The perils and pitfalls of renting out a room

If you thought renting out a room was a simple way to make money, you’ve clearly not kept up with Australia’s tax regime. 

The only thing missing from the ATO’s mathematical paroxysms on the subject are some logarithms and a side order of fries. 

With people across the country looking for new ways to generate income as employment dries up and the economy submerges into a deep recession, some homeowners have turned to their biggest asset as a potential life buoy. 

Renting out a spare room or forsaking the home office to get a tenant in on a short or longer term basis seems like a fairly straight forward way of earning some extra dollars. 

But Australia’s tax system is regarded as one of the most complex in the world, as any expatriate or overseas resident who has completed a comparatively simple tax return elsewhere can attest. 

Illustrating the point is the way in which the seemingly benign decision to rent out that room sends the Australian Taxation Office into a routine more complex and far less attractive than a rhythmic gymnast’s floor routine. 

To make things easier for those who are struggling to make ends meet and subsequently have to invite strangers to live in their home, page 15 of the ATO’s 19-page renter’s toolkit does its best to clarify the process.

Ominously, the ATO toolkit has a footnote in bold warning that “This is a general summary only”. Presumably there are Jedi Knights equipped to delve into the murkier depths of the tax obligations based on the humble act of renting out a room.

Anyway, once you’ve cleaned up your tenant’s breakfast dishes and contended with the above, there’s still (quite) a few other factors to consider. 

The tax office also wants a piece of the following from you – all income before fees and commissions; insurance payouts, e.g. compensation for damage caused by renting; bonds or security deposits you become entitled to retain; and letting and booking fees you charge, including cancellation fees.

But if bringing the ATO on board as an invisible additional tenant (who also won’t wash your dishes) has derailed your plans, there is still some smudgy light breaking through the taxulus not-very-nimbleus clouds. 

You may (and a tax scientist will be your best bet for determining this each-way bet) be able to claim council rates; interest on a loan for the property; electricity and gas; property insurance; cleaning (presumably not the dishes); maintenance costs; fees or commission charged by the platform; and other expenses that directly relate to the earning of your rental income. 

But there’s a catch. There’s usually a catch with the ATO. How much of the expense you can claim will depend on the number of days you rent out the room or whole property during the year and the portion of the property you have rented out (e.g. a room or the whole property).

It might still all be for nothing

So you’ve decided, “To hell with it, I need some money and don’t care about the backroom chap holding a rave in the spare room at 11am on a Tuesday”. 

Before you get too excited, it’s worth weighing up the fact that you may have legally handed over any claim to the house actually being entirely yours, for tax purposes at least. 

If COVID-19 has taken your job, you may have decided to sell your house. Panic not – the ATO is here to help again. And by help, I mean help take your money so politicians can retain their 15.4 per cent superannuation while unabashedly considering denying workers any rise to their less deserving 9.5 per cent.

You ordinarily don’t pay capital gains tax (CGT) when you sell your own home. But renting out a room renders you extraordinary, although not in a superpowers kind of way. More in a 'whatever I do I have the special ability to never quite get ahead' kind of way. 

The reality is that if you’ve rented out the spare room, you may take a hit by paying tax on any profit you might make on its sale. The calculations and variables are again opaque, but the ATO helpfully provides a Capital gains tax property exemption tool and – I’m not making this up – 666 introductory words of explanation. The devil is obviously in the detail.

The ATO kindly concludes on its renters’ website, “For more information, speak with your tax agent.”

You might as well get onto it now. The dishes can wait.