In June 2016 Orpheus Parker purchased a ground floor two-bedroom townhouse in Neutral Bay, Sydney. He decided to rent out part of his townhouse on Airbnb while still living in the property.
The following are the information of the townhouse:
Total floor area: 850 sq feet (79 m2)
Floor space of Orpheus’ bedroom and his private area: 250 sq feet (23.2 m2).
The rented second bedroom area: 200 sq feet (18.6 m2).
The shared area comprising lounge, kitchen and laundry cupboard is 400 sq feet (37.2 m2).
During the period of 1 September 2016 to 30 June 2017, the room was rented for 150 days. Orpheus received a total of $22,500 in rental income.
Expenses relating to occupancy costs, such as mortgage interest, municipal rates, strata levies and home insurance amounted to $50,000. Orpheus also spent $250 on expenses relating to renting the room, ie. advertising fees and consumables supplied for the room.
Advise Orpheus of the tax consequences of using his townhouse to produce rental income for the 2016/17 income year.
Rental income and deductions:
The rental income that Orpheus receives is assessable as ordinary income (ITAA97 s 6-5), hence the expenses relating to the income are allowable as a deduction (ITAA97 s 81). Since Orpheus still lives in the townhouse, any tax deductions must be apportioned to only the income-producing portion as some of these expenses relate to private use by Orpheus.
Step1: The appointment of the deduction is based on the total occupancy percentage of 47%:
（18.6m2 + 37.2m2 /2）/79 m2 = 47%
*(Rented second bedroom area + 50% of the spared area between Orpheus and the guest) / Total floor area
Step2: Apply the occupancy percentage against the number of days the townhouse was used for income-producing purposes in the income years (150 days), the allowable deduction for the 2016/17 income year is $9,658.
$50,000 * 150 days/365 *47% = $9,658
* Expenses relating to occupancy costs * the number of days the property was rented out/365 * the total occupancy percentage
Step3: Orpheus can deduct, with any apportionment, the expense relating to the actual rental of the room. The taxable income that Orpheus is required to declare in his 2016/17 tax return is $12,592
$22,500 – ($9,658 + $250) = $12,592
Orpheus is also permitted to deduct the decline in value for any furniture, fixtures and appliances used in the townhouse using the same apportionment methodology.
Fortunately, Orpheus is not required to be registered for GST. The provision of residential accommodation is input taxed and the property is used predominantly for private purposes (GST Acts 40-35). Accordingly, there is no GST liability as this type of supply is not included in the turnover test for GST registration (GST Act s 23-5).