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Tax implications of buying a holiday home

Buying a holiday house can seem appealing, whether it’s to rent out for income, for your own holidays or both. However, it is important to be aware of the different tax implications for how you choose to use your holiday house.

If you own a holiday house and do not rent it out, you cannot claim any expenses relating to the property. If you decide to sell the property, you will need to calculate your capital gain or loss. Even though you don’t need to include anything in your tax return while you own the property, it is still important to keep all records to determine the capital gains tax implications for when you sell it.

If you own a holiday house and rent it out to others, you have to include the income you receive from rent as part of your income in your tax return. Deductions can be claimed on expenses incurred for the purpose of producing rental income, such as cleaning, advertising costs, pest control, insurance, maintenance and repairs. The cost of repairs and renovations cannot be claimed immediately, but are deductible over a number of years.

You are only able to claim deductions for the periods the property is rented out or genuinely available for rent. A holiday house may not be considered genuinely available when:

If a holiday house is shared between two owners, then the deductions need to be split accordingly. For example, if the house is owned 50-50, then the owners can claim equal shares of the expenses. If one partner owns 20% of the property, they can only claim 20% of the expenses.

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Self-managed super funds (SMSF) aren’t just about financial investment

December 3, 2020

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of on-going investment of time:

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.