The ATO published a statement recently announcing that it had detected a great deal of errors in the previous year in regard to rental property deductions, especially for vacation homes. According to the taxman, some taxpayers were incorrectly claiming deductions for vacation homes.  Vacation homes must be actually rented out or at least “genuinely available” for rent in order to qualify for a tax deduction.

To qualify for deductions, stay within the rules

While it is perfectly legal to use a rental property for a holiday stay, the ATO stresses that vacation homeowners must keep in mind that the only expenses that are tax-deductible are ones that were incurred while the home was physically rented out or actually available for rent.

The ATO further warns that if a property is rented out at a discount (or “mate rates”), deductions can only be claimed in correlation to the actual amount that was charged for rent.  For example, a taxpayer who was found to have been claiming tax exemptions for a rental property that they had been renting to friends and family at an amount well below the market rate had to eventually repay more than $45,000 that they had incorrectly claimed as tax deductions!

If you’re a property owner, you would do well to remember that with all the technological advancements available today, coupled with the vast amount of data that the ATO has at its disposal, the taxman is able to identify deductions that may seem fraudulent or in need of audit.  This is so much truer now than it has ever been in the past.

Claiming a deduction on expenses for a rented investment property is far from suspect.  It is, in fact, a key allowance under the current tax laws regarding investment properties.  Even if the property is not currently rented out, it is still acceptable to claim as a deduction as long as the property is still “genuinely available” for rent.

To safeguard against the chance of audits regarding vacation rental properties, the ATO requests that owners keep these four questions in mind:

• What type of advertisements do you use for your rental property?

Rental property owners are required to advertise their rental in a manner that garners maximum exposure to potential occupants.  Online listings are an excellent way to advertise rental properties.  However, if owners only advertise in avenues that provide limited exposure to potential occupants (i.e., by word of mouth), it can result in an audit from the ATO as it gives the appearance that the property in question is not truly and “genuinely available” for rent.

• What is the location and condition of your rental property?

It is vital that a rental property be in a suitable location and that it is kept in good condition.  This increases the chances that potential tenants will be interested in the property.  If the rental property is in poor condition or in an inconvenient or unsafe neighborhood, it is unlikely to be rented out.  This would make the ATO possibly question that the property was “genuinely available.”

• Are there realistic terms set for renting the property, and is the rent listed at market rates?

If a property owner sets unreasonable terms, such as rent set above market rates, it reduces the likelihood of potential tenants and probability that the property will be rented out This could possibly cause the ATO to question that the property was “genuinely available” as a rental.

Similarly, if the property owner allows friends or family (or even the owners themselves) to stay free of charge, the property will not meet the tax deduction standards during that time period. 

Side note: If the property has been rented out at a reduced rate (“mate rates”), then the qualifying deductions are restricted to only the actual amount of rent charged, not the current market rates.  

• Are possible tenants refused without an acceptable reason?

If a rental property is denied to potential tenants without an acceptable cause, this shows that the property owner may not have an actual intention to receive income from the property in question.  This could be taken as an owner reserving the property for personal use only.  If this is the case, the property will more than likely not meet the ATO’s requirements for being “genuinely available” for rent.

All of these can be summarized simply: in order for expenses on your rental to qualify for deductions, you must ensure that the property is either actually rented or genuinely available for rent. Anything less than that raises red flags with the ATO.