Short-term rental tax considerations
Question from Lynette updated on 13th February 2020:
I have a residential investment business (non-GST) and a separate GST registered business. With my residential investment business I purchased an investment property with the intention of renting it out. However, I would like to use it for Airbnb (short-term accommodation).
This is a commercial activity. However, I don't see it going over the GST threshold and if this business plan doesn’t work well for us, we could revert back to a long-term rental. There will be set up costs for the short-term accommodation business such as furniture and some small renovations.
I know you probably cannot claim these expenses against the long-term rental company. So what would be the best way to manage this?
Our expert Matthew Gilligan responded:
Before answering your question around claiming expenditure, I want to touch briefly on GST. You need to be careful here. Even if the short-term stay accommodation rental remains below the GST threshold, it can be subject to GST if you are running this activity through a GST registered entity.
You’ve explained that you have a residential investment business to which GST is not applicable and a separate GST registered business. If they are both run through the same company then the moment you convert your residential rental to short-term stay accommodation, the property will be dragged into the GST net - even if the short-term rental revenue alone sits below the GST threshold.
In terms of costs, the acquisition of any furniture is not likely to be deductible on the basis that you will be acquiring depreciable chattels. This means you don’t get an upfront deduction, but you get to write off the cost of the chattels over time at the relevant depreciation rate. There are some exceptions to this rule where you spend less than $500.
As for renovations, that depends on whether they constitute capital improvements or repairs and maintenance. You mention the renovations are “small”, which indicates there could be an argument that the expenditure is deductible on the basis it is repairs and maintenance. However, this is a very contentious area and not something on which we can reach a conclusion based on these facts only.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.