Whether you own a luxurious holiday home in Byron Bay or a bed and breakfast, while the property is income producing or available for rent, owners are entitled to claim depreciation deductions.
The Australian Taxation Office (ATO) has announced an increased focus toward holiday property owners who are claiming excessive deductions, especially those located in popular holiday destinations.
“As part of our prevention before correction approach we are sending letters to taxpayers in approximately 500 postcodes across Australia, reminding them to only claim the deductions they are entitled to, for the periods the holiday home is rented out or is genuinely available for rent,” said Assistant Deputy Commissioner Adam Kendrick.
It’s important in the case of holiday homes that investors arrange a depreciation schedule, as often the owner will only plan to rent the property for part of the year. A specialist quantity surveyor will calculate the depreciation available for the portion of the year the property is available for rent. Should an audit take place from the ATO, the quantity surveyor who assessed the property will have all relevant information recorded ready for reviewing. Leaving the hard work up to the professionals will save you time, money and stress.
On the other side of owners claiming excessive deductions they are not entitled to, another mistake made is that holiday owners often assume that because they are personally using their property, depreciation cannot be claimed. This can lead to investors missing out on thousands of dollars in lost deductions annually. The owner of the property can still claim depreciation for any periods of time it is untenanted so long as it is available for rent.
Ensure you claim depreciation deductions for both the building and furniture
The additional cash flow generated by claiming depreciation deductions on a holiday rental can often be the difference between a negative cash flow asset or a positively geared investment.
Depreciation can be claimed in two ways, capital works deduction for the structural components of a building including bricks, mortar, walls and tiles as well as for the plant and equipment assets contained in the property such as carpets, air conditioners, blinds, hot water systems, light shades and heaters.
A specialist quantity surveyor will conduct a site inspection of the property to calculate the depreciable value of all assets within the holiday home. The deductions found can add up to thousands of dollars for an investor in just the first full financial year alone.
In the following example, an investor purchased a fully furnished property valued at $460,000 for use as a holiday home. The owner rented the property to holiday makers for 24 weeks (168 days) of the year for an average return of $1,100 per week. For six weeks of the year, they chose to use the property for personal use. The remaining days in the year, the rental was untenanted. This resulted in a total income of $26,400 per annum. Expenses such as interest, rates and management fees amounted to $28,000.
The client was able to claim losses on a pro rata basis for the time the property was being rented out during the first full financial year, leaving a total claimable amount of $12,997*. They were left with a positive cash position on paper of $13,513. However, by enlisting a specialist quantity surveyor and claiming depreciation, this client could reduce their tax bill by an amount of $1,959 for the year.
*Pro rata calculation $28,000 x 168/365 = $12,887
The investor of the holiday home was able to reduce their out of pocket expenses from $127 per week down to $89 per week. That is a saving of $38 per week, even though the property was only producing income for 24 weeks of the year.
Before making the decision to purchase any holiday rental, investors should seek advice from relevant professionals such as a property manager, an accountant, a financial advisor and a quantity surveyor.