Below is one of over 200 case study type examples, updated to the 2016/17 tax year, from the first ever Australian Practical Tax Examples title, available now on the CCH Bookshop.
The book is the the perfect companion for the Australian Master Tax Guide, expanding on key topics and legislation and providing worked examples on the day-to-day aspects of tax law, covering 12 key topics from CGT, GST to Companies and Trusts.
In June 2016 Orpheus Parker purchased a ground floor two-bedroom townhouse in Neutral Bay, Sydney. He decided to rent out part of his townhouse on Airbnb while still living in the property. The total floor area of the townhouse is 850 sq feet (79 m2). The floor space of Orpheus’ bedroom and his private area is 250 sq feet (23.2 m2). The rented second bedroom area is 200 sq feet (18.6m2). The shared area comprising lounge, kitchen and laundry cupboard is 400 sq feet (37.2m2).
The property has been listed since 1 September 2016 and Orpheus has achieved consistent occupancy rates. During the period of 1 September 2016 to 30 June 2017, the room was rented for 150 days. Orpheus only offered the room to solo travelers and he has received a total of $22,500 in rental income. During this period, expenses relating to occupancy costs, such as mortgage interest, municipal rates, strata levies and home insurance amounted to $50,000. Orpheus also spent $250 on expenses relating to renting the room, ie advertising fees and consumables supplied for the room.
Advise Orpheus of the tax consequences of using his townhouse to produce rental income for the 2016/17 income year.
Rental income and deductions
The income that Orpheus receives under a lease and hiring charges is assessable as ordinary income (ITAA97 s 6-5) and, accordingly, the $22,500 income should be included in his tax return for the 2016/17 income year. Since the $22,500 rental income is included as assessable income, expenses relating to the income are allowable as a deduction (ITAA97 s 8-1).
As Orpheus still lives in the townhouse, any tax deductions must be apportioned to only the income-producing portion as some of these expenses relate to private use by Orpheus. It would be reasonable to consider that expenses relating to the second bedroom and a share of the lounge, kitchen and laundry cupboard would be directly related to the income producing activity.
Where expenses can be directly related to the second bedroom, then the deduction would be allowed in full, otherwise expenses would be calculated on the basis of the number of days the property was rented out and the proportion of the floor area that is rented (and shared).
The apportionment of the deduction is based on the total occupancy percentage of 47% (ie (18.6 + 37.2 / 2) / 79). This includes the rented second bedroom area and a 50% share between Orpheus and the guest of the spared area (ie lounge, kitchen and laundry cupboard). The allowable deductions available against the income received are deductible at a rate of 47% for each night a guest stays at the property.
The expenses that relate to occupancy costs, such as mortgage interest, municipal rates, strata levies and home insurance premiums are relevant and incidental to the derivation of rental income. As occupancy costs relate to a property as a whole, they must be apportioned between the income-producing purpose and the private purpose. Applying the occupancy percentage against the number of days the townhouse was used for income-producing purposes in the income year (150 days), the allowable deduction for the 2016/17 income year is $9,658 calculated as follows:
$50,000 × 150 / 365 × 47% = $9,658
Note that this apportionment takes into account that the room was only available to rent for 10 months of the year.
Orpheus can deduct, with any apportionment, the expenses relating to the actual rental of the room, such as the advertising fees paid and any consumables supplied for the room.
The taxable income that Orpheus is required to declare in his 2016/17 tax return is $12,592 (ie $22,500 − ($9,658 + $250)).
Orpheus is also permitted to deduct the decline in value for any furniture, fixtures and appliances used in the townhouse using the same apportionment methodology. A schedule from a quantity surveyor would need to be prepared and the cost of preparation may be prohibitive compared to the deduction available.
Fortunately for Orpheus, the provision of residential accommodation is input taxed and the property is used predominantly for private purposes (GST Act s 40-35). Accordingly, there is no GST liability as this type of supply is not included in the turnover test for GST registration (GST Act s 23-5). Unlike other sharing economy participants such as Uber drivers, Orpheus is not required to be registered for GST.
References to the Australian Master Tax Guide 2017/18: ¶2-135, ¶10-055, ¶10-105, ¶16-010, ¶30-005
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