We’re living in a sharing economy. Even with the advent of Covid-19, people are using sharing services such as AirBnB, Uber, Car Next Door, Camplify, WeeShare, Swimply, Toolmates and GetMyBoat to make some extra money from assets that might otherwise be sitting idle and not being used. Putting aside the challenges around managing health hygiene, the negative impact on our economy resulting from the pandemic we will likely see these sorts of platforms will continue to grow in popularity with people along with other ways to conserve resources and generate cash such, as garage sales and cottage industries.
As we work our way through to the “new normal” those who own items (or assets) and who are willing to share the enjoyment, convenience and lifestyle advantages they bring may well find themselves able to generate a supplementary income. However, it’s important not to let the enthusiasm get in the way of good judgement. There are several risks to consider including; insurance i.e the potential for damage, theft, injury claims, fraud, managing difficult people and the possibility of inadvertently creating a tax problem.
According to Nathan Thiele, Associate here at Rowe Partners Accountants and Business Advisors, it's important to understand the risks, particularly as it pertains to future tax liability. "As accountants, the risks we’re most concerned about are financial. We like to balance the pros and cons with an eyes wide open approach. We encourage clients who are considering entering the sharing economy to do their homework and approach it in a business-like fashion," he said. "Ensuring your decisions are based on current ATO legislation is critical. The advantage of seeking our advice early is that we're across that detail and can steer interested clients in the right direction and head off potential problems in the future."
*Note laws change. This article was written [8.9.20] with consideration to ATO legislation at the time. It is ALWAYS necessary to seek qualified advice from your accountant before making finance and investment decisions.
The Australian Tax Office (ATO) says that “…the sharing economy is the economic activity through a digital platform such as a website or an app where people share assets or services for a fee.” They say that “…if you provide services or assets through a platform for a fee, you need to consider how income tax applies to your earnings.” Yes, this money is considered earnings. It is deemed assessable. Even if you consider it just a side hustle, the funds earned through these activities are added to any other revenue source as combined income. You’re able to claim expenses against them but in the case of renting a room in your home on AirBNB for example, you’re potentially also exposing yourself to Capital Gains Tax on the property. Capital Gains Tax has the potential to come back to bite the over-enthusiastic AirBNBer. It’s important to weigh up the costs vs benefits beforehand.
Considerating Tax Implications
Start by looking at the percentage of the space or item to be rented – personal use vs time or amount rented. If an entire property is rented through AirBNB then all running costs will be deductible. If you’re renting the use of a backyard swimming pool, we’d consider the size in proportion to the whole property and then calculate income and running costs proportionate to personal use. The same method applies to other rented items that are separate from the home. Every person’s situation is different, which is why we strongly advise making an appointment with your Rowe Partners accountant before embarking on any new venture in the sharing economy.
The amount of tax you will pay depends on what you earn and the allowable deductions. If you’re an AirBNB host renting out a bedroom in your home, then you’re not likely to be earning much from it alone, but if you’re also working earning an income of $80k plus, the extra cash could push you into a higher tax bracket and increase the tax you must pay.
When you’re renting out part of the home e.g. one or two bedrooms or a granny flat, we determine what percentage of the home is rented and then associated costs such as insurance, rates, power, phone and internet, depreciation on furniture and appliances need to be allocated. Capital Gains Tax which might be due on a future sale will work the same way – on a percentage basis.
Watch out for pitfalls. It is common for AirBNBers to rely on the ATO’s “six-year rule” that allows homeowners to be absent from their home for up to six years without losing Capital Gains Tax exemptions. In order to benefit from the six-year rule, your home must cease to be your principal place of residence, not just for a few weeks or months, or Capital Gains Tax will be calculated based on the property value at the time and you’ll be required to all keep records of future expenditure from the date you rented the property. Again, there’s more to it. Call to arrange a consultation with your Rowe Partners accountant before deciding. We can ensure you’re better informed.
Ensuring it’s not more trouble than it’s worth.
Once you’ve talked to us and decided to proceed, the key point to remember is to keep good records and always aim to be transparent about earnings. The ATO uses a range of sophisticated data matching tools and strategies to keep people honest. They can identify people who earn income from the sharing economy. Banks, employers, and health insurers are all legally obliged to report to the ATO. The ATO also cross-references with information held by other Government agencies using the data to check tax returns and calculate the correct amount payable.
Our aim here is not to put you off, just to ensure you’re going about it in the right way. Give your Rowe Partners accountant a call for more information on 1800 04 7693.