

COVID-19 has seen more people enjoy holidays locally, this means rental holiday homes are also being used for personal use more than ever. Due to recent changes in tax legislation, they may no longer be 100% tax-deductible. Similarly, when building new homes or undertaking major renovations your residential investment property may also no longer be tax-deductible.

Holiday Rentals

Recent years have seen the ATO scrutinise the genuine use of holiday homes and negative gearing.

If the property is genuinely available for rent, expenses can generally continue to be claimed as per a normal residential rental property. If a property is not genuinely available, you could fall under the ATO’s radar for review.

Factors that may indicate a property isn't genuinely available for rent include:

• it's advertised in ways that limit its exposure to potential tenants – for example, the property is only advertised     
  • at your workplace
  • by word of mouth
  • on restricted social media groups
  • outside annual holiday periods when the likelihood of it being rented out is very low
• the location, condition of the property, or accessibility of the property means that it is unlikely tenants will seek to rent it (i.e. a secluded location that’s difficult to access)
• you place unreasonable or stringent conditions on renting out the property that restricts the likelihood of the property being rented out, such as     
  • setting the rent above the rate of comparable properties in the area
  • placing a combination of restrictions on renting out the property – for example, requiring prospective tenants to provide references for short holiday stays and having conditions like 'no children' and 'no pets'
• you refuse to rent out the property to interested people without adequate reasons.

Example – If you are always using your holiday home over popular times including public holidays, school holidays, Easter and Christmas, this would limit the likelihood that you are genuinely making the property available for rent (even if it is rented during other times of the year).

As a result, the ATO may scrutinise your method for claiming tax deductions and potentially review and deny prior year deductions claimed. This could mean you are only eligible to claim deductions for the period in which the property was genuinely available.

The above doesn’t mean you can’t use your holiday home for personal use, where would the fun in that be! There are various methods to apply to ensure deductions are being correctly claimed and apportioned in line with the ATO’s expectations. We suggest keeping track of your personal use of the property and discussing with your Nexia Edwards Marshall Advisor how to ensure the property is genuinely available for rent.

Remember, you can no longer claim travel to inspect your residential rental property including motor vehicle expenses and flights.

Vacant Land and New Residential Premises

Effective from 1 July 2019 the ATO has disallowed tax deductions for residential investment properties (excluding companies or SMSF’s) where the land is either vacant with the intention to build or an existing property with plans to substantially renovate or rebuild.

The types of costs which will no longer be deductible include:

• Rates and taxes
• Repairs and maintenance
• Interest and bank fees
• Property holdings costs (i.e. Insurance, ESL, land tax)

Some of these costs will now carry forward and contribute towards the overall capital cost base of the property which will ultimately reduce any potential capital gains made when sold in the future.

You will be able to start claiming tax deductions again when a new residential property being constructed or renovated is completed and is either rented or made available for rent.

How can Nexia Edwards Marshall help you?

If any of the above apply to your situation you should review your position and seek tax advice from Paul Dimasi, who is a member of our specialist Property & Construction team or your Nexia Edwards Marshall Adviser to ensure you remain compliant and are maximizing your legitimate tax deductions.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.