Looking to buy a holiday home this summer?
While relaxing over the holiday period, many people consider investing in a property that can be used for family holidays during the year and listed as short-term rental when not required.
It sounds like an ideal situation, however, there are a number of tax implications that need to be considered prior to making this type of investment.
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Estimate of Net rental income/(loss)
The first step is to prepare an estimate of the anticipated rental income and expenses of the property. This will allow you to assess whether the investment will be financially viable on an ongoing basis and assist in your decision making regarding the ownership structure. You will need to exclude expenses relating to any private use. This may include speaking to local real estate agents and researching the local property market.
- Ownership Structure
A crucial part of the planning process is to determine the best ownership structure for the property.
There is no one best structure - it will depend on your individual circumstances and longer term preferences.
The consequences of getting it wrong – Stamp Duty!
Some questions to consider during the planning process:​ - Is there a possibility the property may eventually become your principal place of residence (PPR)?
- Will the property be negatively geared i.e. in a loss position each year?
- Is one spouse at higher risk than the other? (Asset protection)
- Do you expect the property to make significant Capital Gains?
- Does the state levy a higher land tax on trusts?
- Property specific expenses and restrictions
Local Government
If you are planning to list the property on the short-term rental market i.e. Airbnb then you will need to confirm whether the local council has imposed any restrictions on the property use.
The Noosa Shire Council has an approval process, extra fees and restricts STA to no more than 4 times a year/60 days max. https://www.noosa.qld.gov.au/short-stay-letting
The Byron Shire Council has also recently imposed a 60 day limit on non-hosted short term accommodation. https://www.byron.nsw.gov.au/Development-Business/Land-Use-Zoning/Short-Term-Rental-Accommodation
State Government
In addition to local council, each state has their own set of requirements for STA providers.
From 1 January 2025, the Victorian Government has introduced a Short Stay Levy of 7.5% on all fees charged where the stay is less than 28 days.
In NSW, all providers must register and be listed on the STRA register (NSW Planning) and pay the applicable fees. Each local council then has their own additional requirements.
Insurance
An important item in the planning process is whether the property is insurable. After recent flooding events, there are many properties – particularly holiday houses close to water sources where insurers will no longer provide flood coverage or levy an unaffordable premium.
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Taxes
Income Tax
Any rental income earned will be taxed to the entity that owns the property at their respective tax rate.
Land Tax
Land Tax is a state-based tax and is levied at different thresholds in each state. Each state government revenue website includes a calculator that will provide an estimate.
State Revenue Office (Vic) - https://www.sro.vic.gov.au/calculators/land-tax-calculator
Revenue NSW (NSW) - https://www.apps09.revenue.nsw.gov.au/erevenue/calculators/landtax.php
Queensland Revenue Office (Qld) - https://qro.qld.gov.au/land-tax/
- Property Deductions
Is the property genuinely available for rent?
To claim deductions on the property, it must either be rented or ‘genuinely available for rent’. The property must be advertised to a broad range of people i.e. a rental agent not just word or mouth or via a workplace.
Restrictions such as not being available during the main holiday periods may also show the property is not genuinely available for rent.
Non-Commercial rent
If family and friends are using the property and paying an amount below market rent, deductions can only be claimed for the property up to the amount of income for that period.
Initial Repairs
Initial repairs to the property – any maintenance expenses incurred on the property prior to the property being rented are not deductible. These are capital and can be added to the cost base.
Investment Loan Interest
If the property is purchased with an investment loan, you must be careful when you refinance or redraw funds from the loan. If any extra is borrowed or funds withdrawn and they are used for private purposes then the loan interest will not be fully deductible. The interest deduction will need to be apportioned.
Capital Works – QS Report
You may be able to claim a capital works deduction for construction costs of the property. If the details are not able to be provided by the previous owner, a quantity surveyor can be engaged to assist.
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