Holiday homes depreciation a basket case

I'm currently writing an article in relation to depreciation of plant and equipment, holiday homes and the new tax laws.

What a mixed bag of info.

I was asked today "can I still claim depreciation on plant and equipment on my holiday home if I use it twice a year even if I bought the property it in 2013?"

This is the biggest grey area of all the legislative changes in my view and one that will require further clarification moving forward.

The Government in the Housing Tax Bill Explanatory Memorandum states that if a property is used in an "incidental way" or "occasionally used" then your depreciation eligibility on the plant & equipment does not stop if you acquired the plant & equipment prior to The Budget in May 2017.

But the problem as always is in the detail....

Incidental Use is described as:

"Use is incidental if it is minor in the context of the overall use and arises in connection with another non-incidental use - for example staying at the property for one evening while carrying out maintenance activities would generally be incidental use."

Occasionally Used is described as:

"Spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use."

It's a bit vague, isn't it?

Does one week a year over Christmas nullify your claim? What about if you stay for Easter and Christmas?

What does this mean for all the Airbnb landlords out there that claim depreciation but move in when times are quiet but acquired the property prior to the budget? They went into that investment doing the maths on being able to claim the depreciation on a pro-rata basis based on the tax laws at the time?

Now if they use the apartment for an unknown time they may be disallowed the depreciation deduction.

Strangely, this Memorandum, differs from the ATO's website which was updated on the 15th of December 2017 which indicates that "Gail and Craig" who use their property for 4 weeks a year can claim the depreciation? "Kelly and Dean" would appear to be ok as well!

Whilst the Memorandum doesn't give a time frame...it's indicates that a weekend is OK...I would've thought 4 weeks would've been stretching it?! Who knows - pick a number????

This is at a time when the ATO wants to target Airbnb hosts and pro-rata any capital gain tax exemption that may be applicable.

Go figure.

Hopefully sense will prevail and if the holiday home is clearly available for rent - for let's say 11 months of the year - the plant and equipment will still be able to be claimed.

 

Hi Tyron

Without researching I would say that staying there would be more than incidental use.

What does the actual legislation say?

 

I have been saying this a while as the legislation refers to incidental or occasional use with either word being undefined. The EM says :

spending a weekend ....would be occasional use
staying at the property one night to undertake repairs would generally be incidental use

But what happens if you do this with some frequency ? Or its a long weekend and not a 2 day weekend...Does it mean including the Friday ? Or midweek for four days and you combine a break and repairs. Hey I didnt write the law. But I am expected to read and follow it.

There is also a issue with use of your own home. Lets say you rent 50% of it And have a QS report. Does the 50% or 100% stop ? What happens if its Airbnb and there is a gap so you have a week with no occupant and mum and Dad drop by. Does that end the other 50% ?

The whole legislation was intended to erode and wind back Div 40 claims and I dont expect the ATO to be generous in their ruling if and when it ever comes. I asked for guidance months ago. Their website is aweful and misleading in many areas of tax law ...I hope the Commissioner adopts the views on its website in a public ruling.

One of the problems I forsee is that the ATO may seek a diary record of all property use incl private use that assists to prevent a taxpayer being disallowed Div 40 due to an inability to demonstrate they have met the occasional and incidental use rules.

I would never expect a 11/12th rule. Its asking for taxpayer abuse. Especially if the month in question is the peak XMas season for a beach house.

 

Keep in mind the Explanatory Memorandum is not the relevant law, the ITAA97 is. However the EM might be useful in interpreting the ITAA97, but it shouldn't be relied upon at first instance.

relevant Clauses of the Bill:
2.40 In this context, use for a purpose is occasional where that use is infrequent, minor and irregular. Use of assets in different ways for the same purpose must be considered together in determining if use for that purpose is occasional.

2.41 For example, spending a weekend in a holiday home or allowing relatives to stay for one weekend in the holiday home free of charge that is usually used for rent would generally be occasional use.

 

Yes - Correct which is why a ruling is needed. Neither the EM or the ITAA97 changes are helpful.

In theory could a couple could use their IP each and every weekend (likely not to be occasional) or is it just one weekend a year ? Or ten....And it seems to adopt a different view for repairs v's general occupancy.

These issues impact 2017 tax already and should have already been addressed. Our tax system is far to complex. Why doesnt the ATO issue rulings when new laws are passed ?

 

Could the minor benefits exemption (infrequent, irregular) from FBT act be used as a guide for this definition?
It’s not the same act etc so I don’t believe would be binding at all, but until some guidance is given, is it useful in terms of examples of what is considered regular v infrequent?

 

Very good questions above. I've started staying at my airbnb when it's vacant. That doesn't happen too often, generally gaps between bookings....

 

Wouldn't this be hard in practice to enforce? If a person is just staying at a rental beach house occasionally between lettings but have a primary residence elsewhere what trail of evidence would be left behind?

 

Craig

You raise a good point. In fact the minor and infrequent usage with respect to utes etc has just had clarification from the ATO.

Legal Database

They give an example at example 3 where the total private kilometres are 300kms and total business travel is 20,000km. So a very small percentage.

I suspect a day or maybe even 3 days over a whole year might be deemed as occassional. I think once a month or a whole week and its no longer occassional.

 

I believe the issue is they DONT have evidence. It is a taxpayers onus to prove not the ATO . If the ATO suspect private use then they can determine to deny all Div 40 deductions (and even past ones). Simple traps can be receipts for replacements and repairs etc....Done while there. eg receipts dated 3rd Jan, 5th Jan at Coffs Harbour paid using Mr X's card (or cash) could be used against them. ATO seeks records from PM who says it was vacant for 5 days. ATO suspects owner use.

 

The definitions used in FBT is unrelated law. As terry pointed out when tax law lacks a defined meaning the EM to the law can be used by a court. The EM provides primary school type examples - Vague and over simplified. I believe the ATO needs to issue a ruling from their views.