Festive season presents tax gifts for short-term rental owners
Short-term rentals are likely to be earning their keep over the festive season, but it's also the perfect time for those investment property owners to keep an eye on the tax benefits on offer from a period of high wear and tear.
The 2023 festive season is upon us and this means an increase in the wear and tear of infrastructure and assets in holiday accommodation over this peak period.
Along with the increased traffic through the rooms and communal areas of Airbnb properties and short term rentals, will come ongoing repairs and maintenance that will incur extra costs.
This does not, however, have to mean a loss in cash flow, in fact it could mean the opposite.
Legislation allows the owners of income-producing properties, including short term holiday rentals, to claim capital works deductions.
This refers to the wear and tear on a building’s structure, including items deemed to be permanently fixed to the property or building, such as bricks, mortar, staircases, and even toilets and baths. To be precise, it all falls under Division 43 of the ITAA 1997.
Legislation also allows (under Division 40) for depreciation to be claimed on plant and equipment assets, which refers to all removable assets, including, but not limited to furniture, décor, mechanical equipment and various other assets that can be removed from the building.
Depreciation deductions for these assets are calculated based on each item’s individual effective life, as set out by the Australian Taxation Office (ATO).
To ensure you maximise your tax return on the back of the peak season repairs and maintenance on your short-term rental, we suggest that investors:
- keep a record of everything
- calculate and claim scrapping
- claim pro-rata depreciation deduction
- complete a depreciation schedule
- call in the experts.
Keep a record of everything
During the peak season, the wear and tear on items like carpets, furniture, electronic appliances and various other removeable assets will often mean that they must be replaced during the holidays or soon thereafter.
The purchasing of these new assets can be claimed under Division 40, plant and equipment depreciation.
Though it’s the busiest time of the year, make sure that you keep a meticulous record of all repairs, maintenance and replacements bought for easily removeable assets during this season.
There is no item too small to consider including in a schedule.
Low-cost assets and low-value assets all add up to maximise depreciation benefits and if an asset has sufficiently low value, legislation allows for it to be written off much faster or even claimed in full, increasing deductions and freeing up welcome cash flow.
If any structural repairs must be done, these deductions can be claimed under Division 43, capital works.
Infrastructure like pools and air conditioners that regularly need repairs and maintenance should be assessed by an expert for depreciation purposes, as depreciation deductions for parts of these assets fall under varying divisions.
Calculate and claim scrapping
Old assets that are removed and disposed of can instantly be deducted and claimed for.
This scrapping value is essentially the unclaimed or undeducted depreciable value of an asset.
An expert will prepare a depreciation schedule before the scrapping event and again after the assets are disposed of, to allow the calculation of all the deductions available now and into the future with the new assets.
Claim pro-rata depreciation deduction
A holiday-home owner can claim pro-rata depreciation deductions for the period during which an income producing property is rented out or is given broad exposure to potential tenants who are reasonably likely to rent the property.
Even though the investor can only claim for the period where the property is income-producing, this still poses a lucrative opportunity for short term rental investors who will experience peak tenancy over the festive season.
Complete a depreciation schedule
A tax depreciation schedule outlines the capital works and plant and equipment depreciation deductions available on a property for the purpose of ensuring that you have the lowest taxable income possible.
Claiming depreciation is considered a non-cash deduction, meaning investors don’t need to spend any money in order to claim it and the cost for preparing the schedule is also tax deductible.
