In 2012 shortly after Uber arrived in Australia to disrupt the Taxi industry Airbnb launched in the Australian market as a new option for short term holiday rentals disrupting market traditionally dominated by hotels. Since then Airbnb has grown to an estimated 130,000 listings across Australia and is associated with $1.6b of economic activity. Just as Uber allowed many people to generate additional income offering ride sharing services many people are also taking advantage of the spare space in their homes to provide another source of income.
Through services like Airbnb you can list a room for a short term stay in a few minutes and have guests booking in just as fast, however despite this being a simple process to list your property it may create significant complications to your taxes.
Net Rental Income from Airbnb will be taxed just like any other investment income
One thing many people do not consider when they start using services like Airbnb is that the income will be taxable however and where you do not put funds aside to pay the subsequent tax bill or have sufficient savings you may end up in debt with the ATO. As an example case if you were to rent out your spare/guest bedroom for $150 per night and you had guests paying to stay with you for 100 nights throughout the year (That is only just under two nights a week on average) than you will earn $15,000 which sounds pretty awesome until you lodge your tax return and get hit with a bill including medicare of somewhere between $3,150 for those in the lowest tax bracket through to $7,050 in the highest.
In addition to the tax bill once you lodge your first years returns, anyone who has earned over $4,000 investment or business income will also generally be required to start paying additional PAYG tax instalments on basis that this income is expected to continue in the future. This could see you paying quarterly tax bills of between $787.50 and $1762.50 depending on your marginal tax rate.
Paying taxes on the income you earn is expected and not all that surprising, however the second consequence of renting your house on Airbnb is not as obvious.
Losing the Main Residence Capital Gains Tax (CGT) Exemption
One of the great benefits of home ownership in Australia is that when capital gains tax was introduced in 1985 an exemption was also created for someones main residence. As such you any profit you make from home ownership will not result in a capital gains tax bill. Using Airbnb to rent part of your house will reduce your ability to claim this exemption by the proportion of the property made available to the guests and the amount of time it is used to produce an income.
Continuing our example from before, if you are renting out the guest room in your house and the guests also have access and use of the kitchen, living spaces and a bathroom you could see as much as 80% of the house being used to produce the income. If you are renting the house out for 100 days of the year then just under 22% of the gain in the value of the house over the year will be taxable when you eventually sell it. If you house is worth $700,000 and were to grow by 4% over the year then you would have an unrealised taxable capital gain in your home of $6,173. As CGT is also payable in the year that you sell the property if you multiply this gain by several years it also has the potential to bump you up to a higher tax bracket and cost you even more than you may have expected.
Ultimately using services like Airbnb may be a good opportunity to generate additional income from your spare space however it is important to consider not just the potential income but also plan for the potential tax consequences so you are not left holding a bill.
It is important to note that this information is intended to be general in nature and it has not taken into account your current financial position, needs or objectives. It is important to seek specific personal advice that is suitable for your individual circumstances and which addresses your goals and financial position.
If you have any questions about this or how it may relate to yourself feel free to contact us for a personalised discussion.