It seems the Australian Taxation Office is ready and willing to do something our politicians won’t – crack down on short-term holiday rentals.

Specifically, the ATO is refusing all tax breaks for strata levies, mortgage payments and council rates if there are signs the property is just a subsidised holiday home for the owner rather than a proper commercial enterprise.

Refusing to let your holiday rental to schoolies, banning parties, offering the property to friends at “mates rates” and even only listing it on one online platform could see tax breaks for your Airbnb-or-me investment disappear.

From July 1, the Australian Taxation Office tightened the loophole that previously allowed about 250,000 owners who both rent out their holiday house and use it personally to claim tax deductions for a proportion of holding costs.

The new harder-line approach means holiday home owners must now prove their property is mainly used to produce income – rather than significantly for the owner’s leisure purposes – if they want to be able to make tax deduction for even a part of basic costs such as levies, mortgage interest and council rates.

According to an article in the Australian Financial Review, these expenses could previously be claimed proportionally, based on the number of days a holiday home was available for rent, and could have added up to thousands of dollars.

And the ATO has drawn up a traffic light system for identifying the short term holiday rentals that are really just subsidised holiday homes for the owners.

Locked and blocked

For instance, unreasonable restrictions, such as not renting to people under a certain age, or keeping a locked cupboard of your belongings for personal use when you are there, could lead the ATO to decide your holiday home is a leisure facility rather than an income producing asset, the AFR says.

Blocking out popular holiday periods is a huge red flag for the tax office, for the simple reason that these are the times when the property could be earning most for the owners.

“Once the taxpayer doesn’t make the property available to rent over Christmas or the school holidays, it’s almost a dead duck. It doesn’t matter if you’re going to show that the income producing use was more days than the private use,” Matthew McKee of Brown Wright Stein Lawyers told attendees at the recent Tax Institute Tax Summit.

The ATO uses a “traffic light system” compliance approach. McKee says any behaviour falling in the “red zone” means “you’re starting from the proposition that ATO officers think it’s a holiday home, not a holiday rental”.

McKee said banning pets and parties or being selective about tenants – such as not renting to a group of 18-year-olds on a schoolies trip – all fall under the “red zone” activity of “imposing unreasonable restrictions on renters”.

Setting rents too high, which might deter renters during times you want it for personal use, or too low when friends are renting, could also trigger ATO rejection of tax deduction claims.

McKee said the only safe way to be able to claim holding costs as tax deductions was for owners to not use their holiday home personally at all.

Peak practice

According to the AFR article, the low-risk Green Zone is typified by high commercial exploitation and limited personal use, high occupancy during peak periods, clear favouring of rental over private use, commercial rates and active pursuit of rental returns.

The medium-risk Amber Zone that could attract unwanted ATO attention, targets increased private use (particularly at below-market or no cost), blocking out periods for potential private occupation, using the property during peak seasons and half-hearted attempts to maximise rental income.

The high-risk Red Zone, virtually guaranteed to have the ATO rejecting tax deductions, includes blocking out high-demand periods for personal use, imposing unreasonable restrictions on renters, making minimal efforts to secure bookings and locking guests out of part of the property where personal items are stored for such times as you use the property yourself.

You can read the full AFR article HERE. And, no, the required subscription probably isn’t tax deductible.