The rise of the sharing economy has seen the growth of utilising personal assets such as your home or car to generate additional income. Due to the ease and availability of these options, it has meant that taxpayers have been quick to take up and adapt for these opportunities, often without regard or consideration to the potential tax consequences they may be exposing themselves to. Rent received from the leasing of your home and or part thereof on platforms such as Airbnb or Stayz, can not only have income tax consequences, but more importantly potential significant Capital Gains Tax implications.
Whilst the rental income received on your property is generally assessable, expenses such as interest, rates, water, commission and fees, which are incurred in providing that property for rent can be an allowable deduction against this rental income. The difficulty lies in when only a part of the family home is being used to generate income as well as being used for private purposes; the ability to claim deductions becomes complicated. This is due to the nature of the expenditure incurred can be a mixture of both private and assessable, it is important that the appropriate method of apportionment is used. ATO guidance on these issue states that generally the most accepted method for apportionment is the percentage of floor space available for rent over the total floor space of the family home.
Whilst taxpayers may be expecting their earnings from a rental asset to attract tax, you may be unaware of the impact of Capital Gains Tax (CGT) on your family home. Since the introduction of the Capital Gains Tax regime, a taxpayer’s Primary Place of Residence (PPR) has generally been exempt from Capital Gains Tax due to the nature of these premises being of a private nature. However, when you decide to use your PPR to produce assessable income, this changes the nature of the asset and exposes your PPR to tax on any capital gain you make on the disposal of your property. As the tax calculated on any future sale may be similar to the allowable deductions calculation, the importance of the apportionment method above becomes more relevant. The ATO recognises that your PPR may not have always been an income producing asset and allows the taxpayer to adjust how any capital gain is taxed accordingly. This can become quite complicated depending on the history of the property and the outcome can be vastly different dependant on each circumstance. Dependant on those circumstances the property’s cost base, for example, could have a market value adjustment, original cost base adopted or a time apportionment!
As it can be seen, the hidden effect of ‘tainting’ your PPR exemption, which would ordinarily see a taxpayer pay no tax on any capital gain made, by using your private residence as an additional source of income can become significantly more costly than you may have anticipated after the impact of Capital Gains Tax. In some instances, the tax obligation by using your property to produce assessable income may even leave some taxpayers out of pocket if the income received is not sufficient to cover the overall tax impact upon sale.
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