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Discover the secrets of successful property management and investing on "The Property Investors Handbook" podcast. Join Colleen Sutherland as she shares expert insights and strategies for acquiring, managing, and maximising returns on real estate investments. Whether you're a beginner or seasoned investor, this podcast is your essential guide to navigating the world of property investment. Tune in and unlock the keys to financial success in real estate.
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Hello and welcome to another episode of the Property Investors Handbook Podcast. I'm Adam Bell and today again in the studio, I've got Tony Sutherland joining us as we explore the intricacies of the cash rental market, including renting out rooms, granny flats and properties on platforms like. Airbnb We're going to discuss the tax obligations associated with these types of rentals and why the ATO is paying close attention to them.
Tony, welcome back to the
podcast. Thanks Adam, thanks for having me. Excellent.
Alright, can you start by explaining the tax obligations for property owners who receive cash rent for, you know, rooms or granny flats?
Yeah, thank you. Look, it's, everyone has a perception of, what is, am I renting?
Is it income? That sort of thing. You know, is this just a little side, side gig for me? We've spoken about a normal rental, property done through a property manager and that's pretty straightforward.
Yeah. And that's bank transfers.
Exactly. And it's bank transfers. The property manager is keeping all the records for them of, you know, The money in, the money out, that sort of stuff.
Which, best way to go.
Best way to go. Good record keeping. Sure. But look, there's a growing, industry out there of people, renting out, granny flats. Because as we see, particularly the state governments are encouraging people now to put in granny flats to help ease the, uh, housing crisis and things like that.
So that's happening more and more. There's people renting out rooms, you know, spare rooms in their house. It's just that. Help with the cost of living. That's it. And of course, obviously there's a lot of people moving into that short term rental market through platforms like Airbnb. So yeah, it's a growing industry, but, and a lot of the times the granny flats, the room rentals or things like that.
done in a cash transaction and some people think well that's just a little bit of pocket money. But that's different from the way the ATO views it.
Right, so this cash, it obviously has to be reported. So how does one do that when there is no actual, you know, on paper record?
Exactly, well again it's back to that record keeping.
You need to put it down. You need to have a spreadsheet. You need to.
Exactly. So you've got to understand that the ATO view it just like any other rental property. If you're receiving two, three hundred dollars a week for renting out a room in your house, that's rental. Yes, you're allowed to claim a portion of the expenses.
against that. But it's all about the record keeping and it's all about the ATO, making you or wanting you to declare that in your tax return each year. Sure. So it's how you're going to keep the records for that.
Yep. You know? So here's probably a bit of a slightly difficult question. How did the ATO track it?
How do they know? Is it, are we just going to simply get down to it? This isn't an honesty system and, you know.
Yeah. Well, it, all tax returns at this stage of self assessment. So it's an, it's sort of like an honesty system anyway, anyway. Yeah. But the thing is, The ATO are growing their data matching capabilities, so they're starting to track it because they don't believe everyone's being honest, and that's probably true to us to a certain extent.
So from the easiest point of view, things like anyone who's renting through Airbnb, So from the Airbnb, that's easy for the ATO because Airbnb are required to supply the ATO everyone's annual data. Right. Rental incomes and commissions paid and things like that. So the ATO get that every year, they load it in, they match it against everyone's tax return.
Sure.
It gets a little bit more difficult if, someone's renting a granny flat or a room and particularly if that's in cash.
Yep.
But then the people, the first thing most people do is put it in the bank or have the tenant put it into their bank account. The ATO, I've got access to that.
Yep. And I think we've spoken previously about the technology, the ATO can, they have data recognition, so they control your bank statements, CLAs, cash deposits, and say, that doesn't match up with your salary. And then start asking questions. Start
asking questions. Could you explain, is there any difference in the tax treatment between traditional rentals and, you know, short term accommodation like?
From an income and expenses point of view, no, there's not a lot of difference. So if you're, renting, let's say part of your house, through Airbnb, which many people do, versus, just, anyone renting to a friend, renting a room out. Yep. It's the same. It's, that's income you're receiving, but you're entitled to, uh, claim the relevant proportion of costs in running that.
Obviously things like cleaning, a proportion of your home rates and insurance, body corporate, if you have it, you can apportion those appropriately against that income.
Well, that was actually my next question. If you are renting a room or a granny flat, what are the expenses that you can claim? So you've covered it.
a few there, Let's go through them.
Yeah, look, it's the same as a normal rental property. So whatever you're outlaying to run that house, If, let's say, a portion of that house, let's say it's a third of the house is rented out, then generally a third of the, property expenses, like rates, insurance, body corporate, can be apportioned and claimed.
If there's specific costs to that rental part of the house, be it painting, carpet, You know, those repairs and maintenance, they're directly attributable to that rental income. Sure.
How do you work out the portion, the percentage, let's just say it's one room in a five bedroom house, but that person is obviously, you know, using a bathroom.
They're using the kitchen. Yeah. They're using the, you know, the laundry. How do you work out what that percentage is? Yeah,
that's a good one. That's a very good question. It's generally a, it's a percentage of floor area. So obviously if it's one bedroom, you know, versus four bedrooms in the house, they, you calculate it on floor area.
But if they have. access and use of other parts of the house, like you say, kitchens, bathrooms, laundries, it's then apportioning, you know, on a reasonable basis. Right. What that sort of usage and floor area is. Yes.
Okay. Other than, keeping records of cash transactions or the rental income?
How would, owners go about recording those type, keeping records for those types of expenses? Cause I guess they wouldn't in their normal day to day, you know, running of their, if it was just their own house. Yes. Again, it's just spreadsheets, things like that.
Yeah. Look, the spreadsheet's the most simplest form is, you know, it's free, it's cheap.
So if you're diligent enough to keep it in a spreadsheet form, there are some smaller software versions. You know, you can access for those, those sort of things at very little cost. , but it still requires some input from owner to, to record it, you know, particularly, you know, they go down to Bunnings because they got to buy a thing, something to fix that room or, you know, that rental part, making sure that they put that cash back in.
into their record. Sure. Otherwise they're doing, sorry, otherwise they're doing themselves a disservice by not having all the expenses they've outlaid.
Sure. And probably something we haven't covered here but I'm guessing would be another key piece of advice for someone who's collecting a cash rent and we said keep a record of it, have a spreadsheet and so forth, but actually writing out a written receipt.
And having a receipt book, the old, you know, the old school style, the carbon copy.
Exactly. Cause generally on those sort of, granny flat, you know, rental room, rental things, it's generally, more of a handshake. There's no lease, residential lease agreement or anything like that. So the more records you can keep, the better your positions with the ATO, if they're asking questions.
Sure. If they can see you're a diligent record keeper, then They're not going to bother you too much, even if they come along and do ask questions. If you can produce the documents and the data there and then for them, they'll be very happy. If you can't, they'll go a bit deeper.
Sure. And that, look, that's probably my next question.
What sort of common mistakes do, you know, people in this area who are renting rooms, granny flats, You know, with taking cash, mistakes they make that do draw attention to themselves from the ATO.
Well, that's, we touched on that before. It's like, they might be getting the cash, but then they're banking it, you know.
So, then if they're not declaring it, and that in, that income or that cash doesn't pay, salaries being going into their bank account or other forms of declarable income. The ATO can quickly identify that's from some other source and that's when they ask questions. That's the biggest mistake people make.
But I mean, whether you receive the cash and you put it in your pocket or you put it in your bank account, you've got to remember the ATO in their opinion, well, their laws, it's rental income you have to declare.
Yep. Absolutely. So look, the key again, the key to all of this is record keeping, isn't it?
Absolutely. You need to have that. Do not fall into the trap of thinking I'm taking this, they'll never find out. This is just a little bit of extra on the side. It is income, it needs to be declared and you need to keep records because if they come knocking with that, with that audit email that you get, And you've got no records, you're in a bit of strife.
Absolutely. Yeah, it's, absolutely essential that you keep those good records, even if it's a, you know, cash transaction, because you have to answer the questions if you get asked. Yep,
absolutely.
Look, I would like to just finish that off in, in that people also do have to understand if they're renting part of their home, their primary residence, be it rooms, be it a granny flat out the back, that will affect their future, capital gains tax position and exemptions, and they should seek some very good advice on that before they go into that area, because it could have a fairly substantial capital gains tax impact.
down the track if ever they sell.
Okay, and that's with a granny flat as well? Yes. Okay, very, very important piece of advice. That's, something I would never have even thought of. So, make sure you talk to your accountant again. I do know a good one if, if anyone is looking. There may even be a, a website in the, the notes of this podcast.
So, look, thanks, Tony, for shedding light on this question. You know, the critical tax obligations for cash rentals, granny flats and Airbnb properties. So, you know, to our listeners, understanding and adhering to, these tax requirements is crucial to avoid, avoid penalties, and ensure that your rental ventures are both profitable and compliant.
So look for more detailed support and any sort of property management issues that you might have, please visit. Spmg. com. au Stay informed stay compliant and join us next time on the property investors handbook podcast for more essential property management insights Thanks once again, Tony for coming in and joining us always love having a chat with you You've got such great knowledge coming at it from a little bit of a different perspective but one that's very crucial to All of our property investors who are listening out there.
Thanks Adam. Appreciate it.