Spare rooms are increasingly being let out by empty-nesters as nice little earners. However, there can be pitfalls.
Perhaps the kids have left home, you are newly divorced, or simply need to boost your income. Maybe you just enjoy the company of strangers with a story to tell.
For all sorts of reasons, Australians are twigging to the idea that they can make some extra cash by renting out a room or part of the house. This is especially so now that websites such as Airbnb and Stayz, owned by Fairfax Media, are making it easier to advertise your place to a global audience.
While taking in paying guests is a great way to turn your home into a cash box, it could be costly to ignore tax.
If you use your home to produce income, you are required to declare the income on your annual tax return and pay tax at your marginal rate. Failure to do so could result in stiff tax penalties.
The director of WLM Financial Services, Geoff Walker, says the Australian Taxation Office (ATO) usually calculates penalties as a percentage of the amount of tax avoided and the amount of co-operation shown to resolve the matter. Depending how long the venture has been running, the bill could be large.
The tax treatment of your home-based rental accommodation will depend on the type of rental arrangement. According to a partner with accountants HLB Newhouse, Ben Fock, this needs to be worked out on a case-by-case basis.
"You are dealing with three very different things: pure leasing of a room or a granny flat; a bed-and-breakfast offering a turndown service and food; and board or home stay, which is typically longer-term accommodation for students offering room and board," he says. (A turndown service is when the host prepares the guest's bed covers.)
If you are simply leasing a room or flat, you must include the rental income received in your tax return and you may be liable for capital gains tax (CGT) on any future sale of the property.
The family home is generally exempt from CGT but if you rent out all or part of your home, or use it to run a business, part of any profit on the sale of the property may be taxable. CGT is generally payable on a pro-rata basis for the percentage of floor space used to produce income.
You will only be liable for CGT for the period it is used to produce income, so it can be a good idea to have the property valued before you start renting it out to establish a cost base.
By comparison, board or home-stay payments are generally non-taxable, provided they are designed to cover your costs rather than provide you with a profit. These arrangements are typically made through an educational institution for foreign students and the amount paid is set by the institution to cover food, laundry and other costs.
Fock says the ATO has released a ruling and an interpretive decision on these board and home-stay arrangements that classifies them as "non-economic rental". But hosts are advised to get some sort of agreement in writing to clarify their position.
"You can get into trouble [with the ATO] if the board is considered excessive. If it's excessive it could be considered more as a straight rental," Fock says.
But it is with the increasingly popular B&B or holiday let that tax can be a grey area.
"[Your tax treatment] depends on factors including what you charge, services provided, where you advertise and the regularity of income," Fock says.
Now that individuals can list their homes on international websites, it is only a matter of time until the ATO begins to take an interest in your nice little earner. If the enterprise is designed to make a profit, then income tax will be payable.
You will likely be up for CGT on sale, but if you are running a commercial venture you may be able to claim small-business CGT concessions.
Commerciality is assessed on such things as regularity of bookings, the number of rooms available and length of time they are let, but this is a complex area and people are advised to seek professional advice. Walker says you may be able to claim a tax deduction for costs such as insurance and depreciation of furniture and fittings in the rooms available for rental.
If guests also have the use of common areas such as a kitchen and living area, you may also be able to claim a portion of the depreciation on appliances and furnishings. You can also claim on a proportional basis for rates, water and utilities.
If you also offer guests meals, Walker says it is a good idea to account for food and accommodation separately. Generally, there is no profit on meals included in the deal so no tax is payable.
Walker says people should also think about landlord and tenant insurance to cover against damage caused by guests. Public liability is normally covered by your home-insurance policy.
Whatever your plans, it is worth getting professional tax advice from the outset. There is no point renting a room only to lose the roof over your head to pay a large tax penalty.
- The popularity of websites such as Airbnb has made it easier for Australians to rent out a room or part of the house.
- Hosts are advised to get professional tax advice and written guidance from the Tax Office to avoid tax shocks.
- The tax treatment will depend on the type of rental.
- Board or homestay payments are generally non-taxable, provided they are designed to cover your costs only.
- But the tax treatment of B&Bs or holiday accommodation depends on rates charged, services provided, where hosts advertise and the regularity of income.
Stranger in the attic
With the increasingly popular B&B or holiday let, tax can be a grey area.
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