This month is the third of my monthly discussions focusing on using your home to earn taxable income. A common opportunity many of you may have undertaken or may plan to do is to rent out a spare room or area in your home to earn some extra income.
This may be an attractive opportunity for “empty nesters” after your children have gone their separate ways, or perhaps your retirement income is not enough for a comfortable lifestyle or you are now on your own with a home larger than you need.
Before you make such a decision you should understand your tax obligations and the possible impact on any Centrelink benefits you may be currently receiving and also your exposure to capital gains tax which we will address next month.
You must retain all relevant documentation such as bank records, receipts and invoices and your methodology for calculating deductible percentages of expenses reported in the Rental Property Schedule of your tax return.
Information required for inclusion in the Rental Property Schedule:
- Address of rental property.
- Date when room first earned rental income.
- The total number of days the room was rented for the year.
- Names of the owners of the property and their share of ownership.
- Gross rental received – GST is not applicable as renting a room is not an enterprise for GST purposes.
- Any other rental related income such as insurance payouts resulting from damage caused by renting and security bonds you are entitled to retain.
- Claimable proportion of all deductible expenses including, interest on your mortgage loan, council and water rates, gas and electricity, property insurance, cleaning, repairs and maintenance.
- Claimable direct costs such as advertising and depreciation of room contents owned by the landlord and used by the tenant.
Cost of meals provided when included in the rental agreement.
Methodology for apportioning deductible expenses to determine deductible amounts:
Step 1 Determine the size of the property
Determine the total internal area of your home using the house plan if available, or measure the area of each room noting the length and width and multiplying length by width to determine area in m2, for example 400m2.
Step 2 Determine the size of the rented area.
Measure the area of the room, bathroom and any other areas the tenant has exclusive use and total the m2, for example 50m2.
Calculate the rented area as a proportion of the total area of the home, for example 50m2/400m2 = 0.125
Step 3 Determine the number of days in the year the area has been rented for example 274 days
Calculate the proportion by dividing by the total days in the year, for example 274 days/365 days = 0.7507
Step 4 Calculate the percentage of shared expenses claimable attributable to the area rented for the exclusive use of the tenant or boarder.
Example: 0.125 x 0.7507 x 100 = 9.38%
Step 5 Determine the size of any common areas in the home that are shared between the owner’s family and the tenant.
For example let’s assume the tenant/boarder has access to the kitchen, lounge and a veranda with a total area of 200m2 which is shared with the husband and wife owners.
Step 6 Calculate the percentage of shared common area expenses attributable to the tenant and therefore also claimable.
Calculate the proportion of the shared area to the total area of the home.
Example: 200m2/400m2 = 0.50
Multiply by the proportion of days rented = 0.7507
Multiply by the tenant as a proportion of total residents 1/3 = 0.333
Multiply by 100 to arrive at the percentage claimable of the common area
Example: 0.50 x 0.7507x 0.333 x 100 = 12.50%
Step 7 Determine the total percentage to be applied to deductible shared expenses.
Rented area exclusive to tenant 9.38%
Common area shared with owners 12.50%
Total claimable percentage 21.88%
This percentage should be applied to the annual total of the actual costs incurred for all shared costs such as those listed at the second last dot point above.
The above methodology has been published by the ATO as a guide to how to determine the amounts you are claiming as allowable deductions. You must retain in your records evidence of how you arrived at the amounts claimed irrespective of whether you use a tax agent or prepare your own tax return.
The content of this article is not intended to be used as professional advice and should not be used as such.
Brian Spurrell FCPA, CTA, Registered Tax Agent, is Director of Personalised Taxation & Accounting Services Pty Ltd. PO Box 143 Warrandyte 3113. Mobile: 0412 011 946,
Email: email@example.com, Web: www.ptasaccountants.com.au