Situations will arise where a holiday home is used for private purposes (e.g., by the owner(s) and their family) during peak holiday periods (i.e., during periods that would otherwise generate the highest amount of rent, such as during the December/January school holidays and Easter).

In these situations, many holiday homeowners may seek to:

• claim deductions for property-related expenses (e.g., holding costs) and depreciation that relate to the off-peak periods during the year that their holiday home is listed for rent on the basis that their property is genuinely available for rent; and
• apportion these expenses on a ‘time basis’ (e.g., deductions are claimed for the number of days that the relevant property was listed for rental during off-peak times during the year).

In these circumstances, the ATO is likely to question a taxpayer’s purpose in acquiring and/or holding a holiday home, including whether the taxpayer has a dual purpose (refer to Fletcher & Ors v FCT [1991] HCA 42 and TR 95/33). As a result, the ATO may seek to apply a different apportionment method and/or reduce a taxpayer’s deductions in any of the following ways:

1. Limiting deductions to rental income – The ATO may only allow property-related deductions for the year to be claimed up to the amount of any rental income derived from the property.

2. Using an alternative method to ‘time basis’ of apportionment – If deductions are available for property-related expenses (e.g., holding costs) incurred during off-peak period(s) that the property was listed for rent, the ATO may argue that a ‘time basis’ apportionment (i.e., based on the number of days a property is genuinely available for rent) is not appropriate.

   Instead, the ATO could argue that a more appropriate method would be to calculate allowable deductions based on, for example, the amount of rent received during the off-peak periods the property was listed for rent, as a proportion of the total rent that could have been received during the peak periods the property was used for private purposes.

3. No deductions during off-peak periods that the property was listed for rent – The ATO may entirely deny property-related deductions (e.g., holding cost deductions) that relate to off- peak periods during which the property was advertised for rent in the above circumstances, on the basis that the property is not genuinely available for rent during these periods.

   In this case, the ATO may only allow property-related deductions that relate to any periods in an income year during which the property was actually rented to tenants.

Example: Holiday Home used during peak periods

Helen purchased a new property in a busy seaside holiday town two years ago so that her family can holiday there over the December/January school holidays and the Easter period. For the remainder of the year, Helen rents the property out via an accommodation-sharing platform so that she can claim some of the costs of holding the property against the rental income.

Each year, Helen blocks out the school holiday period over December/January and the Easter period for her family’s use. The town’s busiest times for tourists are during the school holidays, especially during the December/January period when the weather is the warmest.

The use of Helen’s seaside property during the 2024 income year

During the 2024 income year, Helen’s property was used as follows:

• Occupied by Helen and her family over the December/January holidays, the Easter holidays and other school holidays = 40 days
• Rented to holiday makers outside school holidays and Easter = 25 days

Rental income and deductions for the 2024 income year

The rent received by Helen was $3,000 for the 2024 income year, which is included in her assessable income for the year.

Helen incurred total property-related expenses of $60,000 during the year (largely comprising mortgage interest, council rates, land tax, building insurance and depreciation). This also included certain expenses totaling $1,085 that are fully deductible (i.e. not apportioned), comprising a host fee of $450, guest cleaning of $550, and food and drink of $85. According to the ATO, Helen can only claim deductions while her property is actually rented (i.e. for 25 days). On this basis, Helen’s allowable deductions would be calculated as follows:

• $58,915 (i.e., $60,000 – $1,085) x 25 days/366 days = $4,024 (rounded)

This would result in a net loss for Helen from her seaside property (for the 2024 income year) of $1,024 (i.e., $3,000 rental income less $4,024 allowable deductions).

If you would like more information in relation to apportioning your deductions or further information, please reach out to the team @HKSRussell.

t: +61 7 3177 4120
e: advisors@hksrussell.com

Posted on August 1, 2024 by Charisse Russell - Articles