Holiday Homes & Capital Gains Withholding

The ATO is currently reminding taxpayers that they are paying close attention to rental properties that are located in the popular holiday destinations in Australia. The ATO has noticed that some taxpayers are claiming deductions for holiday homes where the property is not genuinely being rented out or genuinely available for rent. The ATO requires strong evidence of the rented or genuinely available for rent at market rates.

4 factors that may indicate your property is not genuinely available for rent are:

1. How do you advertise your rental property? Have you advertised in a way that maximises exposure to potential tenants such as an online site? Advertising in a way that limits exposure to potential tenants such as word of mouth or advertising at your workplace would not be sufficient.
2. What location and condition is your rental property in? Is the property in a location and condition that tenants will want to rent in?
3. Do you have reasonable conditions for renting the property and charge market rate? Is your rental properties advertised rate above the market rate?
4. Do you accept interested tenants, unless you have a good reason not?

Holiday home owners can only claim tax deductions for expenses made during a period when the home is rented out or genuinely available for rent. You cannot claim deductions for the proportion of expenses that relate to private use. Private purposes include use by you, your family and relatives and your friend free of charge. Any properties rented out at discounted rates or “mates” rates they can only claim deductions equal to the amount of rent charged.

Capital Gains Withholding 

The latest ATO announcements have made it clear that they are paying closer attention to rental properties and the sale of Australian real estate. From 1 July 2017 onward all contracts entered into for the sale of real estate with a contract value of over $750,000 will incur a 12.5% capital gains withholding tax unless the vendor being a resident taxpayer is able to obtain a capital gains withholding clearance certificate from the ATO. This clearance certificate acknowledges the seller of the property as an Australian resident for tax purposes and therefore is not required to withhold the 12.5%.

Why has the ATO introduced this new law?

The ATO has introduced this to help assist the collection of foreign residents’ Australian tax liabilities. There has also been an increase of the capital gains withholding rate from 10% to 12.5% and a decrease in the contract price examinable from $2 million to $750,000, thus broadening the ATO’s scope.

What will this mean for me?

If you are an Australian resident then this will simply add one more thing to consider when selling real estate. If your contract price is over $750,000 then you will need to apply for a capital gains withholding clearance certificate which is a simple process that we can assist with. If you are a non-resident then this means that 12.5% of the sale proceeds will be taxed unless a variation application or membership interest declaration is successfully made to the ATO. This also means that if you are the purchaser the onus to pay the 12.5% withholding is on you and must be paid to the commissioner on settlement date.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.