Airbnb and Tax

Today in Australian and around the world, many people are renting out all or some of their house, farm or apartment through Airbnb and want to know how the Australian Tax Office (ATO) might apply tax treatment to those transactions. Until recently there hasn’t been a lot of ATO guidance on this issue.

In the period 2017 through 2020 the ATO released some more detailed information on its website about how such transactions are taxed. There is a lot of taxation law that addresses rental properties but the new sharing economy is new and different and although there are some similarities, there are also some differences in how wholly rented or partially shared properties are treated in the eyes of the ATO. Remember this is an entirely new business model and so a fresh set of eyes is required for all parties.

Taxable Income

So we would all be aware that any money received from renting out part or all of a property is assessable income for tax purposes and must be declared as rental income in your tax return.

The good thing is that if you declare the income you can also claim deductions for expenses associated with the Airbnb activity. These are typically the same as those which could be claimed with any other rental property and include:

• □ fees or commission charged by Airbnb
• □ interest on a loan for the property
• □ electricity and gas
• □ council rates
• □ property insurance
• □ cleaning and maintenance costs (products used or hiring a commercial cleaner).

Whether all or part of the expense can be claimed will depend on:

□ the proportion of the year the property is rented out e.g. certain weekends or days

□ the portion of the property rented out e.g. is it a room or the whole property

□ whether part of the house is used for personal use when it is not rented out. e.g. do you use the room for storage when its not rented out.

A. You only rent out part of the house on Airbnb

If you are only renting part of the home, for example, a single room or part of a larger room, they can only claim expenses related to renting out that part of the house. This means they need to apportion the expenses.

The most common way of apportioning expenses is on a floor-area basis based on the area solely occupied by the renter, and add to that a reasonable amount based on their access to common areas such as the lounge, kitchen, balcony, etc.

A deduction can only be claimed for periods when the room is available for rent. If the room is used in any capacity, for example for storage or as an office when there are no guests staying, then no deduction is available for the unoccupied period.

The client can claim 100% of expenses that are only related to renting out the room to paying guests, such as Airbnb fees and commissions.

Example (from ATO guidance): renting out part of your house

Shane has a two-bedroom unit with two bathrooms in a popular downtown area. Shane lives alone and only uses her spare room as an occasional home office, for storage and when she has guests. Shane mainly uses the ensuite bathroom. The second bathroom is accessible from the main areas and is mainly used by visitors. Shane decides to rent out the spare room on a sharing economy website to earn extra income.

The unit is 80 square metres in total. The spare room being rented is 10 square metres and when the paying guests come to stay she removes all excess items from the room and does not access the area.

Shane also gives the paying guests access to common areas including the second bathroom, the kitchen and the living area (including the balcony) which are 40 square metres in total. For the period guests are staying and have access to the common areas, she can claim 50% of the associated costs.

She also offers her guests access to her wi-fi for free.

Shane had the room available and occupied 150 days in the year. When she is not renting out the room she uses it as storage and a home office. She has calculated that she can claim 15.33% of her general expenses based on:

□ room occupancy – (10/80 x 150/365) x 100 = 5.13%

□ common areas – ((40/80 x 150/365) x 50%) x 100 = 10.2%.

Shane can claim a deduction of 15.33% of her general expenses like electricity, interest on her mortgage, internet expenses, rates and body corporate fees.

Shane can claim 100% of the expenses associated solely with renting out the room like the facilitator’s commission or administration fee.

B. You only rent out your main residence on an occasional basis

If you rent out your whole house or unit on an occasional basis, you can claim the proportion of expenses related to the time when they were not at the house or unit.

A typical example may arise where the property is rented out whilst the owner is on holiday or temporarily working away and the house is vacated to allow paying guests to stay.

In this case, the proportion of total expenses that can be claimed reflects the proportion of the financial year the house or unit was rented out.

Example (from ATO guidance): renting out your main residence on an occasional basis

Steven and Shane live in a one-bedroom unit in the city which they list as available for rent on a sharing economy app for paying guests. When Steven and Shane accept a booking for their unit they go and stay with Shane’s parents. Because the unit is Steven and Shane’s main residence, and they only vacate the place when they have a booking, they can only claim expenses on a proportional basis.

Last year Steven and Shane rented out the unit for 100 nights. This means Steven and Shane can claim 27.93% of expenses (100/365 x 100).

Steven and Shane can claim 100% of the expenses associated solely to renting out the unit like the facilitator’s commission or administration fee.

C. You rent out an investment property

If you have an investment property that is not used at all for private purposes and you have it advertised for the whole year as available for rent through Airbnb, the client can claim 100% of the expenses associated with the property.

If the client has an investment property that is used for personal use, like a holiday home, the deduction claim is based on the proportion of the financial year the house or unit is rented out or advertised for rent.

Is AIRbnb income rental income or business income?

Many AirBNB hosts will wonder if their Airbnb income should be disclosed on the tax return as business income or as rental income. The ATO guidance (from their website), as expected, confirms it is the latter.

There are examples of taxpayers who run a business through Airbnb. include:

Typical characteristics of these taxpayers according to the ATO is:

□ They own multiple properties □ None of these properties are their main residence

□ The whole property is available all year.

We will tackle the professional Airbnb Host who will be treated as running a business in a separate blog post.

Goods and Services Tax

Clients who rent out a room or a whole house do not generally need to register or account for GST.

GST does not apply to residential rents, so clients are not liable for GST on the rent they charge and cannot claim any GST credits for associated costs.

Even if the client is carrying on another GST-registered enterprise, there is no need to account for GST from the income earned from renting out a room or house or unit. So, if the client runs a small GST-registered business (or maybe drives for Uber), and is registered for GST, they do not need to concern themselves with GST on their Airbnb activities.

The ATO guidance does, however, advise that taxpayers must account for GST if they provide accommodation like a hotel room or serviced apartment, a bed and breakfast, or rent out commercial spaces like a function room or office space. These types of accommodations are subject to GST.

The ATO guidance that Airbnb renters must account for GST where they provide bed and breakfast is potentially contentious and whilst many Airbnb renters will be eliminated because their turnover does not exceed $75,000, some renters who are already GST registered for other business activities and who provide breakfast for guests could be affected.

The ATO’s technical position advanced in their guidance can be challenged, especially where only part of a property is rented out. There are already at least two published Private Binding Rules (PBR 52987 and PBR 40178) which consider whether GST must be charged where bed and breakfast services are provided in residential property and both conclude that GST need not be charged.

If you encounter clients who may be affected, contact me for specific guidance or consider obtaining a private ruling from the ATO.

Airbnb and Capital Gains Tax on the Main Residence

Profits from the sale of the main residence are usually exempt from CGT. However, if you use your main residence to earn income through Airbnb (by renting out a room for instance), they are no longer eligible for the full CGT main residence exemption. The client will lose a proportion of their main residence exemption based on the proportion of the floor area rented out, and the length of time it was rented.

This is a sneaky little tax implication of renting through Airbnb which many hosts will not have considered when they first undertook their Airbnb activity and which may not become clear to them until they sell their property.

There are some circumstances in which the CGT main residence exemption is not lost, for example where the client moves completely out of the main residence to live in another home for a period of time (the six-year absence rule applies).

AIRBNB and the 6 Year Exemption Rule

The six-year absence rule is a part of the “treating a former home as a main residence” rule. You can treat a former home as your main residence when renting it out (for up to six years) or indefinitely if it is not used to produce income. However, it must be a former home you apply this to.

In the case of immediately renting out the property (whether short or long term) via AIRBNB, the property is not a former home (i.e. at some point you need to “permanently move out”). This means you wouldn’t be able to use the six-year rule. You can still rent it out before it becomes a main residence, it just means the property would be liable for capital gains on the time before it becomes your main residence.

If you choose to make it your main residence before you start renting out the property, generally you will need to live in the property for at least three months. Keep in mind there are many factors that indicate a main residence (and likewise in reverse NOT a main residence), like whether:

• □ you and your family live in it
• □ your personal belongings are in it
• □ it is the address your mail is delivered to
• □ it is your address on the electoral roll
• □ services such as gas and power are connected.

This means you would need to treat the property as your main residence for at least three months straight before renting it out before you can use the six-year rule. Otherwise, the property will be liable for CGT on the times it is rented.

If you would like a registered tax agent to help you with your AIRBNB tax matter or would like advice on how to setup your AIRBNB service professionally please email: tax @ stevenriderCPA.au.