Renting out a spare room can be a great way to earn some extra cash, particularly with the help of Airbnb and similar online services. However, it’s easy to overlook the fact that the rent you charge, even on short-term stays, is taxable income. It must be declared on your annual tax return and, depending on your total income you may need to pay tax on what you earn. On the other hand, the deal might be sweetened with tax deductions.
Take a chance?
You might want to take a chance on not declaring this additional income, but the Australian Tax Office (ATO) has sophisticated data matching capabilities. They can find you by checking your financial records, searching ads on rooms-for-rent websites and checking electronic payments associated with these websites. They can also act on tipoffs from unfriendly neighbours.
On the upside, the expenses you incur in renting out a room or granny flat may be tax deductible. These can include a portion of your power bill, mortgage and council rates through to the sheets on your lodgers’ bed, room improvements and depreciation.
Renting out a room can have another tax consequence. The portion of your house used for income-producing purposes will become assessable for capital gains tax when you sell your home. Put simply, if you let out 20% of your house for the entire time you own it, and if you make a capital gain of $100,000 when you sell, then $20,000 would be your taxable capital gain. Assuming you own your home for more than 12 months, this will be eligible for a 50% discount, so $10,000 would be added to your taxable income and taxed at the appropriate rate.
Strangers, friends and family
The status of rental income is pretty clear when you advertise for a long-term lodger or short-term guest, but what about friends and family? With adult children taking longer and longer to save for a home of their own, an increasing number are staying at home and often paying board. And what about Mother-in-law in the granny flat out the back?
Provided the amounts involved reasonably reflect the actual costs, contributions from children and elderly parents are considered a family arrangement for sharing living expenses, so don’t need to be declared.
Get the right advice
Don’t let a few tax issues put you off renting out a room to boost the household kitty. Do, however, take the time to discuss your plans with your licensed financial planner or registered tax agent. If you are caught out trying to dodge what may be a modest tax bill, you could end up paying an extra 75% on top of the tax you owe plus interest.
Do the right thing though, and aside from the extra income, new friendships and the pleasure of sharing the secrets of your hometown await.
For more information, contact us at Leenane Templeton on (02) 4926 2300 or email firstname.lastname@example.org.
Australian Tax Office www.ato.gov.au – Rental property expenses