More and more Australians are considering the opportunity of leasing part of their homes to supplement their income. The ‘share economy’ presents easy and flexible access to the short-term rental market through simple-to-use apps such as Airbnb.
It might appear, at first, as easy money. Simply advertise a room, take on some extra cleaning and linen changes, and watch the money roll in.
But there are tax implications. If your clients aren’t aware of this and don’t put money aside to pay the tax bills as they arise, they may be in for a nasty shock. The level of tax payable may also influence the decision to lease out a room in the first place.
Net rental payments are taxable
The first and most obvious tax impact is that net rental receipts (after deducting relevant expenses) are generally taxable income in the income year received.
That taxable income will be in addition to any other taxable income, for example employment income. So the net rental income will be taxable at the client’s marginal tax rate.
Some clients may be inclined to avoid disclosing rental income, but note that rental platform providers such as Airbnb are required to share data with the Australian Taxation Office.
Sardi earns $80,000 per annum working in the hospitality industry.
She has been leasing her spare bedroom for $150 per day, after expenses. Last income year (2016-17) the room was tenanted for 200 days, so Sardi had an additional $30,000 of taxable income.
Assuming her taxable income would otherwise have been $80,000, Sardi has $11,700 of additional tax and Medicare levy to pay in relation to the rental income in the 2016-17 income year.
Once Sardi has lodged a tax return which declares the extra income from leasing the spare room, she will be required to make Pay As You Go (PAYG) instalment payments based on the extra income in future income years. Generally these instalments can be paid quarterly, so Sardi would expect to pay approximately $2,925 per quarter.
Main residence CGT exemption
Using a home for income-producing purposes may impact on the main residence capital gains tax (CGT) exemption, so renting out a room may have additional tax consequences to the assessment of the rental income alone.
The main residence CGT rules apply to reduce the level of exemption based on the proportion of the dwelling and the amount of time that it is used for income producing purposes.
Sardi purchased her home in July 2013 for $737,000. She began renting out her spare room in July 2015. By that time her property was valued at $1.015 million.
Let’s assume the current valuation of Sardi’s home is $1.180 million in June 2018.
If (hypothetically) Sardi was to sell her home at this price and time, a CGT liability would arise. The capital gain accrued prior to leasing the room in June 2015 remains exempt from tax.
A partial main residence CGT exemption would apply to the remaining capital gain ($1.180 million minus $1.015 million = $165,000).
The partial exemption is based on prorating the gross capital gain for the portion of time the property was used to generate income (either based on actual days or a percentage), and the proportion of the property that used by the guest and shared by the guest.
Assuming 25 per cent of the property was used by the guest, and another 25 per cent of the property was shared by the guest with other occupants of the property (for example, common areas), then approximately $128,000 of the remaining capital gain would be exempt from tax.
The individual 50 per cent CGT discount would potentially apply in Sardi’s situation also, reducing the amount subject to tax to approximately $18,500.
Sardi would pay an extra $7,215 of tax at her marginal tax rate of 37 per cent plus the Medicare levy.
Overall Sardi would pay approximately $11,700 per year in additional income tax over three years, plus the $7,215 of CGT. This equates to an overall tax rate of almost 47 per cent of the income received.
Although leasing out part of a home may seem like an easy way to generate additional income, the tax implications should be understood and contemplated in the decision to offer the property for lease.
Income tax, PAYG and CGT implications may significantly erode the net benefit.