Holiday Homes & Capital Gains Withholding

The ATO reminds taxpayers it closely monitors rental properties and holiday homes in popular holiday destinations. Recently, it found some taxpayers claiming deductions for holiday homes they don’t genuinely rent out or make available for rent. To claim deductions related to holiday homes and capital gains, taxpayers must provide strong evidence they rented the property or made it genuinely available at market rates.

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

1. How do you advertise your rental property? Use platforms that maximise tenant exposure, like online sites. Advertising only by word of mouth or at your workplace limits reach and won’t meet ATO expectations.
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? Are you advertising your rental property at a rate above the market value?
4. Do you accept interested tenants, unless you have a good reason not?

Importantly, holiday home owners can only claim tax deductions for expenses they incur during a period when they rent out the home or make it 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. Properties rented at discounted or “mates” rates only allow deductions equal to rent charged.

Capital Gains Withholding 

Recent 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 confirms the seller is an Australian resident for tax purposes and therefore removes the 12.5% withholding requirement.

Why has the ATO introduced this new law?

The ATO has introduced this to help assist the collection of foreign residents’ Australian tax liabilities. Furthermore, 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?

Moreover, for Australian residents, this will simply add one more thing to consider when selling real estate. If your sale is over $750,000, you must apply for a clearance certificate – this is where we can help. Furthermore, non-residents face 12.5% withholding unless the ATO approves a variation or membership interest declaration. Purchasers must pay the 12.5% withholding to the ATO on settlement.

How can we help

Contact our Estate Planning Tax specialist, Cameron Tilley today to discuss your rental property or real estate sale and ensure you’re meeting all ATO tax compliance obligations.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. You must not modify, reproduce, or republish this without prior written consent.