How do taxes work with Airbnb?
With the rising popularity of Airbnb and other vacation rental companies, more and more people are renting their homes and learning about a new set of tax issues that come with it. When you offer your home, or a room in your home, as a short-term rental through services such as Airbnb, HomeAway, VRBO, FlipKey and many others, you can keep your income taxes to a minimum—and sometimes eliminate them—if you follow some of these useful tax tips.
How does Airbnb affect your tax return?
Airbnb offers an excellent opportunity to rent out that spare room without the long term commitment. Or, it’s a handy way to lease a holiday home that would be quiet for much of the year. Both of these things are great – but some Airbnb hosts may not realise the effects and benefits come tax time.
What income do you have to declare?
If you are renting out all or part of your home, the payments you receive from guests are assessable income. This means you have to declare it in your tax return. It’s a good idea to keep detailed records throughout the year of both what you earn for renting out your property and any expenses you incur, so it’s less of a headache at tax time. Cloud-based accounting tools, like QuickBooks Self-Employed, connect to your bank account from your mobile and separate your personal from your business expenses.
Don’t try to hide your Airbnb income
If you’re using Airbnb, it’s out there for everyone to see. The ATO can track this income easily, so even if you’re not earning a lot of money, keep your records and be honest about the income you’ve generated from the property. Airbnb tax is a real thing!
The ATO is not “laid-back” about people who under-claim rental income, and it can lead to back taxes owing plus new fines, penalties and interest charges.
Extra income means extra taxes to pay at year-end
Why not spend all your Airbnb income? Because earning that extra income means the ATO’ll charge you more tax at the end of the year. It is important to save some of what you earn through Airbnb so you can pay the ATO at tax time.
Airbnb and taxes – how much will you pay?
In the first year when you top-up your income with untaxed earnings from Airbnb and other types of ‘side businesses’, you might need to save as much as 30 or 40 per cent of your new earnings for tax! The amount depends on the total income you earn and the amount of tax deducted from your other income sources. Your tax agent can help you predict the right amount you should save for the “tax man.”
Is Airbnb income taxable?
Yes – any income derived from rent will typically be assessable income and must be disclosed in your tax return.
It’s also important to remember that the ATO may already have details about your Airbnb activity through its data collection processes, so make sure you keep accurate records and report everything.
“Re-renting” a rented property on Airbnb
According to Victoria’s Department of Consumer Affairs, if you rent your property from someone else, you need written consent from your landlord if you want to list it (or part of it) on Airbnb.
When you rent out a room through Airbnb, you’re technically offering a short term sub-let agreement, which in some states requires a tenancy agreement. A confusing aspect of Airbnb is that regulations are still being made and can differ from state to state. Consider the risks involved before listing your property, or talk to your landlord or real estate agency first. You’ll also need to check your rental agreement or lease plus Body Corporate laws if you live in an apartment complex. This is serious stuff – don’t just ignore it or try to be sneaky by a re-renting property on Airbnb; you could get into a lot of trouble!
Can you claim Airbnb expenses, and what about GST?
Airbnb is a success story of the “sharing” economy, with a platform that matches private accommodation to potential holiday-makers and renters. But if you own a property, getting to grips with the financial obligations is one of the major challenges posed by this approach to renting it out.
Sadly, one common scenario is for somebody to rush into an Airbnb arrangement to earn extra income quickly, but without any consideration of the potential tax consequences. If you do this, the result could be a shock down the line when you realise the ATO has taken an interest in what you have done. So, to help you avoid any tax-related traumas, here are five key tips for all current or potential Airbnb hosts.
Do I need to register for and pay GST?
Almost certainly not. The ATO considers Airbnb rentals as residential, which means that GST (Goods and Services Tax) does not apply – even if you earn more than the GST threshold ($75,000) from the listing.
Do I need to pay goods and services tax (GST) or capital gains tax?
You don’t have to charge or pay, GST on residential rent you earn from property sharing, but this also means you can’t claim GST credits for associated costs. Be aware, too, that because your main residence is a personal asset, it is usually exempt from Capital Gains Tax (CGT). This could change if you list a portion of it for rent on a sharing platform, like Airbnb. This means that when you decide to sell the property, you could lose all, or part of, your CGT main residence exemption. Calculate which portion of your property is exempt from CGT with the Australian Taxation Office’s (ATO) capital gains tax property exemption tool.
Don’t forget the potential Capital Gains Tax (CGT)
If you own an investment property, you’ll pay CGT when you sell it based on the profit you make through the sale. This profit is, in very simple terms, the difference between the amount you sold it for and the amount you paid to buy it.
With property prices having risen rapidly in recent years, it’s easy to make substantial profits on sale and equally easy to forget that the taxman will want a slice of those profits.
When you’re selling your own home, CGT does not typically apply – unless part of the property has been used for income-earning activities. This includes renting it out through Airbnb.
What can make this even more complicated is the fact that only part of the gain will be taxable, so CGT calculations could be tricky to work out.
This is an area that catches out many Airbnb hosts who are completely unaware of the CGT implications of renting out part of their home. Given the potentially long time-lag between starting to rent out the property and ultimately selling it, CGT can be a costly trap for those who haven’t factored it into their cost/benefit analysis when they first decided to take part of the property available for rent.
What expenses can I claim as tax deductions?
As an Airbnb host, you can claim tax deductions for expenses that directly relate to your rental income. Depending on the set-up, this could include the following:
- Depreciation of furniture including beds, lounges, tables, desks and drawers
- Commercial cleaning costs for the rented area
- Repairs and maintenance
- Breakfast foods, tea, coffee or other provisions made available to Airbnb guests
- Professional photography costs for your Airbnb listing
- Airbnb service fees and commissions
If you’re renting out the entire property, all of the costs involved in running it will typically be tax-deductible.
If you’re renting out part of the property you’re living in, some degree of apportionment is needed. This means that you can only claim a portion of the expenses.
This is typically worked out based on the floor area that’s used for your Airbnb rental compared to the total floor area of your property. For example, if you were renting out a bedroom and offering guest access to the kitchen and living area, the apportionment would factor in both the floor area of the guest’s room as well as a reasonable amount based on their access to the common areas.
Questions that can help you get an idea of what types of claims you can make:
- Is the expense directly associated with the rented area? If so, it could be deducted in full. For example, you may be able to deduct the cost of a bed or other furniture used in a bedroom that is made up specifically for Airbnb guests.
- Does the expense relate to a shared area? As mentioned before, you will need to apportion these expenses. For example, if you and your Airbnb guests have equal access to the lounge and kitchen, you could be able to deduct 50% of related expenses. This could include furniture and appliances as well as Internet, phone and cable TV costs.
- Is the expense in a private area of the property? Any costs that relate to areas that you keep separate from Airbnb guests cannot be deducted.
These questions are important to consider because there is potential to claim a portion of many different property expenses, such as the following:
- Mortgage interest or rent
- Council rates
One final detail to note about expenses where you rent out part of the property you live in is that they are only deductible where an area of the property is rented out. That differs slightly to the situation where you are renting out the whole property, where you can claim deductions for the period the property is genuinely available for rent (rather than simply the time it’s actually rented).
Can I pay my tax in instalments?
If you are earning more than $4,000 per year in residential rentals, you can opt to use the pay-as-you-go (PAYG) income tax instalment system. This lets you pay instalments every three months, to prevent any nasty surprises at the end of the financial year. Don’t worry if you pay too much or too little during the year – you’ll either get a windfall at the end or a reduced bill for the shortfall.
Being an Airbnb or Stayz host or on one of the many property sharing platforms is a great way to supplement your existing income and benefit from some property-related tax deductions. With the help of cloud-based accounting systems, like QuickBooks Self-Employed, to keep track of your expenses and income, you’ll be fully aware of your obligations at the end of the financial year.
Tax tips for Airbnb hosts
- Get advice from your accountant before becoming an Airbnb host. Make sure you are full across all the potential tax impacts of renting your property before you list it.
- Get a market valuation of the property at the date you start renting it out. This can be essential for CGT purposes, particularly where the house you are renting out is also the one you live in.
- Disclose all your Airbnb income in your tax return and make sure you claim all the deductions you are entitled to.
- Consider getting a quantity surveyors to report to maximise your depreciation deductions.
- Keep records of all your income and expenses. The ATO may ask to see them, particularly if they query an expense.
Tips and traps to help maximise your tax return
For those who have relatively straightforward tax affairs and choose to do their return, what are the main points that you need to be aware of?
Don’t file late
Missing that October 31 lodgement deadline can give rise to financial penalties. Also of note is the tax payment due date – three weeks after lodgement deadline, i.e. by November 21. Paying your tax liability late is likely to give rise to interest charges being imposed by the ATO.
Most taxpayers lodge their return online via their myGov account. It helps streamline the process as most information from your employer, banks, government agencies, health funds and other third parties is pre-filled by late July.
If you are expecting a tax refund, lodging online should expedite receiving the money. The ATO usually issues refunds within two weeks where the return is lodged online. Paper returns are processed manually and can take up to 10 weeks.
This year, employers have reported through Single Touch Payroll, which refers to direct payroll reporting to the ATO on a real-time basis. This means you will not receive a payment summary from your employer and instead an income statement will be available via your myGov account by July 31.
How to maximise your refund
In recognition of the changes to many employees’ working arrangements due to COVID-19, the ATO has introduced a shortcut method for claiming working-from-home related tax deductions.
From March 1 to June 30, you can claim a deduction of 80 cents for each hour you work from home, provided that you are carrying out your ordinary employment duties and have incurred additional running expenses as a result.
Tip: It is important to keep a record of the hours you have worked from home.
Trap: If you elect to use this method, you will be unable to claim any other expenses for working.
You may elect to continue to use the existing methods available to calculate your deduction (e.g. the fixed-rate method of 52 cents per hour, or the actual cost method). You can choose whichever of the three methods that provide the most beneficial tax outcome.
If you own a rental property, claim appropriate capital works and capital allowances (depreciation) deductions. Be aware that the rules changed from July 1, 2017, which limits capital allowance deductions for second-hand assets acquired after May 9, 2017. Investors who purchase new plant and equipment will continue to be able to claim depreciation expenses on these assets.
Tip: Get a quantity surveyor to make an assessment and prepare a depreciation report to outline amounts to be claimed in your tax return each year. The cost of having a depreciation report prepared is also deductible.
You no longer need to “salary sacrifice” super contributions to reap tax savings. All individuals under 75 years (including those aged 65-74 years who meet the prescribed work test) are now eligible to claim a tax deduction for personal super contributions made into an eligible fund.
In order to claim a deduction, you need to provide your super fund with a “notice of intent to claim” on or before the day the 2019-20 tax return is lodged, or June 20, 2021, whichever is earlier.
Trap: Be aware of the concessional contributions cap – currently $25,000 – and limit deductible contributions to the cap amount to avoid paying excess concessional contributions tax.
Ensure you have picked up all donations made during the year to deductible gift recipients. Taxpayers often forget to claim them because they forget to keep a record. With the increased use of electronic receipts via email, the ability to locate these receipts has become easier.
Private health cover
Private hospital insurance coverage will ensure you are not liable for the Medicare Levy Surcharge (MLS). Having “extras” or “ancillary” cover only is not sufficient.
The MLS will apply where a taxpayer’s income is above $90,000 (singles) or $180,000 (families).
With over two million tax returns lodged already, the ATO is cracking down on some of the more unusual claims.
From July 1, 2019, health insurers do not have an obligation to send members a private health insurance statement. If you are lodging your return online, your health fund details should be pre-filled online via myGov.
You may need to reach out to your provider to obtain a statement directly if the details are not flowing through by July 20.
The above provides some general guidance. Every situation is different so as a host it is really
important that you obtain advice from a tax professional who can review your situation and advise you on how to maximise your tax benefits in respect of the rental.