We are living in the era of a ‘share economy’ where access to goods and services can often be peer-to-peer, facilitated by apps and online platforms. Airbnb is reportedly worth around $31 billion dollars according to Forbes and it’s easy to see why. There are nearly 5 million lodging options and that number is not getting smaller with more and more Australians considering the opportunity to lease part of their homes to supplement their income.
It might appear, at first, as easy money. Simply advertise a room, take on some extra cleaning and linen changes, and watch the money roll in.
But it’s important to remember an increase in income can also affect the level of tax payable. Ensuring you put enough money aside come tax time so you don’t get a nasty shock, may make you reconsider whether all the trouble is worthwhile.
Net rental payments are taxable
The net rental amount you receive (after expenses) is treated as a taxable amount in the year that you receive the income.
That taxable income will be in addition to any other taxable income, e.g. your salary or wages. In other words, the net rental income you receive will be taxable at your marginal tax rate.
Don’t fall into thinking you can avoid disclosing rental income because Airbnb are required to share data with the ATO!
Main residence CGT exemption
Your main residence is generally exempt from Capital Gains Tax (CGT), but using your home for income-producing purposes may impact on the main residence capital gains tax (CGT) exemption. So renting out a room may have additional tax consequences to the assessment of the rental income alone.
The main residence CGT rules apply to reduce the level of exemption based on the proportion of the dwelling and the amount of time that it is used for income producing purposes.
Summary
Although leasing out part of a home may seem like an easy way to generate additional income, the tax implications should be understood and contemplated in the decision to offer the property for lease.
Income tax, PAYG and CGT implications may significantly erode the net benefit.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online.